Options if an Employer Files for Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is generally for the purpose of liquidation.  A Chapter 7 bankruptcy differs from the other common type of bankruptcy, Chapter 11, which is generally for the purpose of reorganization.  A Chapter 7 debtor (the person or entity who filed for bankruptcy) is required to forfeit all assets of value, and may only retain items which fall within certain “exemptions” provided in the bankruptcy code.  Once the bankruptcy trustee marshals all of the debtor’s assets, the trustee liquidates the estate and then pays claims in order of priority.  Whether or not your claim is paid by the trustee, it is subject to discharge in a Chapter 7 liquidation.  Both people and corporations can file for Chapter 7.

Although bankruptcy may seem like a dead end, employee benefit funds have options.  First, if the employer was incorporated but was run by a single person or a small number of people, and they did not observe the corporate form, the fund may be able to pierce the corporate veil.  This means the fund could sue in a non-bankruptcy forum.  Second, if an employer was not a corporation but an individual or sole proprietor, the fund may be able to bring an adversary proceeding to have its claim deemed “nondischargeable.”  This remedy is available if the fund was a victim of embezzlement, fraud, willful injury or other malicious conduct.  In such cases, the bankruptcy court may determine that the debtor is not entitled to a discharge of its debt to the fund and that the debt should survive the bankruptcy action.  Third,  if an employer underwent Chapter 7 and then opened a substantially similar non-Union company, the fund may be able to bring a claim for successor or alter ego liability.

Accordingly, if you learn that a signatory employer has filed for bankruptcy, you should contact your fund counsel immediately to determine your options, especially if you have reason to believe that an employer intends to operate a non-union company following bankruptcy, or to otherwise attempt to evade its obligations under the applicable collective bargaining agreement. 

For more information, please contact your Trust Fund counsel.

By Jolene Kramer | October 15, 2013

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