The Bankruptcy Hotline

Editor's Note: A full analysis of this decision will appear in an upcoming issue.

Sex Discrimination Claims Improperly Discharged

In a harshly worded rebuke of both the bankruptcy and district courts, the Ninth Circuit reinstated the sex discrimination claims of three workers brought against their bankrupt employer for excusable neglect. ZiLOG Inc. v. Corning, Robert & Cleverdon (In re ZiLOG), No. 04-15787 (June 15).

Three female factory workers alleged that their employer, a manufacturer of semiconductor products, announced it was closing their plant, but that it would pay retention bonuses to employees who stayed until the closing date. The plaintiff further alleged that the company later reneged on this promise and that several male employees had been paid their bonuses. Consequently, the three women sued. By this time, however, the company was in Chapter 11, and both the bankruptcy and district courts held that the plaintiff's claims had been filed too late and were dischargeable under the plan. On appeal, the women argued their claims should have been accepted as timely under the equitable doctrine of excusable neglect.

The Ninth Circuit reversed, ruling that the bankruptcy court had abused its discretion and the district court had erred in upholding summary judgment. From the opening line of the circuit court's opinion, a critical tone of the lower courts was established: 'This case shows once again why it's important for lawyers representing a bankruptcy debtor to turn square corners.' The focal point of the court's ire seemed to stem from an e-mail from the debtor's general counsel sent to the employees reassuring them that the bankruptcy proceedings would only 'affect only the holders of the company's public debt securities and the current holders of our common and preferred shares' and that 'the Chapter 11 case will have no effect on you or our business operations.' The court found that this communication 'was not calculated to inform the women that they needed to file their wage claims with the bankruptcy court. More likely, it would have led them to believe exactly the opposite.' Further, the court noted that this 'plainly defective notice' had also been sent to four of the debtor's bankruptcy counsel, 'none of whom sent a corrected notice.' In addition to ordering the reversal of the bankruptcy court's orders and reinstating the plaintiffs' claims, the circuit court also cautioned the bankruptcy court to 'consider whether any fees it may have approved for debtor's counsel should be adjusted in light of our observations.' Also, 'whether costs and attorneys' fees incurred by the women in defending this adversary proceeding, and the appeal therefrom, should in equity and good conscience, be shifted to [the debtor] and its lawyers.'

Workers' Comp Premiums

The U.S. Supreme Court has ruled that the unpaid workers' compensation insurance premiums that a bankrupt employer owes to its carrier do not qualify for administrative priority status under ' 507(a)(5) of the Bankruptcy Code. Howard Delivery Service Inc. v. Zurich American Insurance Co., No. 05-128 (June 15).

In a 6-3 opinion, the Court reversed the Fourth Circuit and resolved a circuit split on the issue. The Court concluded that it was 'far from clear that an employer's liability to provide workers' compensation coverage fits the ' 507(a)(5) category 'contributions to an employee benefit plan ' arising from services rendered.” The court reasoned that 'workers' compensation does not compensate employees for work performed, but instead, for on-the-job injuries incurred; workers' compensation regimes substitute not for wage payments, but for tort liability. Any doubt concerning the appropriate characterization, we conclude, is best resolved in accord with the Bankruptcy Code's equal distribution aim.' Therefore, '[u]nless and until Congress otherwise directs, we hold that carriers' claims for unpaid workers' compensation premiums remain outside the priority allowed by ' 507(a)(5).'

Editor's Note: A full analysis of this decision will appear in an upcoming issue.

Sex Discrimination Claims Improperly Discharged

In a harshly worded rebuke of both the bankruptcy and district courts, the Ninth Circuit reinstated the sex discrimination claims of three workers brought against their bankrupt employer for excusable neglect. ZiLOG Inc. v. Corning, Robert & Cleverdon (In re ZiLOG), No. 04-15787 (June 15).

Three female factory workers alleged that their employer, a manufacturer of semiconductor products, announced it was closing their plant, but that it would pay retention bonuses to employees who stayed until the closing date. The plaintiff further alleged that the company later reneged on this promise and that several male employees had been paid their bonuses. Consequently, the three women sued. By this time, however, the company was in Chapter 11, and both the bankruptcy and district courts held that the plaintiff's claims had been filed too late and were dischargeable under the plan. On appeal, the women argued their claims should have been accepted as timely under the equitable doctrine of excusable neglect.

The Ninth Circuit reversed, ruling that the bankruptcy court had abused its discretion and the district court had erred in upholding summary judgment. From the opening line of the circuit court's opinion, a critical tone of the lower courts was established: 'This case shows once again why it's important for lawyers representing a bankruptcy debtor to turn square corners.' The focal point of the court's ire seemed to stem from an e-mail from the debtor's general counsel sent to the employees reassuring them that the bankruptcy proceedings would only 'affect only the holders of the company's public debt securities and the current holders of our common and preferred shares' and that 'the Chapter 11 case will have no effect on you or our business operations.' The court found that this communication 'was not calculated to inform the women that they needed to file their wage claims with the bankruptcy court. More likely, it would have led them to believe exactly the opposite.' Further, the court noted that this 'plainly defective notice' had also been sent to four of the debtor's bankruptcy counsel, 'none of whom sent a corrected notice.' In addition to ordering the reversal of the bankruptcy court's orders and reinstating the plaintiffs' claims, the circuit court also cautioned the bankruptcy court to 'consider whether any fees it may have approved for debtor's counsel should be adjusted in light of our observations.' Also, 'whether costs and attorneys' fees incurred by the women in defending this adversary proceeding, and the appeal therefrom, should in equity and good conscience, be shifted to [the debtor] and its lawyers.'