PEOPLE who operate a business are responsible to pay wages to their employees. Everybody knows that. But businesses are not profitable all the time. Many times businesses lose money and eventually become bankrupt. When businesses become bankrupt, they are no longer able to pay wages to their employees. So, the business owner ends up owing unpaid wages to his employees. If the business owner files for bankruptcy, are the unpaid wages to employees dischargeable or non-dischargeable debts?
For instance, debtor owns a health care facility that is no longer able to pay the wages of nurses and caregivers. When debtor files for bankruptcy he owes $50,000 of unpaid wages. The nurses and caregivers get together and file an adversarial complaint alleging that the $50,000 of unpaid wages is not dischargeable. Who will win this case?
In Re Marcella, the plaintiff started working as an independent contractor in March 2007 for debtor as an instructor in personal training and group exercise. The next year, debtor re-classified plaintiff as a salaried employee with the title of general manager and an annual salary of $40,000. On March, 2009, debtor wrote a check payable to plaintiff for two weeks pay, but he did not give the check to the plaintiff because he said he did not have enough money to cover it. The plaintiff worked for another two weeks, and received another check that the debtor said would bounce. He suggested that the plaintiff return to independent contractor status and retain the fees she received from clients. The conversation ended with debtor terminating the plaintiff’s employment. In April 2009, the plaintiff sued the debtor. In June, the debtor paid the plaintiff the principal amount of her accrued wages but did not pay her claim for liquidated damages nor her attorney’s fees and costs. After the debtor filed for Chapter 7 relief, the plaintiff filed an adversarial complaint asserting that her claim was excepted from discharge by Section 523(a)(6). That section of the bankruptcy code excepts from discharge damages “for willful and malicious injury by the debtor to another entity or to the property of another entity.”
It is clear that injury must have been caused willfully and maliciously by debtor for the debt to be non-dischargeable.
The court said the plaintiff, at best, established a technical violation of the Connecticut Minimum Wage Act arising from a failure to timely pay wages, and did not establish that the debtor’s conduct was willful and malicious. “Section 523(a)(6) contemplates injury analogous to an intentional tort. Although the debtor may have breached an employment contract with the plaintiff by failing to pay her wages that were due, a breach of contract unaccompanied by tortuous conduct does not give rise to a Section 523(a)(6) non-dischargeability claim,” the court said. “A breach of contract, or in this case, the violation of a strict liability statute without conduct akin to an intentional tort, is not sufficient to render a debt non-dischargeable. Furthermore, the mere failure to pay an obligation cannot be a willful and malicious injury in and of itself.” The court found that the debtor “did not demonstrate any personal malevolence in connection with the relevant events of this case. The court also finds no conscious disregard by the debtor of his duty to pay the plaintiff her wages.” Thus, the bankruptcy court ruled that the plaintiff’s claim for unpaid wages was not excepted from discharge by Section 523(a)(6).
But what if debtor’s conduct was in conscious disregard of his duty to pay plaintiff’s wages? For instance, if the business was still profitable but debtor deliberately withheld paying plaintiff her wages for the last 3 months even while bankruptcy was not yet a possibility, and debtor used the money allocated for plaintiff’s wages to put a downpayment on a brand new Mercedes Benz for himself, the court might find that debtor willfully and maliciously injured plaintiff by deliberately withholding her wages. What about employee withholding taxes that are left unpaid, are these dischargeable or not?
* * *
Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
| < Prev | Next > |
|---|
