Restructuring

Contributed by Elisa Lemmer
And the sign says, “Long hair freaky people need not apply”
So I put my hair up under my hat and I went in to ask him, why.
He said, “You look like a fine outstanding young man, I think you’ll do.”
So I took off my hat I said, “Imagine that, huh me working for you.”
– Tesla
If Tesla’s song were written today, perhaps the lyrics might begin with, “And the sign says, ‘Debtors need not apply.’”  And, at least in the Fifth Circuit, a private employer who chose to display that sign in its window would not be violating section 525(b) of the Bankruptcy Code.  This is essentially what the Fifth Circuit recently held in Burnett v. Stewart Title, Inc. (In re Burnett), No. 10-20250, 2011 WL 754152 (5th Cir. Mar. 4, 2011) when it affirmed the lower courts’ rulings that a private employer could determine not to hire a job applicant due to her status as a debtor.  (The court did not address whether the private employer could terminate a debtor or former debtor under section 525(b) of the Bankruptcy Code, but this is expressly prohibited under section 525(b)).
In Burnett, debtor Shani Burnett, received an offer of employment with Stewart Title, Inc., which offer was contingent on the results of a drug screening and background check.  During the background check, Stewart Title discovered Burnett had previously filed for protection under chapter 13 of the Bankruptcy Code and rescinded the offer on that basis.
Although many individuals might have pursued other employment opportunities and not taken the matter any further, Burnett sued Stewart Title under section 525(b) arguing that Stewart Title had unlawfully discriminated against her because she was a debtor.  Stewart Title sought to dismiss the lawsuit, asserting that Burnett had no claim against it, and the bankruptcy court agreed with Stewart Title.  Holding that section 525(b) does not prohibit private employers from refusing to hire someone on the basis of his or her status as a debtor, the bankruptcy court granted the motion to dismiss.  The district court, and subsequently, the Fifth Circuit, affirmed the bankruptcy court’s decision.
The Fifth Circuit based its analysis on a textual reading of section 525(b) of the Bankruptcy Code noting that, unlike section 525(a) of the Bankruptcy Code, which prohibits a governmental unit from, among other things, “deny[ing] employment to” a person that is or was a debtor solely due to that person’s bankruptcy or insolvency, section 525(b) (which applies to private employers) does not prohibit a private employer from denying employment to a current or former debtor.
Burnett and others who filed amicus curae briefs contended that section 525(b) prohibits private employers from “discriminat[ing] with respect to employment against” a debtor or former debtor and that such broad language extended to hiring decisions.  The Fifth Circuit disagreed reasoning that if the language were considered in isolation, Burnett and the others who filed briefs in support of Burnett’s position might have had a point, but because section 525(b)’s more limiting language was placed side by side, so to speak, with section 525(a)’s more expansive language, Congress’s omission from section 525(b) was likely made on purpose.  The Fifth Circuit cited to the Supreme Court’s Russello v. United States, 464 U.S. 16 (1983) for the legal canon that, where Congress includes a particular language in one section of a statute but excludes it from another, it is presumed that Congress acted intentionally.
Citing another legal canon for the proposition that a statute is to be read as a whole so as not to render portions of the statute inconsistent or meaningless, the Fifth Circuit similarly concluded that interpreting the prohibition on “discriminating with respect to employment” to include denying employment would render the express prohibition on denying employment contained in section 525(a) meaningless.  Finally, the Fifth Circuit noted that Congress had the opportunity to amend section 525(b) when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but it did not amend the statute.  Against this backdrop, the Fifth Circuit concluded that the bankruptcy court was correct – section 525(b) does not prohibit private employers from denying employment to its applicants due to their bankruptcy status.
The Fifth Circuit’s decision raises a number of policy questions: Did Congress really intend to distinguish between governmental employers and private employers (prohibiting only governmental employers from refusing to hire current or former debtors)?  The Fifth Circuit’s response to these questions was cursory, noting that this was a policy question better left to Congress.  Moreover, if Congress took pains to ensure that private employers could not terminate an employee due to his status as a debtor, why would it have given private employers a free pass on discriminatory hiring for the same reason? What is the scope of the prohibition on “discriminating with respect to employment against” debtors that is contained in section 525(b)?  The Fifth Circuit not only did not answer these questions, but also expressly rejected a Southern District of New York decision, Leary v. Warnaco, Inc., 251 B.R. 656 (S.D.N.Y. 2000), that did.
In Leary, the person denied employment was a former chapter 7 debtor (as opposed to a current chapter 13 debtor), but otherwise the facts are similar to those of Burnett in that, in Leary, the employer informed Leary that she would not be hired because of her credit report, which revealed her former bankruptcy.  The court in Leary, however, gave significant credence to the broadly-worded prohibition on “discriminat[ing] with respect to employment against” debtors, contained in both section 525(a) and 525(b) of the Bankruptcy Code – concluding that hiring decisions were encompassed in the broadly worded phrase.  As to the fact that section 525(b) lacked an express prohibition on discriminatory hiring, the Leary court dismissed the omission as a “scrivener’s error.” From this, that court concluded that Leary’s discrimination claim under section 525(b) could stand.  As a policy matter, the Leary court noted that refusing to hire someone who had been a debtor was contrary to the fresh start policy likely intended by Congress when it enacted section 525 of the Bankruptcy Code.
It appears, however, that the Southern District of New York’s view of this issue may be the minority view.  In fact, just recently, the Third Circuit Court of Appeals held in REA v. Federated Investors, 627 F.3d 937 (3d Cir. 2010), like the Fifth Circuit did in Burnett, that a private employer could elect not to hire someone simply because he had previously been in bankruptcy.  The REA court, like the court in Burnett, expressly rejected the Leary decision, noting that it was the only court to hold that section 525(b) prohibits private employers from engaging in discriminatory hiring.
Although Leary is still good law in the Second Circuit, in light of the recent Fifth Circuit and Third Circuit decisions, it is unclear how courts in the Second Circuit will hold if they are, again, confronted with similar facts.  For now, as a practical matter, this means that, at least with respect to their prospective employment, individuals who seek bankruptcy protection in Fifth Circuit states such as Texas or Third Circuit states such as Pennsylvania will be susceptible to being refused jobs because of their status as a debtor, even though identical behavior by a private employer in New York, for example, would be prohibited.