Employment Claims In Bankruptcy

Financial distress causes companies to conduct mass layoffs and shut downs.  And, with financial distress often comes bankruptcy.  It is no coincidence then that WARN cases are usually filed against bankrupt entities that can pay creditors only pennies on the dollar.  That would appear to make WARN claims of little value to employees.

Nevertheless, Outten & Golden persists where others may fear to tread. It has represented thousands of employees whose former employers were in bankruptcy proceedings. Our lawyers have solved puzzles not found elsewhere in the law to unlock the value of their clients’ claims in this daunting but increasingly important bankruptcy arena.  Because today, corporate bankruptcy is standard operating procedure in business. As companies seek to clean their balance sheets in bankruptcy they all too easily clean out employees’ pocketbooks, expecting them not to understand or show up to complain.

Outten & Golden has made it a point, with an exclamation mark, in American business, that the WARN Act will, indeed, be there.

The WARN Act applies to employers that declare bankruptcy

Bankruptcy calls a halt to many company obligations. But if an employer conducts a plant closing or mass layoff before it declares bankruptcy or afterwards, it may be liable if under the law if it did not provide notice.

There are several paths a company can take in bankruptcy: 

1. It can wind down its operations and go completely out of business.  That is called liquidation.
2. Oftentimes, before liquidating, the company sells off its business operations, which are its assets, to a buyer.  This is known as an asset sale liquidation.  In that scenario, the buyer of the business may keep it operating or dismantle it. 
3. Finally, there is Chapter 11 reorganization. Many big companies go through this form of bankruptcy in order to restructure their financing – that is, to stretch out, or avoid paying their debts in full.  They may keep their business running as usual all the while.  General Motors and Kmart, among many others, are examples.  Or, they may lop off and sell or close certain parts to “clean” their balance sheet before they “emerge” from bankruptcy.

In an economy churned by bankruptcies and layoffs, employees need a champion

A major cause of layoffs and shutdowns in bankruptcy is that financiers acquire distressed companies. They use these companies to squeeze out money or to profit from a quick resale.  While extracting fees, these financiers slash expenses (through layoffs) that spruce up companies’ balance sheets in order to “flip” them to a buyer.  Usually this all takes place around the bankruptcy process. Each year, the American landscape loses famous companies that provided jobs to thousands of employees to shutdowns using these maneuvers.

Common to all these bankruptcies, however, is that employees with claims must get in line with other creditors. They must file their claims within a short time period.  Outside of bankruptcy, employee claimants often do not have to file claims for years.  In bankruptcy, employees must typically act quickly within the first few months.

The outlook always looks bleak for employees, until you remember two things

First, employees have a friend in the law, known as the priority system.  It ranks employees’ claims for certain wage claims above those of other creditors. It puts them near the front of the line, requiring they be paid in full.  That priority was under siege, until Outten & Golden’s WARN Act Practice Group got the Supreme Court to preserve it in a recent landmark victory. 

Second, “bankrupt” does not mean penniless. Outten & Golden has litigated claims in bankruptcies in which employee creditors shared tens of billions of dollars and had their claims paid in full.  Of course, in most bankruptcies there are insufficient funds to pay all creditors.  But, laid off employees often make up one of the largest and most important set of creditors. They need experienced counsel to guide them through the bankruptcy maze and achieve the most value they can for their priority claims arising from a mass layoff,  reduction in force, or company closing. 

Outten & Golden can provide that support. For more information on how the process works, please contact us.