Legal Question in Business Law in California

Company Closed Down Owing Its Employees Their Salaries

In November of 2002, the company I worked for closed down as its assets were frozen (the company president was accused of embezzling). Some employees (myself included) were owed for three paychecks; one which bounced and two others. A judge hearing the case unfroze enough money to replace the checks to those employees which bounced, but refused to release anymore money to pay the rest of the money owed. The owner has now filed Chapter 7 bankruptcy and the employees are left with worthless checks. It should be noted, that the side which brought the action refused to give their authorization to pay the employees. In fact, they fought any attempt to release money for the employees.

Isn't there a law that says employees have to be paid? By what right does the other side have to tell the employees that they don't deserve to be paid when they're the innocent parties?

Is there any recourse that can be taken against the other side for blocking the release of the funds?


Asked on 2/13/03, 10:40 pm

1 Answer from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Company Closed Down Owing Its Employees Their Salaries

Your facts sound familiar; I think I answered a question for you some months ago.

Anyway, the bankruptcy filing changes things drastically. NOBODY -- not even the IRS -- can attempt to collect from a party that has properly filed a petition in bankruptcy. Bill-collection activity is frozen, period.

The bankruptcy judge assumes almost complete control over the bankrupt and its affairs. Creditors must petition the court for relief from the 'automatic stay' on collection attempts. Some are more likely than others to be granted, but that is a discussion beyond the scope of LawGuru on this question.

Eventually, the court will authorize the payment of claims against the bankrupt. Claims must be paid in the priority prescribed in the federal bankruptcy act. Generally, taxes get the highest priority, along with secured creditors. Wage and salary claims also get high priority. Unsecured creditors come next, followed by owners.

So, if there is any money available after the claims of the tax man and the secured creditors are satisfied, it will go to the employees.

However, a Chapter 7 (liquidation) proceeding suggests that the debtor was in really tough shape, and there may only be cents on the dollar, if anything, when you filally get paid.

You may need to contact the bankruptcy court to get forms for filing a claim if you didn't receive them automatically. The debtor is supposed to list all creditors, including employees, which should result in your receiving notices and claim forms by mail, but that doesn't always happen and if it doesn't in your case, take action.

Read more
Answered on 2/14/03, 12:46 am


Related Questions & Answers

More Business Law questions and answers in California