Citicorp Indus. Credit v. Brock
483 U.S. 27 (1987)

Annotate this Case

U.S. Supreme Court

Citicorp Indus. Credit v. Brock, 483 U.S. 27 (1987)

Citicorp Industrial Credit, Inc. v. Brock

No. 86-88

Argued April 20, 1987

Decided June 22, 1987

483 U.S. 27

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

Syllabus

Section 15(a)(1) of the Fair Labor Standards Act (FLSA or Act) prohibits "any person" from introducing into interstate commerce goods produced in violation of the minimum wage or overtime pay provisions of §§ 6 and 7 of the Act. Under a financing agreement with manufacturer Ely Group, Inc. (Ely), petitioner perfected a security interest in Ely's inventory. After Ely began to fail financially, petitioner took possession of the inventory, part of which was manufactured during a period in which Ely's employees were not paid. Concluding that such items were "hot goods" under § 15(a)(1), the United States Department of Labor filed suits in two Federal District Courts, each of which granted a preliminary injunction prohibiting the transportation or sale of the goods in interstate commerce. The Court of Appeals affirmed the consolidated cases.

Held: Section 15(a)(1) applies to secured creditors who acquire "hot goods" pursuant to a security agreement. Pp. 483 U. S. 32-38.

(a) The goods produced during the period when Ely's employees were not paid were manufactured in violation of § 6 and/or § 7 of the Act, and are "hot goods" for the purposes of § 15(a)(1). Pp. 483 U. S. 32-33.

(b) As a corporate entity, petitioner falls within § 15(a)(1)'s plain language, since that section prohibits "any person" from introducing "hot goods" into commerce, while the Act defines "person" to include corporations. Petitioner's argument that § 15(a)(1)'s exemptions for common carriers and good faith purchasers reflect a congressional intent that the "hot goods" prohibition should apply only to culpable parties, and not to "innocent" secured creditors, is not persuasive. Congress' limitation of the effects of other FLSA provisions to culpable parties indicates that its failure to do so here was not inadvertent. Rather, § 15(a)(1)'s exemption of only two narrow categories of "innocent" persons suggests that all others, whether innocent or not, are covered. There is no indication that Congress actually considered secured creditors when it enacted § 15(a)(1), but, by claiming a general exemption for them, without any duty to ascertain compliance with the Act, petitioner would put them in a better position than good faith purchasers, whom Congress did specifically act to protect. Detailed and particular FLSA exemptions cannot

Page 483 U. S. 28

be enlarged by implication to include persons not plainly and unmistakably within the Act's terms and spirit. Pp. 483 U. S. 33-35.

(c) By excluding tainted goods from interstate commerce, the application of § 15(a)(1) to secured creditors furthers the FLSA's goal of eliminating the competitive advantage enjoyed by goods produced under substandard labor conditions. Moreover, prohibiting foreclosing creditors from selling "hot goods" also advances the Act's purpose of establishing decent wages and hours, since such creditors will be encouraged to insist that their debtors comply with the Act's minimum wage and overtime pay requirements. Pp. 483 U. S. 35-38.

(d) Applying § 15(a)(1) to secured creditors does not give employees a "lien" on, or priority in, "hot goods" superior to that of the creditors under state law, since creditors' rights in the goods as against the employer are unchanged by such application, while the employees acquire no possessory interest in the goods thereby. Such application is simply an exercise of Congress' power to exclude contraband from interstate commerce. Pp. 483 U. S. 38-39.

788 F.2d 1200, affirmed.

MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, BLACKMUN, POWELL, O'CONNOR, and SCALIA, JJ., joined. SCALIA, J., filed a concurring opinion, post p. 483 U. S. 40. STEVENS, J., filed a dissenting opinion, in which WHITE, J., joined, post p. 483 U. S. 40.

JUSTICE MARSHALL delivered the opinion of the Court.

Section 15(a)(1) of the Fair Labor Standards Act of 1938, 52 Stat. 1068, prohibits "any person" from introducing into

Page 483 U. S. 29

interstate commerce goods produced in violation of the minimum wage or overtime provisions of the Act. The question in this case is whether § 15(a)(1) applies to holders of collateral obtained pursuant to a security agreement.

I

In 1983, petitioner entered into a financing agreement with Qualitex Corporation, a clothing manufacturer and the corporate predecessor to Ely Group, Inc., and its subsidiaries Rockford Textile Mills, Inc., and Ely & Walker, Inc. (collectively Ely). Under the terms of the financing arrangement, petitioner agreed to loan up to $11 million to provide working capital for Ely. In return, Ely granted petitioner a security interest in inventory, accounts receivable, and other assets. Petitioner perfected its security interest under applicable state law.

The financing agreement imposed various reporting requirements on Ely, including the submission to petitioner of a weekly schedule of inventory, a monthly balance sheet and income statement, and reports of accounts receivable. Petitioner also monitored the collateral upon which it made cash advances through a system of audits and on-site inspections. In the fall of 1984, Ely's sales began to fall below projections, and the balance on the loan began to increase, reaching over $9.5 million by February, 1985. Ely stopped reporting to petitioner in January, 1985. On February 8, petitioner stopped advancing funds and demanded payment in full. At the request of Ely's management, however, petitioner did not immediately foreclose. It gave Ely an opportunity to devise a plan for continuing its operations, but Ely was unable to do so. Petitioner waited until February 19, at which time it took possession of the collateral, including Ely's inventory of finished goods.

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

Page 483 U. S. 30

did not receive any wages for pay periods between January 27 and February 19. The Department of Labor concluded that the items manufactured during these times were produced in violation of §§ 6 and 7 of the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. §§ 206 and 207, and that, under § 15(a)(1), they were "hot goods" that could not be introduced into interstate commerce. [Footnote 1] Acting on information that petitioner intended to transport these goods in interstate commerce, the Secretary of Labor sought to enjoin shipment.

In an action filed in the United States District Court for the Eastern District of Tennessee, the Secretary moved for a preliminary injunction and sought a temporary restraining order to prohibit Ely and petitioner from placing the goods in interstate commerce. The District Court denied the application for a temporary restraining order, but, after a hearing, granted the Secretary's motion for a preliminary injunction. Donovan v. Rockford Textile Mills, Inc., 608 F.Supp. 215 (1985). The Under Secretary of Labor then filed another complaint against Ely and petitioner, this time in the United

Page 483 U. S. 31

States District Court for the Western District of Tennessee. This complaint was also accompanied by a motion for a preliminary injunction and application for a temporary restraining order. The District Court granted the temporary restraining order, and later granted the Under Secretary's motion for a preliminary injunction. Ford v. Ely Group, Inc., 621 F.Supp. 22 (1985).

Both District Courts held that § 15(a)(1), which makes it unlawful for any person to ship "hot goods" in interstate commerce, prohibited not only Ely but also petitioner from transporting or selling items produced by employees who had not been paid in conformity with §§ 6 and 7 of the FLSA. They found this reading of § 15(a)(1) consistent with congressional intent to exclude from interstate commerce goods produced under substandard labor conditions. 608 F.Supp. at 217; 621 F.Supp. at 25-26. The courts concluded that,

"'in light of the purposes of the Act, it would be an unjust and harsh result for the creditor to get the benefit of the labor of the employees during the period of time they produced goods and were not paid as provided by the Act; a benefit which the creditor would not have without the employees['] labor.'"

Id. at 26 (quoting 608 F.Supp. at 217). [Footnote 2]

The two cases were consolidated on appeal. The United States Court of Appeals for the Sixth Circuit affirmed, one judge dissenting. Brock v. Ely Group, Inc., 788 F.2d 1200

Page 483 U. S. 32

(1986). Following the plain language of § 15(a)(1), the majority concluded that "any person," as used in that section, applies to secured creditors. Id. at 1202-1203. Like the District Courts, it found this result consistent with the purpose of the FLSA: to exclude tainted goods from interstate commerce. Id. at 1203. The Court of Appeals rejected the reasoning of the Second Circuit in Wirtz v. Powell Knitting Mills Co., 360 F.2d 730 (1966), which had held § 15(a)(1) inapplicable to secured creditors who take possession of goods produced in violation of the FLSA. 788 F.2d at 1204-1205. The Sixth Circuit noted that Congress created only two exceptions to the broad scope of § 15(a)(1), one for common carriers and one for good faith purchasers, id. at 1205, and concluded that "Powell Knitting Mills created an exception for secured creditors that Congress did not and has not deemed appropriate." Id. at 1206. The dissenting judge would have followed Powell Knitting Mills. He maintained that, in enacting the "hot goods" provision, Congress was concerned with violations of the Act occurring in the course of the ongoing production of goods by a solvent manufacturer, not, as here, by an insolvent corporation that has ceased operations. Id. at 1207.

We granted certiorari to resolve this conflict among the Circuits. [Footnote 3] 479 U.S. 929 (1986). We now affirm.

II

A

The FLSA mandates the payment of minimum wage and overtime compensation to covered employees. Section 6(a) provides that every employer, as defined in the Act, "shall

Page 483 U. S. 33

pay to each of his employees" wages not less than the specified minimum rate; § 7(a)(1) prohibits employment of any employee in excess of 40 hours per week "unless such employee receives compensation" at a rate of not less than one and one-half times the employee's regular rate. Petitioner does not contest the lower courts' findings that Ely failed to pay its employees at all for several weeks immediately preceding the plant closings. Consequently, we conclude, as did the Court of Appeals, that the goods produced during this period were manufactured in violation of § 6 and/or § 7 of the FLSA, and are "hot goods" for the purposes of § 15(a)(1). [Footnote 4] See 788 F.2d at 1201.

Section 15(a)(1) prohibits "any person" from introducing goods produced in violation of § 6 or § 7 of the FLSA into interstate commerce. Section 3(a) defines "person" as "an individual, partnership, association, corporation, business trust, legal representative, or any organized group of persons." 29 U.S.C. § 203(a). As a corporate entity, petitioner clearly falls within the plain language of the statute. Section 15(a)(1) contains two exemptions to the general prohibition on interstate shipment of "hot goods." The first, enacted as part of the original FLSA, exempts common carriers from the prohibition on transportation of such goods. The second, added in 1949, exempts a purchaser who acquired the goods

Page 483 U. S. 34

for value, without notice of any violation, and "in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements" of the Act.

Petitioner does not claim to come within either statutory exemption. Rather, it argues that the exemptions reflect congressional intent to limit application of the "hot goods" provision to culpable parties, and therefore, "innocent" secured creditors should not be subject to the Act. [Footnote 5] We disagree. Although §§ 6 and 7 only require "employers" to pay minimum wage and overtime, § 15(a)(1) refers to "any person," not "any employer." Congress limited other provisions of the FLSA as petitioner suggests, [Footnote 6] which indicates that its failure to do so in § 15(a)(1) was not inadvertent. 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). [Footnote 7] We find no indication that Congress actually

Page 483 U. S. 35

considered application of the "hot goods" provision to secured creditors when it enacted the FLSA. By claiming a general exemption for creditors, without any duty to ascertain compliance with the FLSA, petitioner is asking us to put creditors in a better position than good faith purchasers, for whom Congress specifically added an exemption.

In the past, the Court has refused "[t]o extend an exemption to other than those plainly and unmistakably within [the FLSA's] terms and spirit." A. H. Phillips, Inc. v. Walling,324 U. S. 490, 324 U. S. 493 (1945). Similarly, where the FLSA provides exemptions "in detail and with particularity," we have found this to preclude "enlargement by implication." Addison v. Holly Hill Fruit Products, Inc.,322 U. S. 607, 322 U. S. 617 (1944). See also Powell v. United States Cartridge Co.,339 U. S. 497, 339 U. S. 512 (1950); Mabee v. White Plains Publishing Co.,327 U. S. 178, 327 U. S. 183-184 (1946). We see no reason to deviate from our traditional approach in this case.

B

Petitioner urges us to look beyond the plain language of the statute, citing the often-quoted passage from Holy Trinity

Page 483 U. S. 36

Church v. United States,143 U. S. 457, 143 U. S. 459 (1892):

"[A] thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers."

According to petitioner, the sole aim of the FLSA was to establish decent wages and hours for American workers. This goal, petitioner claims, is not furthered by application of § 15(a)(1) to creditors who acquire "hot goods" by foreclosure, and are not themselves responsible for the minimum wage and overtime violations. However, we conclude that the legislative intent fully supports the result achieved by application of the plain language.

While improving working conditions was undoubtedly one of Congress' concerns, it was certainly not the only aim of the FLSA. In addition to the goal identified by petitioner, the Act's declaration of policy, contained in § 2(a), reflects Congress' desire to eliminate the competitive advantage enjoyed by goods produced under substandard conditions. [Footnote 8] 29

Page 483 U. S. 37

U.S.C. § 202(a). This Court has consistently recognized this broad regulatory purpose.

"The motive and purpose of the present regulation are plainly . . . that interstate commerce should not be made the instrument of competition in the distribution of goods produced under substandard labor conditions, which competition is injurious to the commerce."

United States v. Darby,312 U. S. 100, 312 U. S. 115 (1941). See also Tony & Susan Alamo Foundation v. Secretary of Labor,471 U. S. 290, 471 U. S. 296 (1985); Maryland v. Wirtz,392 U. S. 183, 392 U. S. 189 (1968); Rutherford Food Corp v. McComb,331 U. S. 722, 331 U. S. 727 (1947).

Application of § 15(a)(1) to secured creditors furthers this goal by excluding tainted goods from interstate commerce. Had the Department of Labor not obtained an injunction in this case, petitioner, as a secured creditor, would have converted several weeks of labor by the debtor's employees into goods covered by its security interest; the "hot goods" produced by these uncompensated employees would have competed with goods produced in conformity with the FLSA's minimum wage and overtime requirements. Moreover, prohibiting foreclosing creditors from selling "hot goods" also advances the goal identified by petitioner. Secured creditors often monitor closely the operations of employer-borrowers, as petitioner did in this case. They may be in a position to insist on compliance with the FLSA's minimum wage and overtime requirements. As the District Court for the Western District observed:

Page 483 U. S. 38

"[I]f foreclosing creditors are free to ship and sell tainted goods across state lines, the temptation to overextend credit to marginal producers is strong, as is the likelihood that such producers will become unable to meet their payrolls. The reason for this is that finance companies and institutions stand to reap financial gain by keeping such producers in business. A holding by this Court that creditors may not ship and sell in interstate commerce goods produced in violation of the Act will not only protect complying manufacturers from the unfair competition of such tainted goods, but, we submit, it will also discourage the type of commercial financing which leads to minimum wage and overtime violations."

621 F.Supp. at 26 (emphasis added).

C

A literal application of § 15(a)(1) does not grant employees a priority in "hot goods" superior to that which a secured creditor has under state law. Petitioner's rights in the collateral as against Ely are unchanged by our holding. Petitioner still owns the goods, subject only to the "hot goods" provision, which prevents it from placing them in interstate commerce. The employees have not acquired a possessory interest in the goods. [Footnote 9] Indeed, as the District Court for the Western District of Tennessee recognized, the Secretary brought this action

"not to compel the foreclosing creditor to pay the statutory wages or to put pressure on the defaulting producer to pay such wages, but to keep tainted goods from entering the channels of interstate commerce."

Id. at 25-26. That petitioner can cure the employer's violation of the FLSA by paying the employees the statutorily required

Page 483 U. S. 39

wages does not give the employees a "lien" on the assets superior to that of a secured creditor. [Footnote 10]

In numerous other statutes, Congress has exercised its authority under the Commerce Clause to exclude from interstate commerce goods which, for a variety of reasons, it considers harmful. Like the FLSA, these regulatory measures bar goods not produced in conformity with specified standards from the channels of commerce. [Footnote 11] As the District Courts in this case recognized, secured creditors take their security interests subject to the laws of the land. See 621 F.Supp. at 26; 608 F.Supp. at 217. If, for example, the goods at issue in this case were fabrics that failed to meet federal flammability standards and were therefore banned from interstate commerce under the Flammable Fabrics Act, 67 Stat. 111, as amended, 15 U.S.C. § 1191 et seq., surely petitioner could not argue that it had a right to sell the inventory merely by virtue of its status as a secured creditor. "Hot goods" are not inherently hazardous, but Congress has determined that they are contraband nonetheless. We see no reason for a different result merely because a different form of contraband is involved.

III

We hold that § 15(a)(1)'s broad prohibition on interstate shipment of "hot goods" applies to secured creditors who acquire the goods pursuant to a security agreement. This result is mandated by the plain language of the statute, and it

Page 483 U. S. 40

furthers the goal of eliminating the competitive advantage enjoyed by goods produced under substandard labor conditions. Accordingly, the judgment of the Court of Appeals is

Affirmed.

[Footnote 1]

Section 15(a)(1) of the FLSA, codified at 29 U.S.C. § 215(a), provides in relevant part:

"(a) [I]t shall be 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 or section 207 of this title, or in violation of any regulation or order of the Secretary issued under section 214 of this title; 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 to 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."

[Footnote 2]

The District Court for the Eastern District of Tennessee granted petitioner's motion for a stay of the preliminary injunction pending appeal. The stay permitted the delivery and sale of Ely's inventory, on the condition that petitioner place the proceeds in a separate interest-bearing account to be used to pay the wages of Ely's former employees in the event that, on appeal, § 15(a)(1) was held to apply to petitioner. The District Court in the Western District denied a similar motion for a stay, but the Court of Appeals granted a stay on the same conditions. The Court of Appeals subsequently modified its order to permit petitioner to withdraw all but $1.5 million from the account.

[Footnote 3]

In Shultz v. Factors, Inc., 65 CCH LC

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