Whether a claimant is entitled to an administrative expense claim, or simply a prepetition claim, can mean the difference between full ­payment of the claim and the recovery of only pennies on the dollar. Accordingly, a significant amount of litigation in bankruptcy cases centers around the priority status to which certain claims are ­entitled. The U.S. Bankruptcy Court for the Northern District of Illinois has recently issued a decision granting priority status to claimants seeking damages for violation of the Worker Adjustment and Retraining Notification Act (the WARN Act). Given the significant ­liability that debtors could face under the WARN Act, this decision is relevant to all bankruptcy practitioners.

On Feb. 24, in In re World Marketing Chicago, 564 B.R. 587 (Bankr. N.D. Ill. 2017), the U.S. Bankruptcy Court for the Northern District of Illinois addressed an application for allowance of a class of administrative expense claims against three debtors under the WARN Act. The WARN Act claimants were all employees of the debtors who were terminated from their employment on the date on which the ­debtors filed for protection under the Bankruptcy Code. The WARN Act claimants asserted that their claims for damages under the WARN Act were entitled to administrative priority in the bankruptcy cases, but the liquidating trustee acting on behalf of the estates argued in the alternative that either there was no liability under the WARN Act or, to the extent there was such liability, the claims were not entitled to administrative priority.

Facts and Arguments of the Parties

On the same day on which they filed for bankruptcy protection, World Marketing Chicago, World Marketing Dallas and World Marketing Atlanta (collectively, the debtors) terminated a significant number of their employees (the WARN Act claimants) with no notice. The WARN Act claimants asserted that such termination was in violation of the WARN Act, and filed an application for allowance of their claims as a class claim in the debtors' bankruptcy cases, allegedly entitled to administrative priority under 11 U.S.C. Section 503(b)(1)(A)(ii). The trustee of the debtors' liquidating trust (the trustee) opposed the application, ­arguing that the debtors' estates had no WARN Act liability, based upon the “liquidating fiduciary” exception to the WARN Act, and that even if WARN Act liability was established, such liability should not be entitled to administrative priority.

The Court's Analysis

The bankruptcy court first addressed whether claims under the WARN Act for termination of ­employment immediately following the commencement of a Chapter 11 bankruptcy case could be entitled to administrative priority, assuming no exception to the WARN Act is present. The statutory predicate for such administrative priority is 11 U.S.C. Section 503(b)(1)(A)(ii), which provides that: After notice and a hearing, there shall be allowed administrative expenses, … including—(1)(A)(ii) wages and benefits awarded pursuant to a judicial proceeding … as back pay attributable to any period of time occurring after the commencement of the case under this title, as a result of a violation of federal or state law by the debtor … .

The court easily found that the WARN Act claimants had satisfied their burden in demonstrating the existence of all the elements necessary to establish administrative priority under this section of the Bankruptcy Code: WARN Act liability is calculated in terms of “wages and benefits;” any award granted by the bankruptcy court to the WARN Act claimants would be “awarded pursuant to a judicial proceeding;” the WARN Act classifies damages under the statute as “back pay;” WARN Act claims are in the nature of severance and, therefore, “attributable to the period of time occurring after the commencement of the case;” liability would arise directly from federal law—the WARN Act; and given that the debtors had already ceased operations, allowance of the WARN Act claim would not increase the likelihood of the layoff or termination of other employees.