## Facts

- Emark Corporation suffered financial distress beginning in 1992.
- Emark granted broad security interests in substantially all of its personal property to certain creditors, including its corporate counsel (Rieck & Crotty, P.C.) and corporate insiders (a director, Pat Keig, and a CFO, Mike Rummel), to secure indebtedness.
- Rieck & Crotty held a secured note and a perfected security interest covering, among other items, accounts, inventory, equipment, cash, and records.
- After Emark defaulted, Rieck & Crotty foreclosed on the collateral, acquired it by credit bid, and later resold it to a third party for cash and contingent future payments.
- During an anticipated sale of Emark’s business and assets, employees’ paychecks were withheld with assurances they would be paid when the sale closed.
- Available proceeds were insufficient to satisfy all claims, and employees were offered only a percentage of unpaid wages.
- Employees, led by Jeff Myzer in a class action, sought unpaid wages and benefits and requested a determination that their wage claims had statutory priority under California Code of Civil Procedure § 1205 over the secured creditors’ claims.

## Issues

1. Whether California Code of Civil Procedure § 1205 gives employees’ unpaid wage and benefit claims priority over perfected security interests held by corporate insiders and corporate counsel in proceeds from the employer’s personal property.
2. Whether § 1205 operates as a substantive priority applicable to liquidation proceeds from foreclosure and resale, rather than being limited to particular procedural settings such as attachment or execution.

## Decision

- The Court of Appeal reversed the trial court’s priority determination favoring the secured creditors.
- The court held that, when § 1205 applies, employees’ unpaid wage and benefit claims take priority over competing creditor claims, including the secured claims of Emark’s insiders and counsel.
- The case was remanded for further proceedings to distribute the relevant proceeds consistent with the employees’ statutory wage priority.

## Legal Principles

- California Code of Civil Procedure § 1205 provides a statutory preference for employee wage claims that, when its conditions are met, ranks ahead of other creditor claims.
- Wage preference statutes are construed in light of California public policy favoring payment of earned wages and protecting wage earners when an employer’s business fails.
- The statutory wage priority may subordinate otherwise perfected security interests in the fund created by liquidation of the employer’s assets.
- Priority analysis focuses on distribution of the liquidation proceeds (including proceeds and related payment rights arising from foreclosure and resale), subject to any superior liens recognized by law.

## Conclusion

The court required that employees’ unpaid wages and benefits be paid ahead of secured claims held by the employer’s insiders and corporate counsel under Code of Civil Procedure § 1205, reversing the trial court and remanding for distribution consistent with that statutory priority.


Myzer v. Emark Corp., 45 Cal. App. 4th 884, 53 Cal. Rptr. 2d 60 (Ct. App. 1996)