In re USM Technology Corp.
| Decision Date | 16 September 1993 |
| Docket Number | Adv. No. 92-5672.,Bankruptcy No. 92-56411-JRG |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California |
| Parties | In re USM TECHNOLOGY CORPORATION, Debtor. USM WORKERS' COMMITTEE, Plaintiff, v. Suzanne DECKER, Chapter 7 Trustee for the Estate of USM Technology Corporation; Silicon Valley Bank, Defendants. |
James K. Cameron, Thomas M. Kim, LeBoeuf, Lamb, Leiby & MacRae, San Francisco, CA, for 96 former employees of USM Technology Corp. aka the "USM Workers' Committee."
Timothy H. Hopkins, Hopkins & Carley, San Jose, CA, for defendant Silicon Valley Bank.
John A. Butler, III, Mountain View, CA, for trustee.
Debtor's former employees seek a declaration that their right to receive unpaid wages from proceeds of "goods" produced in violation of the Fair Labor Standards Act1 (the "FLSA") (colloquially known as "hot goods")2 is superior to the rights of a creditor holding a perfected security interest in Debtor's accounts receivable. The court finds that the doctrine is not applicable to proceeds of goods produced in violation of the FLSA.
Prior to filing its bankruptcy petition, USM Technology Corporation ("USM") was in the business of assembling electronic circuit boards utilized in the manufacture of personal computers. Silicon Valley Bank (the "Bank") provided financing to USM. The Bank perfected a security interest in all of USM's assets to secure all loans it made to USM. In early 1992, USM breached its loan agreements with the Bank. On August 27, 1992, the Bank obtained an order appointing a receiver for USM. On September 9, 1992, USM's landlord evicted the receiver and business operations ceased.
Two days later, on September 11, 1992 (the "Petition Date"), USM filed a petition under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). Shortly thereafter, on October 18, 1992, the case was converted to one under Chapter 7 of the Bankruptcy Code. Suzanne Decker (the "Trustee") was appointed the Chapter 7 trustee for the estate of USM.
The primary assets of the estate consisted of uncollected accounts receivable. The receiver, who was in possession prior to the Petition Date, and the Trustee were able to collect approximately $400,000 on the accounts receivable. As of the Petition Date, USM owed the Bank approximately $1.2 million and, as previously noted, the Bank was secured by all assets of USM. The Trustee gave notice of her intent to abandon the accounts receivable proceeds to the Bank based upon its secured status.
In addition to the Bank's claim, USM owed a substantial sum to its former employees for unpaid wages earned from July 17 through September 9, 1992. Ninety-five of the former employees organized themselves into a committee (the "Committee"), which asserted an interest in approximately $230,000 of the accounts receivable proceeds because that amount of the accounts receivable was generated from the sale of circuit boards produced by members of the Committee. The Committee initiated this adversary proceeding to prevent the abandonment by the Trustee. The Committee's complaint contains a claim for declaratory relief seeking a determination that its claim to the Fund for unpaid wages, based on the Fair Labor Standards Act, 29 U.S.C.A. §§ 201-219 (West 1985 & Supp.1993), has priority over the Bank's secured interest in the Fund. The Bank, the Trustee, and the Committee entered into a stipulation that allowed the Trustee to abandon all proceeds of the accounts receivable proceeds except $228,338.50, which the Trustee agreed to hold in an interest bearing account (the "Fund") pending the outcome of this lawsuit. The Bank and the Committee thereafter filed the cross-motions for summary judgment which are now before the court.
The Committee asserts that existing law supports its argument that the FLSA covers the proceeds of "hot goods," as well as the goods themselves, and that employees have standing under the FLSA to initiate an action to pursue "hot goods" or their proceeds. If the court does not agree, the Committee then argues that the court should extend existing law and interpret the FLSA to cover proceeds as well as goods and should also find an implied private right of action in the Act allowing employees to pursue "hot goods" and their proceeds in order to carry out the policies underlying the Act.
Section 6 of the FLSA provides that "every employer shall pay to each of his employees . . . wages at the following rate: . . . not less than $4.25 an hour. . . ." § 6(a), 29 U.S.C.A. § 206(a). Section 7 of the FLSA provides that "no employer shall employ any of his employees . . . for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed." § 7, 29 U.S.C.A. § 207(a)(1).
It is unlawful under the FLSA "for any person — (1) to transport . . . in commerce, . . . any goods in the production of which any employee was employed in violation of section 206 or section 207 of this title . . .; or (2) to violate any of the provisions of section 206 or section 207 of this title. . . ." § 15, 29 U.S.C.A. § 215(a)(1), (2). Section 15(a)(2) makes it unlawful to fail to comply with the minimum wage and overtime pay requirements of the FLSA. Such goods are known as "hot goods." Section 15(a)(1) makes it unlawful for certain persons to transfer "hot goods" into interstate commerce.
The enforcement scheme of the FLSA is found in sections 16 and 17. §§ 16, 17, 29 U.S.C.A. §§ 216, 217. Under section 16(b) individual employees are authorized to bring a private cause action against their employer if their employer violates the above provisions:
Any employer who violates the provisions of section 206 or section 207 of this title shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages. . . . An action to recover the liability prescribed above . . . may be maintained against any employer . . . by any one or more employees for and in behalf of himself or themselves and other employees similarly situated. . . . The court in such action shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney\'s fee to be paid by the defendant, and costs of the action.
§ 16(b), 29 U.S.C.A. § 216(b).
By its terms, section 16(b) applies only to employers. "`Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee. . . ." § 3, 29 U.S.C.A. § 203(d). The Committee does not assert that the Bank is an "employer." Accordingly, an action under § 16(b) is not maintainable against the Bank.3
Second, section 17 provides: "The district courts . . . shall have jurisdiction, for cause shown, to restrain violations of section 215 of this title. . . ." § 17, 29 U.S.C.A. § 217. Only the United States Secretary of Labor has standing to bring an action under section 17. § 11(a), 29 U.S.C.A. § 211(a). The Committee cites no authority for the proposition that employees have standing under section 17.
The only remedy specifically provided for employees under the FLSA is an action against their employer to recover back wages pursuant to section 16(b). Marchak v. Observer Publications, Inc., 493 F.Supp. 278, 280 (D.R.I.1980). In re Southwest Equip. Rental, Inc., 102 B.R. 132, 135-36 (E.D.Tenn.1989). See also, Barrentine v. Arkansas-Best Freight Sys., Inc., 750 F.2d 47 (8th Cir.1984), cert. denied, 471 U.S. 1054, 105 S.Ct. 2116, 85 L.Ed.2d 480 (1985); Morelock v. NCR Corp., 546 F.2d 682, 688 (6th Cir.1976), vacated on other grounds, 435 U.S. 911, 98 S.Ct. 1463, 55 L.Ed.2d 503 (1978); Wirtz v. Jones, 340 F.2d 901, 903-05 (5th Cir.1965); Avitia v. Metropolitan Club of Chicago, Inc., 731 F.Supp. 872 (N.D.Ill.1990); EEOC v. American Telephone & Telegraph Co., 365 F.Supp. 1105 (E.D.Pa.1973), aff'd, 506 F.2d 735 (3d Cir. 1974).
Even if the Committee had standing, the Committee does not seek to enjoin USM from transferring "hot goods" into interstate commerce or from continuing to violate the minimum wage and overtime pay requirements of the FLSA. See §§ 6, 7, 15, 17, 29 U.S.C.A. §§ 206, 207, 215(a)(1), (2), 217. All the goods produced in part through the labor of members of the Committee have already been transferred into interstate commerce, all that remains are accounts receivable proceeds. Moreover, USM no longer has any employees. Simply put, there is no pending or threatened violation of section 15 which the court could enjoin under section 17. §§ 15, 17, 29 U.S.C.A. §§ 215, 217.4
The Committee does not assert that the accounts receivable proceeds are "goods" under the FLSA,5 but instead assert that current case law supports the argument that the proceeds of "hot goods" are also tainted and that unpaid workers have an interest in the allegedly tainted proceeds. Alternatively, the Committee argues that the reasoning underlying recent decisions interpreting the FLSA support a finding that the court should extend the concept of "hot goods" to cover the proceeds of such goods. The court rejects both arguments.6
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