In re Southwest Equipment Rental, Inc.
| Decision Date | 04 May 1989 |
| Docket Number | Bankruptcy No. 1-88-00033,No. CIV-1-88-109.,Adv. No. 1-88-0030,CIV-1-88-109. |
| Parties | In re SOUTHWEST EQUIPMENT RENTAL, INC. d/b/a Southwest Motor Freight, Debtor. C. Kenneth STILL, Trustee of Southwest Equipment Rental, Inc. d/b/a Southwest Motor Freight, Plaintiff, v. CONGRESS FINANCIAL CORPORATION (SOUTHERN), Defendant. |
| Court | U.S. District Court — Eastern District of Tennessee |
Gary R. Patrick, Chattanooga, Tenn., for plaintiff.
Kyle R. Weems, Chattanooga, Tenn., C. Edward Dobbs, Atlanta, Ga., for defendant.
The defendant, Congress Financial Corporation (hereinafter "Congress"), seeks the dismissal of the trustee's action for injunctive relief and the recovery of unpaid wages allegedly due and owing to employees of the debtor, Southwest Equipment Rental, Inc., doing business as Southwest Motor Freight (hereinafter "Southwest"). The trustee filed this action seeking a remedy pursuant to the Fair Labor Standards Act minimum wage and overtime pay provisions, 29 U.S.C. §§ 201 et seq. (1938), alleging that Congress is liable under the "hot goods" provision of 29 U.S.C. § 215(a)(1) for the amount of unpaid wages owed to Southwest drivers and employees. Congress has filed the instant motion to dismiss this suit pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting alternatively that the complaint fails to state a claim for relief, that the trustee lacks standing to bring this claim under the Act, and that the relief requested exceeds the trustee's authority as defined by the Bankruptcy Code.
A complaint challenged by a defendant's motion to dismiss is to be construed in the light most favorable to the plaintiff and its allegations taken as true. See Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). As noted in Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), the plaintiff's complaint should not be dismissed unless it appears beyond doubt that no set of facts may be proved in support of the plaintiff's claim entitling the plaintiff to the relief sought. See also Jones v. Sherrill, 827 F.2d 1102 (6th Cir. 1987); Lee v. Western Reserve Psychiatric Hab. Center, 747 F.2d 1062 (6th Cir.1984).
This case was withdrawn from the bankruptcy court pursuant to 28 U.S.C. § 157(d), where it was originally filed as an adversary proceeding (No. 1-88-0030) in the converted Chapter 7 bankruptcy case of the debtor, Southwest. See Bankr. Case No. X-XX-XXXXX. On January 8, 1988, Southwest filed a petition in the bankruptcy court seeking relief under Chapter 11 of the Bankruptcy Code. Southwest was, at the time, engaged in the commercial interstate transportation of freight, operating its national trucking company from offices near Chattanooga, Tennessee. The defendant Congress Financial acquired the assets of a commercial lender, James Talcott, Inc., in April of 1986. At that time, Talcott was engaged in a financing arrangement with Southwest whereby Talcott would lend or advance operating capital to Southwest in return for the pledging of Southwest's accounts receivable as security for the funds advanced. The trustee asserts that Southwest pledged its accounts, contract rights, chattel paper, general intangibles, inventory, equipment, fixtures and proceeds to Talcott to secure repayment of the funds advanced. The trustee acknowledges that Congress perfected its security interest by filing a UCC-1 with the State of Tennessee.
The trustee asserts that this factoring arrangement between Southwest and Congress continued through 1987 and into the early months of 1988. During this period, the trustee asserts, Congress extended monies to Southwest in excess of the parties financing agreement such that the debtor's outstanding debt balance exceeded $9 million. At some point in the fall of 1987, Congress is asserted to have altered its lending practices as to Southwest, placing strict limits on the extension of further credit and maintaining its own representatives on the Southwest premises to control the debtor's financial operations and collections. The trustee asserts that during this period when Congress was closely involved in the debtor's financial operations, Southwest's outstanding debt to Congress was reduced by over one-half, so that by October of 1987, the amount Southwest owed Congress was down to $4.2 million.
As previously noted, the trustee's claim against Congress arises under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq. (hereinafter "FLSA"). The trustee asserts that during the period of Congress' close control over Southwest's financial operations, Southwest's drivers and employees were not paid their regular wages as required by federal law. Specifically, the trustee charges that Southwest employees were not paid for the pay periods December 18, 1987, through January 15, 1988, although Southwest continued to operate during this period of time and commercial freight was carried. The trustee charges that although Southwest drivers and employees were not paid during this period, Congress continued to control Southwest's finances through monitoring and collecting its accounts receivable with the result that Southwest's outstanding debt was substantially reduced through the collection of the debtor's accounts.
The trustee's complaint seeks an injunction prohibiting Congress from executing on its security interest by collecting further sums from Southwest's accounts receivable, until Congress turns over sufficient funds to the trustee to satisfy the employees' claims for unpaid wages. In the alternative, the trustee seeks direct payment to the employees of their unpaid wages. See Trustee's Complaint. The trustee argues that Congress has violated the FLSA by collecting the debtor's accounts and applying the amounts to pay down Southwest's debt without first satisfying the employees' claims for unpaid wages. The trustee argues that Congress has thereby violated the "hot goods" prohibition set out in 29 U.S.C. § 215(a)(1). The trustee relies primarily on the recent Supreme Court decision in Citicorp Industrial Credit, Inc. v. Brock, 483 U.S. 27, 107 S.Ct. 2694, 97 L.Ed.2d 23 (1987), which applied the provisions of the FLSA, namely the "hot goods" provision, to the secured creditor of a debtor in bankruptcy acquiring goods under a security agreement. The Court in Citicorp banned the sale of the goods in interstate commerce which were produced in violation of the minimum wage and overtime laws of the FLSA, 29 U.S.C. § 215(a)(1).
As the trustee's complaint establishes, Southwest filed its Chapter 11 reorganization petition on January 8, 1988. The bankruptcy court thereafter appointed C. Kenneth Still as the trustee for Southwest, in both the original Chapter 11 reorganization proceeding and subsequently when the case was converted to a Chapter 7 liquidation. The trustee originally filed this action as an adversary proceeding in the bankruptcy court. Subsequently, Congress filed a motion seeking the mandatory withdrawal of the trustee's complaint pursuant to 28 U.S.C. § 157(d), asserting that resolution of the claim requires interpretation and construction of section 15(a)(1) of the FLSA under the facts of this case.1 The motion to withdraw was granted and thereafter, Congress filed the instant motion to dismiss. The trustee has responded in opposition and Congress has filed a reply.
Congress argues in support of its motion to dismiss that the "hot goods" prohibition of § 15(a)(1) of the FLSA cannot be applied to it as argued by the trustee because there are no "hot goods" implicated under these facts. Congress argues that there is no support in either the FLSA or the Citicorp decision for the trustee's claim that the accounts receivable generated by the deliveries of the drivers and work of other Southwest employees can be considered "goods" under the statute. Further, Congress argues that by collecting sums from the debtor's accounts receivable it does not thereby introduce "goods" into commerce in violation of § 15(a)(1) of the FLSA. Congress further argues that the trustee lacks standing to enforce the "hot goods" provision of the FLSA. Congress points out that the provision for injunctive relief provided by the FLSA to restrain violations of the "hot goods" section is found at 29 U.S.C. § 217. Congress relies upon the caselaw interpreting that provision which holds that "the Secretary of Labor is vested with exclusive authority for filing a suit under section 217 to restrain FLSA violations." Marchak v. Observer Publications, Inc., 493 F.Supp. 278, 280 (D.R.I. 1980). See also Wirtz v. Jones, 340 F.2d 901, 903-05 (5th Cir.1965). Lastly, Congress raises the argument that the trustee's suit to recover unpaid wages on behalf of Southwest's employees violates the bankruptcy statute because it seeks recovery for a specific class of creditors, thereby favoring one class over the remainder. Congress asserts that this violates the trustee's fiduciary obligation to the creditors mandated by 11 U.S.C. § 323(a).
The Court will address these issues seriatim.
Enacted in 1938, the FLSA mandates the payment of a minimum wage and maximum hours of work and regulates child labor for all employees within the scope of the statute. 29 U.S.C. §§ 206 and 207. As noted by the court in Donovan v. TMC Indust., 20 B.R. 997, 25 WH Cases 829 (N.D.Ga.1982), the FLSA statutory scheme consists of the following provisions:
The principal features of the Act establish minimum wages (§ 206) and maximum hours (§ 207), and prohibit oppressive child labor (§ 212). The Act prohibits the shipment or sale of any goods in the production of which any employee was employed in violation of § 206 or § 207 (§ 215(a)(1)). This Section also prohibits the violation of the minimum wage and maximum hour provisions (§ 215(a)(2)). The...
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