By Tulay Turan, J.D.
The president’s actions were willful and malicious where the woman’s name was never changed on her pay stub despite a court order requiring it, and she was repeatedly told she could have her job back if she wore men’s clothing.
Granting summary judgment to a transgender woman who was fired a few hours after her employer received notice of her legal name change, a bankruptcy court in New York ruled that a $44,560 employment discrimination judgment against a debtor—the company president—was excepted from discharge because it was incurred as a result of his willfully and maliciously causing injury to her (In re: Mark Rea, July 29, 2019, Morris, C.).
Finding of discrimination under state law. In October 2010, after her termination, the woman filed a charge with the New York State Division of Human Rights (NYSDHR) against her former employer and its president. She alleged her termination was discriminatory on the basis of gender and disability. The NYSDHR found probable cause for gender and disability discrimination, and public hearings were held before an ALJ in December 2013 and February 2014. The ALJ ultimately recommended that the NYSDHR commissioner find the employer and the president discriminated against her under the NYSHRL.
Appellate court affirms findings. In April 2015, the NYSDHR commissioner adopted the ALJ’s recommendations in their entirety and ordered the president to pay damages for lost wages in the amount of $14,560 and pain and suffering in the amount of $30,000. The ALJ also imposed a civil penalty in the amount of $20,000. The employer and president challenged the decision and the case was transferred to the New York State Appellate Division. In June 2018, the Appellate Division affirmed the ALJ’s factual and legal conclusions that the NYSDHR also had adopted.
Bankruptcy petition. On December 17, 2019, the president (debtor) filed for chapter 7 and named the employee as one of his creditors. Upon notification of his bankruptcy, the employee filed this adversary proceeding asking to have her judgment excepted from his chapter 7 discharge under Sec. 523(a)(6) of the Bankruptcy Code. She moved for summary judgment.
Debtor cannot relitigate willfulness. After noting that under Sec. 523(a)(6), a debt that results from a “willful and malicious injury by the debtor to another entity or to the property of another entity” is non-dischargeable, the court applied New York’s two-part test to determine whether the debtor was collaterally estopped from relitigating the issue of willfulness. First, the court found the judgment under NYSHRL was necessary to the resolution of the prior action because it was predicated upon material and necessary factual findings that supported a finding of “willful injury.” The ALJ’s finding of discrimination, which the Appellate Division affirmed, was grounded in the finding that the debtor terminated the employee during a meeting that was held a few hours after the debtor received notice of her legal name change. The ALJ concluded that during the meeting, the debtor told her that he had a “problem with [her] condition” and had to let her go. The court held the employee’s termination was intentionally discriminatory and motivated by unlawful discriminatory animus.
Debtor had full opportunity to litigate. Second, the court found the debtor had a full and fair opportunity to litigate. The debtor’s participation in the prior proceeding was significant. It was undisputed that he was a named respondent in the proceeding, was represented by counsel in the original hearing as well as the appeal, testified at the hearing, and submitted post-hearing briefs. The entire administrative process showed extensive litigation and the record reflected the debtor’s full and diligent participation in the prior litigation.
In addition, the record of the prior action was robust. The Appellate Division affirmed the NYSDHR’s order in its entirety, which included explicit findings of fact, and the bankruptcy court did not need to reconstruct any reasoning for the state court’s decision. Thus, the debtor was collaterally estopped from relitigating the issue of willfulness, and the court held the debtor acted willfully when discriminatorily terminating the employee.
Debtor cannot relitigate malice. The court also found the debtor was collaterally estopped from relitigating the issue of malice. The ALJ’s findings of fact, opinion, and order indicated the debtor acted maliciously; the opinion stated the debtor’s decision to terminate her was “direct and deliberate.” The NYSDHR found the debtor’s “problem with [her] condition” motived her termination, her name was never changed on her pay stub despite a court order to that effect, and she was repeatedly told she could have her job back if she wore men’s clothing. The court found malice implied by the state court finding of deliberate discrimination, the acts and conduct of the debtor in the context of the surrounding circumstances, and the imposition of a civil penalty.
Federal circuit split no excuse. Interestingly, the court rejected the debtor’s contention that a split among the circuits—resulting in cases pending before the U.S. Supreme Court—regarding whether transgender people belong to a protected class for purposes of Title VII could negate malice. The debtor argued that if a transgender person does not belong to a protected class, there is no deliberate discrimination from which malice could be inferred.
According to the court, however, a ruling by the U.S. Supreme Court that transgender persons are not members of a protected class for purposes of federal law would not change the finding of malice here. The judgment subject to exception to discharge is a state court judgment executing the NYSHRL, not federal civil rights laws. The New York Supreme Court has found that gender identity disorder is a disability under NYSHRL, and the bankruptcy court must give full faith and credit to valid state court judgments.
Determination on opportunity to litigate applied. The court also found its determination regarding the debtor’s full and fair opportunity to litigate as to the “willfulness” prong of the discharge exception remained applicable for maliciousness. The debtor was collaterally estopped from relitigating the issue of malice and had acted maliciously when discriminatorily terminating the employee. As such, the court concluded the employee was entitled to relief under Sec. 523(a)(6) and granted her motion for summary judgment.
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