Tuesday, December 09, 2008

Republic Windows & Doors Case Illustrates Gaps in Employee Protection

Republic Windows & Doors, the Chicago company which recently closed its doors, is not a debtor in bankruptcy, at least not yet. However, it illustrates the point that when laws designed to protect employees meet secured financing, the workers can come up short.

Republic was a company which had operated since 1965. It began losing money in 2002. It tried various strategies, including raising new capital and selling assets. However, by October 2008, management knew that they were nearing the end of the road. As a last ditch effort, they presented an offer to Bank of America, their lender, to sell their note for $3.0 million on a balance of $4.5 million. Bank of America denied the request and demanded a plan for an orderly wind down. The company presented its first plan on October 16, 2008, which was turned down a few days later. The company submitted another proposal which was also rejected. Then it asked for permission to pay its employees for their vacation pay. Finally, on December 2, 2008, the company gave its employees three days notice that it would be closing.

Under the WARN Act, companies are required to give employees 60 days notice of a plant closing in many circumstances. Additionally, the employees would be entitled to a priority claim in bankruptcy for their wages up to $10,950. However, those rights are not worth much without money to pay them. The news articles don't go into detail about the lending relationship with Bank of America. However, in an asset-based lending transaction, all receivables are paid into a lockbox controlled by the bank. If the bank does not advance the money back under the loan, there is no money to operate with. In this situation, if management is not willing to divert receivables in violation of the credit agreement, the bank has the final control over whether employees are paid or not.

The fact that employees rights can be frustrated so easily has led to some creative methods to get workers paid. Some plaintiffs lawyers have sued banks under the WARN Act under the theory that they have become the employer. In the Republic Windows & Doors case, the employees have staged a sit-in at the factory to bring attention to their cause. They have managed to get prominent politicians from Rep. Luis Gutierrez to President-elect Barack Obama to plead their cause. Some have criticised Bank of America for accepting $25 billion in federal bailout money, but turning a cold shoulder toward the unpaid workers. Illinois Gov. Rod Blagojevich has ordered all state agencies to stop doing business with Bank of America until the workers are paid. However, the fact that Gov. Blagojevich was indicted on federal corruption charges today may give him less influence than he might have had otherwise.


Patches said...

So is this a "cash" collateral situation? or Couldn't the B of A loan be a pref. transfer of assets as B of A holds and continues to receive and hold "receivables"? Please excuse my ignorance as my knowledge is skewed towards consumer bankruptcies. Just trying to stretch my brain a bit and trying to understand the ins and outs of 11. Couldn’t those receivables be property of the estate in 11 to pay priority claims? So this is a liquidating 11 and not reorganization?

Thomas MacEntee said...

Employers trying to screw employees out of what is owed them is not new. In October I was laid off along with close to 700 other employees at my law firm - and no, I am not an attorney. Just someone who wiped attorney butt all day.

Just like Republic they won't pay accrued vacation (I am sitting on over 225 hours) or the WARN Act monies as required by law. You'd think that lawyers would know what laws to follow and not to break! At least 300 of us have not found new employment in this economy and are looking forward to Crappy Holidays thanks to Heller Ehrman as well as Bank of America and Citibank who are making decisions not to pay us.