Federal appellate decision in bankruptcy case will help prevent employers from avoiding accountability for wage theft

July 7, 2022

A recent ruling in a bankruptcy case will help ensure that employers cannot use bankruptcy proceedings to dodge certain debts, including wages that they failed to pay employees. The U.S. Court of Appeals for the Fourth Circuit held in Cantwell-Cleary Co. v. Cleary Packaging that in the new, efficient form of bankruptcy in Subchapter V of the Bankruptcy Code, the rules governing which debts can be discharged apply to both individual and corporate debtors. The decision reverses a lower court opinion that said that the Subchapter V’s prohibition on the discharge of debts that arise from “fraud” or from “willful and malicious injuries” only applied to individuals, not corporations.

As the Public Justice Center and allies explained in a November 2021 amicus brief, the lower court’s holding would have allowed businesses engaged in wage theft to manipulate the bankruptcy process to avoid wage judgments won by their workers. Written by PJC Murnaghan Appellate Advocacy Fellow Michael Abrams, the brief urged the Fourth Circuit to adopt the proper interpretation of the statute, recognizing that Congress intended the discharge exceptions to apply to corporations and individuals alike. To illuminate the potential impact their decision could have on workers, we provided the Court with context on how wage theft affects workers throughout the Fourth Circuit. The brief described the challenges workers face in holding employers accountable, from fear of retaliation to the difficulty of collecting unpaid wages and damages through litigation or enforcement agencies. And we explained that businesses engaged in wage theft are especially likely to be the kinds of businesses eligible for Subchapter V bankruptcy. Thus, if the Court codified this loophole, inadequate enforcement against wage theft would grow.

While the Fourth Circuit decision did not directly address our concerns about wage theft, it did repeatedly refer to the principles of “fairness and equity” in bankruptcy, such that corporate Subchapter V debtors should not “especially benefit from the discharge of debts incurred in circumstances of fraud, willful and malicious injury, and . . . other violations of public policy.” The victory is significant as the first federal appellate decision to address this question, and the court recently denied rehearing.  We are hopeful the decision will serve as trend-setting precedent nationwide.

A big thank you to PJC paralegal Lena Yeakey for helping get this brief across the finish line. And we are grateful to the many organizations throughout the Fourth Circuit who joined the brief, including the Legal Aid Justice Center, Mountain State Justice, the North Carolina Justice Center, CASA, Centro de los Derechos del Migrante, the Farm Labor Organizing Committee, the National Black Worker Center, and the National Employment Law Project.