A bankruptcy court did not err in determining that a terminated at-will employee's claim resulting from a retaliatory discharge was not entitled to priority status, the U.S. District Court for the Northern District of Illinois ruled Oct. 1 (Belson v. Olson Rug Co., N.D. Ill., No. 1:12-cv-04474, 10/1/12).
Judge Ruben Castillo held that the appellant's claim was not entitled to priority status because it was not wages earned within 180 days prior to the bankruptcy filing and further held that the bankruptcy court did not err in capping the claim.
On July 15, 2011, Olson filed for Chapter 11 protection and Belson timely filed a proof of claim. Belson's claim was for $356,229, representing his judgement plus interest. He also claimed priority status on $11,725 of the judgment as wages, salaries, or commissions earned within 180 days of the bankruptcy filing pursuant to Section 507(a)(4) of the Bankruptcy Code.
The bankruptcy court sustained the objection, thereby denying priority and capping the claim. Belson appealed to the district court.
The court said that for the purposes of Section 507(a)(4), wages must have been “earned” within the 180 day window and that “[s]uch claims are 'earned' under an employment arrangement no later than the termination of the individual's employment.”
“Granting priority status to a four-year old [c]laim simply because the judgment supporting the [c]laim was entered in the 180 days prior to the bankruptcy promotes no purpose or goal recognized by the Bankruptcy Code,” the court said. Therefore, the court found that the bankruptcy court did not err in denying the claim priority status.
According to the court, Section 502(b)(7) caps employees' claims “for damages resulting from the termination of an employment contract” and that Belson's “distinction between tort and contract damages is not supported by the plain text of [S]ection 502(b)(7) or the caselaw interpreting that section of the [c]ode.”
Furthermore, the court found that under Illinois law, Belson clearly had a “binding at-will employment contract,” a contract that was “terminated” when he was discharged.
“It was the circumstances of this termination that gave rise to [Belson's] [c]laim,” the court said. “The [c]laim, therefore, falls within the plain meaning of the statutory text of [S]ection 502(b)(7) and accordingly must be capped.”
Therefore, the bankruptcy court's order sustaining Olson's objection was affirmed.
By Stephanie M. Acree
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