Varela v. AE Liquidation, Inc. (In re AE Liquidation, Inc.)

• Decision Date: 04 August 2017
• Docket Number: No. 16-2203,16-2203
• Parties: IN RE: AE LIQUIDATION, INC., et al., Debtors Annette Varela, on behalf of herself and all others similarly situated; John J. Dimura, on behalf of himself and all others similarly situated, Appellants v. AE Liquidation, Inc., et al., f/k/a Eclipse Aviation Corporation
• Court: U.S. Court of Appeals — Third Circuit

866 F.3d 515

IN RE: AE LIQUIDATION, INC., et al., DebtorsAnnette Varela, on behalf of herself and all others similarly situated; John J. Dimura, on behalf of himself and all others similarly situated, Appellants

v.AE Liquidation, Inc., et al., f/k/a Eclipse Aviation Corporation

No. 16-2203

United States Court of Appeals, Third Circuit.

Argued: December 7, 2016

Opinion Filed: August 4, 2017

Christopher D. Loizides, Loizides, 1225 King Street, Suite 800, Wilmington, DE 19801, Jack A. Raisner (Argued), Rene S. Roupinian, Outten & Golden, 685 Third Avenue, 25th Floor, New York, NY 10017, Counsel for Appellants

Mark E. Felger, Barry M. Klayman (Argued), Cozen O'Connor, 1201 North Market Street, Suite 1001, Wilmington, DE 19801, Counsel for Appellee

Before: FISHER,^* KRAUSE, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

KRAUSE, Circuit Judge.

This case arises from the bankruptcy and subsequent closing of a jet aircraft manufacturer, and requires us to assess that manufacturer's obligation under the Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C. §§ 2101 - 2109, to give fair warning to its employees before effecting a mass layoff. On appeal, we are asked to determine whether a business must notify its employees of a pending layoff once the layoff becomes probable—that is, more likely than not—or if the mere foreseeable possibility that a layoff may occur is enough to trigger the WARN Act's notice requirements. Because we conclude that a probability of layoffs is necessary, and the manufacturer has demonstrated that its closing was not probable until the day that it occurred, it cannot be held liable for its failure to give its employees requisite notice. Accordingly, we will affirm the judgment of the District Court, which in turn affirmed the judgment of the Bankruptcy Court.

I. Background

Appellants are former employees of Appellee Eclipse Aviation Corporation¹ who were laid off when Eclipse unexpectedly closed its doors in February 2009. This shutdown was not expected because when Eclipse declared bankruptcy in November 2008, it reached an agreement to sell the company to its largest shareholder, European Technology and Investment Research Center, (ETIRC)² —an agreement that, if it had closed, would have allowed Eclipse to continue its operations. The sale, however, required significant funding from Vnesheconomban (VEB), a state-owned Russian Bank, and this funding never materialized. For a month, Eclipse waited for the deal to go through with almost daily assurances that the funding was imminent and the company could be saved, but eventually, as those assurances failed to bear fruit, the time came when it was forced to cease operations altogether. To explain why layoffs were not probable before that point, however, we must review the development of the relationship between Eclipse and ETIRC, and their prospective financing arrangement with VEB.

The relationship between Eclipse and ETIRC began in 2004 when ETIRC became both a customer for and distributor of Eclipse's aircrafts. After three years as a customer and distributor, ETIRC became an investor in Eclipse in late 2007, providing Eclipse with a significant loan in exchange for preferred stock. Around the same time, Eclipse and ETIRC also agreed to a Memorandum of Understanding under which ETIRC was to buy aircraft kits from Eclipse to be assembled by a factory in Russia ("Russian factory deal"). This arrangement was to be financed in large part by VEB, and money generated from this project was expected to play a large role in ensuring that Eclipse could maintain its working capital requirements for the upcoming year. Shortly thereafter, in early 2008, ETIRC purchased additional preferred stock in Eclipse and, as part of a restructuring agreement, Eclipse agreed to appoint two representatives of ETIRC to its five-member board of directors. Following these investments, ETIRC continued to provide Eclipse with financial support as needed.

In June 2008, the closing of the Russian factory deal became delayed and Eclipse began to run out of money. As Eclipse's financial troubles mounted, its dependency on ETIRC grew and, after Eclipse breached its minimum cash covenant required to operate, ETIRC provided Eclipse with a $25 million unsecured loan to help keep the company solvent. Shortly thereafter, ETIRC's Chairman, Roel Pieper, was named acting Chief Executive Officer of Eclipse.

Despite ETIRC's support, Eclipse's solvency was short-lived. Although the Russian factory deal continued to progress and Pieper reported to Eclipse's board of directors that the issues that had caused its delay had been resolved, the timing of the closing remained uncertain, and, by November 2008, Eclipse had again fallen below its minimum cash covenant. At that point, an ad hoc committee of Eclipse's noteholders froze all company accounts, and Eclipse's board of directors began to explore the company's options via bankruptcy proceedings.

The board of directors considered pursuing three possible courses of action in bankruptcy: (1) auctioning off Eclipse's assets as a whole pursuant to Section 363 of the Bankruptcy Code, 11 U.S.C. § 363(b)(1), with ETIRC serving as a "stalking horse" bidder;³ (2) auctioning off the company's assets as a whole in a "naked" sale pursuant to Section 363—that is, conducting an auction without a "stalking horse" bidder, J.A. 960; and (3) liquidating the company pursuant to Chapter 7 of the Bankruptcy Code. ETIRC expressed a "genuine interest" in continuing Eclipse's business, J.A. 960, and committed an additional $1.6 million to help fund Eclipse's operations while the two sides negotiated an agreement for ETIRC to acquire Eclipse.

On November 25, 2008, Eclipse filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code along with an asset purchase agreement to sell substantially all of the company's assets to ETIRC pending an auction. The deal included a provision that VEB would provide ETIRC with a $205 million loan, and, although the asset purchase agreement did not contain any express provisions requiring ETIRC to take on Eclipse's employees, it specifically provided that Eclipse was to continue operating its business and retain its employees through closing. The Bankruptcy Court entered an order approving the proposed procedures governing the auction and sale, and an auction and sale hearing were scheduled for mid-January 2009.

Eclipse did not receive any additional qualifying bids for the company, and, after a multiple-day sale hearing, the Bankruptcy Court entered an order on January 23, 2009, approving a second amended asset purchase agreement under which Eclipse was to be sold to ETIRC. Although ETIRC's receiving additional financing was not a condition of the sale's closing, the amended agreement stated that VEB had delivered a fully executed commitment letter confirming that it would provide ETIRC with a $205 million loan to finance the sale. Like the original agreement, the amended agreement did not require ETIRC to retain Eclipse's employees, but did provide that Eclipse was to continue its full operations through closing. Lastly, although the agreement did not contain a specific closing date, it afforded both parties the option to terminate the agreement if closing did not occur by February 28, 2009.

In the month that followed, VEB took ETIRC and Eclipse on a roller coaster ride of promises and assurances that never came to fruition. Following the Bankruptcy Court's approval of the agreement, closing was originally scheduled for January 29th, but it did not move forward on that date because VEB was unexpectedly insolvent. Nonetheless, Pieper reported to Eclipse's board that he had been assured that then-Russian Prime Minister Vladimir Putin personally would make a decision on February 2nd as to whether the sale could still be funded. On February 3rd, Pieper and Daniel Bolotin, another ETIRC executive who sat on Eclipse's board of directors, reported to the board that VEB would be recapitalized on February 5th, that there was a "high likelihood" the sale's funding would be approved by the Russian parliament that same day, and that the funding would become available early the following week. J.A. 1001. Eclipse's disinterested directors,⁴ however, were not comfortable with this uncertain arrangement and agreed that while they had "no reason to disbelieve" Pieper and Bolotin's reports, they would "need to see specific documentation ... evidencing the approval of ... the recapitalization of VEB ... [and] the approval of the [funding for the sale]," and, without such documentation, they would recommend that the sale be called off and Eclipse's bankruptcy proceedings be converted to a liquidation under Chapter 7 of the Bankruptcy Code. J.A. 1003-04.

Consistent with Pieper's report, on February 5th, the Russian parliament approved the recapitalization of VEB and ETIRC's funding, and Pieper was invited to Moscow the following week to sign documents finalizing the agreement. With the closing seeming imminent, ETIRC also agreed to provide additional funding of its own to cover the added costs Eclipse had incurred as a result of this delay.

Pieper arrived in Moscow on February 10th, and informed Eclipse executives and the board the next day that while, much to his surprise, VEB had not yet been recapitalized, the final necessary meeting would take place later that week and VEB would receive funds on either February 13th or February 16th, with the ETIRC funds becoming available shortly thereafter. Bolotin described Pieper's meeting with Prime Minister Putin's deputy as "positive," and Pieper indicated that "all of the background work in Russia has been successfully completed and all that remains is execution and timing." J.A. 1012-13.

At that same board meeting, Eclipse's CFO reported that the company had become administratively insolvent as of February 6th and was on pace to run out of money the week of February 20th. In light of...