Former Corporate Shareholder, Director and Chief Executive Officer of Corporation Not Personally Liable for Payment of Unpaid Wages Under the Illinois Wage Act

Credit: bankruptcylitigationblog.com

Credit: bankruptcylitigationblog.com

The Illinois Wage Payment and Collection Act (Wage Act or Act) provides employees a cause of action to collect payment of earned wages or compensation due to them. [FN1] Wages is a term defined broadly under the Act, and the purpose of the Wage Act is to “protect employees in Illinois from being stiffed by their employers.” [FN2]

The question of who is an employer under the Act, and thus potentially liable for a claim under the Act, is a more pressing question.  An issue that has arisen in this context is whether a corporate officer can be held personally liable for unpaid wages of its employees under the Wage Act.

In the recent Montalbano case from the Northern District of Illinois, Judge Barnes discusses the standards for imposing personal liability on a former employer of a corporation under the Act, before concluding in that case that the standards for imposing such liability were not met. [FN3]

Section 2 of the Wage Act provides that the term “employer” includes any “individual, partnership, association, corporation, business trust … or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee, for which one or more persons is gainfully employed.” [FN4]

The Illinois Supreme Court, however, has further clarified that section 13, rather than section 2 of the Wage Act, defines who, other than the employer itself, may be treated as an “employer” for the purposes of the Wage Act.  [FN5] The Supreme Court noted that while Section 2 confirms that an employer is liable for both its own violations of the Wage Act and any violations committed by its agents, Section 13 imposes personal liability on any officers or agents of the employer who knowingly permitted the Wage Act violation, rather than imposing strict Wage Act liability on all officers or agents under a literal reading of Section 2. [FN6]

In Montalbano, two former employees of Montalbano Builders, Inc. (MBI) were pursuing claims for unpaid wages from their former employer, MBI, before they were terminated when MBI went out of business.

The former MBI employees filed their applications for wage claims with the Illinois Department of Labor who found in their favor and against MBI. Anthony Montalbano (Debtor), the former 100% shareholder, sole director, Chief Executive and President of MBI, filed a chapter 11 bankruptcy case which was subsequently converted to chapter 7.

In the Debtor’s personal bankruptcy case, the trustee took the position that while the former employees of MBI were owed last wages, the Debtor was not the “employer” of those employees. The trustee accordingly proceeded to object to the two claims for wages filed in Debtor’s case by the former employees.

The Bankruptcy Court noted that to incur individual liability under the Wage Act, two standards must be met:

An officer must “(i) have knowledge of the compensation arrangement … and (ii) knowingly permit the corporation to wrongfully deny some amount of compensation by participation in the decision to do so.” [FN7]

The Bankruptcy Court found no difficultly concluding that the Debtor, as the former 100% shareholder, sole director, CEO and president of MBI, knew of the compensation arrangements of the claims, and thus met the first part of the test.

The claimants’ argument with respect to the second part of the test, however, was based on the fact that the Debtor had personally advanced in excess of $36 million by a series of loans and capital advances to MBI in the final years of MBI’s operations to try to fund its shortfalls. The claimants contended that because the Debtor knew (or should have known) that the withdrawal of his funding of MBI would result in MBI being unable to meet its employment obligations, the Debtor did in fact knowingly permit the corporation to wrongfully deny them compensation.

The Bankruptcy Court found that this argument stretched the application of the Wage Act beyond the scope reasonably intended by the Illinois legislature.

The Court did not find that the Debtor’s use of his own money to support the business operations of MBI met the second standard for imposing liability under the Wage Act. It found no scienter or deception by the Debtor’s actions with regard to the unpaid wages, but rather that they were just the Debtor’s good faith efforts to keep MBI from having to declare bankruptcy.

It also likened the wage claims to the theory of deepening insolvency that has been advanced by some parties in the insolvency community in recent years. Under a deepening insolvency theory, a party makes the claim that a controlling party should be held liable for debts of a business as a business falters, because that controlling party could have acted to avoid those debts. It noted in particular, that courts that had considered the theory in depth found no principled reason to treat such claims differently from traditional veil-piercing or fraud claims. [FN8]

It found that on the facts in this case the claimants had not pled such facts supporting a claim for veil-piercing or fraud as to why the court should hold the Debtor personally individually liable for MBI’s corporate debts, and would not infer one from the limited facts before it.

The Court also noted sound policy reasons to reject the claimants’ arguments. It found that by it adopting the claimants’ arguments, it would be supporting the notion that a CEO or other controlling person must immediately cease operations once liquidity issues are recognized to avoid individual liability. It found that this would be in conflict with the principles of the American system of insolvency which favors the rescue of businesses over liquidation.

The case illustrates that something more than just allegation of participation as an officer or director of a business before its closing is necessary to meet the standards for imposing personal liability on an individual under the Wage Act. These will be fact-driven situations in which those seeking to impose personal liability under the Act will need to specifically plead some intentional misdirection or withholding of funds available to pay wages.

[FN1] 820 ILCS 115/4 – 115/6

[FN2] In Re Montalbano, 486 B.R. 436, 2013 WL 525478, No. 09 B 30477 (Bankr. N.D. Ill. February 12, 2013) (Barnes, J.), citing Glass v. Kemper Corp., 133 F.3d 999, 1000 (7th Cir. 1998).

[FN3] Id.

[FN4] Id. citing 820 ILCS 115/2.

[FN5] Id. citing Andrews v. Kowa Printing Corp., 838 N.E.2d 894, 899 (Ill. 2005).

[FN6] Id. citing 820 ILCS 115/13.

[FN7] Id. citing Richard L. Miler, II & John Haarlow, Jr., Departing Executives and the Wage Payment Act, 96 Ill. B.J. 138, 142 (2008) and Spalding v. Abbott Labs., No. 10C199, 2010 WL 4822894 (N.D. Ill. 2010).

[FN8] Id. citing In re Gluth Bros. Const., Inc., 424 B.R. 379, 389-90 (Bankr. N.D. Ill. 2009).

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