Can My Business In New York Discharge, In Bankruptcy, Employees’ Claims for Unpaid Wages?

Can My Business In New York Discharge, In Bankruptcy, Employees’ Claims for Unpaid Wages?

 In general, yes. Employees’ claims for wages, salaries or commissions earned before the filing of a corporate employer’s bankruptcy petition are dischargeable, unless such pre-petition wage claims are debt for “willful and malicious injury by the debtor [the employer] to another entity [the employees] or to the property of another entity [the employees].” 11 U.S.C. § 523(a)(6) [an annotated version of this statute is available to lexis.com subscribers]  .

The case law of the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) controls bankruptcy proceedings brought in, among other federal judicial districts, the U.S. Bankruptcy Courts for the Southern, Eastern, Northern and Western Districts of New York. A Bankruptcy Court within the Second Circuit has held that a debtor employer’s mere failure to pay an employee’s pre-petition wages in connection with her employment is not “willful and malicious” within the meaning of the dischargeability exception set forth in 11 U.S.C. § 523(a)(6).

Specifically, in Orr v. Marcella (In re Marcella), 463 B.R. 212 (Bankr. D. Conn. 2011) [an enhanced version of this opinion is available to lexis.com subscribers], an adversary proceeding within an employer’s bankruptcy case, the U.S. Bankruptcy Court for the District of Connecticut held that the plaintiff employee’s pre-petition wage claims against the debtor employer were dischargeable. The Marcella Court explained that “Although the Debtor [employer] may have breached an employment contract with the Plaintiff [employee] by failing to pay her wages that were due, ‘a breach of contract unaccompanied by tortious conduct . . . does not give rise to a Section 523(a)(6) nondischargeability claim.’ “  Marcella, 463 B.R. at 219.

To put it another way, unless, before the filing of the corporate employer’s bankruptcy petition in New York, an employee has obtained a judgment for wages, salaries or commissions owed based on findings that the employer acted either with personal malevolence or with conscious disregard of the employer’s duty to pay the employee his wages, it is likely that the employee’s pre-petition wage claim will be eliminated in bankruptcy. Compare Marcella, 463 B.R. at 215-223 with Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1203 – 1209 (9th Cir. 2001) [enhanced version] (after a bench trial, a California state trial court had held the individual owner of a mortgage brokerage liable to his ex-employee for failing to pay commissions and vacation pay owed under the employment agreement between them, and had determined that the “[the individual owner] had the clear ability to make these payments to [the plaintiff ex-employee], but chose not to”; that instead of paying the plaintiff ex-employee and other employees the money owed to them, the individual owner diverted his company ‘s funds to his personal use; and that the individual owner’s behavior was willful and warranted imposition of punitive damages; in an adversary proceeding within the individual owner’s subsequent, Chapter 7 bankruptcy case, holding that the California state trial court’s judgment “arose from willful and malicious injury caused by the debtor’s tortious conduct” and “is therefore excepted from discharge under 11 U.S.C. § 523(a)(6)”).

Claims for “wages, salaries or commissions, including vacation, severance, and sick leave pay” earned before the filing of a corporate employer’s bankruptcy petition fall fourth on the Bankruptcy Code’s list of priorities for payment. See 11 U.S.C. § 507(a)(4) [annotated version], 11 U.S.C. § 507(a)(4)(A). These fourth-tier priority wage claims are only allowed up to $10,000 per claimant. 11 U.S.C. § 507(a)(4).

Further, a fourth-tier priority wage claim must be for compensation earned within 180 days before the date of filing of the corporate employer’s bankruptcy petition or the date of cessation of the corporate employer’s business, whichever occurs first. 11 U.S.C. § 507(a)(4).

Visit the New York Business Litigation and Employment Attorneys Blog for commentary regarding business litigation, employment, and securities related legal issues.