Bankruptcy Update Blog

Bankruptcy and Labor Law: Decision by Appeals Court Permits Debtor to Discharge an NLRB Fine in Bankruptcy

If the National Labor Relations Board (“NLRB”) fines an employer for unlawfully firing workers who tried to unionize, can the employer discharge the fine in bankruptcy, or will the exception to discharge found in Bankruptcy Code section 523(a)(6) apply?  That section bars discharge of debts that arise from “willful and malicious injury.”  The issue was addressed recently in a decision by the United States Court of Appeals for the Seventh Circuit following proceedings before an administrative law judge (“ALJ”), the NLRB, a District Court, and a Bankruptcy Court.[1]  An individual debtor had sought to use bankruptcy to discharge a liability imposed by the NLRB.  However, the NLRB argued that the discharge should be denied because the debtor had engaged in “willful and malicious injury,” citing 11 U.S.C. §523(a)(6). In a 2-1 decision, the Seventh Circuit held that the administrative finding that the debtor violated §158(a)(3) of the National Labor Relations Act —which prohibits an employer from discriminating an employee to encourage or discourage membership in any labor organization—did not bar the debtor from arguing that he had not acted with malice.

Edward Calvert, the debtor, was the sole owner and president of E.L.C. Electric, Inc. (“E.L.C.”).  A labor organization had tried but failed to unionize E.L.C.’s workforce.  E.L.C. then fired rank-and-file electricians to prevent future unionization attempts.  The union filed a charge with the NLRB alleging that E.L.C. unlawfully fired the electricians for exercising their rights to unionize.  After a trial, the ALJ ruled that E.L.C. had violated 29 U.S.C. §158(a)(1) and (3), which prohibit an employer from interfering with, restraining, or coercing employees in the exercise of their rights guaranteed under Section 7 of the National Labor Relations Act—such as the right to form labor organizations and to bargain collectively—and from discriminating in hiring or any term or condition of employment based on membership in any labor organization. 

The NLRB affirmed the ALJ’s ruling and ordered E.L.C. to compensate the electricians with backpay.  But E.L.C. didn’t pay the award and instead ceased its operations.  In supplemental proceedings, the ALJ concluded that Calvert shuttered E.L.C. to avoid paying the electricians and held him personally liable for $437,427.  The NLRB adopted the ALJ’s findings and conclusions, and the Seventh Circuit summarily enforced the NLRB’s order. 

Soon after, Calvert filed a chapter 7 bankruptcy petition.  In that case, the NLRB challenged Calvert’s attempt to discharge the backpay debt through bankruptcy, arguing that Bankruptcy Code section 523(a)(6) precluded Calvert from discharging the debt for backpay imposed under section 158(a)(3) of the National Labor Relations Act.  The Bankruptcy Court rejected the NLRB’s argument and ruled for Calvert, concluding that the NLRB had not proven or obtained a finding from the ALJ that Calvert had acted with malice.  Therefore, the section 523(a)(6) exception to discharge didn’t apply.  The District Court affirmed. 

The Seventh Circuit concluded that the NLRB had failed to demonstrate that the NLRB’s decision and the discharge argument before the Bankruptcy Court addressed the same issue.  The Seventh Circuit rejected the NLRB’s argument that the ALJ’s decision to impose liability under 29 U.S.C. §158(a)(3) necessarily included a factual finding that Calvert acted with malice.  Thus, it affirmed the lower courts’ rulings that Calvert could discharge the backpay debt in bankruptcy.

In dissent, Judge Bucklo — a United States District Judge for the Northern District for Illinois, sitting by designation in this case — opined that the ALJ actually decided the issue of Calvert’s malicious intent.  Under Seventh Circuit law, “malice” under 11 U.S.C. §523(a)(6) means “conscious disregard of one’s duties or without just cause or excuse.”[2]  In her view, the ALJ’s determination that Calvert fired his employees because of their union activities was essential to the ALJ’s ultimate decision.  Most importantly, Judge Bucklo said, Calvert’s failure to establish his affirmative defense of legitimate business reason necessarily indicated that Calvert was “without just cause or excuse” and, therefore, acted maliciously under section 523(a)(6).

Judge Bucklo also contrasted majority’s decision in this case with decisions from other courts across the country that have held that “an agency or state court finding that the debtor acted with discriminatory intent and without just cause satisfies the malice standard under §523(a)(6).”[3]  But those other decisions were at the District Court level.  No Circuit Court until now has decided this issue.

 

[1] In re Calvert, 2019 U.S. App. LEXIS 2012 (7th Cir. 2019).

[2] First Weber Grp., Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir. 2013).

[3] In re Calvert, 2019 U.S. App. LEXIS at *14-15.