Recently, I successfully represented a debtor in an adversary proceeding brought by creditors (the Plaintiffs) seeking to have the debt owed to them declared non-dischargeable pursuant to 11 U.S.C. § 523(a)(6). In this case, my client’s entity, in which he was the sole shareholder, formerly owned and operated a bar in Colorado for a short period of time. During the time that his entity owned the bar, employees complained of sexual harassment at the hands of the bar’s manager, who was the Debtor’s brother-in-law. This blog will explore the facts and circumstances of this case along with the legal standard to explore why the Judge ultimately found that the Debtor was entitled to judgment as a matter of law.
BASIC FACTS OF THE CASE
As stated above, the Debtor in this case was the principal of an entity that owned a bar in Colorado while living in New Jersey. Shortly after assuming ownership of the bar, this individual received complaints that the manager of the bar, his brother-in-law, was drinking excessively at the bar and sexually harassing employees. In response to these allegations, the Debtor notified his professional employer organization of the allegations and an investigation was commenced. The investigation conducted by the professional employer organization found that the allegations could not be corroborated. Nonetheless, the Debtor terminated his brother-in-law as manager of the bar out of an abundance of caution. Ultimately, despite the finding of the investigation, the Equal Employment Opportunity Commission issued right to sue notices to the Plaintiffs. While the Debtor and his entity were dismissed from the underlying litigation, the Debtor’s professional employer organization decided to mediate and settle with the Plaintiffs. As part of the settlement, the Debtor’s professional employer organization assigned its right to indemnification against the Debtor’s entity to the Plaintiff. The client services agreement entered into by the professional employer organization and the Debtor’s entity, which contained the indemnification agreement, was personally guaranteed by the Debtor. This personal guaranty was the Plaintiffs’ sole basis for liability against the Debtor individually.
The Plaintiffs sued the Debtor and his entity in the Colorado State Court, which resulted in a judgment against the Debtor and his entity based on the actions of an agent of the Debtor’s entity. The Colorado State Court also entered the judgment against the Debtor individually based on the personal guaranty of the client services agreement executed by the Debtor. This judgment was upheld on appeal by the Colorado Appellate Court.
ADVERSARY PROCEEDINGS BROUGHT UNDER 11 U.S.C. § 523(A)(6)
When a Debtor files a bankruptcy proceeding, a creditor has the right to challenge the dischargeability of a debt pursuant to Section 523 of the Bankruptcy Code. A creditor must review the provisions of that code section to determine if the facts and circumstances concerning the debt owed falls within one of the provisions of that code section. One of the provisions of Section 523 of the Bankruptcy Code is 11 U.S.C. § 523(a)(6), which states that “a discharge…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.” The United States Supreme Court has set an extremely difficult standard for creditors to meet to establish non-dischargeability of a debt under this code section by finding that the debtor must cause a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Therefore, the conduct of the Debtor must exceed recklessness and rise to the level of deliberate or intentional conduct. Id.
DISCUSSION OF THE LAW AS IT PERTAINS TO THE CASE
The Court found that the record did not support a finding that the Debtor intentionally injured the Plaintiffs. The Court noted that upon learning of the issues at the bar, the Debtor flew to Colorado to meet with complainants and initiated an investigation. Further, the Debtor fired the manager against whom the complaints were made. The Court explained that even though the manager of the bar did not ultimately comply with the Debtor’s directives, it does not support that the Debtor intended to injure the Plaintiffs.
The Plaintiffs sought to establish liability on the part of the Debtor for a willful and malicious injury by alleging that the Debtor failed to do enough to protect them and that the Debtor did not do more because he did not believe the allegations. The Court found that the allegation that the Debtor did not believe the allegations weakens the Plaintiffs’ argument, since the Debtor could not inflict an intentional injury if he did not believe that the allegations being made were true. Moreover, the Court noted that correspondences being sent by other employees of the bar to the Debtor which did not reference any allegations of ongoing sexual harassment and the investigation conducted by the professional employer organization which found the allegations to be unfounded. Lastly, the Court astutely found that the Plaintiffs did not allege that the Debtor intended for his remedial measures to not remedy the situation or that they were substantially certain to not be successful, just that they were ultimately unsuccessful. Accordingly, the Court held that the Debtor’s actions or inactions alleged by the Plaintiffs did not raise to the level of what constitutes a willful and malicious injury pursuant to the Bankruptcy Code and has been established by precedent. Therefore, the Court held that the Defendant’s Motion for Summary Judgment was granted on the basis that the Plaintiffs could not show a deliberate or intentional injury caused by the Debtor. For a more in depth reading on this opinion, the Court’s Opinion is attached.