Priority of Unpaid Wages for Former Employees of the entity in Receivership By Davidson, Peter* Q: I was getting ready to wrap up a case
recently when I got a call from a former employee of the entity in
receivership who said his brother-in-law, a lawyer, told him that his
claim for unpaid wages should be paid on a priority basis. I looked at the
sections of the Code of Civil Procedure dealing with receiverships,
Sections 564-570, and the Rules of Court and did not see anything about
wage priorities. Is the former employee correct?
The statute has two other interesting provisions, which I would wager are not generally followed by receivers. Subsection (c) provides: “The above claims shall be paid…before the claim of any other creditor…and shall be paid as soon as the money with which to pay same becomes available.” Subsection (d) goes on to provide: “This section is binding upon all courts of this state and in all receivership actions the court shall order the receiver to promptly pay out of the first receipts and earnings of the receivership, after paying current operating expenses, such preferred labor claims.”
The legislature has made it clear that receivers and assignees should not
wait until the end of the case to pay these labor claims. The statute
directs receivers, in two different sections, to pay these claims as soon
as possible. As to the first question, a receiver can wait to pay labor claims until he or she has sufficient funds in the estate to pay any “current operating expenses”, which would include fees and costs owed to the receiver and his or her professionals, as well as sufficient funds, if applicable, to run the business or property. When sufficient funds exist, however, the receiver should seek instructions to pay the labor claims (which the statute states “the court shall order”) rather than waiting until the end of the case. This would not be true if the matter were an assignment for the benefit of creditors. There, the wage claims would have priority over the assignee’s fees and expenses, because subsection (d) providing for payment “after paying the current operating expenses”, only applies to receiverships. This is one reason a receivership may be preferable to an assignment.
This interpretation of the statute has been affirmed by the 9th Circuit
and California cases. In Division of Labor Enforcement v. Stanley
Restaurants, 228 F. 2nd 420 (9th Cir. 1955), the 9th Circuit had
previously reversed the district court when it held that labor claims had
priority over taxes owed the federal government (another priority to
remember that is not apparent in the C.C.P. But note, state taxes do not
have a priority because Revenue and Taxation Code §6756 specifically
states that §1204 claims have priority). As indicated above, subsection (d) only refers to receiverships and does not mention assignments or other insolvency proceedings. The 9th Circuit not only relied on the statutory language, but reasoned that in a receivership “the estate is in the hands of a court appointed and supervised individual acting as an arm of the court. Such is not true of the common law assignee. No matter how salutary the practice of assignments for creditors, it must be conceded that as an individual engaged in private enterprise, the assignee is for practical purposes outside the control and supervision of the court.” It also cited California cases to the same affect including Bank of Visalia v. Dillonwood Lumber Co., 148 Cal. 18 (1905). The assignee in the case argued that such a rule would be fatal to assignments “since the risk of nonpayment of fees and expenses would be immeasurably increased if labor claims be held to be entitled to a priority”. The court rejected this assertion as being overstated but added “but even if not, we find no sufficient ground for holding otherwise.” See also, Meyer v. Bass, 281 F. 2nd 728, 731 (9th Cir. 1960) [“payment of fees and expenses of administration in disregard of the liens of the wage claimants was an improper disbursement by the assignee.” – assignee surcharged for making distribution].
With regard to federal receiverships, while the statute is not binding on
federal courts (the statute itself confirms it is only “binding upon all
courts of this state”) at least one federal court has indicated it will
usually follow it. T. H. Mastin & Co. v. Pickerling Lumber Co., 2 F. Supp
605, 606 (N.D. Cal. 1933) [“it is conceded that federal courts acting in
equity receiverships are not absolutely bound to recognize preferences and
priorities created by state laws, but it is the practice of this and other
jurisdictions to allow such preferences and priorities as seem
equitable”.]. It is unlikely, however, that the provision would be
followed in government enforcement cases where the goal is to return funds
to defrauded investors or consumers because, generally, the money
recovered in those cases is held in trust for the defrauded parties. FTC
v. Crittenden, 823 F. Supp 699 (C.D. Cal. 1993). To the extent there are
sufficient funds in the estate to pay such claims, then the priority would
likely apply. |