Terminating Bankrupt Employee, Quirky Question # 93

Quirky Question # 93:

I am the Chief Financial Officer of a public company.  I recently learned that the Controller of our company has filed for personal bankruptcy.  I don’t think that we should have someone in that position who has obviously been unable to handle her own finances – not only because she has access to the company’s finances, but also because as word of this spreads, I don’t think that others in management will trust her judgment any longer.  Is there any reason that we cannot terminate her employment?

Dorsey’s Analysis:

You ask whether there is any reason why your company could not terminate your Company’s Controller, given the fact that she has declared personal bankruptcy.  There is.

It is a completely understandable and appropriate impulse to have the concerns you expressed.  There are very good reasons to worry that someone in this situation may be more tempted than usual to cross the line into dishonest or unethical behavior, and good reasons to worry that other people in the company are going to lose faith in her abilities and her judgment.

The obstacle to terminating her employment is the United States Bankruptcy Code.  Part of the goal of a bankruptcy filing, of course, is to help a debtor get a fresh start.  To that end, a provision in the Bankruptcy Code directly addresses this situation and protects the employee.

11 U.S.C. 525 (b) provides as follows:

“No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt— (1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy
Act . . .”

This prohibition is not quite as sweeping as it might appear.  First, note that the statute prohibits a termination of employment only if it is “solely” because of the bankruptcy filing.  If there is evidence of misconduct or poor performance by an employee – even if that employee has filed for bankruptcy, and even if the employer is upset about the bankruptcy filing – then a termination based at least in part on that misconduct or poor performance is not “solely” because of the bankruptcy filing and is not unlawful.  Laracuente v. Chase Manhattan Bank, 891 F.2d 17 (1st Cir. 1989); Stockhouse v. Hines Motor Supply Inc., 75 B.R. 83 (D. Wyo. 1987).

Second, even though the statute purports to prohibit any “discriminat(ion) with respect to employment,” it has not in fact been applied that broadly.  A number of courts have held, for example, that the statute does not create a cause of action for a failure to hire a job applicant because of the applicant’s prior bankruptcy filing.  See Stinson v. BB&T Investor Services, 285 B.R. 239 (W.D. Va. 2002); Pastore v. Medford Savings Bank, 186 B.R. 553 (D. Mass. 1995).

It is clear under the statute, however, that an employer cannot terminate an employee simply because the employee has filed for bankruptcy, even if the employer has a reasonable fear that others will react negatively to news of the filing.  In re Hopkins, 66 B.R. 828 (W.D. Ark. 1986). In your situation, a termination of this employee will likely lead to a claim that the statute has been violated.

Dorsey & Whitney

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