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Employer can’t discharge quid pro quo sexual harassment judgment in bankruptcy

By Robert Margolis, J.D.

An employee who won on her sexual harassment claims against her former employer will recover $206,735 of the judgment despite the employer’s bankruptcy, ruled a bankruptcy court in California, explaining that a finding of willful misconduct was inherent in the state court judgment in her favor on her quid pro quo sexual harassment claim. Finding that this portion of the judgment was not dischargeable in bankruptcy, the court granted her motion for summary judgment in part. Her motion was denied with respect to her hostile work environment claim (Olivares v. Dason, June 18, 2018, Houle, M.).

The state court judgment. The employee, who was a dental assistant, filed a state court action alleging she “was subjected to offensive sexual comments and inquiries, and other unwelcome, sexually based, offensive conduct” by the dentist. After three years of litigation, the dentist declined to appear for trial, with the result being a default judgment for the employee as follows: (1) $300,000 for past emotional distress – hostile work environment; (2) $200,000 for past emotional distress – quid pro quo sexual harassment (3) $500,000 for future emotional distress; (4) $100,000 for punitive damages; (5); $1,875 for future psychiatric care; (6) $8,125 for future psychological care; (7) $6,735 for past lost income; and(8) $608,261 for attorneys’ fees and costs.

Bankruptcy. The dentist then filed a Chapter 7 voluntary bankruptcy petition. The employee filed a complaint against the dentist, contending that the judgment debt in her favor is non-dischargeable under the Bankruptcy Code, 11 U.S.C. § 523(a)(6), based on it arising out of willful conduct. The dentist opposed her petition and the employee moved for summary judgment, arguing among other things that because the judgment required a finding that the dentist committed willful misconduct, he was precluded from relitigating the issue of his willfulness in bankruptcy court.

Issue preclusion. To establish that the debt is non-dischargeable, the employee had to show “willful conduct” by the dentist. The question was whether, given the default judgment, the issue of “willfulness” actually was litigated in the state court so as to create issue preclusion in the bankruptcy proceeding. The employee argued that the nature of the claim for which she obtained judgment in state court, sexual harassment under Cal. Gov. Code § 12940(j)(i), means a finding of willfulness was inherent in the judgment, therefore it was “actually litigated” so as to create issue preclusion. The court agreed, at least for the part of the judgment that was for “quid pro quo sexual harassment.”

The court found the delineation of two separate sexual harassment categories in the judgment to be significant. The court separated “Hostile Work Environment” and “Quid Pro Quo Sexual Harassment,” and identified separate damages for “past emotional distress hostile work environment” and “past emotional distress quid pro quo sexual harassment.”

Quid pro quo harassment. The court agreed with the employee that quid pro quo harassment is akin to extortion, which is clearly an intentional tort (indeed also a crime). By intentionally and negatively conditioning employment terms on the employee’s acceding to unwanted sexual advantages, the dentist did the equivalent of intentionally causing an injury. The court therefore held that willfulness is part of a quid pro quo sexual harassment claim, and the question of willfulness was “actually litigated” in the state court as to that portion of the judgment. It granted the employee’s motion as to the line item of damages related to “past lost income and past emotional distress – quid pro quo sexual harassment,” totaling $206,735.

The employee quit her job, arguing in the state court that she was constructively discharged. The dentist thus argued to the bankruptcy court that constructive termination does not inherently contain a finding of willfulness. Relying on a 1994 California Supreme Court Decision, Turner v. Anheuser-Busch, Inc., the court rejected the dentist’s argument. In Turner the state high court held that a constructive discharge claim requires that the employer “either deliberately create the intolerable working conditions that trigger the resignation” or, at a minimum, “know about them and fail to remedy the situation in order to force the employee to resign.” This was sufficient to establish willfulness under § 523(a)(6), the court held.

Hostile work environment. The court found, however, that willfulness is not inherent in a judgment for hostile work environment sexual harassment and denied summary judgment as to the non-dischargeability of that portion of the judgment. The court contrasted this with quid pro quo liability, where the injury results from the employer’s intentional action or retaliation against the employee. In a hostile work environment scenario, however, the injury is based on the employee’s perspective and does not require a showing of intent. “[T]he hostile workplace could be created negligently or unintentionally, based on incorrect assumptions of the employer,” the court noted.