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How a bankruptcy case could affect workers’ ability to hold employers accountable for wage theft

The PJC and allies file amicus brief in the U.S. Court of Appeals for the Fourth Circuit

December 16, 2021

What does a bankruptcy lawsuit have to do with workers’ rights? More than you might think. When workers successfully sue their employer for unpaid wages, one of the ways employers try to avoid paying up is to declare bankruptcy. Appellate court decisions in bankruptcy cases can set legal precedent that affects workers’ ability to recover unpaid wages in other cases. That’s why the Public Justice Center and a diverse coalition of organizations recently filed an amicus brief in the U.S. Court of Appeals for the Fourth Circuit in Cantwell-Cleary Co. v. Cleary Packaging. Written by Murnaghan Appellate Advocacy Fellow Michael Abrams, the brief argues that a new form of bankruptcy proceedings for small businesses does not allow corporations to dodge certain debts, including wages that they failed to pay employees.

The central benefit of bankruptcy is the discharge of debts, providing the honest debtor with a fresh financial start. However, the Bankruptcy Code is also supposed to ensure that dishonest debtors cannot take advantage of this “fresh start” policy, winning the discharge of their debts despite their unlawful business practices. So discharge is unavailable for some kinds of debt, including debts that arise from “fraud” or from “willful and malicious injuries.” These exceptions are the avenue for a worker to keep their employer on the hook for wage theft even after their employer declares bankruptcy.

The appeal in Cantwell-Cleary Co. v. Cleary Packaging raises an issue about how these exceptions to discharge apply to a new form of bankruptcy. In 2019, Congress passed the Small Business Reorganization Act, which created a less costly and simpler bankruptcy process for some small businesses, known as Subchapter V bankruptcy. Most notably, Subchapter V makes it easier for a small business owner to receive the benefits of bankruptcy—discharging their debts—without losing control and ownership of their business.

We spoke up in this appeal to make sure that this easier bankruptcy process does not also make it easier for dishonest debtors to manipulate the system. The question is whether Congress also blocked the discharge of debts from fraud and malicious injuries in Subchapter V. The lower court held that only individuals remain on the hook, but not corporate entities. Under that rule, employers engaged in wage theft would still have a way to manipulate the bankruptcy process to avoid wage judgments won by their workers. Overturning that ruling is especially important because it’s often hard for workers to collect on their judgments from the individual employers.

The PJC’s brief urged the U.S. Court of Appeals for 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 codifies this loophole, inadequate enforcement against wage theft will grow. We hope to focus the Fourth Circuit’s attention on the implications of the case for workers’ rights, which might otherwise have gone unnoticed in this case between two corporations.

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.