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Board Members Face Personal Liability for Unpaid Wages Under Washington Supreme Court Ruling

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The Washington Supreme Court has ruled that a company’s Chapter 7 bankruptcy filing does not protect the company’s board members from personal liability for payment of unpaid employee wage claims under Washington’s Wage Rebate Act (RCW 49.52.050). Allen v. Dameron, No. 93056 2, 2017 WL 448997 (Wash. Feb. 2, 2017).

In Allen, Advanced Interactive Systems, Inc. (the “Company”), defaulted on its loans to its senior secured lender. The secured lender ultimately declined to extend new funding and the Company’s board of directors voted to authorize the Company’s Chapter 7 bankruptcy filing. The bankruptcy was filed on March 14, 2013, one day before the Company’s regular March 15 payroll payment date for its employees.

Plaintiff Allen was the CFO of the Company and was not terminated before the bankruptcy filing along with the Company’s other employees because he was deemed necessary to prepare the Chapter 7 filing documents. By the March 14 bankruptcy filing date, the Company lacked sufficient funds to pay its employees, including Allen. A subsequent class-action lawsuit produced a settlement that paid employees $322,615, but Allen received none of these funds because he was not a member of the class. As a consequence, Allen sued the board members, alleging that under RCW 49.52.050 he was entitled to payment for three months’ severance pay, unused vacation pay, and wages earned during two pay periods: wages with a payday date one day after the bankruptcy case was filed and one week’s worth of wages with a payday date 15 days after the filing.

RCW 49.52.070 provides that “any employer and any officer, vice principal or agent of any employer who shall violate any of the provisions of RCW 49.52.050(1) and (2) shall be liable in a civil action by the aggrieved employee or his or her assignee to judgment for twice the amount of the wages unlawfully rebated or withheld by way of exemplary damages, together with costs of suit and a reasonable sum for attorney’s fees . . . .” RCW 49.52.050 in turn applies to “any employer or officer, vice principal or agent of any employer . . . who . . . willfully and with intent” deprives an employee of his or her wages.

The Ruling

In its opinion, the Allen Court rejected the defendants’ initial suggestion that, as board members, they did not fit the statute’s ostensibly limited application to an “officer, vice principal or agent of any employer.” In declining to accept this defense, the Court asserted that the directors were acting as the de facto officers of the Company and had made the decisions about the timing of how much would be paid to which Company employees. Noting that the Company had operated without a CEO for several days until the board filed for Chapter 7, the Court concluded that “Such decision-making is not within the normal duties of a member of the board of directors for a corporation.”

The defendants next argued that the filing of the bankruptcy on March 14 made it legally impossible for them to pay wages on the normal March 15 payroll date. The Court rejected this argument as well, declining to allow “responsible officers, principals, and agents to circumvent the legislature’s intent that employees receive all the wages owed to them simply because the previously established payday date for wages occurs after a chapter 7 filing” and further asserting that “in circumstances of chapter 7 bankruptcy, we look to whether the employer or officer, vice principal, or agent withheld their employees’ earned wages when the company entered chapter 7 liquidation instead of on the established payday date.” For the Court, a bankruptcy “does not excuse the willfulness of an individual’s exercise of his or her control to not pay wages, especially in circumstances where the decision to file for chapter 7 bankruptcy is controlled by the individual exercising control over wages.”

In an interesting footnote, the Court also addressed the defendants’ argument that under RCW 49.56.010, the bankruptcy trustee was the “proper party against whom such [wage] claims may and should be brought.” RCW 49.56.010 provides that certain wage claims are preferred claims in “proceedings in insolvency” and “must be paid by such trustees or assignees before any other creditor or creditors.” The Allen Court did not elaborate on the application of this statute but did make it clear that liability for payment of employee wage claims under Washington’s Wage Rebate Act was an independent, alternative cause of action that unpaid employees could choose to pursue—and presumably would pursue—in cases in which a bankruptcy estate had “insufficient funds to satisfy wage claims.”

The Take Away for Businesses

The Court’s message here is plain and business decision-makers must take note. The Allen decision follows the Court’s prior decision in Morgan v. Kingen, 166 Wn.2d 526, 210 P.3d 995 (2009). In Morgan, the Court held that corporate officers were personally liable for payment of employee wages that had accrued between the date on which a company had filed for Chapter 11 protection and the date on which the Chapter 11 reorganization case was converted to a Chapter 7 liquidation. Taken together, Allen and Morgan make it very clear that in Washington, corporate business decision-makers can never assume that the bankruptcy filing of their company will enable them to escape personal liability for payment of unpaid employee wages, regardless of whether those payment obligations accrued before or after the bankruptcy filing. Although these decisions are only applicable in Washington, employers in other states should be aware of their potential to spark similar litigation elsewhere in the future.