Delaware Bankruptcy Court Indicates That Directors and Officers of an Insolvent Company May Be Liable for Breaches of Fiduciary Duty for Failing to Provide Timely WARN Act Notice

January 7, 2016

Directors and officers of distressed businesses face a dizzying array of challenges, including personal liability for unpaid wages under federal and state laws. The federal Worker Adjustment Retraining and Notification Act [1] and similar state laws (the "WARN Act") require at least 60 days’ notice of a plant closing or mass layoff.   

A recent decision from the Delaware bankruptcy court—In re Golden Guernsey Dairy, LLC [2]—is a cautionary tale on the potential implications of the failure to provide a timely WARN notice. Before bankruptcy, the debtor, Golden Guernsey Dairy, operated a dairy and milk processing facility in Wisconsin. The debtor was wholly owned by MILK072011, LLC (“MILK”). Andrew Nikou was the manager of MILK and former manager of the debtor. Brad Parks was the president of the debtor. After the debtor filed for chapter 7 bankruptcy, the Wisconsin Department of Revenue, on behalf of some of the debtor’s former employees, filed a $1.56 million priority claim for violations of the Wisconsin state law version of the WARN Act. The chapter 7 trustee for the debtor then sued MILK, Nikou, and Parks, among others, alleging they breached their fiduciary duties to the debtor by not giving the appropriate notice under the WARN Act before bankruptcy. The defendants moved to dismiss the complaint arguing, among other reasons, that the trustee did not have standing to sue, the failure to give the WARN Act notice did not create the debtor’s insolvency, and the fact that liabilities from WARN Act violations grew did not give rise to a cause of action.

The court first held that the chapter 7 trustee had standing to bring the fiduciary duty claims under the Delaware Limited Liability Company Act [3] as the sole representative of the estate, and that it didn’t matter whether the particular claims were direct claims of the company or derivative in nature. The court declined to dismiss the complaint because, assuming as it must that the facts alleged in the complaint were true, the defendants may have breached their fiduciary duties by: (a) maintaining the debtor’s operations until the last moment, thereby exposing the debtor to WARN Act claims (the complaint alleged that the debtor was insolvent beginning December 21, 2011, and did not file for chapter 7 bankruptcy until January 5, 2013) and (b) ignoring their WARN Act obligations and never giving the requisite WARN Act notices to employees. The court therefore denied the defendants’ motion to dismiss.

The Golden Guernsey Dairy decision is a clear reminder to management to be mindful of existing obligations under federal and state wage laws. This opinion, while only denial of a motion to dismiss, serves as guidance to directors and officers of distressed businesses that they must consider whether and when to provide a WARN Act notice and that failure to comply with WARN notice obligations may result in personal liability.

[1] 29 U.S.C. §§ 2101 – 2109.

[2] 2015 WL 5579990 (Bankr. D. Del. Sept. 21, 2015).

[3] 6 Del. C. § 18-1002.

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