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Secured Creditor, Corporate Owner not liable for Corporate Wages: Lyons Equipment

In re: Lyons Equipment Company, Inc. Bk 09-21419; AP 09-1059 (Judge Bucki; decision September 8, 2010)

Buffalo Bankruptcy Judge Carl Bucki has ruled that a secured creditor which took over management of a corporation is not liable for unpaid wages that were incurred prior to the take-over. Lyons Equipment owed Greystone Business Credit $2.4 million dollars, which was secured by the corporate assets. In September 2008, Greystone took over operation of Lyons, installing their own 'chief restructuring officer.' Under Greystone's management, Lyons repaid the secured creditor almost all of the money owed to it.

Meanwhile a former commissioned employee sued Lyons for unpaid commissions. The employee also sued Greystone and its restructuring officer. State Court was on the verge of ruling in favor of Greystone when Lyons filed Chapter 11. All parties agreed to allow the Bankruptcy Court to make the final ruling on Greystone's liability.

Judge Bucki ruled in favor of the secured creditor and its restructuring officer. Greystone was under no obligation to look after the interest of any creditors other than itself (absent collusion or breach of a statutory obligation.) While there are penalties for failure to pay employees (New York Labor Law Sect. 191-c, regarding commissioned employees, Labor Law Sect. 198-a, regarding criminal penalties for failure to pay wages, and Business Corporation law sect. 630, regarding shareholder liability for unpaid wages), they did not apply to a creditor of the corporation.

The restructuring officer owed an independent duty of sound management to Lyons as an officer of the corporation, but paying off a secured creditor of Lyons, to avoid a catastrophic repossession of corporate assets, was within the scope of that duty. Furthermore, as a matter of 'realistic expectations", it would not be proper to find a restructuring officer personally liable for payment of wages incurred before he or she was installed into that position.

The Court also found that the former principal of the business, who was replaced by the restructuring officer, was also not financially liable to the former employer. Only the corporation, not its management or creditors, had a contractual relationship with the employee.

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