A law intended to protect workers is being converted into one to discourage lenders from extending credit to shaky enterprises. The transformation means creditors no longer can count on the validity of a 20-year-old ruling that gave them leeway to dispose of collateral on defaulted loans.

The controversy involves the provision in the Fair Labor Standards Act that bars shipment of goods made by workers who have not gotten their legal wages. The intent was both to pressure employers to pay at least the minimum wage and required overtime and to protect companies that do obey the law from competition from manufacturers with unlawfully low labor costs.

But in 1966, the U.S. Court of Appeals in New York wrote what the judges called a "judicial exception" into that provision. The judges gave the go-ahead to a lender who had foreclosed on the inventory of a sweater factory to sell the goods, even though the workers who had made them had been paid less than the legal minimum wage.

Now, the U.S. Court of Appeals in Cincinnati has rejected that reasoning. In Brock v. Ely Group, handed down April 23, the majority read the FLSA as unequivocally banning the shipment and found no justification for making an exception that Congress had not written into the statute.

Not only is the ban on shipping such goods clear, the judges explained, but it also conforms with one of the underlying purposes of the act. Allowing a creditor who has executed a lien and taken title to goods produced in sweatshop conditions to sell those goods would put at a disadvantage those competitors who have been law-abiding -- and Congress wanted to avoid just such an unfair result.

The situation described in the new case was even worse than in the 1966 litigation. The workers were not just underpaid -- they went without pay at all for some weeks, as the manufacturer got onto slipperier and slipperier financial ground. The U.S. District Court judge in Memphis who originally enforced the shipment ban more than a year ago suggested that it is just for the lenders to be left holding the bag, because they bear some of the responsibility.

Enforcing the FLSA in such a way that lenders will think twice about advancing money for raw materials to operations so close to the margin that they cannot pay their workers would produce benefits, Judge Odell Horton argued.

In other cases, courts ruled that:

Homeowners can write off as a casualty loss on their income tax some declines in property values. The Internal Revenue Service always has argued that when a flood, or similar natural disaster, makes a house less saleable, the only loss that can be deducted is the actual cost of making repairs. But the U.S. Court of Appeals in Atlanta has rejected that narrow interpretation, opening the way for significant tax savings. When homeowners can show that fear on the part of potential buyers that a similar disaster will strike makes the real market value of the property fall, that loss of value is a casualty loss deductible like any other. (Finkbohner v. U.S., May 6)

Any kind of hiring or promotion test can be judged by whether or not the results are discriminatory. Some circuit courts of appeal have said the "disparate impact" way of assessing the legitimacy of job requirements -- tossing out unjustified height requirements because they lead to more women than men being rejected, for instance -- can be used only for objective criteria. But the U.S. Court of Appeals in Chicago gives greater rights to those seeking to prove unlawful employment discrimination, saying they can challenge subjective criteria -- such as open-ended questions posed by the members of an interviewing panel -- when the results seem to work against members of particular groups.(Regner v. Chicago, May 1)

A product liability suit can be based on injuries that were psychologically induced. The law in Oklahoma does not allow a plaintiff to recover for the mental anguish of an accident unless there is physical injury as well. But the Oklahoma Supreme Court decided the mental suffering does not have to follow the physical ailments. The justices gave the green light to a suit by a woman who got so upset at finding what she thought was a worm in a bottled soft drink that she got physically ill from her fear. The fact that the object in the bottle was really a piece of candy was not significant to the ruling. (Ellington v. Coca-Cola of Tulsa, April 1)