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Issue: Whether the individual managers of a debtor can be held liable, individually, under the FLSA.
Holding: Affirmed in Part, Reversed in Part and Remanded for proceedings consistent with this opinion.
Rule: "The FLSA defines 'employer' as 'any person acting directly or indirectly in the interest of an employer in relation to an employeeŠ' [And,] the definition of 'employer' under the FLSA is not limited to the common law concept of 'employer,' but 'is to be given an expansive interpretation in order to effectuate the FLSA's broad remedial purpose.' Š Whether an employer-employee relationship exists does not depend on 'isolated factors but rather upon the circumstances of the whole activity.' The touchstone is the 'economic reality' of the relationship." "Where an individual exercises 'control over the nature and structure of the employment relationship,' or 'economic control' over the relationship, that individual is an employer within the meaning of the Act, and is subject to liability."
Reasoning: Accepting Ballard's allegations with respect to the Defendants' roles in Castaways as true, Ballard's claim withstands a motion to dismiss. The Defendants are challenging their personal liability under the FLSA based upon the fact that Castaways converted from a chapter 11 debtor-in-possession to a chapter 7 debtor in liquidation. Generally, the court said that it could "not see how it makes a difference one way or the other whether the Castaways was in Chapter 11 or Chapter 7. The Castaways is not a defendant, and the defendants are not debtors." The court then discussed § 362 and said that "[a]s a general rule, the automatic stay protects only the debtor, property of the debtor or property of the estate." Here, Ballard's claim against the Defendants is not seeking to get at any property of the estate, and the claim against the Defendants is unrelated to the Castaways' debts. Additionally, Ballard does not seek to damages based upon the debtor's insurance policy. Ultimately, neither Ballard nor the Defendants "has alleged that the estate would be diminished by any judgment in favor of the plaintiff, nor is there any indication in the record that the Castaways would be required to indemnify the individual managers for legal expenses or any judgment against them in this case." (Although, the court points out that if there was an effect on property of the estate, it may be that Ballard would have to proceed against the Defendants through the bankruptcy.) Therefore, "the managers are independently liable under the FLSA, and the automatic stay has no effect on that liability."
Facts: Many of the debtors' directors and officers ("D&Os") were sued in various civil actions asserting damages for actions or omissions taken by the debtors and their D&Os prior to the bankruptcy filing. The D&Os filed proofs of claim in the debtors' bankruptcy seeking indemnification, reimbursement, and contribution for costs incurred ("Defense Costs") and for any judgment of liability entered against them in the state court cases. In a previous order, the court granted the confirmed liquidation plan trustee's (the "Trustee") motion for subordination and disallowance of the D&Os indemnification claims related to any judgment that is entered against them. Before the court is the Trustee's motion, pursuant to § 502(e)(1)(B), to disallow the D&Os' claims for Defense Costs that are incurred in certain of the civil actions.
Issue: "[W]hether the Officers' and Directors' indemnification claims for attorneys fees and costs incurred in defending Š [certain civil actions] should be disallowed pursuant to Bankruptcy Code § 502(e)(1)(B)."
Holding: Motion to disallow claims is granted.
Rule: "To achieve disallowance of a claim under Bankruptcy Code §502(e)(1)(B), the Plan Trustee must prove three elements: (i) the claim must be contingent, (ii) the claim must be for reimbursement or contribution, and (iii) the debtor and the claimant must be co-liable on the claim."
©2010 Leif M. Clark
