In Re USM Technology Corp.

I. INTRODUCTION.

Debtor’s former employees seek a declaration that their right to receive unpaid wages from proceeds of “goods” produced in violation of the Fair Labor Standards Act (the “FLSA”) (colloquially known as “hot goods”) is superior to the rights of a creditor holding a perfected security interest in Debtor’s accounts receivable. The court finds that the doctrine is not applicable to proceeds of goods produced in violation of the FLSA.

II.FACTUAL BACKGROUND.

Prior to filing its bankruptcy petition, USM Technology Corporation (“USM”) was in the business of assembling electronic circuit boards utilized in the manufacture of personal computers. Silicon Valley Bank (the “Bank”) provided financing to USM. The Bank perfected a security interest in all of USM’s assets to secure all loans it made to USM. In early 1992, USM breached its loan agreements with the Bank. On August 27, 1992, the Bank obtained an order appointing a receiver for USM. On September 9, 1992, USM’s landlord evicted the receiver and business operations ceased.

Two days later, on September 11, 1992 (the “Petition Date”), USM filed a petition under Chapter 11 of Title 11 of the United States Code…