Seventh Circuit Finds Employer’s Liability for Unfair Labor Practice to be Dischargeable in Bankruptcy

By Peter D. DeChiara

pdechiara@cwsny.com

February 2019

There are some debts that bankruptcy will not erase.  Section 523(a)(6) of the Bankruptcy Code prohibits the discharge of liability that an individual debtor incurred from having caused “willful and malicious injury.”  Does Section 523(a)(6) prevent the discharge of liability for an unfair labor practice committed against employees?  The U.S. Court of Appeals for the Seventh Circuit recently confronted that issue and held that, under the particular circumstances of the case, Section 523(a)(6) did not prevent a bankruptcy court from discharging the liability of an individual found by the National Labor Relations Board (NLRB) to have unlawfully laid off employees because of their union activities.  See In re Edward L. Calvert, Case No. 17-1895 (7th Cir. Jan. 22, 2019).

Edward Calvert was sole owner and president of an electrical contracting company.  After the International Brotherhood of Electrical Workers mounted an unsuccessful organizing effort at the company, Calvert decided to lay off most of the company’s rank-and-file electricians.  An NLRB administrative law judge (ALJ) found that the NLRB’s general counsel established a prima facie case that the company unlawfully laid off the employees “because of their union activities” and that Calvert at trial “utterly failed” to rebut that conclusion.  In rejecting Calvert’s claim that his decision was motivated by legitimate business reasons, the judge explained that Calvert’s testimony was “wholly unreliable,” “smacked of evasion,” and was both “replete with internal inconsistencies” and “frequently contradicted by other witnesses.”  The judge also noted that Calvert offered shifting reasons for the layoffs.  The NLRB later held Calvert personally liable for backpay and interest to the laid off employees.

Calvert then filed for bankruptcy protection, but the NLRB argued that Section 523(a)(6) precluded discharge of his unfair labor practice liability.  Calvert did not dispute that his decision to lay off the employees was “willful,” but he denied that it was “malicious.”  In a bankruptcy court hearing, he testified that he had laid off the employees so he could save money, by using independent contractors instead.  The NLRB offered no evidence in opposition, arguing instead that the ALJ’s finding precluded Calvert from relitigating in the bankruptcy court the issue of his motive for the layoffs.

The bankruptcy court disagreed with the NLRB, credited Calvert’s testimony, and held that Section 523(a)(6) did not block discharge of his unfair labor practice liability.  The district court agreed.

In affirming the lower court rulings, the Seventh Circuit did not deny that an unfair labor practice could be “malicious” conduct preventing discharge of liability.  Rather, the two-member majority of the appeals court panel held that the NLRB’s case fell short because the agency had not “grounded its argument in specific findings entered in the NLRB proceeding, much less applied those findings to the malice standard under §523(a)(6).”  The decision, authored by Judge Diane Sykes, appeared to hinge on the court’s view that the NLRB wrote an inadequate appellate brief.  But why should that have mattered?  The ALJ’s finding — that Calvert failed to rebut the evidence that he acted with antiunion animus — speaks for itself.

A very sensible dissent by Judge Elaine Bucklo pointed this out.  The dissent cited case law holding that acting “without just cause or excuse” constitutes Section 523(a)(6) malice and it noted that the ALJ found that Calvert had acted with antiunion animus.  “It is not clear to me,” Judge Bucklo wrote, “what additional analytical dots the Board needed to connect” to establish that Calvert’s liability was not dischargeable under Section 523(a)(6).

Fortunately, the Seventh Circuit’s decision does not close the door on the argument that an unfair labor practice can, in the right circumstances, constitute “malicious” conduct under Section 523(a)(6).  But it leaves uncertain what the NLRB must do to establish that liability for a labor law violation is not dischargeable.  In Calvert, should the NLRB have re-tried its case in the bankruptcy court, instead of arguing that the issue of Calvert’s motive was already decided?  Or would it have been enough for the NLRB to have written a more detailed appeal brief analyzing the ALJ’s findings and the malice standard?  Unfortunately, the uncertainty about how the NLRB can establish non-dischargeability will remain, unless future cases provide guidance.