Employers be WARNed: employees must know about a potential job loss

At first glance, Stanziale v. MILK072011, looks like someone suing over a bad expiration date and conjures up images of Ron Burgundy proclaiming “milk was a bad choice.” But in actuality Stanziale is much more interesting: it answers whether one can breach their fiduciary duty by exposing an employer to a claim under the aptly-named WARN Act, which requires employers to tip off their workers to a possible job loss.

In Stanziale, a chapter 7 bankruptcy trustee sued, among others, MILK — the owner of the debtor-employer, Golden Guernsey Dairy (Dairy), which operated a dairy and milk processing facility in Wisconsin, and Dairy’s former president and one of its managers (who later started working for MILK).

The trustee alleged that MILK and the two individuals breached their fiduciary duties to Dairy because their actions exposed Dairy to a WARN Act claim. Under the WARN Act, if an employer does not provide sufficient notice of a plant closing or mass layoff, it may be liable to the affected employees for up to 60 days’ of wages and benefits, which in this case was a priority claim for $1.5 million.

The court refuses to dismiss the case

The defendants argued that the Bankruptcy Court should dismiss the fiduciary duty breach claim because Dairy had insufficient assets to cover its liabilities prior to the WARN Act violations, such that the violations did not create Dairy’s insolvency.

The Court disagreed stating that the complaint sufficiently alleged that the defendants maintained Dairy’s operations until the last possible moment and ignored their responsibility to give proper notice to employees, thereby exposing Dairy to the WARN Act claim, and that these actions could constitute a breach of the duty of loyalty.

Generally, under Delaware law, where a director or controlling party owe a fiduciary duty to the company they serve, and that party fails to act in the face of a known duty to act, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.

Takeaways

This case is significant because, while individuals cannot be held personally liable under the federal WARN Act, they may now be liable under a breach of fiduciary duty claim for exposing their company to WARN Act claims.

Further, while this case occurred in the bankruptcy context — it was the representative of the bankruptcy estate asserting claims derivatively on behalf of the debtor-employer — it may provide the means for a solvent company to sue its former senior executives for exposing it to a WARN Act claim.

Finally, senior executives should consider whether they are operating in a state with a mini-WARN Act that may impose personal liability or with a wage payment law that will hold them personally liable if the company does not meet its payroll obligations before it shuts down.

Arnold and Walsh are both members at Mintz Levin. Arnold represents clients in connection with a variety of complex employment litigation matters and Walsh focuses on all aspects of bankruptcy and commercial law.

The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.