The bank makes a loan to an employee; the employee mishandles the loan and is subsequently terminated. Does the bank have any right to get payment for the loan with funds from the employee's 401K? Can they refuse to give the employee the funds in the 401K until the debt is paid?

You need to be speaking to your attorney. If you had no security agreement or other legal claim in the 401K I would say you cannot, however I am not an attorney or an expert in employee benefits and services.

Below is an excerpt from the CPA Journal, Oct. 2000 - http://www.nysscpa.org/cpajournal/2000/1000/features/f102200a.htm

Under ERISA and IRC regulations, a participant’s accrued benefit or account balance in a qualified retirement plan is generally insulated from attack by creditors. However, this protection is not absolute, and there are significant exceptions in the area of owner-only plans and IRAs, which are affected by evolving state law.

Not sure what the exceptions are, but as suggested by Dan, get with your attorney to see if you have options.