With recent troubles in the sub-prime mortgage industry making headlines, companies dealing with layoffs of lenders’ employees should take note of a new decision from the Second Circuit Court of Appeals.  In Coppola v. Bear Stearns & Co., the court rejected a claim by a laid-off mortgage lender’s employees that a creditor that mandated restructuring of their company was required to provide advance notice under the federal Worker Adjustment and Retraining Notification Act (“WARN”).  WARN requires employers to provide 60 days notice of a facility closing or mass layoff.

 

In this case, the plaintiffs alleged that during a downturn in the mortgage industry in the late 1990’s, their employer misappropriated money from a credit line extended to it by Bear Stearns.  Once Bear Stearns learned of the deception, it conditioned a loan workout on replacement of the mortgage lenders’ officers, and stock pledge agreements.  The creditor also refused to extend new loans to the mortgage company, including loans to cover payroll obligations.  The plaintiffs contended that Bear Stearns’ workout terms resulted in the resulting need to close the business, yet it took no steps to provide advance notice to employees under WARN.

 

The District Court entered summary judgment for Bear Stearns, concluding that the creditor was not an “Employer” within the meaning of that term under WARN.  The Second Circuit affirmed this decision.  Creditors can become employers under WARN, but only if they become responsible for operating the business as a going concern, rather than acting to protect their security assets, or preserving those assets for liquidation or sale.  In this case, even though Bear Stearns assumed significant control of the business as a result of its owners’ malfeasance, this control was clearly limited to protection of its debt.

 

A decision for the plaintiffs in this case may have had the unintended effect of encouraging layoffs by preventing creditors from negotiating loan workout terms.  The specter of WARN liability may cause creditors to simply declare loans in default.  Creditors involved in loan workout negotiations should be aware that in some circumstances, their assumption of day-to-day control over the debtor could result in responsibility for providing advance notice of layoffs.