SDNY bankruptcy court finds unlawful termination survives employer's bankruptcy petition

Let's say you won your employment discrimination case. But before you are able to collect on the judgment, the employer files for bankruptcy. What happens next? Bankruptcy court is a specialized forum, with its own rules and procedures that bear little relationship to the Federal Rules of Civil Procedure or the CPLR. This case provides some guidance on how to proceed.

The case is Fuller v. Rea, issued by the SDNY bankruptcy court on July 29, 2019. I represent Fuller, who defeated Rea and his company in an employment discrimination case before the State Division of Human Rights, which found that Rea terminated Fuller because she is transgender. The employer appealed that finding to the Appellate Division, which affirmed Fuller's victory. Rea then filed for bankruptcy. Now what?

After you get notice that the employer has filed for bankruptcy, you must cease and desist any collection efforts. Instead, you have to file a Proof of Claim with the bankruptcy court to stake your claim to your damages award. But that is not enough to get paid. If you are defending a judgment, you will have to file an Adversary Proceeding in bankruptcy court, which is a related case to the initial bankruptcy filing. The reason for this is that not all debts are discharged or extinguished as a result of the bankruptcy filing. Any debt that arises from a "willful" and "malicious" injury will not be discharged and the victim can legally pursue that debt once the employer (or the debtor) is able to extinguish his other debts through the bankruptcy court.

In our case, I filed an Adversary Proceeding with the bankruptcy court, claiming that Fuller's termination was willful and malicious. After Rea filed his Answer to that complaint, I moved for summary judgment, arguing the state court judgment should have collateral estoppel effect on whether Fuller's damages were the product of Rea's willful and malicious actions. Under this argument, there would be no need for discovery or a trial in bankruptcy court on this issue. In a ruling handed down on July 29, Chief Judge Morris agreed with us and ruled that Fuller's debt was the product of a willful and malicious injury, and that Rea is collaterally estopped from arguing otherwise since the State Division of Human Rights provided him with a full opportunity to defend himself against Fuller's employment discrimination claims.

The "willful and malicious" inquiry creates a high burden for bankruptcy creditors who want to collect on their debts. That language draws from 11 U.S.C. sec. 523(a)(6), which is part of the bankruptcy code. "Willful" under the code is defined as "a deliberate and intentional injury, not merely a deliberate or intentional act that leads to injury." "Malicious" is defined as "wrongful and without just cause or excuse, even in the absence of hatred, spite, or ill-will." Willful and malicious is not an either/or proposition. The creditor has to prove both. A routine negligence case will probably not cut it.

Fuller wins the summary judgment motion on these issues. First, the bankruptcy court finds that her termination was willful under section 523(a)(6) because Rea terminated her employment only hours after she came into work with a name-change order from State Supreme Court. She was now Erin Fuller. Rea said, "now I have a problem with your condition. I have to let you go." The bankruptcy court writes, "Plaintiff's termination was intentionally discriminatory and motivated by unlawful discriminatory animus, the animus here being Defendant's exclaimed and exhibited 'problem with [Plaintiff's] condition.'" Moreover, the SDHR's findings "establish that Defendant was motivated by discriminatory factors and deliberately caused the adverse employment action." In my research into this issue, few cases turned up involving disparate treatment employment discrimination (as opposed to sexual harassment, where malice is more easily inferred) and nondischargeability. Perhaps recognizing that, Judge Morris concludes, "This Court now holds that discriminatory termination is the injury Plaintiff suffered and that a judgment finding a Defendant intentionally caused that injury, particularly when an unlawful discriminatory motive is apparent, is enough to meet the prong of willfulness under section 523(a)(6) of the Bankruptcy Code."

Fuller's termination was also malicious under the bankruptcy code. Of course, as the bankruptcy court noted in the "willful" analysis, when he fired her, Rea told Fuller that he had a problem with her condition. Also, not only did the SDHR find that Fuller was "continuously asked to dress like a man and was told, following her termination, that if she dressed like a man she would be allowed to return to work," but she was terminated on the same day as the name-change order and Rea continued to issue Fuller's paychecks in her male name despite warnings from Fuller's doctor about the potential danger of treating her "as anything other than female." Moreover, the SDHR imposed a civil penalty against the employer, which "act[s] as a persuasive basis for malice implicit in the 'direct and deliberate' discrimination found by the ALJ."