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In re AE Liquidation, Inc.

United States Court of Appeals, Third Circuit

August 4, 2017

AE LIQUIDATION, INC., ET AL, f/k/a ECLIPSE AVIATION CORPORATION ANNETTE VARELA, on behalf of herself and all others similarly situated; JOHN J. DIMURA, on behalf of himself and all others similarly situated, Appellants

          Argued: December 7, 2016

         On Appeal from the United States District Court for the District of Delaware (District Court No. 1:14-cv-01492) Honorable Leonard P. Stark, District Judge

          Christopher D. Loizides Loizides Jack A. Raisner (Argued) Rene S. Roupinian Outten & Golden Counsel for Appellants.

          Mark E. Felger Barry M. Klayman (Argued) Cozen O'Connor Counsel for Appellee.

          Before: FISHER, [*] KRAUSE, and GREENBERG, Circuit Judges.



         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 Corporation[1] 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 Eclipse's dwindling finances, its disinterested directors resolved that if ETIRC had not received the funding or "satisfactory confirmation" of it by February 16th, they would recommend either a Chapter 7 liquidation or that all but a handful of Eclipse employees be furloughed to preserve the company's money while it waited for the VEB financing to arrive. J.A. 1015.

         On February 16th, a Russian Governor appeared by phone at a meeting of Eclipse's full board of directors and informed them that VEB had been recapitalized, that funding the Eclipse project was one of Prime Minister Putin's top priorities, and that the Governor expected to have more information on the structure of the financing the following day. The board minutes also reflect that the Governor "expressed his optimism that the funding could occur rapidly." J.A. 1017. This was enough to assure Eclipse's disinterested directors that a conversion to liquidation was unnecessary at that time, but they agreed to move forward with the furlough if the funding did not arrive the following day. As an alternative possibility, the disinterested directors inquired of Pieper whether ETIRC could, at least in the short term, fund the agreement without the loan from VEB.

         On February 17th, Pieper and Bolotin reported to the board that VEB had allocated a budget to fund the sale and there was a possibility that funding would arrive as early as the next day. Pieper also disclosed that, in the event the funding was further delayed, ETIRC did not have the capital to fund Eclipse on its own. At a meeting of the disinterested directors that same day, Eclipse's CFO informed the disinterested directors that, without further funding, the company was set to run out of money by February 27th. In light of this information, the disinterested directors agreed to proceed with the furlough to ensure that the company could continue through the anticipated closure. Accordingly, on February 18th, Eclipse employees were informed that "the sale of Eclipse Aviation is taking longer than expected" and that, although "all actions to date allow us to believe that the sale and closing of the overall process is well within reach, " they were being furloughed indefinitely in order to "make the company's remaining cash last as long as possible and give [Eclipse] the most time to complete the sale." J.A. 1025.

         On February 19th, Pieper reported to Eclipse's CFO that VEB had approved all documentation, that the money had been allocated, and all that was needed was the final signoff from Prime Minister Putin. The next day, the ad hoc committee of noteholders informed Pieper that, due to ETIRC's failure to obtain financing, they had "no alternative" but to convert Eclipse's bankruptcy to a Chapter 7 liquidation. J.A. 691. Pieper informed the noteholders that there would be further meetings in Russia the following day, and that he would have more information then.

         At the board meeting on February 21st, Pieper similarly reported he expected the funding to be approved later that afternoon, and Bolotin confirmed that a meeting was occurring that afternoon at the Moscow "White House" and a final decision would be made at that time. J.A. 1027-28. When the board reconvened later that day, however, Bolotin gave the board the bad news that, contrary to all prior representations, Prime Minister Putin had not made a decision on the funding, because he "still had to think about it." J.A. 1028. Bolotin also reported that the Russian Governor who had assured the board a few days earlier that the funding was coming could not attend the meeting with Prime Minister Putin due to a medical emergency, and that Bolotin would be receiving a more detailed description the following day of what had occurred during the meeting with the Prime Minister.

         According to the noteholders' motion to convert, Pieper did not show up for a scheduled meeting that day and, on February 22nd, informed the committee that problems appeared to have arisen with the financing in Russia. When no further updates of progress from Pieper or Bolotin had been received by February 23rd, the noteholders informed the board and Pieper that they were ready to pull the plug on the deal and to file a motion to convert Eclipse's bankruptcy to liquidation proceedings. Pieper asked for one more day to make the financing come through, and Bolotin advised the board that ETIRC's Moscow attorney would personally call Prime Minister Putin the following morning to advocate for the project, expressing confidence that he could provide a final answer to the board the next day. The noteholders and disinterested directors agreed to wait one more day for a definitive answer, but adopted a resolution directing management to file a motion to convert the bankruptcy to Chapter 7 liquidation proceedings at 2:00 p.m. on February 24th unless they received a "formal written commitment from the Russian Government" that committed to closing by February 26th-the day before Eclipse expected to run out of money. J.A. 1029-30. No commitment came that afternoon, and the motion to convert was then filed on February 24th.

         Once the motion was filed, Eclipse emailed its employees informing them that despite its best efforts, "closing of the sale transaction has stalled and our company is out of time and money, " and that because of the "dire circumstances in today's global marketplace" and the lack of any additional funding, the company's noteholders and board of directors had decided to convert Eclipse's bankruptcy from a reorganization under Chapter 11 to a liquidation under Chapter 7. J.A. 1039. The email explained that this meant the prior furlough had been converted into a layoff, effective February 19th, and that the employees would receive information regarding their benefits packages in the mail later that week.

         Eclipse's employees filed the class action complaint that gave rise to this appeal-an adversary proceeding in the Bankruptcy Court alleging that Eclipse's failure to give them sixty days' notice prior to the layoff violated the WARN Act. After discovery, the employees moved for partial summary judgment, asserting that Eclipse could invoke neither the Act's "faltering company" exception, nor its "unforeseeable business circumstances" exception to excuse its lack of notice, and Eclipse filed a cross-motion for summary judgment, contending that the "unforeseeable business circumstances" exception barred WARN Act liability. The Bankruptcy Court agreed with Eclipse and granted summary judgment in its favor. In re AE Liquidation, Inc., 522 B.R. 62 (Bankr. D. Del. 2014). The District Court affirmed on appeal, In re AE Liquidation, Inc., 556 B.R. 609 (D. Del. 2016), and this appeal followed.

         II. Jurisdiction and Standard of Review

         The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b), the District Court had jurisdiction under 28 U.S.C. § 158(a), and we have jurisdiction under 28 U.S.C. § 158(d). In reviewing bankruptcy court decisions on appeal, we "stand in the shoes" of the district court and apply the same standard of review. In re Global Indus. Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011) (en banc). Here, we exercise ...

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