Neal v. United Furniture Industries, Inc

The United Staes Bankruptcy Court for the Northern District of Mississippi (the Court) recently held that damages arising from an employer’s failure to give the required notices under the Worker Adjustment and Retraining Notification Act (the “WARN Act”) ware entitled to priority as wages under 11 U.S.C. § 704(a)(4).  Neal v. United Furniture Industries, Inc. (In re United Furniture Industries, Inc.)¸2025 WL 1617554 (Bankr. N.D. Miss. June 5, 2025).  View the opinion here.

Facts

Debtor United Furniture Industries, Inc. (“UFI”) and its affiliates were engaged in the manufacturing and distribution of furniture.  They filed petitions under chapter 11 of the Bankruptcy Code in 2022 and confirmed a liquidating chapter 11 plan, under which a trustee was appointed to liquidate the assets and pay claims in order of distribution.

On November 21, 2022, the debtors abruptly terminated approximately 2700 employees.  The Plaintiffs, individually and on behalf of a certified class of former employees, brought an action in the District Court, subsequently removed to the Bankruptcy Court, seeking damages arising from the debtors/defendants’ failure to provide the proper notices required by the WARN  Act.  Prior to this decision the Court had ruled that UFI failed to provide a “brief statement” explaining why 60 days’ advance notice was not possible as required under 29 U.S.C. §2102(b)(3), which rendered all statutory defenses to liability unavailable. With liability fixed, the only question before the Court for this ruling was whether the damages available to the employees were priority wage claims under §§ 704(a)(4) or (5).

The liquidating trustee opposed the priority classification, arguing that WARN damages were not wages because the WARN Act did not specify that they were.  Since the Act was silent, reading priority into the statute would impermissibly broaden its scope.  He further asserted that both Supreme Court and Fifth Circuit authority had denied WARN damages priority status.  The Plaintiffs, to the contrary, argued  that the damages were intended to compensate employees for lost income due to the failure by an employer to give the appropriate advance notice to terminated employees.

The Court sided with the plaintiffs, finding the damages were entitled to priority.

Reasoning

The damages provision of the WARN Act provides that an employer who violates the statute “shall be liable to each aggrieved employee who suffers an employment loss” for “back pay” and “benefits under an employee benefit plan.”  29 U.S.C. 2104 (a)(1).  The Court observed that courts give words their ordinary and plain meaning.  The common understanding of “back pay” fits within the language of § 507(a)(4), which gives priority to claims for “wages, salaries, or commissions…”  It further noted that many courts have ruled that WARN Act damages fall within the scope of priority wage claims.

The Court rejected the trustee’s argument that the Supreme Court in Czyzewski v Jevic Holding Cor., 580 U.S. 451 (2017), had ruled on this issue and denied the priority status.  To the contrary, the Jevic decision presumed that the class of creditors who had been wrongly bypassed in the order of distribution, with payments going to general unsecured creditors rather than the skipped class, were entitled to priority as terminated wage earners with WARN Act claims.  Similarly, the trustee’s claim that the Fifth Circuit had denied priority status was misguided.  The relevant case, Fleming v. Bayou Steel BD Holdings II, LLC, 83 F. 4^th 278 (5^th Cir. 2023), decided only that the terminated wage class was not entitled to a jury trial on damages under the Seventh Amendment. 

The Court also addressed the trustee’s assertion that priority wages must be “earned” within 180 days of the filing.  The Court reasoned that when employees are terminated without the required notice, they “are deprived of a benefit granted by federal law,” with the WARN Act entitling them to compensation equivalent to the wages and benefits they would have earned during the 60-day benefit period.  The plaintiffs’ claims were entitled to priority.

Author’s Comments

This must be the correct decision.  The terminated employees were prevented from working the 60 days in question and also not given an opportunity to find substitute employment while still earning a wage from their prior job. This deprivation is exactly what the WARN Act was meant to prevent.  Just because the employer had filed bankruptcy should not result in a less effective remedy.

[The Commercial Finance Newsletter is written by an ad hoc group of layers in the Business Law Section of the California Lawyers Association.  This review was written by the Hon. Meredith Jury, U.S. Bankruptcy Judge, Central District of California (Ret.), a member of the ad hoc group.   The opinions contained herein are solely those of the author.]