Creditors' rights just got a little narrower. And if the result is that lenders become a bit more cautious about loaning money to shaky businesses, that is just what U.S. District Judge Odell Horton of Memphis intended.
His March 27 ruling came in a case that pitted federal labor law against the normal commercial transactions that finance business. Labor law won, even though Horton conceded that his decision is unfair to the company that put up the money. What he was really doing in Ford v. Ely Group was choosing between competing unfairnesses.
The case involves a lender who advanced money to a manufacturer to turn out textile products, with the merchandise itself securing the loan. When the manufacturer went out of business, the lender took title to the textiles, and wanted to sell them to retire the loan. Judge Horton, however, issued an injunction preventing such a sale. The manufacturer had gotten into such dire financial straits that it could not pay its workers their final two weeks' wages. That meant the merchandise was produced in violation of the Fair Labor Standards Act, and the U.S. Labor Department went to court to keep the goods out of the stream of commerce.
The FLSA labels such products "hot goods," and bans their sale. The purpose of that provision, the U.S. Supreme Court explained in 1941, is to protect employers who pay the legal wage from having to compete with companies that ignore the law and thereby benefit from unfairly low labor costs. Horton reasoned that cut-price competition would have the same effect on the legitimate manufacturer whether the goods were being sold by a shady operator or a creditor who had taken title to them.
Horton admitted that the lender was an innocent victim of the FLSA violation, but he added that his decision might help achieve the goals of that statute. As he sees it, employers keep wages from their workers only when they have run out of money completely. And if lenders were a bit less ready to keep marginal operations going by advancing funds for raw materials in return for a right to take possession of the goods, hapless workers might never find themselves employed by companies too poor to pay wages.
In other cases, courts ruled that:
It is tougher to get a valid patent than some older court rulings have indicated. The U.S. Court of Appeals for the Federal Circuit, which specializes in patent litigation, has decided that the obligation of an inventor to give all the facts to the Patent Office "should not be judged by the least common denominator." The judges tried to settle ancient arguments over just how much an inventor has to tell the government about previous discoveries, including information that might suggest that the latest twist is not enough of a breakthrough to merit a patent. The court declared that every close call should come out on the side of disclosure, which means that a patent obtained when some information was held back may not be enforceable. (Argus Chemical v. Fibre Glass-Evercoat, April 4)
Cable television programmers must be given broader latitude in scheduling questionable material than is allowed regular broadcasters. In 1978, the Supreme Court ruled that the Federal Communications Commission could, at least in some circumstances, keep "vulgar" and "offensive" material off the air. But the U.S. Court of Appeals in Atlanta, in striking down a Miami ordinance against "indecent material" on cable TV, said the same reasoning should not apply to cable. The difference: Cable comes into the home only when a subscriber has gone to some trouble to get it, and it is easier for subscribers to keep children from seeing "adult" cable shows than it is for them to monitor what youngsters see or hear on non-pay broadcast stations. At issue in the case were depictions of sexual activity that some viewers might find offensive, but that do not meet the legal definition of obscenity. (Cruz v. Ferre, March 22)
Taxpayers can take deductions for home offices that are in separate buildings on their residential property. The Internal Revenue Service, in challenging the income tax return of a New Orleans chemistry professor who ran two businesses out of a building in his back yard, argued that home-office deductions are only available for space that is part of -- or at least attached to -- the living quarters. But the U.S. Tax Court refused to accept that interpretation, saying that as long as expenses for the separate building were included in the bills for the residence, the deduction is available. (Scott v. Commissioner, April 15)
A lender who reneges on a financing agreement can be liable for the closing down of a company. The U.S. Court of Appeals in Cincinnati approved a $7.5 million verdict against a trust company that had decided not to advance money on an existing line of credit, thereby causing the collapse of a grocery business. Although a literal reading of the line-of-credit agreement gave the bank the right to refuse to advance the money when asked, the bank's interpretation would put a customer at too much risk, the judges reasoned. The bank has at the least "an obligation of good-faith performance," which would, for instance, require advance notice of a decision to curb the credit line. (K.M.C. v. Irving Trust, March 4)