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Payroll Debts Ruled Nondischargeable in Chapter 7 Bankruptcy

DodgertonSkillhause from morguefile.comA judgment of the California Labor Commissioner, which ordered a debtor to pay back wages to former employees, is not a dischargeable debt in a Chapter 7 bankruptcy, according to a California federal court. In re Han, No. 2:13-cv-1524-ODW, order (C.D. Cal., Jul. 8, 2013). Three former employees of the debtor’s business had obtained administrative judgments for unpaid wages, interest, and penalties. The bankruptcy court ruled against their claims and discharged the debts. The district court reversed the decision and remanded the case.

The debtor owned and operated a cleaning business, Gold Maintenance, Inc., for about ten years. He personally supervised the company’s employees, according to the district court’s order. Three employees, who worked for Gold Maintenance for various periods between 2006 and 2008, filed administrative complaints with the California Labor Commissioner in 2008, alleging that the debtor “required them to work thirteen to fourteen hours per night, five to seven nights per week.” Id. at 2. He agreed to pay “minimum wage,” the employees said, but did not pay them for overtime, double-time, meal or break time, or time spent traveling during work hours. He allegedly wrote checks to himself from the company account for substantial sums during this time. The employees claimed the debtor owed them compensation for unpaid wages, interest, and waiting-time penalties under the California Labor Code. The Labor Commissioner awarded them judgments totaling more than $95,000 in January 2010.

The debtor filed a voluntary petition for Chapter 7 bankruptcy in May 2011. The employees filed an adversary proceeding in August 2011, requesting that the bankruptcy court declare their judgments nondischargeable. They cited statutory provisions that prevent discharge of debts “for…services…to the extent obtained by…false pretenses, a false representation, or actual fraud,” 11 U.S.C. § 523(a)(2)(A); “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny,” 11 U.S.C. § 523(a)(4); and “for willful and malicious injury by the debtor to another entity,” 11 U.S.C. § 523(a)(6). The bankruptcy court ruled that the employees had not established the nondischargeability of these debts by a preponderance of evidence, and the employees appealed.

The district court reversed the bankruptcy court’s judgment. It found that the employees had made a case under § 523(a)(2)(A), and therefore did not address claims under (a)(4) or (a)(6). The employees had to prove five elements by a preponderance of evidence: the debtor (1) made a misrepresentation (2) with knowledge of the falsity of the statement and (3) “intent to deceive;” (4) the creditor justifiably relied on the misrepresentation; and (5) the misrepresentation and the creditor’s reliance proximately caused the creditor’s damage. Han, order at 4, citing In re Weinberg, 410 B.R. 19, 35 (B.A.P. 9th Cir. 2009). The employees, the court found, met their burdens of proof for all five.

Bankruptcy may offer relief to individuals whose income does not allow them to keep up with the payments on their debts. A Chapter 7 bankruptcy may enable a person or business to eliminate most types of debt, thereby giving them a fresh start. If done correctly, a person or family that files for bankruptcy protection can keep all their assets. Bankruptcy attorney Devin Sawdayi has sixteen years’ experience guiding clients in the Los Angeles area through the bankruptcy process. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.

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Photo credit: DodgertonSkillhause from morguefile.com.