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One more reason for managers to ensure compliance with employment laws: judgment for individual liability might not be dischargeable in bankruptcy

July 12th, 2012  |  Pamela Wolf

Earlier this year, one of my colleagues supplied employers with a list of cases that could be used to motivate managers to ensure compliance with employment laws (Scare tactics for compliance: teaching managers that they could be personally liable for employment law violations could encourage compliance). Here’s one to add to the list — when a judgment for intentional discrimination is entered against a manager individually, it may be the one debt that can’t be avoided — even by filing bankruptcy.

A federal bankruptcy court in New York ruled that a $200,000 sexual harassment judgment against a debtor was excepted from discharge because it was incurred as a result of his willfully and maliciously causing injury to a former employee of the New York State Thruway Authority (In re Spagnola, June 18, 2012, Morris, C).

The debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. A female creditor listed on the bankruptcy petition was awarded $150,000 in compensatory damages and $50,000 in punitive damages some five years earlier pursuant to a jury trial on her sexual harassment claim against the debtor. The jury found her right to Equal Protection under the 14th Amendment was violated when the debtor engaged in conduct that created a hostile work environment during her employment with the Thruway Authority. The debtor appealed the judgment but to no avail. The former employee brought an adversary proceeding seeking to have her judgment excepted from discharge in bankruptcy. To that end she sought summary judgment asserting that the debtor should be collaterally estopped from challenging the facts found by the jury and that those facts were sufficient to prove nondischargeability under Sec. 523(a)(6) of the Bankruptcy Code.

Willfulness. The court rejected the debtor’s contention that there was a genuine fact issue as to whether his conduct was intentional, and that his intent had not been litigated. After reviewing the factors to be considered in determining whether collateral estoppel bars an action, the court noted that collateral estoppel may be invoked to preclude relitigating the elements necessary to meet one of the exceptions provided for in Sec. 523. Under Sec. 523(a)(6), “an individual debtor may not receive a discharge from any debt ‘for willful and malicious injury by the debtor to another entity,’” noted the court. “Willful means a ‘deliberate or intentional injury,’ and malicious means ‘wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.’” Moreover, malice may be implied by the debtor’s acts and conduct in the context of the surrounding circumstances.

The district court was unpersuaded by the reasoning of In re Busch, advanced by the debtor. In support of its holding that there is “no authority for treating sexual harassment as an intentional tort sufficient to operate as a basis for nondischargeability under §523(a)(6),” the Busch court stated that it “[could] not find that the Debtor intended to harm the [p]laintiff in any manner” because he ‘acted with specific intent to advance his own prurient interests at the expense of [the plaintiff’s] right to be free from sexual attack and harassment.’” The district court thought “stating that a debtor’s intent to ‘advance his own prurient interest’ was not the same as intent to ‘harm a sexual harassment victim” parsed too thinly the Supreme Court’s holding in Kawaauhau v Geiger.

Busch concerned a medical malpractice judgment attributable to negligent or reckless conduct and not a sexual harassment verdict where specific intent was an element of the claim proven at trial. “[E]exposure to unwelcome sexual conduct, like an advancing of one’s prurient interests to the point of harassment, is the injury that a sexual harassment victim suffers … a judgment finding an individual intentionally caused that injury is enough to meet the prong of willfulness under §523(a)(6),” wrote the district court, declining to follow Busch. Moreover, Busch relied in part on a law review article as support for its contention that Title VII did not require that an employer intend to injure a plaintiff. The cited portion of the law review article focuses on the specific intent of an employer found vicariously liable for sexual harassment, not the intent of the individual harasser.

Here, the plaintiff met her burden of showing the debtor acted willfully. The jury was expressly charged with a definition of willfulness that is almost identical to the one provided by the Supreme Court in Geiger. To hold him liable, the jury was required to find that the debtor “intentionally, as opposed to recklessly or negligently, created a hostile work environment on the basis of her gender. An action is intentional if it is done knowingly, that is, if it is done voluntarily and deliberately and not because of mistake, accident, negligence, or other innocent reason.” The special verdict the jury returned found the debtor liable for “intentionally discriminat[ing] against [Plaintiff] in the terms or conditions of her employment based on her gender through the creation and maintenance of a sexually hostile or abusive work environment,” and awarded $150,000 in compensatory damages to the plaintiff for that intentional discrimination. The jury awarded an additional $50,000 in punitive damages to punish the debtor for “extraordinary misconduct.” Further, many bankruptcy courts have found sexual harassment discrimination is inherently an intentional tort and permitted it to be excepted from discharge as a willful and malicious injury.

The determination of intent here was an element of a district court action fully and fairly litigated in a jury trial. Its outcome was affirmed on appeal to the Second Circuit. Thus, the findings in the sexual harassment action and the jury’s award of punitive damages required the district court to hold that the debtor’s actions were willful pursuant to Sec. 523(a)(6).

Maliciousness. The court similarly found the former employee established that the injury was malicious. To establish the injury was malicious she was required to demonstrate that the injury was “wrongful and without just cause or excuse.” As a matter of law, the district court explained, malice is inherent in finding a debtor liable for sexual harassment. “Sexual harassment is not only illegal, but so morally reprehensible and degrading to one’s personal dignity that the harasser’s conduct cannot possibly be considered anything other than ‘wrongful and without just cause or excuse,’” wrote the court.

Here, the jury determined that the injury was wrongful by finding the debtor liable. The Second Circuit affirmed the lower court’s decision holding there was evidence of “detailed inappropriate behavior” and “hostile, severe, and abusive” conduct by the debtor. The determination was made following a full jury trial in which the debtor had a full and fair opportunity to litigate the issue. Thus, the former employee was entitled to a finding of maliciousness.

The district court accordingly granted summary judgment to the former employee, holding that the debt should be excepted from discharge pursuant to Sec. 523(a)(6) because the debtor caused the former employee “willful and malicious” injury.

Get the word out. When conducting employer training on the importance of compliance with employment laws, this case is a good illustration of just how high the stakes can be for managers and supervisors who may be subject to individual liability.