At least in California, an arbitrator’s finding of unlawful discrimination on account of pregnancy results in nondischargeability via issue preclusion, even though the arbitrator did not explicitly find that the debtor’s actions were willful, malicious and intended to cause injury.

The creditor had been a full-time employee of the debtor. The employer fired her four weeks after she told him that she was pregnant. The employee lodged a claim of unlawful discrimination, alleging that termination on account of pregnancy was a form of sexual discrimination prohibited by California law. The parties agreed to arbitrate.

Both sides were represented by counsel before a former judge who served as arbitrator. After taking testimony, the arbitrator issued a five-page award finding “beyond doubt” that the employer fired the employee “because she was pregnant.” The arbitrator also found that the employer’s weak financial condition was not a consideration in the termination.

The arbitrator awarded the employee almost $540,000 in damages, including special damages, emotional distress damages, attorneys’ fees and costs. The arbitrator declined to award punitive damages.

The employer filed a chapter 7 petition two weeks after the award. The employee obtained a modification of the automatic stay allowing conversion of the award to final judgment in state court. The employee also filed a complaint in bankruptcy court charging that the judgment was nondischargeable under Section 523(a)(6) as a “willful and malicious injury.”

Based on issue preclusion, the bankruptcy court granted the employee’s summary judgment motion. The employer-debtor appealed to the Ninth Circuit Bankruptcy Appellate Panel.

The BAP affirmed in an opinion on June 22. Although nonprecedential, the 22-page opinion was a meticulous application of the record to California law on issue preclusion. The BAP panel consisted of Bankruptcy Judges Laura S. Taylor, Robert J. Faris and William J. Lafferty.

In California, issue preclusion applies when (1) the issues were identical; (2) the issue was necessarily litigated; (3) the issue was necessarily decided; (4) the decision was final on the merits, and (5) the party against whom preclusion is sought was the same. In addition, the court may not impose issue preclusion unless it is consistent with public policy.

In so many words, the arbitrator did not find that the injury was willful and malicious, a requisite for nondischargeability under Section 523(a)(6). The BAP was tasked with deciding whether those elements were inherent in a judgment of discrimination based on sex.

Tortious conduct is required for Section 523(a)(6) nondischargeability. The requirement was “easily met,” the panel said.

In California, discrimination based on sex is a tort. The panel therefore held that the employee’s claim supplied the basis for nondischargeability under Section 523(a)(6).

A willful injury requires a subjective motive to cause injury or a deliberate act with knowledge that the act is substantially certain to cause injury. The debtor contended that issue preclusion could not apply because the arbitrator was not required to find nor did he find that the debtor intended to injure.

The BAP responded by saying that the employer was “charged with knowledge of the natural consequences of his intentional discrimination. . . . He must have known that it was substantially certain that [the employee] would suffer injury as a result of the wrongful termination.”

The BAP therefore ruled that willfulness was necessarily decided and actually litigated. With regard to intent to injure, the panel charged the debtor with “knowledge of the natural consequences of his wrongful act.”

For the same reasons, the panel decided that the award necessarily meant that the debtor’s acts were malicious.

The debtor nonetheless argued that the arbitrator’s refusal to impose punitive damages at least created a triable issue of fact regarding intent. For several reasons, the panel said that the “decision not to award punitive damages does not undercut” the conclusion that the injury was willful.

Even if there was intentional malice or fraud, punitive damages remain discretionary. Furthermore, punitive damages must be limited to the defendant’s ability to pay, because the award is designed to deter.

In addition, punitive damages must be based on the higher standard of clear and convincing evidence, while nondischargeability rests only on the preponderance of the evidence.

Concededly, the bankruptcy court erred by not deciding whether invoking issue preclusion would be consistent with public policy.

The BAP ruled that the “oversight” by the bankruptcy court was harmless error because “we can conduct the analysis in the first instance given that the record allows a complete understanding of these issues.”

On that score, the BAP observed that the parties were represented by counsel who filed written arguments and that the retired judge serving as arbitrator heard several witnesses over three days. Because the debtor had raised no public policy concerns, the BAP conclude that the error was harmless and that reversal was not appropriate.