Belculfine v. Aloe

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
4-28-1997
Belculfine v. Aloe
Precedential or Non-Precedential:
Docket 96-3237
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 96-3237
____________
PASCHAL F. BELCUFINE;
SCOTT BERRINGER; GUY GADOLA;
MARGARET HROMYAK; EDWARD KRAFFT;
BETTY LAWRENCE; JOSEPHINE NAUMAN;
KEN SEKERSKY; JAMES R. ZWIKL;
H. SPENCER CARLOUGH; RICHARD D. OWEN;
RICHARD BORNES, and other
similarly situated salaried individuals,
Appellants
v.
MARK ALOE; ANDREW ALOE,
individuals, jointly and severally, and
SHENANGO INC.,
Appellees
____________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
____________________
(D.C. Civil No. 95-cv-01615)
_________________
Argued: November 26, 1996
Before: GREENBERG, ALITO, and ROTH, Circuit Judges:
(Opinion Filed: April 28, 1997)
____________________
Lee R. Golden, Esq. (Argued)
Todd T. Zwikl, Esq.
Suite 660 USX Tower,
Pittsburgh, PA 15219
Attorneys for Appellants
Jay Flowers Conti, Esq. (Argued)
BUCHANAN INGERSOLL, P.C.
One Oxford Centre, 20th Floor
300 Grant Street
Pittsburgh, PA 15219
Wendy E.D. Smith, Esq.
1
KIRKPATRICK & LOCKHART LLP
1500 Oliver Building
Pittsburgh, PA 15222
Clem C. Trischler, Esq. (Argued)
Raymond G. McLaughlin, Esq.
38th Floor
One Oxford Centre
Pittsburgh, PA 15219
Attorneys for Appellees
____________________
OPINION OF THE COURT
____________________
ALITO, Circuit Judge:
Under Pennsylvania law, when a corporation fails to pay
wages and benefits that it owes its employees, the corporation’s
top officers can be held personally liable for the non-payments.
See, e.g., Carpenters Health and Welfare Fund v. Ambrose, Inc.,
727 F.2d 279, 282-83 (3d Cir. 1983); see also Antol v. Esposto,
100 F.3d 1111, 1119 (3d Cir. 1997). The purpose of this rule is
to give top corporate managers an incentive to use available
corporate funds for the payment of wages and benefits rather than
for some other purpose. Carpenters, 727 F.2d at 282-83. Holding
the managers personally liable serves to give them an incentive
not to divert funds away from the payments owed to employees.
The issue raised by this case is what happens when their company
files a Chapter 11 bankruptcy petition and the employees seek to
recover from the corporate managers for unpaid vacation and
retirement benefits that were allegedly earned in the pre-
petition period, but that became due only in the post-petition
period. The filing of a petition for bankruptcy under Chapter 11
2
of the Bankruptcy Code bars the payment of pre-petition claims by
the company. See 11 U.S.C. § 362 (providing for automatic stay
of creditors’ efforts to seek repayment); In re Eagle-Picher
Indus., Inc., 963 F.2d 855, 861 (6th Cir. 1992). The question,
then, is whether, in this context, where, by law, the company’s
managers have no discretion to order payment of the amounts owed
to the employees, they can simultaneously be held liable for not
making the payments. We think not.
I.
The Shenango Corporation (“Shenango”) is a
Pennsylvania-based producer of coke and iron products. In
December 1992, Shenango filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. A group of Shenango’s
former employees (the “employees”) claim that they are owed
specific sums of money for vacation and supplemental retirement
benefits. They filed this action pursuant to the Pennsylvania
Wage Payment and Collection Law (“WPCL”), 43 Pa.C.S.A. § 260.1 et
seq. The employees’ complaint asserted that Mark and Andrew
Aloe, as officers of Shenango1, were personally liable for the
benefits payments not made by Shenango.
The WPCL arms Pennsylvania employees with a statutory
vehicle for the collection of unpaid wages and benefits and
1. Mark A. Aloe was a member of Shenango’s board of directors
from March 25, 1986 until February 17, 1993, and was chief
executive officer and chairman of the board from March 25, 1986
through June 20, 1990. Andrew Aloe has been on the board of
directors since March 25, 1986, and has been chief executive
officer in the period subsequent to the filing of the bankruptcy
petition.
3
provides for penalties to be imposed for non-compliance. See 43
Pa.C.S.A. § 260.1 et seq. The WPCL defines an “employer” to
include “every person, firm, partnership, association,
corporation, receiver or other officer of a court of this
Commonwealth and any agent or officer of any of the above-
mentioned classes employing any person in this Commonwealth.” 43
Pa.C.S.A. § 260.2a. The definition of an “employer” under the
WPCL has been held to include a corporation’s highest ranking
officers, because they are the persons who are likely to have
“established and implemented the policy for the non-payment” of
the wages and benefits at issue. Carpenters, 727 F.2d at 283.
In addition to providing for civil remedies and penalties, see 43
Pa.C.S.A. § 260.9a, the WPCL also provides for criminal
penalties, see 43 Pa.C.S.A. § 260.11a.
The employees in this case are seeking recovery of
vacation pay and supplemental retirement benefits. If Shenango
had not filed for bankruptcy, it appears that the Aloes, as
officers of Shenango, might indeed have been personally liable
for the claimed amounts. Any sums that may have been due and
owing by Shenango prior to the filing of the Chapter 11 petition
appear to fall within the ambit of the WPCL and, thus, arguably
were residual obligations of the Aloes. The employees’ claims
here, however, arose out of the post-petition cessation of the
employees’ benefits. The claims arose out of pre-petition
obligations, but arose with respect to payments that came due in
the post-petition period.
4
The employees originally brought their action in
Pennsylvania state court. The Aloes then removed the action to
the United States District Court for the Western District of
Pennsylvania pursuant to the bankruptcy removal statute, 28
U.S.C. § 1452, which generally permits the removal of any claim
or cause of action if the district court has subject matter
jurisdiction under 28 U.S.C. § 1334.2 From there, the matter was
referred to the bankruptcy court. The bankruptcy court granted
Shenango’s and the Aloes’ motions for summary judgment on the
ground that the WPCL was pre-empted by federal bankruptcy law.
The district court affirmed the grant of summary judgment, but
not based on pre-emption. The court reasoned that because the
filing of a Chapter 11 bankruptcy petition operated to bar
Shenango from making payments on debts, such as the employees’
claims, that came due in the post-petition period, the purpose of
the WPCL would not be furthered by holding the corporation’s
officers personally liable.3 We affirm.
2. The Aloes, through a third-party complaint, joined Shenango
as a defendant on a claim for indemnification. The
indemnification claim was based on the by-laws of Shenango that
imposed an affirmative obligation on Shenango to indemnify its
officers and directors for reasonable expenses, judgments, fines,
or costs incurred in a legal proceeding.
3. In a recent case, Antol v. Esposto, 100 F.3d 1111, 1114 (3d
Cir. 1997), employees brought suit under the WPCL against a
corporation’s officers and shareholders for wages earned in the
post-petition period pursuant to a Collective Bargaining
Agreement (“CBA”). The court rejected the WPCL claims on the
ground that the suit was based on the terms of the CBA and was
therefore preempted by the Labor Management Relations Act and the
National Labor Relations Act. Id. The court noted, however,
that 11 U.S.C. § 1113 provides that a CBA remains in full force
in a Chapter 11 proceeding until rejection is approved by a
bankruptcy judge, id. at 1121 n.4, and that, in the Chapter 11
5
II.
A. Subject Matter Jurisdiction
The employees question whether the bankruptcy court had
subject matter jurisdiction over this matter. They argue here,
as they did before the district court, that (1) the Aloes’ claim
for indemnification against Shenango is barred by 11 U.S.C. §
502(e)(1)(B) because it is a contingent claim against the
bankrupt estate, (2) the Aloes’ indemnity claim is barred by the
terms of Shenango’s confirmed plan because the Aloes did not file
a timely proof of claim before the bankruptcy court, and (3) the
Aloes’ indemnity claim was a collusive attempt to manufacture
jurisdiction.
In analyzing the question of subject matter
jurisdiction, the district court first looked to the relevant
statutory sections. Pursuant to 28 U.S.C. § 1334(b)4, a district
court
(..continued)
context, arbitration brought pursuant to a CBA is not subject to
the automatic stay. Id.
4. Similarly, pursuant to 28 U.S.C. §§ 157 (a) & (b)(1):
(a) Each district court may provide that any or all
cases under title 11 and any or all
proceedings arising under title 11 or arising
in or related to a case under title 11 shall
be referred to the bankruptcy judges for the
district.
(b)(1) Bankruptcy judges may hear and determine all
cases under title 11 and all core proceedings
arising under title 11, or arising in a case
under title 11, referred under subsection (a)
of this section, and may enter appropriate
orders and judgments, subject to review under
section 158 of this title.
6
shall have original but not exclusive jurisdiction of
all civil proceedings arising under title 11,
or arising in or related to cases under title
11.
Under the above provision, the answer to whether there
is subject matter jurisdiction depends on whether the cause of
action “aris[es] under,” “aris[es] in,” or is “related to” a case
under title 11 -- in this case, the Shenango bankruptcy
proceeding. See 28 U.S.C. § 1334(b).
The employees are suing the Aloes for nonpayment of
amounts allegedly owed to them by Shenango. Based on an express
provision in Shenango’s by-laws, the Aloes have an
indemnification claim against Shenango. The district court held
that, at a minimum, the existence of this indemnification claim
demonstrated that the employees’ claims against the Aloes could
conceivably have an effect on the bankruptcy estate and therefore
satisfied the “related to” test. Hence, the court determined
that there was subject matter jurisdiction over the cause of
action.
In Pacor v. Higgins, 743 F.2d 984 (3d Cir. 1984), we
explained that:
the test for determining whether a civil proceeding is
related to bankruptcy is whether the outcome
of that proceeding could conceivably have any
effect on the estate being administered in
bankruptcy . . . . Thus, the proceeding need
not necessarily be against the debtor or
debtor’s property. An action is related to
bankruptcy if the outcome could alter the
debtor’s rights, liabilities, options, or
freedom of action (either positively or
negatively) and which in any way impacts upon
the handling and administration of the
bankrupt estate.
7
Id. at 994 (internal citations omitted; emphasis in original).
Pacor holds that the reach of “related to” jurisdiction
is very broad, extending to any action the outcome of which
“could conceivably have any effect on the estate being
administered in bankruptcy.” Id.; see also Donaldson v.
Bernstein, 104 F.3d 547, 552-53 (3d Cir. 1997). Based on the
broad reach of the term “related to,” we agree with the district
court’s determination that it had subject matter jurisdiction
over the employees’ action. In fact, Pacor specifically notes
that contractual indemnity claims can have an effect on a
bankruptcy estate and thus provide a basis for the exercise of
“related to” jurisdiction. 743 F.2d at 995; see also A.H. Robins
Co., Inc. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.), cert.
denied, 479 U.S. 876 (1986).5
5. In an analogous context, the Sixth Circuit affirmed a stay
granted by a district court in derivative actions against a
bankrupt debtor corporation’s non-bankrupt directors. See In re
Eagle-Picher Indus., Inc., 963 F.2d 855, 857 (6th Cir. 1992).
The debtor corporation in Eagle-Picher had filed a Chapter 11
petition and availed itself of the automatic stay against
creditor actions. Id. There remained, however, actions against
two of the debtor corporation’s individual officers. Id.Reasoning, in part, that the existence of absolute indemnity
agreements between the officers and the debtor corporation
created such an identity between the debtor and the individual
officers that allowing the suit to proceed against the officers
would, in effect, be allowing the suit to proceed against the
bankrupt debtor, the court affirmed the stay on the actions
against the non-bankrupt officers. Id. at 860-61; see also David
A. Skeel, Jr., Rethinking the Line Between Corporate Law and
Corporate Bankruptcy, 72 Tex. L. Rev. 471, 501 & n.128 (1994).
The rationale applied in Eagle-Picher was one first articulated
in A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999-1001 (4th
Cir.), cert. denied, 479 U.S. 876 (1986), that has since been
adopted by this Circuit. See McCartney v. Integra Nat’l Bank N.,
106 F.3d 506, 510-11 (3d Cir. 1997) (describing and applying the
Robins principle).
8
The employees’ attacks on the district court’s
determination that there was subject matter jurisdiction are
misdirected. The employees’ first two arguments are that the
indemnification claims are barred since (1) the claims were
contingent and (2) timely proof of claim was not made. As the
district court pointed out, however, the question whether the
claims are barred is one for none other than the bankruptcy
court.
The employees’ third argument is that the Aloes’
indemnification claims represent a collusive attempt to
manufacture jurisdiction and are therefore barred under the
collusive joinder provision of 28 U.S.C. § 1359. This provision
states:
A district court shall not have jurisdiction of a civil
action in which any party, by assignment or
otherwise, has been improperly or collusively
made or joined to invoke the jurisdiction of
such court.
The district court pointed out that it was unclear
whether Section 1359 even applied to federal question cases,
i.e., non-diversity cases. But whether or not it applied, the
court held that the “collusive joinder” claim failed because it
was not supported by any evidence. We agree. The employees
state in conclusory fashion that the Aloes’ indemnity claim
against Shenango was pretextual and was asserted solely in order
to create federal jurisdiction. The only explanation the
employees give for their conclusion is that “Shenango has never
defended against [the Aloes’] third party claims for indemnity.”
But we do not see why Shenango should necessarily have defended
9
against the Aloes’ claims if the claims were valid -- as they
appear to be under Shenango’s by-laws. In sum, the employees
have failed to show error in the district court’s analysis of
subject matter jurisdiction. Cf. Sterling Nat’l Mortgage Co., v.
Mortgage Corner, Inc., 97 F.3d 39, 44 (3d Cir. 1996) (conclusory
allegations are not sufficient to survive summary judgment).
B. Removal
An issue not raised by the employees, but raised by us,
sua sponte, is whether, notwithstanding the existence of subject
matter jurisdiction, removal was proper under the general removal
provision, 28 U.S.C. § 1441(b). This provision states:
Any civil action of which the district courts have
original jurisdiction founded on a claim or
right arising under the Constitution,
treaties or laws of the United States shall
be removable without regard to the
citizenship or residence of the parties. Any
other such action shall be removable only if
none of the parties in interest properly
joined and served as defendants is a citizen
of the State in which such action is brought.
The Aloes, as defendants, do not contend that they are
citizens of a state other than the one in which the action was
brought, i.e., Pennsylvania. Accordingly, if 28 U.S.C. § 1441(b)
applies to this case6 removal was proper only if the action is
6. As previously noted, this action was removed, not under 28
U.S.C. § 1441, but under 28 U.S.C. § 1452, which specifically
authorizes the removal of most claims or actions over which the
district court has subject matter jurisdiction under 28 U.S.C. §
1334. In Pacor, we said that “sections 1441-1447 were never
meant to be read into the procedures for bankruptcy removals.”
743 F.2d at 992. However, in Things Remembered, Inc., v.
Petrarca, 116 S. Ct. 494, 497 (1995), the Supreme Court held that
the procedural requirements under 28 U.S.C. § 1447(d) apply to a
case that is removed under the special bankruptcy removal
provision, 28 U.S.C. § 1452, that the defendants utilized here.
See also Donaldson, 104 F.3d at 553 n.1. Consequently, if the
10
one that “aris[es] under” federal law within the meaning of that
provision.
Whether this is so is an interesting question. On the
one hand, the employees’ action plainly asserted a claim under
state law (namely, the Pennsylvania WPCL), and federal law
appears to have been implicated in the form of a defense to the
state law claim. Cf. Robert A. Ragazzo, Reconsidering the Artful
Pleading Doctrine, 44 Hastings L. J. 273, 275-76 (1993)
(defendant cannot create federal question jurisdiction by
pleading federal defenses to state claims alleged in state
court). On the other hand, if we are correct in holding that the
district court had subject matter jurisdiction under 28 U.S.C. §
1334(b) -- and we believe that binding precedent plainly dictates
that conclusion -- and if the jurisdictional grant set out in 28
U.S.C. § 1334(b) is based on the “arising under” jurisdiction of
Article III of the Constitution, it must follow that the
(..continued)
reasoning of Things Remembered applies to 28 U.S.C. § 1441(b), as
well as 28 U.S.C. § 1447(d), the former provision applies in this
case.
To read Sections 1452 and 1441(b) as working in conjunction
would provide plaintiffs in “related to,” but not “arising
under,” cases with greater control over the choice of forum than
defendants. Cf. Richard H. Fallon, Jr., Daniel J. Meltzer and
David L. Shapiro, The Federal Courts and the Federal System 1616
(1996) (noting, in the context of removal, that there are a
number of federal statutes under which defendants are denied the
choice of forum given to plaintiffs). Under such a system, a
state law claim that was “related to,” but not “arising under,” a
title 11 proceeding, could be brought by the plaintiff in a state
court of the state in which the defendant was a citizen, and
would not be removable, even though the case could have
originally been brought in federal court. See 28 U.S.C. §§
1441(b) & 1452.
11
employees’ action is one that arises under federal law for
constitutional purposes.
We need not, however, attempt to resolve the question
whether the removal in this case was improper under 28 U.S.C. §
1441(b). The issue of improper removal was not raised at the
time of the removal, and any claim was therefore waived. Where a
case could have been originally filed in federal court but there
is an irregularity in its removal from state court, that
irregularity is waivable. See Korea Exch. Bank v. Trackwise
Sales Corp., 66 F.3d 46, 50 (3d Cir. 1995). In other words,
since this cause of action could have been brought originally in
federal court, any defects in the removal of the case from state
court were “procedural,” as opposed to “jurisdictional,” and were
thus waivable. Id. As the Supreme Court said in Grubbs v.
General Elec. Credit Corp., 405 U.S. 699 (1972):
We have concluded that, whether or not the case was
properly removed, the District Court did have
jurisdiction of the parties at the time it
entered judgment. Under such circumstances
the validity of the removal procedure
followed may not be raised for the first time
on appeal.
Id. at 700; cf. Caterpillar Inc. v. Lewis, 117 S. Ct. 467, 475
(1996) (citing Grubb).
C. WPCL
The substantive issue in this case is whether the
employees can sue the Aloes, as officers of Shenango, under the
WPCL for Shenango’s non-payment of certain pre-petition benefits
that became due to the employees in the period after Shenango had
12
filed for bankruptcy. The district court rejected the employees’
WPCL claim because the failure to pay benefits by Shenango
occurred after the bankruptcy petition was filed. The court
reasoned that the failure to pay was caused by the Bankruptcy
Code’s prohibition on Shenango’s making such payments, and not by
the Aloes’ voluntary choice to refrain from making them.
The WPCL provides, with respect to fringe benefits and
wage supplements, that
[e]very employer who by agreement deducts union dues
from employees’ pay or agrees to pay or
provide fringe benefits or wage supplements,
must remit the deductions or pay or provide
the fringe benefits or wage supplements, as
required, within 10 days after such payments
are required to be made to the union in the
case of dues or to a trust or pooled fund, or
within 10 days after such payments are
required to be made directly to the employee,
or within 60 days of the date when the proper
claim was filed by the employee in situations
where no required time for payment is
specified.
43 Pa.C.S.A. § 260.3(b).
The WPCL further provides that
[a]ny group of employees, labor organization or party
to whom any type of wages is payable may
institute actions provided under this act.
43 Pa.C.S.A. § 260.9a(a) (emphasis added).
The parties do not dispute that under the WPCL the top
management of a company can be held liable for wages that are
owed by the company. The dispute here is over whether the
employees’ claim is for benefits that were “due and payable”
under the WPCL. The district court held that they were not since
federal bankruptcy law operated to prevent these benefits (which
13
came due after Shenango filed for bankruptcy) from being “due and
payable.” We agree.
The liability of corporate managers under the WPCL is a
“contingent” liability, i.e., it is contingent on the
corporation’s failure to pay debts that it owes. See Laborers
Combined Funds of W. Pa. v. Mattei, 518 A.2d 1296, 1300 (1986)
(“the only apparent purpose [of holding managers liable for wages
and benefits not paid fully by the company] was to subject these
persons to liability in the event that a corporation failed to
make wage payments”) (emphasis added); accord Carpenters, 727
F.2d at 282-83. Once a corporation files a Chapter 11 petition,
however, it is obligated to pay wages and benefits only to the
extent required by the bankruptcy workout. Cf. In re Ribs-R-Us,
Inc., 828 F.2d 199, 203 (3d Cir. 1987) (describing the effect on
a debtor of the filing of a petition in Chapter 11). Hence, when
a corporation under Chapter 11 fails to make payments that the
Bankruptcy Code does not permit, the contingency needed to
trigger the liability of corporate managers under the
Pennsylvania WPCL never occurs. Here, Shenango was current on
all of its payments in the pre-petition period. The employees’
claims are for amounts that technically came due in the post-
petition period. Since the corporation was not permitted by law
to pay these claims in the post-petition period, the contingency
of the amounts becoming “due and payable” under the WPCL did not
occur, and hence the managers were not personally liable.
14
This conclusion is consistent with the goals underlying
the WPCL. Pennsylvania’s purpose in holding the agents and
officers of a corporation liable for unpaid wages and benefits is
to give those agents and officers an incentive to pay wages and
benefits while the corporation still has the resources to do so.
See Mohney v. McClure, 568 A.2d 682, 685 (1990), aff’d per
curiam, 604 A.2d 1021 (1992). Put differently, the WPCL seeks to
deter corporate managers from diverting corporate funds that are
meant to go towards paying wages and benefits. For example, one
could imagine a situation in which a firm is under the threat of
bankruptcy and the managers’ primary concern is saving their jobs
(i.e., keeping the company out of bankruptcy) as opposed to
paying the employees from the available funds. In such a
situation, managers might be tempted not to use available funds
to pay wages and benefits owed to the employees. Instead, they
might be tempted to employ the funds in a high risk gamble that,
if successful, might prevent bankruptcy and hence save the
managers’ jobs but that most likely will fail and result in a
loss of the funds. See, e.g., Susan Rose-Ackerman, Risk Taking
and Ruin: Bankruptcy and Investment Choice, 20 J. Legal Stud. 277(1991); cf. Robert K. Rasmussen, The Ex Ante Effects of
Bankruptcy Reform on Investment Incentives, 72 Wash. U. L. Q.
1159, 1162 & n.16 (1994).
Given that the purpose of the WPCL is to deter managers
from strategically diverting company resources away from the
payment of wages and benefits, it makes sense for the WPCL to
15
apply in only those contexts in which the managers have room to
behave strategically. Indeed, the courts have applied the WPCL
in precisely this manner. In Mohney, the court refused to hold a
corporate secretary liable for unpaid wages and benefits, where
the secretary, who earned no more than a small retainer, had no
role in the corporate decision making processes. 568 A.2d at 686(liability under the WPCL is premised on the person being held
liable being an “active decision mak[er]” in the context of
deciding not to pay the employees); see also Central Pa.
Teamsters Pension Fund v. Burten, 634 F. Supp. 128, 131 (E.D. Pa.
1986) (absent some indication that the defendant exercised a
policy-making function in the company, he could not be held
liable under the WPCL).
The logic of Mohney applies to this case.7 Shenango
was current on its payments to the employees up to the point of
filing for bankruptcy. Once Shenango filed for bankruptcy,
however, management no longer had the power to choose not to use
the corporation’s funds to pay wages. Specifically, once
Shenango went into bankruptcy, bankruptcy law compelled it to
refrain from paying the employees’ claims. In this context, it
is easy to see that management was not in the position of an
7. The WPCL is a penal statute. The narrow interpretation given
to it by the Mohney court is consistent with Pennsylvania’s rule
of statutory interpretation that doubts about the reach of a
penal provision are to be resolved in favor of a narrow
construction. See 1 Pa.C.S.A. § 1928(b)(1) (penal provisions are
to be strictly construed); cf. David L. Shapiro, Continuity and
Change in Statutory Interpretation, 67 N.Y.U. L. Rev. 921, 935
(1992).
16
“active decision maker” vis-a-vis choosing not to pay employees
benefits that technically became due in the post-petition
period.8 Therefore, the WPCL did not come into play.9
8. This exception to the applicability of the WPCL is not an
attempt to incorporate a scienter requirement into the WPCL. See
Mohney, 568 A.2d at 686. We note, however, that there exists at
least one situation in which corporate officers are held
statutorily liable for the non-payment of debts owed by the
corporation and where this liability is premised on a
determination of willfulness. The context is that of taxes, such
as withholding and social security taxes, that are required to be
deducted by employers from the wages paid to employees. In this
context, Congress has imposed personal liability on any officer
or employee who “willfully fails to collect such tax, or
truthfully account for and pay over such tax, or willfully
attempts in any manner to evade or defeat any such tax or the
payment thereof.” 26 U.S.C. 6672(a); Ribs-R-Us, 828 F.2d at 200.
Part of the rationale underlying the imposition of such
liability was the recognition that “taxes collected by a
corporate employer on behalf of employees ``can be a tempting
source of ready cash for a failing corporation beleaguered by its
creditors.’” Ribs-R-Us, 828 F.2d at 200 (quoting Slodov v. United
States, 436 U.S. 238, 243 (1978)).
9. One might ask, as the dissent does, why this case is
different from an ordinary third-party guaranty of a debt, where
the purpose of the guaranty is to ensure that the creditor
receives complete and timely payment even if the primary debtor
goes into bankruptcy and avails itself of the automatic stay.
The reason for the difference is that the secondary liability of
managers under the WPCL attaches only when they are “active
decision makers.” In other words, their liability is not
automatic, but is premised on their being in a position to stop
the original non-payment. This makes the WPCL manager liability
different from an ordinary contract guaranty.
The dissent fears that this case will radically alter
the law applicable to all forms of contractual guaranties. Our
decision here, however, is predicated solely on an interpretation
of Pennsylvania law on the WPCL. It is predicated on the
existence of the “active decision maker” component of the WPCL; a
component provided by the Pennsylvania courts. Unless private
parties agree to include such a component in their guaranties, we
fail to see how this decision will affect those contracts.
Further, the dissent suggests that under the WPCL there
cannot be any doubt as to Pennsylvania’s legislative intent to
17
The employees, however, argue that the district court’s
decision was inconsistent with the applicable case law. In
particular, they point to Mohney and Adams v. Benjamin, 627 A.2d
1186 (1993). We disagree with the employees with respect to both
cases.
In Mohney, the plaintiff was asserting claims for wages
that allegedly had been accrued but were only partially paid at
the time of filing for bankruptcy. 568 A.2d at 684. The
employees read Mohney to hold that claims for wages that were
accrued at the time of the filing for bankruptcy, but that did
not come due until after the filing of the petition, were valid
under the WPCL. We do not read Mohney to say any such thing.
The language in Mohney to which the employees point is the
(..continued)
hold its corporate officers and directors liable for the unpaid
wage and benefits debts of the corporation when the corporation
itself is temporarily stayed, by operation of the Bankruptcy
Code, from paying those debts. We disagree.
Corporate bankruptcies are not unusual events. When
companies go into Chapter 11, it can take them substantial
periods of time to emerge. During the period the corporation is
in Chapter 11, it is stayed from paying its pre-petition debts.
Under the dissent’s interpretation of the WPCL, the officers and
directors of Pennsylvania corporations would be personally liable
for covering these unpaid wage and benefits debts during the
entire period of the stay -- even though these were amounts that
became due only after the bankruptcy petition was filed. The
combination of (1) a corporation with a large workforce and (2) a
lengthy bankruptcy workout, would result in staggering personal
liability for the corporate officers. That, in turn, would
produce a serious incentive for corporations to avoid locating in
Pennsylvania. Without clear indication from the legislature that
its intent was to impose such a regime, we, unlike the dissent,
decline to read such an intent as obvious.
18
portion of the opinion in which the court articulates the claim
made. Id. The court then, without holding whether or not the
wage claims in and of themselves were valid under the WPCL, see
id., rejected the plaintiff’s claim since the defendant played no
active decision-making role in the non-payment of the wages and
benefits at issue. See id. at 686.
Adam is inapplicable because that case did not involve
the question of what happens to wages and benefits that are
accrued pre-petition, but come due only in the post-petition
period. 627 A.2d at 1189-90. Instead, in Adam, the wages and
benefits at issue appear to have come due prior to the filing of
the bankruptcy petition. Id. at 1189.
III.
The decision of the district court is affirmed.
19
GREENBERG, Circuit Judge, concurring and dissenting.
I respectfully dissent in part in this case which
is of enormous significance under bankruptcy law. As the
majority points out, Shenango Corporation in December 1992 filed
a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. A group of Shenango's former employees sought
to recover specific sums of money for vacation and supplemental
retirement benefits earned before the petition was filed but due
in the post-petition period in an action under the Pennsylvania
Wage Payment and Collection Law ("WPCL"), Pa. Stat. Ann. tit. 43,
§ 260.1, et seq. (West 1992). The employees brought the action
against Mark and Andrew Aloe, officers of Shenango, in a
Pennsylvania state court, but the Aloes removed the case to the
district court which then referred it to the bankruptcy court.
The Aloes then filed a third-party complaint against Shenango
predicated on an indemnification agreement. The bankruptcy court
granted the Aloes and Shenango summary judgment against the
employees' claims, and the district court affirmed. The
employees then appealed to this court.
The majority makes a comprehensive analysis
upholding the bankruptcy court's exercise of subject matter
jurisdiction, and I join this portion of its opinion. The
majority then defines the "substantive issue" as "whether the
employees can sue the Aloes, as officers of Shenango, under the
WPCL for Shenango's non-payment of certain pre-petition benefits
that became due to the employees in the period after Shenango had
filed for bankruptcy." Typescript at 13. The majority points
20
out that employers must pay "fringe benefits and wage
supplements," "as required" by the WPCL, and that employees may
institute actions to collect such items if they are "payable."
Id. at 14. The majority recognizes that the top management of a
company can be liable under the WPCL but characterizes their
liability as being "contingent on the corporation's failure to
pay debts that it owes." Id. at 14. It then indicates that once
the corporation files a petition under Chapter 11, "it is
obligated to pay wages and benefits only to the extent required
by the bankruptcy workout." Id. The majority then concludes
that the bankruptcy and district courts reached the correct
result because "when a corporation under Chapter 11 fails to make
payments that the Bankruptcy Code does not permit, the
contingency needed to trigger the liability of corporate managers
under the Pennsylvania WPCL never occurs." Id. at 15.
The majority contends that its result is
consistent with the goals underlying the WPCL. It reasons that
Pennsylvania law holds agents and officers liable "to give [them]
an incentive to pay wages and benefits while the corporation
still has the resources to do so," typescript at 15, citing
Mohney v. McClure, 568 A.2d 682, 685 (Pa. Super. Ct. 1990), aff'd
per curiam, 604 A.2d 1021 (Pa. 1992). It then concludes that
"[g]iven that the purpose of the WPCL is to deter managers from
strategically diverting company resources away from the payment
of wages and benefits, it makes sense for the WPCL to apply in
only those contexts in which the managers have room to behave
strategically." Typescript at 16. The majority supports this
21
conclusion by citing Mohney v. McClure and Central Pa. Teamsters
Pension Fund v. Burten, 634 F. Supp. 128, 131 (E.D. Pa. 1986),
for the proposition that only decision makers in the corporation
can be liable under the WPCL.
According to the majority, the logic of Mohney
applies here because "[o]nce Shenango filed for bankruptcy . . .
management no longer had the power to choose not to use [its]
funds to pay wages [because] bankruptcy law compelled it to
refrain from paying the employees' claims." Typescript at 17.
It thus concludes that "the WPCL did not come into play." Id. at
18.
I reject the foregoing analysis. Under the WPCL,
the definition of employer encompasses "every person, firm,
partnership, association, corporation, receiver or other officer
of a court of this Commonwealth and any agent or officer of any
of the above-mentioned classes employing any person in this
Commonwealth." Pa. Stat. Ann. tit. 43, § 260.2a. For clarity,
in applying this definition throughout this opinion I distinguish
"statutory employer(s)" from "conventional employer(s)." Under
the facts of this case, the corporation, Shenango, was the
employer in the conventional sense; that is, the employer who
actually paid wages and benefits to the employees (when such
payments were made). Under the WPCL, however, both a corporation
and its agents and officers are deemed "employers"; I call the
agents and officers "statutory employers."
For purposes of these proceedings, there is no
doubt but that the Aloes are agents or officers of Shenango and
22
are thus the employees' statutory employers. In fact, the
bankruptcy court said as much for it indicated that "[a]bsent
bankruptcy, the Aloes, in their positions as officers of
Shenango, would have been liable for claimed amounts pursuant to"
the WPCL. Indeed, the majority does not suggest otherwise.
Thus, in analyzing this case we undoubtedly must start from the
premise that had there been no bankruptcy and Shenango had not
made the payments, the Aloes would be liable under state law;
again the majority does not suggest otherwise.
The majority characterizes agents' and officers'
liability as a "contingent" liability which comes into play when
the corporation does not make the payments it owes. I do not
believe that the majority uses the term "contingent" in a
technical or legal sense for the WPCL requires that "[e]very
employer . . . must remit the deductions or pay or provide the
fringe benefits or wage supplements" as required by the WPCL. Id
§ 260.3(b). Inasmuch as the Aloes are employers, their
responsibility under the WPCL was as primary as that of Shenango.
Yet, as a practical matter, I have no quarrel with the
characterization of their liability as "contingent"; undoubtedly
in the ordinary situation, the corporation, or conventional
employer, pays the benefits; the liability of its agents or
officers as statutory employers is significant only when the
conventional employer does not make those payments.
But whether we characterize the Aloes' liability
as contingent or primary makes no difference. There cannot be
the slightest doubt but that the legislature contemplated that if
23
the corporate employer, i.e., the conventional employer, did not
make the payments required under the WPCL, then the decision-
making agents and officers as statutory employers would be liable
for them. This liability cannot be avoided by the majority's
conclusion that the agents and officers should not be liable
because the corporation lawfully could not make the payments.
Nothing in the WPCL even remotely can be read to excuse the
agents and officers as statutory employers, in this case the
Aloes, from liability merely because the conventional employer,
in this case, Shenango, cannot make the payments. Nor does the
WPCL distinguish a corporation's inability to make payments by
reason of operation of law from its inability to make payments
because it does not have the money to do so.
In fact, whether an agent's or officer's liability
is viewed as primary or contingent, when the corporation as the
conventional employer does not make the payments required by the
WPCL, the parties confront the exact circumstance in which the
legislature contemplated that the employees could hold the agents
or officers as statutory employers liable. Nothing could be
clearer for, as we explained in Carpenters Health and Welfare
Fund v. Kenneth R. Ambrose, Inc., 727 F.2d 279, 282 (3d Cir.
1983) (internal quotation marks omitted), "the [legislature's]
only apparent purpose [for defining an agent or officer as an
employer] was to subject these persons to liability in the event
that a corporation or similar entity failed to make wage
payments." I cannot join an opinion which excuses the agents and
officers from liability at the exact time when it is important
24
that they be liable because the legislature cannot possibly have
intended such a result.
I also point out that a decision-making agent's or
officer's liability for payments due under the WPCL is not
dependent on a showing of his or her culpability or scienter. As
the Pennsylvania Superior Court explained in Laborers Combined
Funds v. Mattei, 518 A.2d 1296, 1300-01 (Pa. Super. Ct. 1986)
(emphasis in original), "[o]f those courts which have had
occasion to rule on the personal liability of corporate officers
in the face of a corporation's failure to make its required
contributions to various union funds, as provided for in their
collective bargaining agreement, all have, without exception,
held the officer(s) of the corporation personally liable, and
they did so without reference to any proof of culpability or
scienter as a sine qua non to establishing a contravention of the
Act in a civil suit." So there you have it. If, as seems to be
the case, the Aloes were the decision makers, they are liable for
the amounts due under the WPCL and the case should be remanded to
the bankruptcy court for further proceedings.
I respectfully suggest that the majority's
contrary points are unavailing. It points out that the
imposition of agent or officer liability seeks to deter the
corporate agents and officers from diverting to another purpose
"funds that are meant to go towards paying wages and benefits."
Typescript at 16. I certainly agree with that proposition, yet
the fact that an agent or officer who diverts funds may be liable
under the WPCL does not mean that an agent or officer cannot be
25
liable without diverting funds. Laborers Combined Funds makes
this point clear for in that case even though a bookkeeper
embezzled the money that should have been used to satisfy the
obligations under the WPCL, the officers were liable because
their liability was not dependent on their "culpability or
scienter." We should consider, too, the case of a corporation
which never generated income, i.e., a new business, but which
incurred obligations under the WPCL. In that case there would be
no funds to divert, yet surely the decision-making agents or
officers would be liable.
The bottom line on the diversion theory is this:
there is nothing in the WPCL itself or in the case law to support
a conclusion that an agent or officer can be liable only if he or
she diverts funds that should have been applied to obligations
due under the WPCL. The WPCL is not a trust fund statute
imposing liability only when the agent or officer has misapplied
the res, and thus it should not be treated as a trust fund
statute. Yet by predicating liability on the diversion theory,
the majority treats the WPCL as a trust fund statute. In fact,
the WPCL establishes employers' liability without regard for
trust fund concepts and, as we must on this appeal treat the
Aloes as employers, they are potentially liable and were not
entitled to summary judgment.
The majority contends that inasmuch as the purpose
of the WPCL is "to deter managers from strategically diverting
company resources away from the payment of wages and benefits, it
makes sense for the WPCL to apply in only those contexts in which
26
the managers have room to behave strategically." Typescript at
16-17. Here Shenango's bankruptcy deprived them of that room.
Yet the cases the majority cites on the point do not support its
conclusion in this case for they merely establish that corporate
agents who are not corporate decision makers are not liable under
the WPCL because they are not statutory employers. See Mohney,
568 A.2d 682, and Central Pa. Teamsters Pension Fund, 634 F.
Supp. 128. The immunity of the officers in those cases stemmed
from the circumstance that they were not decision makers in the
corporation, not from their failure or inability to have
exercised control over the "decision" not to make the required
payments. These cases are not relevant to the issue at hand
which is whether an agent or officer who is a statutory employer,
and who by reason of a bankruptcy loses his or her freedom to
apply the corporate assets strategically, nevertheless remains
liable under the WPCL.
At the outset of this dissent, I said that this
case is of enormous significance to bankruptcy law. I will now
explain why. The principles involved in this case are applicable
in any case in which a person has guaranteed a debt of a bankrupt
corporation. (I use the term "guaranteed" broadly to include co-
obligors, endorsers, and guarantors in situations in which, as
between the debtors, the obligation to pay is primarily on the
bankrupt.) The majority seeks to distinguish this case "from an
ordinary third-party guaranty of a debt," typescript at 18 n.7,
and indicates that it intends to predicate its opinion solely on
an interpretation of the Pennsylvania law as set forth in the
27
WPCL. Thus, it believes that this case should not have
implications in other contexts.
I believe, however, that this case is not
distinguishable from a case involving an ordinary guaranty. The
majority says that the liability of agents and officers under the
WPCL "is not automatic," but rather accrues only when the
officers exercise decision-making authority with respect to the
challenged nonpayment. Transcript at 18 n.7. However, for
statutory employers the liability arises by operation of law, and
thus to that extent it is indeed automatic. Liability under the
WPCL is not dependent on the circumstances surrounding or the
causes of the nonpayment, whether external to or intrinsic within
the statutory employers. Thus, just like an ordinary guaranty,
the liability of agents and officers under the WPCL is
"automatic." Furthermore, in the case of an ordinary guaranty,
just as here, the creditors call on the guarantor to pay because
the corporation cannot.
The majority's attempt to limit this case to an
application of the WPCL fails for the additional reason that
there is not even a hint in that Act that the liability of a
statutory employer is affected by the bankruptcy of the corporate
or conventional employer. If a court can create a bankruptcy
exception to the statutory employers' liability here, persons who
have made other types of guarantees will seek similar relief.
Accordingly, this case opens a door which will be hard to close.
But even if somehow the impact of this case could be limited to
situations under the WPCL, I nevertheless think that the majority
28
is reaching the wrong result in this case which in itself is of
great importance.
I close with one final point. The majority
apparently believes that practical considerations require it to
reach its result. It points out that "[c]orporate bankruptcies
are not unusual events" and that corporations in Chapter 11
proceedings are stayed from paying prepetition debts. It thus
indicates that an application of the WPCL in a situation such as
this may result in imposition of "staggering personal liability"
on corporate officers, thereby creating an incentive for
corporations to avoid locating in Pennsylvania. Typescript at
18-19 n.8. The problem with this point is that we are judges,
not legislators, and it is beyond our power to rewrite the WPCL
so as to create a bankruptcy exception in favor of statutory
employers merely because we believe that it would be good for
business to do so.
The majority does not point to a bankruptcy
exception in the WPCL to support its conclusion that the
"staggering personal liability" should not be imposed for the
very good reason that the WPCL does not include any such
provision. Rather, the WPCL imposes liability on statutory
employers without exception under the WPCL. Thus, even under the
majority's view that its result is consistent with the policy of
the WPCL, which I reject, the majority should not read a
bankruptcy exception into that act. Rather, it should heed the
point we made so recently in In re Barshak, 106 F.3d 501, 506 (3d
Cir. 1997), that we "are not free to ignore the clear language of
29
a Pennsylvania statute merely because by rewriting the statute we
arguably would act consistently with a legislative policy."
In fact, the majority's creation of a
bankruptcy exception in the WPCL has frustrated the purpose of
the Act because relegating the employees to a remedy against the
corporate employer means that they can recover only as provided
in a plan of reorganization or, as I explain below, not recover
at all. This relegation almost surely will mean that the
employees will not receive the payments due under the WPCL.
Thus, I cannot understand why the majority suggests that this
case merely involves a situation where the corporation is
"temporarily stayed, by operation of the Bankruptcy Code,"
typescript at 18-19 n.8, from paying the employees' claims. In
fact, the employees' claims against Shenango largely have been
discharged. Shenango itself makes this point clear for it
explains in its brief that "the Former Employees hold allowed
unsecured claims against Shenango's estate and pursuant to the
Plan the claims were discharged except to the extent that they
will receive pro rata payments under the confirmed Plan of
reorganization in satisfaction of the Wage Claims." Br. at 3.
I also point out that there is no principled way
to distinguish between large corporations in which claims against
the statutory employers could be "staggering" and small one-
person corporations. Thus, according to the logic of the
majority opinion, if a small corporation owned and operated by a
single person receives a discharge under Chapter 7 of the
Bankruptcy Code, even if, as is likely, the owner is a statutory
30
employer under the WPCL and is not in bankruptcy personally, he
or she will be discharged from liability under the WPCL. After
all, the Bankruptcy Code restrains a corporation being liquidated
under Chapter 7 from using its funds as it sees fit just as its
restrains a corporation reorganizing under Chapter 11 in its use
of its funds. In such a case under Chapter 7 the employees may
receive nothing on their WPCL claims even though the statutory
employer has substantial assets. I cannot conceive that the
legislature intended such a result.
For the foregoing reasons, I respectfully concur
in part and dissent in part.
31