On July 27, 2009 the Ninth Circuit issued an opinion stating that individual managers can be held liable under the FLSA even though the company that employed the plaintiffs had filed for bankruptcy. Boucher v. Shaw (9th Cir. 05-15454). In Boucher, the company that employed the plaintiffs, Castaways Hotel, Casino, and Bowling Center, that filed for Chapter 11 bankruptcy protection in June of 2003, discharged the plaintiffs in January 2004, and then converted to a Chapter 7 liquidation. Later that year, the plaintiffs filed claims under federal and Nevada state law for unpaid wages against three Castaways managers. The district court dismissed the plaintiffs' claims and the plaintiffs appealed. With respect to the state law claim, the issue was certified to the Nevada Supreme Court, which determined that individual managers could not be found liable as "employers" under the relevant Nevada state law. The Ninth Circuit then addressed whether the defendants could be personally liable despite Castaways' bankruptcy.

It is generally settled law that certain managers, depending on factors such as the amount of interest and control they exert over the structure of an employment relationship, can be individually liable for violations under the FLSA as an “employer.” See Lambert v. Ackerley, 180 F.3d 997, 1011-12 (9th Cir. 1999); Chao v. Hotel Oasis, 493 F.3d 26 (1st Cir. 2007). In this case, there was no dispute that the individual defendants could be considered employers under the FLSA. Instead, they argued that the conversion of Castaways' bankruptcy from Chapter 11 to Chapter 7 terminated their duty to pay the plaintiffs their wages. The Ninth Circuit rejected the argument. First, the court noted that the plaintiffs were terminated prior to the conversion to Chapter 7, meaning that their pay had already been earned. The court held further that the nature of the bankruptcy filing by Castaways was irrelevant because Castaways was not a defendant in the wage and hour case, the defendants (the managers) were not debtors in bankruptcy, and an automatic stay intended to protect a debtor could not affect the plaintiffs' claims.

In assessing the impact of the bankruptcy proceedings and the protections offered by bankruptcy law, the court focused on the wage and hour proceedings’ potential impact on the bankrupt estate. The court noted that the plaintiffs' claims were unrelated to any of Castaways' debts, the plaintiffs were not seeking damages based on any insurance policy held by Castaways, the claims were not being used as an alternative route to accessing property of the bankruptcy estate, and there was no evidence that a judgment in favor of the plaintiffs would otherwise diminish the estate. The court did state that "if the liability of the non-debtor party were to affect the property of the bankruptcy estate, such as by a requirement that the debtor indemnify the non-debtor or by payment of the liability from a director's and officer's insurance policy, it may be necessary for the plaintiff in such a case to proceed against the non-debtor party through bankruptcy proceedings." The claims at issue, however, did not impact the bankrupt estate, and therefore, the court remanded the case to the district court to allow the plaintiffs to proceed with their claims against the managers under the FLSA.

Only a few weeks earlier, on July 2, 2009, the Washington Supreme Court issued a similar opinion in which the plaintiffs filed a wage claim under state law against individual managers of a company that filed for Chapter 11 bankruptcy that was later converted to Chapter 7. Morgan v. Kingen, 2009 WL 1887353 (Wash. July 2, 2009). The court held that because the state statute permits individual liability against certain officers, the individual managers could be held personally liable despite the company's bankruptcy. The court pointed out that the defendants "had authority over the payment of wages," the "wages were accrued prior to chapter 7 bankruptcy," and that the "bankruptcy of the corporation is not a means to escape personal liability by those who failed to pay wages owed."

It is important to keep in mind that the FLSA and certain state wage laws that permit individual liability may not allow certain managers or officers to escape personal liability despite a company's bankruptcy filing, especially where a judgment in favor of the plaintiffs would not affect the estate of the company-debtor.

This blog entry was authored by Nitin Sud.