Award of attorney’s fees, costs and interest in FMLA suit not entitled to administrative or priority status, Delaware bankruptcy court rules

By Peter D. DeChiara

pdechiara@cwsny.com

Posted April 2015

Many employment statutes provide that if an employee successfully sues his employer for violation of the statute, the employee can collect his attorney’s fees and costs, as well as pre- and post-judgment interest.  If a court awards such payments to a prevailing plaintiff after the employer has filed for Chapter 11 protection, do the amounts awarded give rise to an administrative, or at least a priority, claim in the bankruptcy case?  No, according to a recent decision of the Delaware bankruptcy court, which held that an employee’s claim for attorney’s fees, costs and interest arising from his successful suit against the debtor constituted a general unsecured claim.  See re Trump Entertainment Resorts, Inc., Case No. 14-12103 (Bankr. D. Del. March 9, 2015).

In Trump, a former employee sued the casino for firing him in violation of the Family and Medical Leave Act (FMLA).  The FMLA gives an employee the right to take medical and other types of leave under certain circumstances without losing his or her job.  A few months before Trump filed bankruptcy, the former employee prevailed against it in a jury trial in federal district court, obtaining a back pay award of $47,500.  He attached that amount in the casino’s bank account.  After Trump filed for Chapter 11 protection, the bankruptcy court lifted the bankruptcy stay and the district court ordered the casino to transfer the back pay amount from its bank account to the plaintiff.

The district court then issued an order finding that Trump was also liable to the former employee for another approximately $105,000, for his attorney’s fees and costs and pre- and post-judgment interest.  Based on the district court’s order, the former employee asserted a priority claim for that amount in the Chapter 11 proceedings and also moved for it to be paid as an administrative expense.

Bankruptcy judge Kevin Gross concluded that the claim for attorney’s fees, costs and interest was entitled to neither administrative nor priority status.   The judge first considered whether the claim had administrative expense status under Section 503(b)(1)(A)(ii) of the Bankruptcy Code, which provides such status, under certain circumstances, to “wages and benefits awarded pursuant to a judicial proceeding.”  Judge Gross noted that whether attorney’s fees, costs and interest in an FMLA action give rise to an administrative claim was a matter of first impression and that there was no relevant legislative history under Section 503(b)(1)(A)(ii).  Nonetheless, the bankruptcy court had no hesitation disposing of the administrative expense motion.  Relying on the plain language of the statute, the bankruptcy court concluded that attorney’s fees, costs and interest do not fall within the ordinary meaning of the term “wages and benefits.”  The bankruptcy court was swayed neither by policy arguments regarding the claimed importance of attorney fee-shifting in employment litigation nor by the argument that attorney’s fees, costs and interest should be no less payable than the back pay judgment under which they arose.  The bankruptcy court took a similarly straightforward approach to finding that the claim for attorney’s fees, costs and interest also lacked priority status.  Section 507(a)(4) of the Bankruptcy Code grants priority status to certain claims for “wages, salaries, or commissions.”  Claims for attorney’s fees, costs and interest, the bankruptcy court concluded, do not fall within the ordinary meaning of “wages, salaries, or commissions.”  Accordingly, the bankruptcy court deemed the former employee’s claim to be a general unsecured claim.

In the context of the WARN Act, at least one court has held that attorney’s fees accrued post-petition are entitled to administrative expense status, even if the underlying WARN Act claims accrued pre-petition.   See Jamesway Corp., 242 B.R. 130, 134-36 (Bankr. S.D.N.Y. 1999).  The court in Jamesway relied in part on the policy behind the statute’s fee-shifting provision, which is intended to encourage lawyers to accept plaintiff employment cases.