WELA ALERT: WASHINGTON SUPREME COURT

De Facto Corporate Officers Are Liable For Willful Withholding of Wages Earned Before a Chapter 7 Bankruptcy Regardless of Pay-Day

Plaintiff was the CFO of a financially troubled company. After failing to obtain additional financing, the Board of Directors began to make preparations for a Chapter 7 bankruptcy filing. The Board ordered the CFO to terminate all employees other than those necessary for the bankruptcy filing. The CEO resigned and was not replaced.

The remaining Board members first decided to use the company’s remaining money to pay the retained employees, their own director & officer insurance and other company insurance. By the time of the bankruptcy filing, the company owed more than $320,000 in unpaid wages and accrued vacation payments. The CFO had informed the Board that at termination he would be owed unpaid salary, accrued vacation, and a $50,000 severance payment in accordance with his offer letter. The Board paid $31,000 to employees other than the plaintiff and then filed the Chapter 7 bankruptcy.

The plaintiff filed suit against the former Board members in federal court alleging willful withholding of wages. Both sides moved for summary judgment. The district court granted the Board members’ motion solely on the basis that they did not have authority to pay wages with pay days following the Chapter 7 filing. The plaintiff filed for reconsideration and asked the district court to certify the issue to the Washington Supreme Court. The district court did so.

The Supreme Court refused the Board members’ request to revisit the district court’s ruling that they were proper defendants under RCW 49.52. The Court, per Justice Wiggins, held that the Board members were the de facto officers at the time of bankruptcy filing. They decided who was paid, when and how much.

The Court ruled that an individual defendant may be held liable under RCW 49.52 for employee wages with pay days following his own termination as a result of a Chapter 7 bankruptcy. Such a defendant may be liable for willfully withholding employee wages earned before or on the date of the Chapter 7 bankruptcy filing.

Normally the court considers withholding of wages based on the pay day for the wages. The filing of a Chapter 7 petition makes previously established pay periods and pay days irrelevant. The Court refused to allow responsible officers to circumvent the legislature’s intent that employees receive all the wages owed to them simply because previously established pay date occurs after the bankruptcy.

The Court disagreed with both the defendants and district court that Morgan v. Kingen, 166 Wn.2d 526 (2009) and Ellerman v. Centerpoint

Prepress, Inc., 143 Wn.2d 514 (2001), were in conflict. Ellerman did not require individual defendants who previously had control over the payment of wages to have control over the payment of wages at issue on their pay day. Ellerman exempted low-level employees and managers who lacked control over payment of wages from liability.

The Court then held that a defendant’s participation in the decision to file Chapter 7 bankruptcy tends to show willful withholding of wages by the defendant. Here the defendant Board members choose to retain the plaintiff to help with the bankruptcy, chose to file the bankruptcy, and chose to withhold his wages. Their decision to put payment of his wages beyond their control by filing the Chapter 7 shows willfulness.

Justice McCloud, joined by Justice Gonzales, filed a concurring opinion arguing that the mental intent that RCW 49.52.050 requires, i.e., “willfulness” was not subject to a liberal construction even in a civil case because it was a criminal statute. The majority responded in footnote that this case involved only civil remedies.

Allen v. Dameron, — Wn.2d —, 389 P.3d 487 (2/2/17).