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Managers Can be Individually Liable for Unpaid Wages Despite Appointment of a Trustee

In Boucher v. Shaw, WL 2217517 (9th Cir. Jul. 27, 2009), the court held that managers of a company operating under Chapter 11 of the Bankruptcy Code could be individually liable for employees’ unpaid wages, accrued vacation and holiday pay under the Fair Labor Standards Act (the “FLSA”), even after a bankruptcy trustee is appointed. 

In late January, 2004, the Chapter 11 debtor ceased operations and terminated its employees.  On February 10, 2004, the bankruptcy court converted the case to a Chapter 7 liquidation and appointed a trustee. Three former casino employees brought suit against the company’s Chairman and CEO, CFO, and labor relations manager for unpaid wage claims at the time the company ceased operations. The district court dismissed the suit, but the Ninth Circuit reversed and reinstated the claims.
 
On appeal, the managers argued that the appointment of a Chapter 7 trustee 11 days after the company ceased operations removed them from control over the company and any ability to pay the wages. The court rejected this argument because, according to the court, the obligation to pay employees’ wages became due and payable immediately at the time of discharge. As such, the subsequent appointment of a Chapter 7 trustee did not relieve the managers of any potential personal liability for unpaid wage claims. The court also made clear that the automatic stay of § 362 of the Bankruptcy Code provided no protection to the individual managers because they were not the debtor in the bankruptcy proceedings. The court explained that under the FLSA, the term “employer” is to be given an expansive interpretation. Accordingly, individuals who have “control over the nature and structure of the employment relationship,” or “economic control” over that relationship are “employers” within the meaning of the FLSA and may face personal liability, regardless of whether a trustee is appointed.

A manager’s potential personal liability may be especially acute in a bankruptcy case. The debtor is typically in severe financial distress and the Bankruptcy Code only affords limited priority to unpaid pre and post-petition wage claims (11 U.S.C. §507(a)(1)(C)(4), §503(b)(1)(A)(ii) and §726(b)). As such, the Bankruptcy Code may prohibit the payment of wages unless all claims of higher or equal priority are also paid. The Ninth Circuit’s decision suggests that it really does not matter whether a debtor in bankruptcy can pay, the manager may be liable.

Copyright 2007 - 2010 Ryley Carlock & Applewhite. A Professional Association. All rights reserved.National Law Review, Volume , Number 365
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