At-Will Employee's Retaliatory Termination Judgment Not Given Priority Status, Capped

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Belson v. Olson Rug Co., N.D. Ill., No. 1:12-cv-04474, 10/1/12

  • Key Holding: Denial of priority status and capping of at-will employee's claim affirmed.

  • Key Takeaway: Employee's wages deemed “earned” no later than date of termination; damages claims resulting from employment termination, not just breach of contract, must be capped.

By Stephanie M. Acree

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.

Retaliatory Discharge
Bruce Belson was an at-will employee working as a salesman for Olson Rug Company. Belson was terminated on March 19, 2007, and subsequently filed a common law retaliatory discharge claim against Olson. On May 13, 2011, Belson obtained a jury verdict of $350,865 consisting of $156,875 in back pay, $43,990 in front pay, and $150,000 in damages for emotional distress.

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.

Objection to Claim
On Feb. 21, 2012, the bankruptcy court confirmed Olson's plan with Belson classified as a general unsecured creditor. On March 5, 2012, Olson filed an objection to Belson's proof of claim and argued that no portion of the judgment constituted wages, salaries, or commissions earned within 180 days of the filing and was therefore not entitled to priority status. Olson also argued in the objection that pursuant to Section 502(b)(7), Belson's claim should be capped at $49,193 because it constituted a claim for damages “resulting from the termination of an employment contract.”

The bankruptcy court sustained the objection, thereby denying priority and capping the claim. Belson appealed to the district court.

No Later Than Termination
Belson argued that even though his termination occurred over four years prior to the bankruptcy filing, his claim “continued to accrue” until his jury verdict was rendered on May 13, 2011, which fell within the 180 day window. Belson argued that his “back pay” was entitled to priority because it only became “fixed and unconditional” on the date of the jury's verdict. However, the court found that Belson's argument “confuse[d] the calculation of damages with the right to payment of damages.”

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.

At-Will Employment Contract
Belson also argued that Section 502(b)(7) only applies to breach of contract claims, and that he “could not have filed a breach of contract suit because he was an at-will employee, and Illinois does not recognize a cause of action for breach of an 'at-will employment contract.'” The court said this argument misconstrues both the plain meaning of Section 502(b)(7) as well as Illinois law.

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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