Opinion ID: 2630997
Heading Depth: 4
Heading Rank: 1

Heading: pre-receivership employees' wages and benefits

Text: Focusing solely on pre-receivership wages, vacation pay or employment taxes paid during the receivership period, Hawaii Ventures specifically argues that: The circuit court erroneously and retroactively approved payment of Otaka debts to Otaka employees for services rendered to Otaka prior to the receivership of approximately $156,220 in wages, $60,122 in payroll taxes withholding, and $99,486 in vacation benefits[, totaling $316,188.00]. . . . There is no record to support that payment for, or use of, benefits such as vacation accrued during the pre-receivership period was a reasonable or necessary expense during the [r]eceivership period[.] (Emphases added.) The contested payments represent (1) wages earned the week immediately preceding the circuit court's appointment of the receiver and (2) vacation benefits taken during the receivership that were drawn in part from unused vacation credits accrued pre-receivership. In response, Receiver Park maintains that the appointment order gave [her] the authority, power, and discretion to pay wages and other obligations that may have had their inception before her appointment, but which arose during the receivership. To prohibit her from maintaining the Hotel's work force, by funding essential perquisites of employment, would contradict her ultimate duty to care for, preserve, and maintain the property. (Emphasis added.) ILWU similarly argues that, [b]ecause the circuit court's order appointing the Receiver gave her the necessary authority, the Receiver acted properly in paying the disputed employee benefits from [the Estate's] assets. ILWU also contends that the payments were appropriately approved by the circuit court as administrative expenses chargeable to the Estate because, inter alia, [t]he Receiver paid wages and vacation in question knowing that continued labor throughout the receivership period was essential to protecting the operation of the [H]otel and making it profitable. Generally, the costs and expenses of a receivership incurred in preserving its assets are administrative expenses, chargeable to the assets of the receivership. Miller v. Leadership Hous. Sys., Inc., 57 Haw. 321, 327, 555 P.2d 864, 869 (1976) (citations omitted) (emphasis added). This court, however, has warned against construing the word preserve too literally. Id. at 328, 555 P.2d at 869. In Miller, this court held that expenses for improvements to a property in receivership may be paid from the receivership assets if they are necessary to preserve the property in the hands of the receiver. Id. at 327-28, 555 P.2d at 869 (citations omitted). The Miller court explained that improvements to the property in the receiver's hands can result in the property being figuratively `preserved' in its intended final condition and a greater sum realized for distribution to creditors, general and special, than if the receiver were forced to leave it in its incomplete less salable condition. Id. at 328-29, 555 P.2d at 869-70 (internal quotation marks and citation omitted). With respect to the specific pre-receivership payments at issue here, other courts have recognized that it may be proper for receivers to pay wages and vacation benefits earned by employees prior to the imposition of a receivership. For example, in United States v. Wisconsin Valley Trust Co., 233 F.Supp. 73 (W.D.Wis.1964), the United States sued Receiver Wisconsin Valley Trust Company in federal court, arguing that the receiver should not have paid pre-receivership wages and vacation in a previous state court corporation receivership and that such sums should have instead been paid towards federal taxes. Id. at 74. The federal court, in dismissing the United States' lawsuit, held, inter alia, that the payments were necessary and explained: Here is a Receiver that was confronted with the duty of running a business [ i.e., a trucking company ] and the record shows that he was dealing with some 250 to 300 employees belonging to approximately 12 or 15 [l]abor [o]rganizations. It was his duty to keep the business running and he could not do so unless he had truck drivers and maintenance men. This [c]ourt takes notice of the facts of business life in that these employees would not continue working had they not been paid the wages due them. Id. at 79. The court further explained that the business could not have been sold so lucratively had it not been for the receiver's decisions that kept it operational. Id. Accordingly, the court held that these payments[, i.e., wages and vacation pay,] to the employees had to be made to preserve the business. It is the [c]ourt's opinion that the Receiver would have been derelict in his duty had he not pursued the course he had for the purpose of preserving the assets which eventually were sold as a going business. Id. at 81 (emphases added). In reaching its conclusion, the court recognized, one, that [w]ages earned prior to the appointment of a receiver have likewise been held to be a first charge upon net earnings during the receivership, upon grounds which would entitle them to a preference out of the corpus, namely, that there has been, prior to the receivership, a diversion of the current earnings out of which such wages should have been paid, or that payment was necessary in order to retain the services of employees needed by the receiver, or that the mortgagees have received a benefit from the continuance of the business as a going concern for which they are bound in equity to pay[,] id. at 80 (format altered) (some internal quotation marks, citations, and ellipses omitted), and, two, that [i]t cannot be affirmed that no items which accrued before the appointment of a receiver can be allowed in any case. Many circumstances may exist which may make it necessary and indispensable to the business . . . and the preservation of the property, for the receiver to pay pre-existing debts of certain classes, out of the earnings of the receivership, or even the corpus of the property . . . . Yet the discretion to do so should be exercised with very great care. Id. (emphasis added) (format altered) (quoting Miltenberger v. Logansport, C. & S.W.R. Co., 106 U.S. 286, 311, 1 S.Ct. 140, 27 L.Ed. 117 (1882)). [13] Here, the appointment order expressly authorized the Receiver to use [her] best efforts to manage, protect, care for, preserve, and maintain the Estate, to pay for such expenses as are necessary or appropriate for the care, preservation and maintenance of the Estate, and to undertake to expend revenues for maintenance or enhancement of the ability of the [m]ortgaged [p]roperty to operate, including marketing and refurbishing expenditures. The circuit court also granted the Receiver the broad authority to take such other actions as is reasonable to effectuate [her enumerated] powers and duties. These provisions empowered Receiver Park to pay any expenses, including payroll, that were appropriate to maintain or enhance the value of the Hotel during the receivership. In fact, the appointment order specifically permitted Receiver Park to pay expenses that were incurred or arose during the receivership and that were necessary and appropriate for the preservation of the Estate. Receiver Park's decisions to pay to the Hotel employees wages earned the week before her appointment and allow the employees to use vacation benefits earned prior to her receivership were clearly necessary [and] appropriate for the care, preservation and maintenance of the Estate. Had she not done so, the Hotel may not have been an asset, but a liability. Receiver Park took over the Hotel with $406,000.00 in the operating account; by the time of the foreclosure sale, she had increased the Hotel's cash-on-hand over tenfold to $4,300,000.00 as of June 30, 2001. Nevertheless, it would not be unreasonable to expect that the Receiver's refusal to pay the pre-receivership wages and benefits could have resulted in a loss of employees or a refusal to work. Moreover, the ILWU could have called for a strike, set up picket lines, and filed charges of unfair labor practices. From her perspective as the manager of an ongoing business and the discretionary authority granted to her in the appointment order, Receiver Park's decision to pay employee expenses to prevent any potential breakdown in the Hotel's labor relations that might have impaired the property's value was reasonable. See Coy v. Title Guarantee & Trust Co., 198 F. 275, 280 (D.Or.1912) (a receiver exercises, in matters of management and manner of disposition of the estate, a large discretion, which he . . . must do, as the court cannot attend to details of administration.). As demonstrated in her final report, Receiver Park commended the efforts of the management team and the workforce in maintaining an average monthly occupancy rate of 72.19% for the period from September 2000 through June 30, 2001, which rate represent[ed] an improvement from the 69.95% average from the previous year (September 1999 through June 2000), and is very much in line with other comparable Waikiki hotels[.] Receiver Park also indicated that, [o]ut of a work force of 270 employees (which included bargaining and non-bargaining, full-time, part-time and on call employees), from August 24, 2000 to June 30, 2001, only 28 resigned (with 11 of them resigning in June 2001). [14] Accordingly, we hold that the circuit court did not abuse its discretion in approving Receiver Park's payment of employees' wages and benefits earned pre-receivership when such payment was clearly appropriate to maintain and enhance the value of the Estate. [15]