Tuesday, November 5, 2013
Plaintiff in Wage Suit Held Liable for Receivership Costs
By KENNETH OFGANG, Staff Writer
A former employee of a now-shuttered Koreatown bakery is responsible for the costs of putting the business into receivership, the Court of Appeal for this district ruled yesterday.
Div. Four, in an unpublished opinion by Justice Nora Manella, said it was reasonable to place the costs of the receivership on Sung J. Lee, because the business failed—through no fault of the receiver—to generate sufficient funds to pay those costs, and it was Lee who asked for the receiver to be appointed.
Lee sued Wien Bakery, LLC, claiming the company failed to pay his wages, and won a judgment for more than $360,000, including penalties. The receiver, Kevin Singer, was appointed on the plaintiff’s application under Business and Professions Code Sec. 17203.
The statute permits appointment of a receiver to collect a judgment entered against a business under circumstances constituting unfair competition.
The order authorized the receiver to operate the business, for the primary benefit of the plaintiff, until the judgment was satisfied. Singer was appointed in February 2011, but subsequently reported to the court that he was unable to take control of the business and assess its prospects for profitability until May of that year because the company filed for bankruptcy.
Once the bankruptcy petition was dismissed for failure to file a plan, Singer took control, but subsequently reported that he had been unable to generate enough revenue to make the lease and rental payments. In July, he asked the court for permission to close the business and sell off its assets.
He explained in moving papers that over a six-week period, the business generated about $136,000 in sales, of which all but $12,000 was spent on wages, payroll taxes, insurance, suppliers, and other immediate operating expenses. The rent and equipment leases were still unpaid, and an appraisal showed that the equipment was worth only $15,000 in excess of outstanding liens.
While the motion was pending, Wien Bakery LLC filed a new Chapter 11 petition and retook possession of the bakery. Singer filed a final report and accounting, saying he had “fulfilled his duties and should be discharged.” He said he was owed more than $27,000 and asked that Lee be ordered to pay it.
Lee objected, saying the receiver breached his duties to the plaintiff, should have notified him sooner that the business could not generate revenues for him, had overpaid his support staff at the rate of $150 per hour, and that issues related to the reasonableness of his fees should be resolved by the bankruptcy judge.
Singer withdrew his motion due to the automatic stay created by the second bankruptcy filing, then brought a new motion after the bankruptcy judge granted relief from the stay. He claimed additional costs and legal fees, and asked the judge to award him more than $35,000.
Los Angeles Superior Court Judge Elizabeth Allen White, in granting the motion, rejected the plaintiff’s claim that that Singer had a duty to pay Lee ahead of others and that the plaintiff should not be liable for expenses incurred after Singer moved to shut down the business.
The judge said the receiver could not have “simply siphon[ed] off, for the benefit of [Lee], funds that need[ed] to go to pay payroll and things that the business [was] obligated to pay by law.”
Manella, writing for the Court of Appeal, agreed, saying the receiver had acted within his discretion.
It was reasonable, she said, for Singer to operate the business for a short period in order to assess whether the business was viable and how much its assets were worth. The receiver, she said, acted in good faith by trying to cut the bakery’s expenses and to settle with Wien Bakery before determining that there was no alternative to shutting down the business.
She agreed with the trial judge that while the business was open, the receiver had a duty to pay necessary expenses—those that were labor-related, kept the business supplied, or were related to security. “All other significant creditors went unpaid,” she noted.
Manella went on to say that while a receiver’s expenses are normally paid from the income of the business, it was reasonable under the circumstances to require Lee to pay them “in the absence of any viable alternative.”
The justice reasoned:
“Here, the court concluded that in the absence of any viable alternative for remunerating the receiver appellant had sought to have appointed, the costs of the receivership should fall on appellant. Not only was appellant the party who requested that a receiver be appointed but his attorney personally selected respondent to be the receiver and was in close communication with him throughout the post-judgment proceedings.”
Attorneys on appeal were Henry M. Lee and Robert Myong for the plaintiff and Byron Z. Moldo and Matthew J. Eandi of Ervin Cohen & Jessup for Singer.
The case is Lee v. Wien Bakery LLC, B241325.
Copyright 2013, Metropolitan News Company