Introduction
The Worker Adjustment and Retraining Notification Act (“WARN”) requires an employer to give 60 days’ advance written notice prior to a plant closing or mass layoff. Frequently, as a company encounters financial distress—a situation that often leads to a plant closing or mass layoff— creditors exercise greater control over the entity in an attempt to recover debts owed to them. When the faltering company fails to provide the requisite WARN notice, terminated employees often assert that WARN liability should attach to such creditors. In Coppola v. Bear, Stearns & Co.
With US Circuit Courts split on the issue of whether bankruptcy courts have the power to release third parties from creditors’ claims without the creditors’ consent, a move known as non-consensual third-party release, the Seventh Circuit recently weighed in the affirmative in In re Airadigm Communications, Inc.1 With the split widening between the circuits on this matter, it seems more likely than ever that the Supreme Court could weigh in on and decide this critical issue to lenders and others.2
One of the hallmarks of chapter 11, and bankruptcy jurisprudence in general in the U.S., is the fundamental right of creditors and other stakeholders to have a meaningful voice in the proceedings concerning matters that affect their economic interests.
Principles of corporate governance that determine how a company functions outside of bankruptcy are transformed and in some cases abrogated once the company files for chapter 11 protection, when the debtor's board and management act as a "debtor-in-possession" ("DIP") that bears fiduciary obligations to the chapter 11 estate and all stakeholders involved in the bankruptcy case.
On January 31, 2008, less than two years after the institution of their bankruptcy cases, Dana Corporation and its affiliated debtor companies became one of the first large manufacturing entities with fully funded exit financing to emerge from chapter 11 under the recently revised Bankruptcy Code.
Centimark Corp. v. Pegnato & Pegnato Roof Mngt, Inc., Case No. 05-708 (W.D. Pa. May 6, 2008)
In the last issue of Franchise Alert, we discussed how to spot signs of franchisee financial distress at an early stage. Here, we present some steps franchisors can take to deal with financially distressed franchisees.
Update Files
The United States Bankruptcy Court for the Southern District of New York has granted another preliminary injunction ordering an excess directors and officers liability insurer to advance defense costs, despite the fact that the insurer had denied coverage on the basis of a prior knowledge exclusion and three of the insured entity's principals have pled guilty to various offenses, including violations of the securities laws. Murphy v. Allied World Assurance Co. (U.S.), Inc. (In re Refco, Inc.), No. 08-01133 (Bankr. S.D.N.Y. Apr. 21, 2008).
Do officers of a public corporation have an affirmative obligation to monitor corporate affairs? Yes, according to Judge Walsh in his recently issued memorandum opinion in Miller v. McDonald (In re World Health Alternatives, Inc.).1 Although "Caremark" oversight liability had previously generally only been imposed on directors of public corporations, the Bankruptcy Court for the District of Delaware determined that officers are not immune from such liability as a matter of law.