Southern California Bankruptcy Law Blog

Harvey Weinstein, et al., and Bankruptcy

Posted in Chapter 11, Chapter 13, Chapter 7, Nondischargeability

For those of you who have been living in a cave without access to any news of the day, I would bring you up to speed on the ever expanding sex abuse/sexual harassment scandal that implicates many famous Hollywood types, politicians, religious leaders, big business execs, . . . , and the list just keeps on growing; but if you’re still living in your cave, you probably won’t read this post.

For those of you who aren’t living in a cave, but haven’t been paying attention to the salacious details, here’s the classic comic book version.  Many famous and powerful people have recently been accused of sexual harassment.  The list of the accused includes both men and at least one woman.  As the list grows, the likelihood that at least one accuser (maybe many more) will file civil actions against the accused increases.  Since this is a bankruptcy blog, our question of the day is:

Question:  Can the accused discharge any financial liability associated with the (alleged) harassment in bankruptcy?

 

Leaving aside the fact that most, if not all, of the accused are multimillionaires who probably won’t seek bankruptcy protection, the question is still worth addressing because people who don’t occupy the rarified world of big ticket corruption can still face such accusations.

I.  The Relevant Bankruptcy Code Provisions

 

     A.  Chapters 7, 11, 12, And The Hardship Chapter 13 Discharge

 

Unless the debtor files a bankruptcy under Chapter 13 (and completes the plan), the answer will undoubtedly depend on the application of 11 U.S.C. § 523(a)(6) to the case.  That Code subsection provides (with emphasis added):  “A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt— . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.”

Notice the conjunctive structure:  The injury must be both willful and malicious; one of them is not enough to establish nondischargeability.

 

     B.  Chapter 13

 

If the debtor files under Chapter 13 (and completes the plan), the standard is a bit different because § 523(a)(6) is not part of 11 U.S.C. § 1328(a)(2):

[T]he court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt— . . . (2) of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a).

Instead, either § 1328(a)(3) or (4) will apply:

[T]he court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt— . . .

(3) for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime; or

(4) for restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual.

Notice that in § 1328(a)(4) the disjunction, “or” is used, rather than the conjunction “and” found in § 523(a)(6).  This means that only one of “willful” or “malicious” is necessary for a nondischargeability determination.

By the way, don’t get too focused on the word “awarded” here.  It doesn’t mean that the damages have to have been awarded prior to the debtor filing for bankruptcy protection.  See, e.g., In re Waag, 418 B.R. 373, 382 (B.A.P. 9th Cir. 2009)  (“Section 1328(a)(4) does not require, explicitly or implicitly, a prepetition judgment.”)

 

II.  The Relevant Standard Of Proof

 

Of course, if the accused has already been convicted in a criminal action of the (alleged) behavior, the application of § 523(a)(6) might be nothing more than a pro forma proceeding.  This is because the standard for criminal conviction is “beyond reasonable doubt,” (See, e.g., In re Winship, 397 U.S. 358, 364 (1970) (“[W]e explicitly hold that the Due Process Clause protects the accused against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute the crime with which he is charged.”)), which is a much higher standard than the standard in a § 523(a)(6) action, which is “preponderance of the evidence” (See, e.g., Grogan v. Garner, 498 U.S. 279, 291 (1991)  (“[W]e hold that the standard of proof for the dischargeability exceptions in 11 U. S. C. § 523(a) is the ordinary preponderance-of-the-evidence standard.”))  In other words, if the “beyond reasonable doubt” standard has already been met, then a fortiori, the “preponderance of the evidence” standard has been met.

But remember that an allegation is just that, an allegation, and in the United States the accused is entitled to the protection of due process (See U.S. Const. amend V and XIV, § 1), which starts with the presumption of innocence (pace Katherine Timpf’s unfortunate recent inversion:  “Guilty until proven innocent!”.  However, the absence of a criminal conviction does not preclude a determination of nondischargeability because, as previously noted, the nondischargeability standard is easier to meet than the criminal conviction one.

 

III.  The Meaning Of “Willful And Malicious”

 

Although a person’s body can be thought of as the property of that person, for our purposes the relevant thrust of § 523(a)(6) is really on injury to a person rather than injury to property.  As we have already seen, that subsection has two components:  The injury must be both willful and malicious.  To understand this standard, we must look at the way courts have interpreted this statutory language.

 

     A.  The Case Law: Kawaauhau v. Geiger

 

In Kawaauhau v. Geiger, 523 U.S. 57 (1998)  the Supremes considered the case of a doctor, whose malpractice led to the amputation of part of his patient’s leg.  After a jury trial in Missouri state court, the doctor ― who had no malpractice insurance! ― was found liable to the tune of $355,000.  The doctor filed for bankruptcy protection and the injured party filed a § 523(a)(6) action.  The Bankruptcy Court found the debt to be nondischargeable, but the Eight Circuit Court of Appeals reversed, and the Supremes affirmed the Appeals Court.  Thus, the debt was discharged.

The Court identified the key question as:  “Does § 523(a)(6)’s compass cover acts, done intentionally, that cause injury … or only acts done with the actual intent to cause injury … ?” Geiger, at 61 (Courts appear to cite the case as Geiger rather than Kawaauhau, presumably because Geiger is shorter and easier to say.).  The Court concluded that only acts done with the actual intent to cause injury fall within § 523(a)(6)’s ambit.  Id. at 64 (“We hold that debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).”).

Based on the Geiger holding, a claim for sexual harassment would be nondischargeable if the act, or acts, in question were done with the intent to cause injury.

It is apodictic that rape satisfies the “willful and malicious” standard because of its violent nature.  What about “lesser” forms of sexual harassment?

On the one hand, one of those lesser forms have included telling a coworker that she looks nice.  While the coworker may be offended by the comment, it is difficult to put a damages dollar amount on the offense.

On the other hand, if a workplace superior promised workplace success for sexual favors, or failure based on the refusal to provide those favors, it would be quite a bit easier to come up with a damages amount.  This distinction captures the somewhat inconsistent case law applying the Geiger holding to § 523(a)(6) actions involving sexual harassment.

 

     B.  The Case Law: Geiger’s Progeny – In re Busch

 

The Court in In re Busch, 311 B.R. 657 (Bankr. N.D. NY 2004) was faced with a § 523(a)(6) case involving sexual harassment.

 

          1.  The Debtor’s Offending Behavior

 

The Court summarized the content of the adversary complaint filed by the plaintiff:

In the underlying District Court action, plaintiff proved during a jury inquest, conducted the 15th day of April, 2002, that during the employment by the defendant/debtor from April 1998 through June 27, 2000 she had been subjected to a regular, frequent, unwanted, uninvited, and abusive pattern of sexually charged behavior, lewd sexual comments, innuendo, propositions, jokes, and offensive physical contact including the touching of her body by the defendant and his exposing his intimate and private body parts to her on one or more occasions.

In re Busch, at 660.

The alleged behavior sounds pretty bad; the debtor appears to have been a sort of Harvey Weinstein lite.

 

          2.  The “Malicious” Prong of § 523(a)(6)

 

Since Geiger didn’t address the “malicious” prong of § 523(a)(6), the Busch Court turned to the Second Circuit Court of Appeals’ holding in In re Stelluti, 94 F.3d 84, 87 (2d Cir.1996):

While Geiger addresses only the first prong of § 523(a)(6), the Second Circuit interpreted “malicious,” as used in § 523(a)(6), to mean “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.”  In re Stelluti, 94 F.3d 84, 87 (2d Cir.1996) (citations omitted).  Actual malice may be implied by the circumstances surrounding the debtor’s acts and conduct.  Id. at 88.  Thus, in order to prevail in this proceeding, the Plaintiff must prove that: (1) the Debtor deliberately and intentionally caused the resulting injuries to the Plaintiff; and (2) the Debtor acted maliciously.

In re Busch, at 666.  (Does that page number suggest something about the reasoning?  You decide.)

The Court concluded that the plaintiff easily met the “malicious” prong:

As a matter of law, violations of Title VII will meet the actual malice standard under Stelluti for purposes of a § 523(a)(6) determination.  Because sexual harassment is both illegal and morally reprehensible, it is impossible to conceive of an actionable sexual harassment case against an individual employer where that employer’s conduct could be construed as anything other than “wrongful and without just cause or excuse.”  In re Stelluti, 94 F.3d at 87.  Thus, malice is inherent in finding that the debtor is liable for sexual harassment.

Id. at 668.

 

          3.  The “Willful” Prong of § 523(a)(6)

 

In dealing with the “willful” prong, the Court quoted Geiger:

The “willful” prong of § 523(a)(6) was translated by the Supreme Court in Geiger as follows:  ‘The word “willful” in (a)(6) modifies the word “injury,” indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. . . . the (a)(6) formulation triggers in the lawyer’s mind the category “intentional torts,” as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend “the consequences of an act,” not simply “the act itself.”

Id., at 665.

Based on that Supreme Court holding the Busch Court held that the plaintiff had NOT met the willfulness standard, meaning that the debt was ultimately discharged:

Several considerations, however, cause the court to conclude that the Plaintiff has not met her burden of proof on the first prong of § 523(a)(6).  Intent to cause injury was not a necessary element of the Title VII causes of action asserted against the Debtor in the District Court Action.  In addition, it is clear that intent to injure was not a necessary underpinning for a punitive damages award.  The question of whether the Debtor in fact intended to cause the Plaintiff’s injuries is now, for the first time, squarely in issue.  As the Supreme Court determined in Brown, this is the type of question that Congress intended this court to resolve.

Id. at 669.

Based on this reasoning it appears that the primary focus of a § 523(a)(6) sexual harassment plaintiff should be on establishing that the debtor intended to cause the injuries suffered by the plaintiff, since the “malicious” prong will naturally fall into place if there is a Title VII violation.

 

     C.  The Case Law: Geiger’s Progeny – In re Carmona

 

The Court in In re Carmona, Nos. 08-20783-dob, 08-2075-dob (Bankr. E.D. Mich. 2011) came to a different result from the Busch holding.  In Carmona the underlying facts were similar, but arguably worse.  Rather than recounting the underlying facts, which are a bit more lurid than those in Busch, I’ll let you read them if you wish.

As in the bulk of case law, the “malicious” prong was easily established by the fact of sexual harassment.  The key difference between the Busch and Carmona holdings is the Carmona Court’s conclusion that the “willful” prong was also satisfied.  Unlike the Busch holding, which focused on Title VII, a federal statute, the Carmona holding was based on a Michigan sexual harassment statute.

But more significantly, the debtor in Carmona had demanded sexual favors in exchange for job security.  Thus, part of the plaintiff’s injury involved workplace retaliation, which was clearly intended by the debtor.

Based on the differences between these cases, you might reasonably conclude that in the absence of retaliation facts, the “willful” prong couldn’t be satisfied.  However, the case law trend is toward treating sexual harassment as an intentional tort, making the “willful” prong a sort of strict liability factor:  Willfulness is inherent in sexual harassment.  See, e.g., In re Spagnola, 473 B.R. 518, 523 (Bankr. S.D. NY 2012) (“This Court believes that 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 and that a judgment finding an individual intentionally caused that injury is enough to meet the prong of willfulness under § 523(a)(6).”).

Although this area of law is still developing, the Busch decision appears to be a minority holding.  The general trend is to find sexual harassment, almost by definition, satisfies both prongs of § 523(a)(6), so any debt that is the result of sexual harassment will not be dischargeable in bankruptcy.

The only additional comment I have is that a sense of proportion is in order.

On the one hand, a single catcall from a construction worker might be tasteless, but the injury is sufficiently slight that the damages would be di minimis, and not worth pursuing.

On the other hand, a demand for sexual favors, with the threat of a demotion or job loss if the demand is rebuffed, is much more serious, and could give rise to significant damages that should survive a bankruptcy discharge.

If you’re in the Central District of California, and are either a creditor wanting to file an adversary proceeding, or a debtor facing an adversary proceeding, call an attorney who is a board-certified bankruptcy law specialist with adversary proceeding experience to represent you.

And if you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts under Chapter 7, 11, or 13, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

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