Director & Officer Liability for WARN Act Claims in Light of Stanziale

Introduction
Prior to September 2015, directors and officers generally have not been held individually liable for a company’s failure to provide timely notice under the federal and Wisconsin WARN Acts. However, a recent decision issued by a Delaware bankruptcy court has clouded the issue of whether individual corporate officials fall within the ambit of the WARN Act. In Stanziale v. MILK072011, LLC, the court refused to dismiss the chapter 7 trustee’s claims against the sole manager and president of an insolvent corporation for breach of fiduciary duty based on these individuals’ failure to provide the requisite 60-day notice under the WARN Act.
Stanziale v. MILK072011, LLC
Stanziale arose out of a claim filed in the bankruptcy case of Golden Guernsey Dairy, LLC. Before bankruptcy, the company had operated a dairy and milk processing facility in Wisconsin, and was wholly owned by MILK072011, LLC, which was a portfolio company of a private equity firm owned by Andrew Nikou. On January 5, 2013, Golden Guernsey abruptly ceased operations, and three days later filed a petition under Chapter 7 of the Bankruptcy Code.
On January 3, 2014, the Wisconsin Department of Workforce Development filed an amended proof of claim on behalf of some of Golden Guernsey’s former employees claiming damages in an amount not less than $1.56 million based on the company’s alleged violation of the Wisconsin WARN Act. On November 4, 2014, the bankruptcy trustee instituted an adversary proceeding against MILK072011, as well as Nikou and Golden Guernsey’s former president for damages cause by their alleged failure to issue a WARN notice. In his complaint, the trustee alleged that the individuals breached their fiduciary duties to the debtor by maintaining the debtor’s business operations until the last moment and by ignoring their responsibility to issue appropriate notices to its employees, thereby exposing the company to liability under the Wisconsin WARN Act.
The managers filed a motion to dismiss the breach of fiduciary duty claims asserted in the complaint on the ground that the alleged facts, even if true, did not give rise a valid legal claim. The managers argued that the company was already insolvent at the time when they might have given the WARN notice, and that the additional liability caused by closing without having given the notice merely deepened the insolvency. Since Delaware has rejected the “deepening insolvency” theory of director and officer liability, the managers argued that the complaint did not state a valid cause of action against them. The court ultimately concluded that the trustee’s complaint alleged facts which, if established at trial, would support a finding that the Defendants had breached their fiduciary duties to Golden Guernsey.
Importantly, although the WARN Act only provides for recourse directly against the “employer,” the chapter 7 trustee sought to hold the officers personally liable for the violation on based on the alleged breach of fiduciary duty claims.
The WARN Act
Legislative History
The Worker Adjustment and Retraining Notification (WARN) Act prohibits certain employers from ordering any long-term plant closing, mass layoff, or worker dislocation without first giving 60 days advance notice. The advance notice period is intended to afford employees time to find other jobs, obtain retraining or otherwise adjust to their soon-to-be-changed employment situation.
Despite its history, there have been surprisingly few lawsuits filed under the WARN Act. Various reasons for the lack of WARN Act litigation have bee