Laid-off Eclipse workers left in the lurch
In November 2008, Albuquerque’s Eclipse Aviation declared bankruptcy. Within the small world of private jet manufacturing, the company’s failure was stunning news. Flying Magazine reported that there had “never been a financial failure of this scale in the entire history of general aviation.” The company’s assets were eventually acquired by a successor corporation, which remains in business today.
Nine years might seem like enough time to turn the final page on the history of a defunct company, but Eclipse Aviation continues to make news. In August, the federal 3rd Circuit Court of Appeals issued a ruling in the bankruptcy case that affects everybody who was working for Eclipse when its board finally pulled the plug.
The federal Worker Adjustment and Retraining Notification (WARN) Act requires all companies of 100 or more employees to provide 60 days’ notice before instituting a mass layoff. When Eclipse laid off its entire workforce, it provided no notice at all. Or, rather, it provided negative notice: Workers were first furloughed and then, six days later, informed the furloughs had been retroactively converted into layoffs.
A company that violates the WARN Act must pay its laid-off workers back pay, including benefits, for the entire period of the violation. In Eclipse’s case, that would have meant a full 60 days of wages and benefits for its entire workforce.
But the WARN Act has exceptions. The notice period can be shortened or even eliminated if the mass layoffs result from “business circumstances that were not reasonably foreseeable.” Even then, however, the company must give as much notice as is “practicable” under the circumstances.
Eclipse Aviation claimed its abrupt closing was the result of unforeseeable business
circumstances and prior notice was impracticable. When it initially declared bankruptcy, it did so under Chapter 11, seeking reorganization, with no mass layoffs contemplated. Its largest shareholder was the European Technology and Investment Research Center, or ETIRC, which was also a distributor of Eclipse’s aircraft. The plan was for ETIRC to buy the company’s assets at a bankruptcy auction and continue its operations, allowing the going concern to emerge from bankruptcy relieved of its debt load.
ETIRC believed it had the capital to complete the purchase because of agreements it had with certain Russian businesses. ETIRC had contracted to sell Eclipse aircraft kits to a Russian assembly plant, a deal that was to be financed by a state-owned Russian bank known by the acronym VEB. After Eclipse Aviation’s initial bankruptcy filing, VEB additionally agreed to loan ETIRC $205 million to purchase Eclipse’s assets.
The only hitch to the plan was VEB’s insolvency. Admittedly, insolvency wasn’t an unusual condition for banks during the 2008-09 period, but it still posed the problem of lack of funds. The Russians repeatedly assured ETIRC that the government was just about to recapitalize the bank. The bank’s vaults would be refilled with government money as soon as the prime minister signed off. For weeks ETIRC was told, and its executives chose to believe, that the prime minister’s approval could be expected any day. But the prime minister never acted.
Eclipse Aviation’s collapse had many causes. But the final straw was placed on the camel’s back by then-Prime Minister Vladimir Putin.
While the Russians strung ETIRC along, Eclipse ran out of money. On Feb. 18, 2009, it furloughed its workers. Six days later, the board converted the Chapter 11 reorganization into a Chapter 7 liquidation and informed its workers they no longer had jobs. It was a mass layoff without any notice at all.
The question before the 3rd Circuit was whether the layoffs were “reasonably foreseeable” at any time during the 60 days leading up to Feb. 24. The court determined that the “reasonably foreseeable” standard is met only when the possibility of layoffs grows into a probability. Accordingly, the legal duty to provide notice is triggered when the likelihood of mass layoffs crosses the 50-50 mark. To determine the precise moment when that occurred, the judges embarked on mental time travel, ignoring the lessons of hindsight and looking back to evaluate what Eclipse’s board members would have predicted during the crucial 60 days. The judges concluded that a reasonable board member wouldn’t have considered layoffs probable so long as the Russians were making their sweet-sounding promises, which they did right up to the bitter end.
Because the layoffs were not “reasonably foreseeable” before they happened, Eclipse’s workers, many of them Albuquerque residents, weren’t entitled to notice. And because the company didn’t violate the WARN Act, the workers weren’t entitled to back pay. The workers were first furloughed, then laid off, and finally left empty-handed.