Portions of employer liability in California PAGA actions are dischargeable in bankruptcy under a bankruptcy court decision issued this summer. Specifically, employers’ liability for the 25% share of PAGA penalties to be paid to aggrieved employees and the attorneys’ fees awarded to prevailing plaintiffs may be discharged in bankruptcy. In the right circumstances, the ruling bolsters employers’ leverage in settling cases under the California Labor Code Private Attorneys General Act (“PAGA”) and can pare down liability in the event of adverse judgments.
In June, the U.S. Bankruptcy Court for the Eastern District of California addressed whether an employer could discharge a $2,000,000 PAGA judgment in bankruptcy. The eight plaintiffs who won the judgment in Superior Court argued that the PAGA judgment was not dischargeable because, first, PAGA penalties arise from “willful and malicious injury” and, secondly, the PAGA penalties are a debt “payable and for the benefit of a governmental unit,” in the words of the U.S. Bankruptcy Code. In re Patacsil, 2023 WL 3964908 (E.D. Cal. Bankr. June 9, 2023).
As for the PAGA plaintiffs’ first argument — that a PAGA judgment is a debt arising from “willful and malicious injury” and not dischargeable on that basis — the court ruled against plaintiffs. In evaluating PAGA liability under the willful and malicious injury standard, the court looked to California wage-and-hour statutes for a requirement of “intent.” Because many California wage-and-hour claims do not require proof of the employer’s “intent” (e.g., liability for the failure to pay overtime wages or to pay final wages on time), PAGA judgments do not reflect “willful and malicious injury,” the court determined, and are not dischargeable on that basis under 11 U.S.C. Section 523(a)(6). To the extent some wage-and-hour penalty claims require proof of intent (e.g., penalty claims for the failure to pay minimum wage), the court held the level of intent required for imposition of the statutory penalties under the California Labor Code falls short of the “willful and malicious” level of intent required for exemption from discharge. On the basis of this analysis, the bankruptcy court held the PAGA judgment was not a debt arising from “willful and malicious injury” and was not excluded from discharge on that ground.
The plaintiffs’ second argument, however, proved convincing to the court. There, the PAGA plaintiffs argued that the judgment was a debt “payable and for the benefit of a governmental unit,” in the language of 11 U.S.C. Section 523(a)(7), and not dischargeable in bankruptcy on that basis. The court ruled that the 75% share of PAGA penalties that are paid to the California Labor and Workforce Development Agency satisfy Section 523(a)(7) and are not dischargeable. However, the court distinguished the 25% share of PAGA penalties payable to aggrieved employees (who are not a governmental unit) and ruled that share to be dischargeable in bankruptcy.
Significantly, the court ruled that all attorneys’ fees awarded to plaintiffs prevailing in PAGA actions to be dischargeable [even to the extent that such fees were incurred pursuing penalties that may ultimately go to a governmental unit].
Takeaways:
1. In the right circumstances, the Patacsil decision will prove to be a helpful new tool for employers to use in resolving PAGA cases on affordable terms. Bear in mind that the only parts of a PAGA judgment that ultimately line the pockets of the plaintiff and their attorneys are part of the 25% share of the PAGA penalties that are paid to the aggrieved employees and the attorneys’ fees award — which are also the parts that the court in Patacsil decided can be discharged in bankruptcy!
As a consequence, where the employer is in actual financial distress and can credibly threaten it will file bankruptcy if plaintiff refuses to settle on realistic terms, the employer can now invoke Patacsil to demonstrate to the PAGA plaintiff and their counsel that, if they make filing bankruptcy necessary with excessive settlement demands, the PAGA claim will have no value to plaintiff or their counsel as any aspect of the claim that may benefit them will be discharged. In the right cases, the interplay between the Patacsil decision and the self-interest of plaintiffs and their counsel should help move parties toward realistic settlements.
2. The Patacsil decision obviously also will prove valuable to employers in bankruptcy whose debts include PAGA judgments because it makes clear that at least significant parts of PAGA judgments can and will be discharged.
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