Divided 7th Circuit: Business owner may seek discharge of back pay debt

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A divided panel of the 7th Circuit Court of Appeals has allowed an Indiana business owner to seek to discharge back pay debt in bankruptcy proceedings, rejecting the National Labor Relations Board’s argument that the debt was not dischargeable because the employees to whom the back pay was owed were “maliciously” fired.

The case of In Re: Edward L. Calvert, Appeal of: National Labor Relations Board, 17-1895, traces back to July 2002, when the International Brotherhood of Electrical Workers, Local 481, sought to become the bargaining representative for the rank-and-file electricians working of E.L.C. Electric, Inc. Edward Calvert, the company’s owner, opposed the unionization efforts, and the union lost and filed an objection with the National Labor Relations Board. Calvert, meanwhile, fired his rank-and-file workers.

Thus, the union filed a second charge with the NLRB, this time alleging the electricians were unlawfully fired, and an administrative law judge likewise found Calvert had violated the National Labor Relations Act by discriminating against the employees for exercising their statutory rights. The board affirmed that ruling and ordered E.L.C. Electric to compensate the electricians with back pay, but instead the company ceased operations in March 2006.

The ALJ then determined Calvert had shuttered his company to avoid the back pay, so the court pierced the corporate veil and held him personally liable for $437,427. The board again affirmed the ALJ, and Calvert eventually filed for Chapter 7 bankruptcy.

The NLRB argued Calvert should not be allowed to discharge the back pay debt because the debt was exempted from discharge under 11 United States Code section 523(a)(6), arising from “willful and malicious injury to another entity.” Calvert disputed that he maliciously fired the electricians, and the board sought summary judgment.

A bankruptcy judge denied the summary judgment motion and the Indiana Southern District Court affirmed, with the latter noting the NLRB failed to analyze the elements of collateral estoppel or cite to portions of the agency record that would support preclusion. The board then appealed again to the 7th Circuit, but a majority of the panel affirmed.

Judge Diane Sykes, writing for the majority joined by Judge Frank Easterbrook, found the NLRB failed to satisfy its burden to prove issue preclusion by failing to identify the specific issues decided in the labor proceeding, instead presenting a highly general collateral estoppel argument.

“In short, the Board has not met its burden to establish that the prior agency adjudication involved and actually decided the issue of whether Calvert acted with malice, which is fatal to its preclusion argument,” Sykes wrote. “And because the Board does not challenge the bankruptcy judge’s factual finding that Calvert did not act with malice, its claim that the backpay debt is exempt from discharge under section 523(a)(6) necessarily fails. Accordingly, the judgment below is affirmed.”

But in a separate dissenting opinion, District Judge Elaine Bucklo, sitting by designation from the Northern Illinois District Court, said she would have held that “the bankruptcy court was precluded from reopening an inquiry into Calvert’s intent” in firing the electricians.

“In adjudicating the underlying 29 U.S.C. section 158(a)(3) discrimination claim in the NLRB’s favor, the ALJ conducted an analysis that ‘substantially mirrored’ the malice inquiry under 11 U.S.C. section 523(a)(6) …and determined that Calvert’s conduct was unsupported by any lawful purpose,” Bucklo wrote. “That finding should have been given preclusive effect in the bankruptcy court.”

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