Citicorp v. Brock: FLSA Hot Goods Provision Applies to Secured Creditors

In Citicorp Indus. Credit, Inc. v. Brock, 483 U.S. 27, 107 S. Ct. 2694 (1987) the Supreme Court held that the Fair Labor Standards Act’s prohibition on selling “hot goods” applies to secured creditors who acquire the goods pursuant to a security agreement, even when the creditor itself did not engage in an FLSA violation.

Statutory Background – The FLSA “Hot Goods” Provision

Relevant to the decision in Citicorp, Section 215(a)(1) of the Fair Labor Standards Act provides that it is unlawful for “any person”

(1) to transport, offer for transportation, ship, deliver, or sell in commerce, or to ship, deliver, or sell with knowledge that shipment or delivery or sale thereof in commerce is intended, any goods in the production of which any employee was employed in violation of section 206 [minimum wage provisions] or section 207 of this title [overtime wage provisions], or in violation of any regulation or order of the Secretary issued under section 214 of this title [employment under special certificates] …

29 U.S.C. § 215(a)(1). Therefore, the FLSA generally prohibits any person from selling or shipping goods made using employees who were not paid the required overtime or minimum wages. This prohibition is sometimes called the FLSA’s “hot goods” provision.

The FLSA provides two exceptions to the “hot goods” rule, for common carriers and good faith purchasers under certain circumstances:

…except that no provision of this chapter shall impose any liability upon any common carrier for the transportation in commerce in the regular course of its business of any goods not produced by such common carrier, and no provision of this chapter shall excuse any common carrier from its obligation to accept any goods for transportation; and except that any such transportation, offer, shipment, delivery, or sale of such goods by a purchaser who acquired them in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements of this chapter, and who acquired such goods for value without notice of any such violation, shall not be deemed unlawful;

29 U.S.C. § 215(a)(1). At issue in Citicorp was whether or not the “hot goods” provision applied to secured creditors who acquired goods pursuant to a security agreement.

Facts

In 1983, Citicorp entered into a financing agreement with a clothing manufacturer and the corporate predecessors to Ely Group, Inc. (collectively “Ely”). Under the arrangement, Citicorp agreed to loan up to $11 million to provide working capital for Ely. In return, Ely granted Citicorp a security interest in its inventory, accounts receivable, and other assets. 107 S. Ct. 2694, 2696.

In the fall of 1984, Ely’s sales dropped and it began to fail financially. Citicorp subsequently gave Ely an opportunity to present a plan for continuing its operations, but Ely was unable to do so. Citicorp waited until February 19, 1985, at which time it took possession of the collateral, including Ely’s inventory of finished goods. 107 S. Ct. at 2696.

Ely’s employees continued to work until February 19, when Ely ceased all operations and closed its manufacturing facilities. Because Ely defaulted on its payroll, the employees did not receive any wages for pay periods between January 27 and February 19. 107 S. Ct. at 2696-97. The Department of Labor concluded that the goods made during these times were produced in violation of the FLSA’s overtime and minimum wage requirements and that under § 215(a)(1), they were “hot goods” that could not be introduced into interstate commerce. 107 S. Ct. at 2697.

The DOL therefore filed suits in two federal district courts, each of which granted a preliminary injunction prohibiting the shipment or sale of the goods in interstate commerce. The Court of Appeals affirmed the cases. 107 S. Ct. at 2697-98.

In Citicorp, the question for the Supreme Court was whether this prohibition applied to Citicorp, which now had possession of the goods as its collateral on the loan, even though Citicorp did not itself engage in the overtime and minimum wage violations at issue.

The Court’s Decision

The Court held that the FLSA’s prohibition on selling “hot goods” applies to secured creditors who acquire “hot goods” pursuant to a security agreement, even when the creditor did not engage in an FLSA violation. 107 S. Ct. at 2698-2702.

First, the Court determined that the goods produced during the period when Ely’s employees were not paid were manufactured in violation of the FLSA’s overtime and minimum wage requirements, and therefore were “hot goods” for the purposes of Section 215(a)(1). 107 S. Ct. at 2698.

Second, the Court observed that as a corporation, Citicorp fell within the plain language of Section 215(a)(1). That section prohibits “any person” from introducing “hot goods” into commerce, and the FLSA defines “person” to include corporations. 107 S. Ct. at 2698 (citing definition at 29 U.S.C. § 203(a)).

Third, the Court rejected Citicorp’s argument that Section 215(a)(1)’s exemptions for common carriers and good-faith purchasers reflected a congressional intent that the “hot goods” prohibition should apply only to “culpable parties” and not to “innocent” secured creditors. 107 S. Ct. at 2699. The Court noted that since Citicorp was neither a common carrier nor a good-faith purchaser of the goods at issue, the exemptions in Section 15(a)(1) only supported the interpretation that Citicorp was subject to the provision: “That Congress identified only two narrow categories of ‘innocent’ persons who were not subject to the ‘hot goods’ provision suggests that all other persons, innocent or not, are subject to § 15(a)(1).” 107 S. Ct. at 2699 (emphasis in original). The Court cited past cases supporting this principle of interpretation, that  “where the FLSA provides exemptions ‘in detail and with particularity,’ we have found this to preclude ‘enlargement by implication.’” 107 S. Ct. at 2699 (citation omitted, collecting cases).

Fourth, the Court observed that this interpretation supported the FLSA’s policy goals. The FLSA’s policy statement in Section 202(a) reflected ““Congress’ desire to eliminate the competitive advantage enjoyed by goods produced under substandard conditions.” 107 S. Ct. at 2700 (citing 29 U.S.C. § 202(a)). “Application of § 15(a)(1) to secured creditors furthers this goal by excluding tainted goods from interstate commerce.” Id. Further, the Court noted that prohibiting creditors who foreclose on “hot goods” from selling them also advanced the FLSA’s minimum wage and overtime requirements, since creditors would be encouraged to insist that their debtors comply with those requirements. 107 S. Ct. at 2700-01.

Finally, the Court noted that the fact that a secured creditor like Citicorp could cure the employer’s FLSA violation by paying the employees the statutorily required wages “does not give the employees a ‘lien’ on the assets superior to that of a secured creditor.’” 107 S. Ct. at 2701. Rather, the creditor’s rights in the goods were not changed, while the employees did not acquire a possessory interest in the goods. Id. at 2701-02.

Analysis

In sum, Citicorp held that the FLSA’s prohibition on selling “hot goods” applies to secured creditors who acquire the goods pursuant to a security agreement, even when the creditor itself did not engage in an FLSA violation.

 

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