Bankruptcy Discrimination in Hiring Approved by Federal Appeals Court

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

January 6, 2011

For the first time, a federal appeals court has ruled that the bankruptcy code does not forbid a private employer from refusing to hire a person based solely on the fact that he or she filed for bankruptcy.  The court distinguished refusing to hire a person based upon having filed for bankruptcy from other forms of discrimination, such as termination of employment or other negative actions affecting a person’s employment, which presumably would still be forbidden.

Rea v. Federated Investors, No. 10-1440 (3rd Cir. Dec. 15, 2010), involved Dean Rea, a Pennsylvania man who filed bankruptcy in 2002.  In 2009, Rea applied for employment at Federated Investors.  However,  Federated refused to hire him, citing Rea’s past bankruptcy filing as the reason.  Rea sued in federal court, claiming that bankruptcy code section 525 forbade dicrimination in hiring based upon bankruptcy.  The court dismissed Rea’s complaint and he appealed.

The U.S. Court of Appeals, Third Circuit, upheld the lower court’s dismissal, concluding that section 525 allowed bankruptcy discrimination in hiring by private employers.  The court observed that section 525(a), which forbids discrimination by governmental units based upon bankruptcy, contains language not found in section 525(b), which addresses discrimination by private entities.  Section 525(a) provides:

(a) … [A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

Section 525(b) provides:

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt— (1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act; (2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or (3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

The phrase “deny employment to” is found in section 525(a) but not in section 525(b).  Because section 525(a) applies only to governmental units, and because section 525(b) applies only to private employers, the appeals court held that Congress must have intentionally omitted the prohibition against bankruptcy hiring discrimination from the section dealing with private employers.

Although section 525(b) does prohibit bankruptcy discrimination by private employers “with respect to employment,” the appeals court held that this prohibition was applicable only to employees who have already been hired.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: February 21, 2013