August 27, 2024
A 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 Fifth Circuit held in In the matter of GFS Industries, LLC, Avion Funding, LLC v. GFS Industries, LLC 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 April 2024 decision reverses a lower court opinion that said that 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 June 2023 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 former PJC Murnaghan Appellate Advocacy Fellow Hayley Hahn (2022-2023), the brief urged the Fifth 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, the brief provided the Court with context on how wage theft affects workers throughout the Fifth Circuit region of Texas, Mississippi, and Louisiana. 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 the brief 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 Fifth Circuit decision did not directly address our concerns about wage theft, the victory nevertheless helps remove the bankruptcy process as a way for employers to avoid accountability for unpaid wages. The ruling is also consistent with a 2022 decision from the U.S. Court of Appeals for the Fourth Circuit in Cantwell-Cleary Co. v. Cleary Packaging, adding momentum to our fight for the same protections across the federal circuits. The PJC and allies submitted an amicus brief by former Murnaghan Fellow Michael Abrams (2021-2022) in Cantwell-Cleary Co. v. Cleary Packaging, which in turn was adapted for the amicus brief in In the matter of GFS Industries, LLC and an amicus brief by former Murnaghan Fellow Melanie Babb (2023-2024) filed with the U.S. Court of Appeals for the Eleventh Circuit in Benshot LLC v. 2 Monkey Trading LLC et al. We hope that courts will continue to apply this precedent in bankruptcy cases across the country.
Thank you to our co-counsel, Christine E. Webber of Cohen Milstein Sellers & Toll PLLC, for her assistance, as well as to our co-amici in In the matter of GFS Industries, LLC, Avion Funding, LLC v. GFS Industries, LLC —Centro de Los Derechos del Migrante, Fe y Justicia Worker Center, Mountain State Justice, the National Employment Law Project, the North Carolina Justice Project, and Loyola College of Law-New Orleans’ Workplace Justice Project—for their support.
