CURRENT MONTH (September 2021)

When Did Business Cease for Purposes of Employees’ Priority Claims?

By Michael Enright

Judge Gross of the U.S. Bankruptcy Court in Delaware shed new light on an old question recently—how to determine whether there was a “cessation of business” by the Debtor before the petition date, and if so, when did it occur? The question is important because it governs the application of Section 507(a)(4) and (5) for purposes of determining the priority claims of terminated employees. Those employees are entitled to a capped priority claim for amounts earned but unpaid by the Debtor for the period of 180 days before the filing of the petition or the cessation of business, whichever occurs first. In Etzelsberger v. Fisker Automotive Holdings, Inc. (In re FAH Liquidating Corp.), Adv. Pro. No. 13-52517 (Bankr. D. Del. Sept. 27, 2021), an employee and 155 of his co-workers who were terminated on April 5, 2013, filed a class action adversary proceeding against the Debtor for damages under the WARN Act. The Debtor had filed a chapter 11 petition months after the mass layoff, in November 2013. Although the April 5, 2013, termination left the Debtor with 52 remaining employees, that number dwindled to fewer than 20 by September. After expressing some surprise at the limited case law on the subject, Judge Gross turned to In re Adcock Excavating, Inc., 42 B.R. 84 (Bankr. N.D. Ill. 1984) for guidance. Adcock utilized a balancing test, which Judge Gross applied. First, he determined that although the Debtor did not terminate all of its employees in April, it terminated “substantially all” of them, because it made the choice to retain only a “special few” whom it deemed necessary for a stalking horse process. Next, the court determined that the Debtor ceased its “usual work” in April, because at that time it ceased manufacturing cars, its primary business; no longer continued its normal business; and started preparing for bankruptcy. As such, the court held the WARN claimants were entitled to priority at the rate of $12,475 per claimant, plus interest, beginning on the termination date. The holding updates the case law in an area where there has been little guidance and is helpful for understanding an infrequently construed section of the Bankruptcy Code.

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