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WHEN YOUR COMPANY IMPLODES

The Baltimore Sun

For nearly two decades, federal law has protected workers and communities against the impact of sudden business closings and mass layoffs, guaranteeing a 60-day advance notice in many cases.

But it can be difficult for workers to enforce that guarantee - especially when the company has gone out of business.

Take the case of SPI Floors LLC of Elkridge, a family business for more than half a century that merged into a larger company in 2005 and abruptly shut its doors a month ago.

Workers for its parent company filed a class action lawsuit last week in federal court in New Jersey, on behalf of up to 900 workers, including an estimated 300 in Maryland. They are seeking to collect 60 days' worth of pay and benefits, which they argue they are owed because they didn't get the notice required under federal law.

"This is no slam-dunk," said Charles A. Ercole, the lawyer representing the workers. "That's why you haven't seen any other guys running into court."

Because the Worker Adjustment and Retraining Notification Act, known as the WARN Act, has a number of exemptions built into it, companies that don't give notice are often found to have no liability.

Of 8,350 plant closings and mass layoffs during 2001, only about a quarter appeared to require WARN notices, according to a 2003 study by the Government Accountability Office. And, even in cases where warnings appeared to be required, the GAO found, employers issued them in only 36 percent of the cases.

Even if the company has acted improperly, it is not easy for workers to recover. The Toledo Blade of Ohio reviewed 226 WARN Act lawsuits from around the country for an article published this year, and found the workers prevailed slightly less than half of the time.

Where to collect

And even when the workers do win, the next - and often insurmountable - problem is to collect.

"There's not a pocket to get into" in many cases of shut-down companies, said David A. Santacroce, who teaches law at University of Michigan.

"People buy these smaller companies," he said, "and they squeeze them like a sponge, and then they walk away."

Santacroce formerly headed the WARN Act unit at the Sugar Law Center for Economic and Social Justice, a national nonprofit legal advocacy group based in Detroit.

The act was passed in 1988, after a wave of abrupt job losses, both to give workers a chance to adjust to impending shutdowns and to allow communities to mobilize social services to mitigate the impact.

Sometimes, workers can collect. Ercole said he and his firm recovered almost $7 million for 2,000 workers of USF Red Star, a freight trucker that closed in 2003, and nearly $3 million for 800 employees of Oakwood Homes, a builder of mobile homes that went bankrupt in 2002.

But overall, Santacroce said, the act isn't working nearly to the extent that was intended. "Do some people give notice who wouldn't otherwise? Yes. Could it work a lot better? Yes, a lot better," he said.

Hurt by slump

In SPI's case, trouble began after it merged two years ago with Hoboken Wood Flooring, another long-running family business that had sold a controlling interest that year to Code Hennessy & Simmons LLC, a Chicago private equity firm.

The reshaped company built up debt to fuel an expansion but ran headlong into the housing slump. As the market for flooring cratered along with demand for new homes, so did the company's revenue. It shut down abruptly near the end of October. New Jersey employees got a few days' notice, Ercole said, but Maryland workers got none.

The company filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code in Delaware last month, but the workers' case was quickly dismissed after the company said it had no assets beyond what it owed to secured bank lenders. The workers, unable to press a claim in bankruptcy court, then filed the class action suit.

Now, workers seeking 60 days' pay and benefits face a legal labyrinth in pressing their claim.

Hoboken Wood Flooring claims that it was exempt from the notice requirements under the "faltering business" clause of the WARN Act, according to Ercole. Hoboken's attorney and officials at majority owner Code Hennessy & Simmons did not return phone calls seeking comment.

"A company that's out there trying to drum up a buyer or drum up a capital infusion" is exempt from the notice requirement because a shutdown notice could short-circuit those attempts to save the business, said Ian Meklinsky, a New Jersey labor lawyer who represents employers. "This gets litigated frequently within bankruptcy," he said.

Even if they prevail, the workers have to find assets of the closed company that are not claimed by other creditors, principally bank lenders with secured claims.

"If you look at WARN Act claimants versus secured creditors, the secured creditors are going to come out on top," said Michael T. Conway, who heads the bankruptcy practice in the New York office of the law firm LeClairRyan. Conway represented former workers in the huge Global Crossing bankruptcy proceeding.

Surviving entity

In the SPI/Hoboken case, the company has claimed that its secured bank lenders have valid liens that exceed the company's assets. "We found no evidence of any reason to challenge those liens," said John McLaughlin, the attorney who represented the bankruptcy trustee.

Although SPI and Hoboken are out of business and claim to have no assets beyond what they must pay first to their bank lenders, there is a surviving entity with assets. "The only going concern is Code Hennessy," Ercole said.

But to collect from Code Hennessy, several experts said, the workers will have to show that the company was not just an investor but in day-to-day control of the businesses.

That depends on the facts, but, Conway said, "It's an argument that almost never succeeds."

bill.salganik@baltsun.com

The WARN Act

Here's how the Worker Adjustment and Retraining Notification (WARN) Act works:

Who's covered:

Employers of more than 100 workers

When it applies:

Closing of a business location with more than 50 employees; layoffs of 500 or more; layoffs of 50 to 499 if they constitute one-third or more of the work force.

What's required:

60 days' notice

Exceptions:

The notice period can be shortened or waived in case of unforeseeable business changes, natural disasters or if a "faltering company" needs to avoid public notice that would ruin its efforts to secure new financing.

Enforcement:

Workers can sue in federal court. If they prevail, they can collect 60 days' pay and benefits.

[Source: U.S. Department of Labor, Employment and Training Administration]

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