WA Supreme Court Upholds Director Liability for Unpaid Wages Post-Bankruptcy
This case involves Advanced Interactive Systems. Why am I excited to blawg about this? Well, your humble attorney used to be a humble IT guy. His first IT job was at Advanced Interactive Systems. The company was known for a variety of products, but specialized in law enforcement and military weapons simulators, which included a "shoot back" option, which could shoot non-lethal munitions at the participant in time with the simulation, especially in cases where the participant was failing to appropriately use cover. It also allowed for the instructor to manage the scenario, including escalation and deescalation of the scenario based on the participant's behavior. I was responsible for installation, troubleshooting, QA, and customer support. It was a fun job. Unfortunately, the travel got to me rather quickly, and I made the move to Unisys, where I spent the remainder of my tech career.
They also, much to my chagrin, made gun range games and bow hunting simulators.
Now, I made the decision to leave AIS primarily based on the travel. But the straw that broke the camel's back, as they say was this phrase: "[The CEO] has decided to step down in order to spend more time with his family." That is a huge red flag in the corporate world, denoting some manner of ill-performance. It is the corporate equivalent of a movie star checking in to a hospital for "exhaustion."
This case came to the Washington Supreme Court on Certification from the Federal District Court for the Western District of Washington. They asked the following two questions:
Is an officer, vice principal, or agent of an employer liable for a deprivation of wages under RCW 49.52.050 when his or her employment with the employer (and his or her ability to control the payment decision) was terminated before the wages became due and owing?
Does an officer, vice principal, or agent's participation in the decision to file the Chapter 7 bankruptcy petition that effectively terminated his or her employment and ability to control payment decisions alter the analysis? If so, how?
Now what happened here was Allen took a job as interim CEO. Due to the financial difficulties, he deferred some of his pay, as did other key employees. The funds in the piggy bank were insufficient to meet final payroll. The Board made the decision to file for Chapter 7 if its senior secured lender could not back more funds. Allen had the oh so fun job of announcing the shutdown, and stating they would be receiving their final paychecks with accrued vacation, on the next pay date. The Board kept Allen on for the filing. He didn't get a share of the pie.
Allen filed suit for willful withholding of wages in violation of the Washington Rebate Act. The case was dismissed by the Western District of Washington on the basis that the Board didn't have authority to pay Allen and that they didn't wrongfully withhold wages. Allen asked for reconsideration and certification to the Court of Appeals.
First the Court held that the filing of a Chapter 7 Bankruptcy has no bearing on whether the wages were wrongfully withheld by the Officers of the Company. In addition, the Court held the Officer participation in the decision to file a Chapter 7 Bankruptcy is actually further evidence of an intent to wrongfully withhold wages. It did not matter that the officer was terminated as a result of the Chapter 7, and the last pay date came after the filing and the officer's termination. This is because the wages are due and owing under the law at termination, but at the next pay period. What happens in the interim does not quash the obligation.
In its reasoning, the Court held that this was a rather unique situation, in that Boards don't generally engage in payroll decisions:
In addition, the circumstances where a member of the board of directors will be liable under the WRA appear to be rare. Here, the directors were acting as the de facto officers of AIS. In fact, AIS operated without a CEO for a period of several days until the board filed for chapter 7 bankruptcy. The board made the decisions of who, when, and how much was being paid to AIS employees. Such decision-making is not within the normal duties of a member of the board of directors for a corporation.
So what does this mean for businesses operating in Washington? First, Boards should be careful to assume payroll obligations. Second, payroll obligations need to be treated as paramount: fold up shop before you run the last cent out. For higher level employees that wish to defer, perhaps issuance of stock instead of accruing liabilities you will be unable to pay. Third, make sure you are adequately insured for D&O liability: If you have to assume an obligation, make sure you're covered in the event a suit is around the corner.
If you have any questions regarding the case or its implications for your business, please feel free to contact our Issaquah Attorneys. We are conveniently located on the Eastside, and we handle all business matters from formation through litigation, including coverage for Washington and Alaska. We're here to help.