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." 

NYC's driver suspension procedure violates due process

The City of New York has an elaborate process that kicks in when taxicab drivers are arrested. When that happens, their licenses are suspended. The drivers can then request a hearing to have the suspensions lifted. The taxi drivers sued the City under the Due Process Clause, claiming these hearings are a sham. The City loses the case, which provides a good tutorial on how federal due process cases are decided.

The case is Nnebe v. Daus, issued on July 19. These post-suspension hearings are impossible to win (though, in the end, most are able to resume driving their taxi's through a favorable disposition of their criminal cases). The Court (Katzmann, Lynch and Hall) notes that almost no one wins these hearings. Only three drivers out of hundreds of hearings have actually won their hearings, and all three cases were decided by the same ALJ, who was "promptly reprimanded" and "took care not to make another such recommendation for fear that the would be transferred to a less desirable work location." So those three wins were quirks. I guess they were supposed to lose.

The question is whether the post-suspension hearings provide an opportunity for a taxi driver to assert that, even if the criminal charges are true, continued licensure does not pose any safety concerns. Since the drivers do not have that opportunity, the hearings violate due process, in part because no one ever wins them.

The Court first finds that the hearings implicate an important private interest in the taxi drivers earning a living. So they win that prong of the three-part due process analysis under Matthews v. Eldridge (1976), which remains the Supreme Court's seminal procedural due process case. The Cost next examines the risk of erroneous deprivation from the hearings. That's part two of the Matthews test. The Court notes, that once the process exhausts itself, as many as 90 percent of the drivers are back on the road, driving like maniacs again. Since that high number includes drivers whose licenses were initially suspended, the system in place does pose a risk of erroneous deprivations. So the plaintiffs win that prong also, and that makes them two-for-two in the Matthews equation.

The Court turns to the third Matthews prong, which weighs the governmental interest in immediately suspending the licenses upon a driver arrest. "While we take seriously the Government interest implicated [ensuring the safety of the tax-riding public and maintaining the pubic trust in taxi's], we hold that, given the potential of conducting far more meaningful hearings at little or no additional financial or administrative cost to the [Taxi and Limousine Commission], that interest is outweighed by the private interest at stake and the unacceptably high risk of erroneous deprivation."

"Annoying advertisement" ban in Uber vehicles does not violate First Amendment

The City of New York regulates taxicabs and fore-hire vehicles like Uber. Those regulations sometimes impact the First Amendment. In this case, the city's rules governing commercial speech in this vehicles are under attack. The Court of Appeals says these rules do not violate the First Amendment.

The case is Vugo, Inc. v. City of New York, issued on July 16. The city has banned video advertisements inside for-hire vehicles (FHV) on the basis that "passengers rind in-ride advertisements . . . extremely annoying." But taxicabs (distinct from FHV's) are allowed to have certain advertisements (they call it "Taxi TV") to defray the costs of computer screens and related technology in those vehicles to alert riders to track the progress of their metered fare as the taxi's sit in traffic and the meter continues to rise. The FHV people claim the prohibition against these advertisements in their cars violates the First Amendment.

Commercial advertisements must satisfy constitutional standards, but since these advertisements do not involve political speech, the government enjoys additional leeway in regulating this speech, and the rules cannot be struck down unless they directly advance a substantial governmental interest and the regulation is no more extensive than necessary to sere that interest. We call this the "intermediate scrutiny" test, as opposed to the much more restrictive standards guiding political speech restrictions. After reviewing recent legal developments in this area, the Court of Appeals (Katzmann, Livingston and Droney) concludes that the Supreme Court in Sorrell v. IMS Health, Inc., 564 U.S. 552 (2011), has not altered the intermediate scrutiny standard relevant to these claims, and no Court of Appeals has ruled otherwise.

First things first: the Court says the City has advanced a substantial governmental interest in prohibiting video advertisements in FHV's because the public hates these advertisements. This logic derives from cases holding the government has a substantial interest in regulating community aesthetics and preventing "undue annoyance." This case extends that rationale to video advertisements.

Second, the regulation has a reasonable fit with the interest in avoiding customer annoyance. The FHV lawyers argue the regulation is underinclusive, which even the Court of Appeals says can raise a "red flag." But the government still has authority to regulate matters like this. The City wins this case (and the district court's contrary ruling is overturned) because (1) the Taxi TV exception facilitated the installation of the handy credit card machines in the vehicles and (2) the City had good reason to ban these annoying advertisements. And, by the way, it's not me who obsesses over these annoying advertisements. The Second Circuit ruling repeatedly makes reference to how irritating they are. The fact that taxicabs and not FHV's cannot use these advertisements is not fatal to this regulation, as the FHV's covered by the challenged rules accounted for more than one-third of the daily passenger trips in 2016, including the yellow and green taxis that are not classified as FHV's, the ones that we hail from the street. According to the statistics, that year, riders took 370,000 daily trips in yellow taxis and 213,000 daily trips in Uber and Lyft vehicles. Since that many people were spared these advertisements, that amount is substantial enough to justify the selective regulation.

Title IX claims carry a three-year statute of limitations

This case resolves two issues that I thought was settled long ago: what is the proper forum for educational discrimination claims brought under Title IX of the Civil Rights Act of 1964? And, what is the statute of limitations for educational discrimination claims brought under the Americans with Disabilities Act? The Court of Appeals holds for the first time in a published ruling that a three year statute of limitation applies.

The case is Purcell v. New York Institute of Technology, issued on July 18. The issue arises because plaintiff says the institute discriminated against him as a student. The trial court said the statute of limitations is four months, which is the timeline under Article 78 of the New York CPLR. The Article 78 angle may seem silly, but it is true that you can challenge academic decisions against private colleges under Article 78, which is an expedited legal procedure that asks the court to resolve the dispute on the basis of affidavits and exhibits without live testimony. The drawback for plaintiffs is that, in Article 78's, the colleges get the benefit of the doubt in cases involving academic decisionmaking on the theory that colleges are best suited to address these issues unless they abuse their discretion and issue a crackpot ruling on the academic dispute.

The Court of Appeals (Katzmann, Walker and Cabranes) now holds that federal law is available to resolve these disputes as well, if the students raise federal claims. We all kinda knew this, but sometimes it takes a while for the Court of Appeals to definitively resolve what we all kinda knew all along. Purcell wins on this issue because he is raising a federal claim and not the kind of state law claim that normally arises in an Article 78 proceeding. The Court says, "However strongly New York may feel about the need to defer to academic decision-making, and however justified its decision to funnel all related state claims into Article 78 proceedings may be, New York cannot nullify a federal right or cause of action it believes is inconsistent with its local policies." If at all possible, federal law reigns supreme in our system, however the State of New York feels about it. Since the statute of limitations under Title IX is three years (borrowing from state law personal injury deadlines), Purcell's case is timely and the case returns to the federal trial court.

Along the way, the Court of Appeals resolves an issue that lingered for years without a definitive ruling from this appellate court. In unpublished summary orders, the Second Circuit had held that ADA claims against educational institutions carry a three-year statute of limitations. The Court now solidifies that reasoning in a published ruling. It also reaffirms that the three-year statute of limitations governs Title IX claims.

The rule of completeness - how it applies in the real world

One way to ensure that your statements are not introduced before a jury out of context is to allow the jury to hear the entire statement. Lawyers like to cherry-pick statements from the opposing party in trying to prove their cases. But if they leave out the rest of the story, the courts will bring in the entire statement. This case shows that the so-called "rule of completeness" has its limits.

The case is United States v. Williams, issued on July 9. I wrote about this case at this link, dealing with the scope of the police department's inventory search which revealed a gun stowed away in a secure compartment of a rental car. The Court held the inventory search did not violate the Fourth Amendment even though it was the second inventory search of the evening. The second search was prompted by defendant's freak-out when he learned the police were going to return the car to the rental people.

A second issue in the appeal involves Williams' claim that the trial court should have allowed the jury to know that he initially denied the gun was his before he eventually 'fessed up. As it happens, Federal Rule of Evidence 106 addresses the rule of completeness, but it only mentions written statements, not oral statements. But the common law applies that rule to oral statements. Why doesn't Rule 106 cover oral statements as well? I have no idea. Maybe the committee that drafted the rule had their eye on the clock and it was almost time to go home for the weekend.

After initially ruling that the rule of completeness allows a party to introduce hearsay evidence to place the one-sided comment in context, the Court of Appeals (Kearse, Livingston and Carney) says the trial court did not abuse its discretion in preventing Williams from introducing his initial denial about the gun ownership before the jury. The rule is that defendant had to "demonstrate that admission of the initial statements denying ownership of the gun was 'necessary to explain' his later statements that the gun was his, to place [these statements] in context, to avoid misleading the jury, or to ensure fair and impartial understanding' of these later statements." The Court says Williams is trying to take the doctrine too far, reasoning:

It is not uncommon for a suspect, upon interrogation by the police, to first claim n a self-serving manner that he did not commit a crime, only thereafter to confess that he did. But the rule of completeness does not require the admission of self-serving exculpatory statements in all circumstances, and the mere fact that a suspect denies guilt before admitting it, does not -- without more -- mandate the admission of his self-serving denial. As the district court here aptly pointed out, Williams' confession was 'simply a reversal of his original position."

Court of Appeals reinstates excessive force verdict

Even experienced judges make mistakes. The Court of Appeals has reinstated a verdict that a longtime Southern District judge vacated. The plaintiff has regained his excessive force verdict against a New York City police officer.

The case is Ortiz v. City of New York, a summary order issued on July 17. Plaintiff testified that he was walking down the street when officer Vazquez attacked him without warning, kicked his knee and sent him face first into the pavement. Plaintiff said the police injured his knee, wrist and back. Of course, the officers told a different story: that Ortiz was slumped against buildings and collapsed on the ground over the course of about 40 minutes, and that since he was intoxicated, they made arrangements for him to be taken to the hospital. This is why we have trials. The jury ultimately ruled in plaintiff's favor against one of the police defendants, Vazquez, awarding him $118,000. The trial court then asked the jury if Vazquez handcuffed the plaintiff after they observed him on the pavement that day. The jury said "yes." The judge next vacated the verdict, concluding that "Ortiz's testimony at trial 'inextricably linked' his claims of unlawful seizure and excessive force, because he testified that 'the altercation between him and Vazquez was so sudden and quick that any unlawful seizure and use of excessive force were simultaneous."

The Court of Appeals (Livingston, Lynch and Sullivan) reverses and reinstates the verdict. The Second Circuit reminds us that the only way the district court can erase a verdict is if there is no evidence whatsoever to support the verdict. The court has to be convinced the plaintiff had nothing, and that the case never should have gone to trial in the first place. The principle here is that the jury may believe only parts of the plaintiff's testimony en route to a plaintiff's verdict. While "the jury does seem to have accepted the officers' account of how, why, and when they handcuffed Ortiz," that does not mean the district court had a basis to find that the jury had rejected all of Ortiz's testimony relating to the excessive force. As the Court of Appeals says:

The jury may well have disbelieved Ortiz’s testimony that Officer Vazquez attacked Ortiz from behind and drove him to the ground with a kick, or thought that Ortiz was exaggerating in his description of the altercation; nonetheless, the jury may still have credited Ortiz’s testimony that Officer Vazquez kicked him at some point during the encounter.

The jury was entitled to credit some portions of Ortiz’s testimony while disbelieving other portions. The jury could have reasonably regarded the medical evidence Ortiz presented as corroborating his testimony that he was violently kicked—in contrast to his uncorroborated and somewhat implausible account of the genesis of the encounter. As a result, the district court erred in directing judgment for Officer Vazquez on the excessive force claim, because a “reasonable jury” may have had a “legally sufficient evidentiary basis to find for [Ortiz] on that issue.”

Second inventory search was legal under the Fourth Amendment

There are a zillion exceptions to the warrant requirement under the Fourth Amendment. In this case, we become acquainted with the rule that police officers may search a vehicle without a warrant provided the search is part of a legitimate "inventory search." This case asks when the police may conduct multiple inventory searches.

The case is United States v. Williams, issued on July 9. Defendant was driving a rental car that was leased in someone else's name. The police pulled him over for reckless driving. When the police brought defendant back to the precinct, they immediately commenced an inventory search of the car. As a general rule, the police are allowed to do this without a warrant. The reasons for an inventory search are (1) "to protect the owner's property while it is in police custody; (2) to protect the police against spurious claims of lost or stolen property; and (3) to protect the police from potential danger." Since these searches do invade the motorist's privacy, the police must conduct inventory searches pursuant to established police procedures. If, in the course of a legitimate inventory search, the police find something illegal, that contraband can be used against the driver in court.

Once the inventory search ended, the police told defendant the car would be returned to the rental agency. This made defendant visibly nervous, and he demanded that the police allow him to make a phone call. Defendant got on the phone and told someone to quickly retrieve the car, and the police noticed his stress level was elevated and he sounded "more stressed." This prompted the police to search the car again. They found a gun hidden in the vehicle, which they retrieved after loosening the screws of a center console that is not normally designed to be opened.

Following his conviction for the illegal gun, defendant tells the Court of Appeals that the second inventory search was illegal and that only the initial inventory search complied with the Fourth Amendment. This is a tricky issue because the second search happened only because defendant got nervous when he realized the car would be returned to the rental place. The Court of Appeals (Livingston, Kearse and Carney) upholds the search. Not only was the second search conducted pursuant to NYPD procedures, but it does not matter that those procedures say nothing about conducting follow-up searches. The Court says these policies do not have to account for every possibility. What is more, the second search made sense because defendant's nervousness about the rental car returning to the agency led the police to think that something of value remained in the car, thereby implicating the very reasons why the police are allowed to undertake inventory searches in the first place. It does not look like the courts have ruled on whether a second inventory search is legal, but the Second Circuit breaks ground in this case on that issue.

The Court of Appeals does not really get into this, but my sense is they worried that someone else would rent the same car the next day and somehow find the gun in the console. While the console was screwed shut as a matter of course (the car was manufactured that way), who the hell knows what would happen if some kiddo with a screwdriver decided to open up the console and found the gun?