9th Cir.: Managers Of Business Are “Employers” Within Meaning Of FLSA, Subject To FLSA Liability; Bankruptcy Of The Underlying Corporation Does Not Affect This Liability Where Individual (Not Corporate Pledged) Assets Sought

Boucher v. Shaw

Three former employees of the Castaways Hotel, Casino and Bowling Center (the Castaways) and their local union sued the Castaways’ individual managers for unpaid wages under state and federal law. The district court dismissed the plaintiffs’ claims. This appeal raised several issues, most significantly whether the Castaways’ individual managers can be held liable for unpaid wages under Nevada law and/or the Fair Labor Standards Act (FLSA). The state court held that individual managers cannot be held liable as “employers,” and therefore that claim was properly dismissed by the district court. The Ninth Circuit holds that such managers can be held liable, and therefore reversed and remanded the FLSA claim to the district court.

“The Castaways filed for Chapter 11 bankruptcy protection on June 26, 2003. The individual plaintiffs were discharged in January 2004, when the Castaways was operating as the debtor-in-possession. On February 10, 2004, after the plaintiffs were discharged, the Chapter 11 petition was converted to a Chapter 7 liquidation, and the Castaways ceased operations. The individual plaintiffs, Ardith Ballard, Thelma Boucher and Joseph Kennedy III, filed suit in Nevada state court seeking to recover unpaid wages for themselves and for a class of Castaways employees. Ballard alleges that she has not been paid for the last pay period that she worked at the Castaways. Boucher alleges that she was not paid for the final pay period until two weeks after her employment was terminated. All three individual plaintiffs allege that they have not been paid their accrued vacation and holiday pay. Culinary Workers Union, Local 226 (Local 226 or the union) seeks to recover wages that were withheld as dues from the paychecks of Thelma Boucher and other employees. The plaintiffs assert claims under Chapter 608 of the Nevada Revised Statutes and the FLSA, 29 U.S.C. § 206(a).

The defendants are three Castaways’ managers. Dan Shaw was the Chairman and Chief Executive Officer of the Castaways at the time the plaintiffs were discharged. Michael Villamor was responsible for handling labor and employment matters at the Castaways. And James Van Woerkom was the Castaways’ Chief Financial Officer. Shaw had a 70 percent ownership in the Castaways, and Villamor had a 30 percent ownership interest. The plaintiffs allege that each defendant had custody or control over the “plaintiffs, their employment, or their place of employment at the time that the wages were due.”

The plaintiffs filed this lawsuit in Nevada state court on October 14, 2004. On December 21, 2004, Defendant Shaw removed the case to the United States District Court for the District of Nevada and filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Villamor and Van Woerkom separately filed motions to dismiss, alleging the same grounds for dismissal as Shaw. The district court granted the defendants’ motions and dismissed all of the plaintiffs’ claims. Boucher v. Shaw, No. CV-S-04-1738-PMP (PAL) (D.Nev. Jan. 25, 2005); Boucher v. Shaw, No. CV-S-04-1738-PMP (PAL) (D.Nev. Feb. 18, 2005); Boucher v. Shaw, No. CV-S-04-1738-PMP (PAL) (D.Nev. Apr. 11, 2005). The district court concluded that the defendants were not “employers” under Nevada law, Local 226 lacks standing to bring a claim under Nevada law and the plaintiffs cannot maintain a cause of action under the Fair Labor Standards Act against the defendants. Boucher v. Shaw, No. CV-S-04-1738-PMP (PAL), slip op. at 1-2 (D.Nev. Jan. 25, 2005). The plaintiffs challenge each of these conclusions on appeal. We certified the state law question to the Nevada Supreme Court, and stayed the case pending its resolution. The Nevada Supreme Court has answered the state law question, and we incorporate that court’s reasoning into our decision.”

After discussing the holding of Nevada’s Supreme Court, upon referral of the issue from the Ninth Circuit, that Nevada State law does not consider individuals liable for wage law violations of the corporation as “employers,” the Court considered the same issue under the FLSA, and whether such individuals can be liable as employers, despite the bankrupt status of the underlying corporate employer.

“In the case at bar, Ballard has alleged that Defendant Villamor was responsible for handling labor and employment matters at the Castaways; Defendant Shaw was chairman and chief executive officer of the Castaways; and Defendant Van Woerkom was the Castaways’ chief financial officer and had responsibility for supervision and oversight of the Castaways’ cash management. The plaintiff also alleges that Shaw held a 70 percent ownership interest in the Castaways, Villemor held a 30 percent ownership interest and all three defendants had “control and custody of the plaintiff class, their employment, and their place of employment.” ( See Complaint ¶¶ 9-11.) Accepting these allegations of material fact as true, Ballard’s claim withstands a motion to dismiss. See Simon, 546 F.3d at 664.

The defendants do not challenge their status as employers under the FLSA. Rather, they argue that any duty they had to pay wages to Castaways’ employees ended with the conversion of the Castaways’ Chapter 11 bankruptcy proceeding into a Chapter 7 liquidation. The defendants cite no authority for this proposition, but state merely that “[a]ny action under the FLSA is properly directed to the Chapter 7 Trustee and not Shaw, Villamor or Van Woerkom.” (Appellees’ Br. at 14.) Ballard responds that the case was not converted to a Chapter 7 proceeding until February 10, 2004, at least eleven days after she was fired, so that even if the duty to pay wages ceased upon the conversion of the case, the managers were liable up until that point. In supplemental briefing ordered by the court, the defendants do not dispute that the bankruptcy was converted to a Chapter 7 on February 10. Yet they assert that the Castaways “had ceased its operations altogether at the time that Ballard’s wage claim accrued,” which appears to mean that although Ballard is owed wages for the final pay period prior to when the Castaways ceased operating on January 29, her paycheck was not due to be issued to her until afterwards. Ballard argues to the contrary, citing Nev.Rev.Stat. § 608.020, for the proposition that wages and compensation earned and unpaid at the time of discharge are to be paid immediately. We agree. Moreover, the defendants’ subsequent argument that Ballard’s FLSA claim should fail because her wage claim has already been satisfied in the bankruptcy proceeding raises a question of fact not properly resolved on a motion to dismiss.

As a more general matter, we cannot see how it makes a difference one way or the other whether the Castaways was in Chapter 11 or Chapter 7. The Castaways is not a defendant, and the defendants are not debtors. The defendants perhaps assume that the automatic stay or other injunctive power of the bankruptcy court has some effect on the plaintiff’s claim, but they have not shown how that would be.

Section 362 of the Bankruptcy Code embodies the automatic stay, which immediately applies when a debtor files a bankruptcy petition and is designed to preclude a variety of post-petition actions-both judicial and non-judicial-against the debtor or affecting property of the estate. See 11 U.S.C. § 362(a). The automatic stay is fundamental to bankruptcy law. It ensures that claims against the debtor will be brought in one place, the bankruptcy court. The stay protects the debtor by giving it room to breathe and, thereby, hopefully to reorganize. The stay also protects creditors as a group from any one creditor who might otherwise seek to obtain payment on its claims to the others’ detriment. See, e.g., Chugach Forest Prods., Inc. v. Northern Stevedoring & Handling Corp., 23 F.3d 241, 243 (9th Cir.1994) (quoting Hillis Motors, Inc. v. Hawaii Auto. Dealers’ Ass’n, 997 F.2d 581, 585 (9th Cir.1993)).

As a general rule, the automatic stay protects only the debtor, property of the debtor or property of the estate. See 11 U.S.C. §§ 362(a); 541(a) (defining property of the estate); Advanced Ribbons and Office Prods., Inc. v. U.S. Interstate Distrib., Inc., 125 B.R. 259, 263 (9th Cir.BAP1991) (citation omitted); see also Chugach, 23 F.3d at 246. The stay “does not protect non-debtor parties or their property. Thus, section 362(a) does not stay actions against guarantors, sureties, corporate affiliates, or other non-debtor parties liable on the debts of the debtor.” Chugach, 23 F.3d at 246 (citations omitted). We have refused to extend the automatic stay to enjoin claims against a contractor-debtor’s surety, even though a surety bond guarantees the contractor-debtor’s performance. See In re Lockard, 884 F.2d 1171, 1178-79 (9th Cir.1989). In Lockard, we reasoned that extending the stay was inappropriate because the surety, not the contractor-debtor, puts its property directly at risk of liability to creditors in the event of nonpayment by the contractor-debtor, and therefore a surety bond is not property of the bankruptcy estate. Id. at 1178. We found that this was the case even though allowing a claim against the surety would trigger the surety’s right to recourse against the debtor. Id. Similarly, the automatic stay does not protect the property of parties such as officers of the debtor, even if the property in question is stock in the debtor corporation, and even if that stock has been pledged as security for the debtor’s liability. Advanced Ribbons, 125 B.R. at 263.

We have never addressed the question whether a company’s bankruptcy affects the liability of its individual managers under the FLSA. But our case law regarding guarantors, sureties and other non-debtor parties who are liable for the debts of the debtor leaves no doubt about the answer: the Castaways bankruptcy has no effect on the claims against the individual managers at issue here.

This is, in fact, an easier case than our precedent cited supra . Here, the plaintiff’s claim does not seek to reach property of the managers that has been pledged to secure the Castaways’ debt, or that would otherwise impact property of the estate. The individual managers generally are not liable for debts of the debtor, and even if they were, the plaintiff’s statutory claim against the individual managers is unrelated to any of the Castaways’ debts. Nor does the plaintiff seek damages based on an insurance policy held by the debtor. Cf. A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 998-1004 (4th Cir.1986). The plaintiff’s claim is not being used as an alternative route to recoup property of the estate, and therefore cannot be said to be “related to” the bankruptcy proceeding, such that it would be swept into the bankruptcy court’s jurisdiction under 28 U.S.C. § 1334(b). See Celotex v. Edwards, 514 U.S. 300, 307-08, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Neither party has alleged that the estate would be diminished by any judgment in favor of the plaintiff, nor is there any indication in the record that the Castaways would be required to indemnify the individual managers for legal expenses or any judgment against them in this case. Cf. In re Minoco Group of Cos., 799 F.2d 517, 518 (9th Cir.1986) (affirming bankruptcy court’s finding that insurance policy cancellation was automatically stayed because of its impact on debtor’s obligation to indemnify officers and directors). However, 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. See id.; A.H. Robins Co., 788 F.2d at 1007-08.

In this case, the parties have not raised any claims that this suit would affect the bankruptcy estate, so we need not reach this question.

To the contrary, the managers are independently liable under the FLSA, and the automatic stay has no effect on that liability. The defendants in their supplementary briefing repeatedly assert that they were unable to find any authority in support of this proposition. We have found at least two cases holding that individual managers can be held liable under the FLSA even after the corporation has filed for bankruptcy. See Donovan v. Agnew, 712 F.2d 1509, 1511, 1514 (1st Cir.1983) (finding managers of bankrupt corporation individually liable under FLSA and noting, “The overwhelming weight of authority is that a corporate officer with operational control of a corporation’s covered enterprise is an employer along with the corporation, jointly and severally liable under the FLSA for unpaid wages.”); Chung v. New Silver Palace, 246 F.Supp.2d 220, 226 (S.D.N.Y.2002) (“The automatic stay … affects only [the debtor]; it does not apply to plaintiff’s [FLSA] claims against the [debtor]’s non-debtor co-defendants.”).

The district court correctly held that the plaintiffs could not state a claim against the managers for unpaid wages under Nevada law, and therefore correctly dismissed that claim, making the issue of the union’s standing moot. However, the plaintiffs have adequately stated a claim under the FLSA.”