If concerns by financial institutions about environmental liability of their debtor corporations was the threat of the 1990’s, the threat of the 2000’s may well be debtor liability under the Worker Adjustment and Retraining Act of 1988, known as the “WARN Act.”

In sum, the WARN Act requires that, with extremely limited exceptions, employers with over 100 employees must give at least 60 days notice of a plant closing or mass layoff. Essentially, the employer must provide full compensation and benefits for the entire 60 day period. Liability for failure to comply can be tremendous, including potential for civil penalties of $500 per day per occurrence.

Recently, Courts have wrestled with the issue of whether lenders who undertake involvement in the debtor’s business in the wake of financial concerns also place themselves within the scope of the WARN Act. In Smith v. Ajax Magnathermic Corp., the United States Court of Appeals for the Sixth Circuit held that, in certain circumstances, lenders can be held liable for WARN Act violations of debtor companies. Specifically, the Court held that lenders could potentially have liability under the WARN Act where they “insert[ed]” a management consultant to assist in company operations. Such involvement, the Court concluded, could evidence assumption of a management role in the company sufficient to trigger responsibility under the WARN Act.

In today’s business climate, lenders often take active roles in working with debtors to avoid bankruptcy and maintain viable operations. While such goals are certainly laudable, and necessary, lenders must be cognizant of this new, potentially costly, theory of liability.

While this area continues to develop, lenders should be extremely cautious in undertaking involvement of any kind in the day to day operations of debtors. Moreover, where there is involvement, no matter how limited, lenders should insure that its debtor has, in all respects, complied with the requirements of the WARN Act.

For more information about the WARN Act and its potential impact on financial institutions, contact Robert J. Tribeck, Esquire at 717.237.6701 or rtribeck@rhoads-sinon.com.