Monday, April 28, 2008, 9:32 AM

Take That: Filing Bankruptcy to Block Wage and Hour Suits Against Company Executives! But Will This New Tactic Work to Help or Hurt Executives?

The current sluggish economy and lack of economic growth in the United States have wrecked havoc on companies as consumers spend less and less of their disposable income on non-necessities. Restaurants have seen a substantial decline in their patronage causing many of them to file for bankruptcy protection and otherwise shut their doors for good. The interplay between bankruptcy law and lawsuits against the company--pending and potential--will become an increasingly common concern of employers, employees, attorneys, and judges in 2008 and into the future should the economy not improve with enough speed.

Liquidation (so-called Chapter 7 bankruptcy) and rehabilitation of the debtor (Chapters 11, 12, or 13) are the two basic types of bankruptcy proceedings. While Chapter 7 bankruptcies are the most common type, the sale of debtor's assets and distribution pro rata to properly identified creditors often spells the end of a commercial debtor and hinders an individual's credit for ten years. Many companies prefer to attempt rehabilitation, which allows the debtor to use future earnings to pay off creditors under the supervision of a trustee. Either creditors or debtors can initiate bankruptcy.

A crucial part of a bankruptcy is that once filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding and property of the debtor is not allowed to be transferred. Lawsuits against the debtor that have not concluded are subject to an automatic stay.

Buffets Holdings Inc., owner and/or operator of over 600 restaurants nationwide, filed Chapter 11 bankruptcy on January 22, 2008 because of stresses brought on by the poor economy, with listed assets of $964 million in assets against debt of $1.16 billion. Buffets is attempting to rehabilitate itself through additional financing and other corporate changes so as to ultimately regain its profitability as a restaurant chain should it emerge from bankruptcy.

On March 21, 2008, a Buffets employee, James Harris, filed a wage-and-hour suit on behalf of approximately 780 employees of Buffets who held salaried restaurant management positions against three Buffets' executives for failure to pay overtime and provide meal or rest periods required under California law (the specifics of California Wage and Hour Law has been noted previously in this blog). Buffets, the company, was not named. Buffets filed this declaratory action (click here for Buffets' complaint) on April 21, 2008 to stop Harris' suit as a violation of bankruptcy's automatic stay given that Buffets' bylaws require the company to indemnify officers and directors (such as those named as defendants by Harris) to the "fullest extent" allowed under Delaware law. Buffets also requested injunctive relief in its complaint to prevent Harris or any other proposed class member from suing Buffets on the same factual allegations.

This will be a case to watch for employers and employees alike. A ruling for Harris potentially subjects key executives of employers facing bankruptcy to additional liabilities against which he or she may have no means of adequately protecting himself or herself. This would be a good time to review your insurance policies (D&O, EPL, umbrella, and excess) if you are a director or officer or other covered executive of a company. A ruling against Harris has the potential to leave employees without recourse on employment law violations once an employer has filed bankruptcy. With bankruptcy, timing is often everything, so be alert if economic issues are facing you as an employer or your employer if you are an employee if you have potential claims to raise.

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