In re: Maziyar James Khabushani ( 2021 )

FILED
JUN 22 2021
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-20-1242-TFL
MAZIYAR JAMES KHABUSHANI,
Debtor. Bk. No. 2:19-bk-11796-BR
MAZIYAR JAMES KHABUSHANI, Adv. No. 2:19-ap-01096-BR
Appellant,
v. MEMORANDUM*
KILEY TASLITZ ANDERSON,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Barry Russell, Bankruptcy Judge, Presiding
Before: TAYLOR, FARIS, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
An arbitrator found that Maziyar James Khabushani wrongfully
terminated Kiley Taslitz Anderson’s employment with Mr. Khabushani’s
wholly owned corporation, Madison + Vine, Inc. (“M+V”), and awarded
her damages, attorneys’ fees, and costs. In so doing, the arbitrator expressly
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
rejected Mr. Khabushani’s assertion that the termination was motivated by
M+V’s financial condition, not unlawful discrimination.
Mr. Khabushani later filed a chapter 7 1 case, and Ms. Anderson filed
an adversary proceeding seeking a declaration of nondischargeability of
the wrongful termination judgment. She prevailed on a summary
judgment motion; the bankruptcy court gave issue preclusive effect to the
arbitrator’s findings and determined that the state court judgment debt was
nondischargeable under § 523(a)(6). This appeal followed.
We acknowledge that in this Circuit there is no per se rule that such a
judgment constitutes a willful and malicious injury for purposes of
§ 523(a)(6). But nonetheless, we AFFIRM. The arbitrator’s conclusions and
the Ninth Circuit authority charging Mr. Khabushani with knowledge of
the natural consequences of his wrongful actions provided an appropriate
basis for the application of issue preclusion.
FACTS 2
Mr. Khabushani was the sole officer, director, and shareholder of
M+V, a marketing and advertising company. He employed Ms. Anderson
first as a temporary employee, then as an independent contractor, and
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 We exercise our discretion to take judicial notice of documents electronically
filed in the bankruptcy court’s dockets. See Atwood v. Chase Manhattan Mortg. Co. (In re
Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). We also adopt facts as determined in
the arbitration.
2
finally, on November 2, 2017, as an M+V employee with full benefits. Five
days later, Ms. Anderson informed Mr. Khabushani that she was pregnant
and requested a maternity leave commencing in May of 2018.
Twenty-five days later, Mr. Khabushani terminated her.
In February of 2018, Ms. Anderson commenced arbitration against
Mr. Khabushani and M+V, asserting claims arising from her termination,
including sex discrimination in violation of the Fair Employment and
Housing Act (“FEHA”), Cal. Gov. Code § 12940 et seq., wrongful
termination in violation of public policy, alter ego claims, and California
Labor Code violations.
A retired judge acted as arbitrator in the proceeding. During the
three-day arbitration hearing, the parties each presented testimonial and
documentary evidence under oath and cross-examined witnesses.
The Arbitrator then issued his final award and an amended final
award correcting a single typographical error (“Award”). He found that
Mr. Khabushani and M+V were jointly and severally liable for wrongful
termination of Ms. Anderson because of her sex and pregnancy but were
not liable for Labor Code violations. Among other things, the Arbitrator
determined that:
[t]he evidence regarding the wrongful termination was very
compelling. A simple review of the time line, shows that
[Anderson] was a valued employee until she told [Khabushani]
that she was pregnant and within less than four weeks she was
terminated. This combined with the statements made by
3
[Khabushani] to other employees3 and other actions taken by
him just two days before terminating [Anderson],4 proves
beyond doubt that her termination was because of her
pregnancy.
The evidence offered by [Khabushani] regarding the company’s
poor financial condition was not convincing; at least at the time
of [Anderson’s] termination, the company’s finances were not a
consideration. The company’s condition at some later date
obviously convinced [Khabushani] that the company needed to
go in a different direction, but this had nothing to do with the
termination of [Anderson]. 5
The Arbitrator awarded Ms. Anderson $43,759.00 in special damages,
$125,000 in emotional distress damages, $319,667.50 in attorneys’ fees, and
$48,787.68 in costs, for a total award of $537,214.18. But he declined to
award punitive damages after determining that “[t]he evidence presented
3
The Arbitrator found that before the termination, Mr. Khabushani told other
M+V employees that he was disappointed that Ms. Anderson would be taking
maternity leave and informed them that he might terminate her employment because
she was not doing a great job and she let her children interfere with her career.
4 The Arbitrator found that during a November 28, 2017, meeting between
Mr. Khabushani and Ms. Anderson, he questioned her ability to hit her sales targets
given that she was having a baby and would be “leaving,” reduced her performance
bonuses because he “changed his mind,” and attempted to raise her sales targets to
“make up” for the time that she would be “losing” during maternity leave.
5 The Arbitrator determined that: Mr. Khabushani told M+V employees that he
terminated Ms. Anderson due to undisclosed performance issues and that M+V was
financially stable; within a week of Ms. Anderson’s termination, Mr. Khabushani
booked an expensive vacation using M+V funds and began looking for her replacement;
and in January of 2018, Mr. Khabushani hired two new employees, including a new
President. The Arbitrator made these determinations while also acknowledging that,
within a few months of terminating Ms. Anderson, Mr. Khabushani terminated nearly
all of M+V’s employees.
4
[did] not substantiate [Ms. Anderson’s] request for Punitive Damages.”
Less than two weeks after entry of the Award, Mr. Khabushani filed a
chapter 7 bankruptcy. Ms. Anderson timely filed a § 523(a)(6) complaint,6
seeking to except from Mr. Khabushani’s discharge the debt owed her for
the wrongful termination. She subsequently obtained relief from the
automatic stay and converted the Award to a final judgment in state court. 7
After the appeal period expired, Ms. Anderson filed a motion for
summary judgment on her § 523(a)(6) claim based on the preclusive effect
of the Arbitrator’s findings and the final state court judgment.
Mr. Khabushani opposed the summary judgment motion and
contended, among other things, that summary judgment would be
improper because the issues underpinning a willful and malicious injury
determination were not at issue, actually litigated, or necessarily decided in
the arbitration.
After holding a hearing on the motion, the bankruptcy court entered
an order granting Ms. Anderson summary judgment. The order was
accompanied by findings of fact and conclusions of law in which the
bankruptcy court determined that issue preclusion barred Mr. Khabushani
from relitigating whether he inflicted a willful and malicious injury on
6
The complaint also included a § 727 claim, which will not be discussed herein as
it was voluntarily dismissed.
7 The state court entered judgment confirming the $537,214.18 Award and
granting Ms. Anderson $32,821.59 in prejudgment interest and $8,445 in additional
attorneys’ fees and costs for a total judgment of $578,480.77.
5
Ms. Anderson by terminating her employment with M+V.
Mr. Khabushani timely appealed from the summary judgment.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err in granting summary judgment on
Ms. Anderson’s § 523(a)(6) claim based on issue preclusion?
STANDARDS OF REVIEW
We review a bankruptcy court’s grant of summary judgment and
§ 523(a)(6) nondischargeability determination de novo. See Black v. Bonnie
Springs Family Ltd. P'ship (In re Black), 487 B.R. 202, 210 (9th Cir. BAP 2013).
We likewise review a bankruptcy court’s determination that issue
preclusion is available de novo. Id. If issue preclusion is available, we
review its application for an abuse of discretion. Id. A bankruptcy court
abuses its discretion if it applies the wrong legal standard, misapplies the
correct legal standard, or its factual findings are illogical, implausible, or
without support by inferences from the facts in the record. See
TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
We may affirm on any basis supported by the record. In re Black,
487 B.R. at 211.
6
DISCUSSION
A. Summary judgment and issue preclusion standards
Summary judgment is appropriate if the pleadings and supplemental
materials demonstrate that there is no genuine issue as to any material fact
on the claims at issue and the moving party is entitled to judgment as a
matter of law. Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 91 (9th Cir.
BAP 2000), aff’d, 33 F. App’x 365 (9th Cir. 2002). While the evidence must be
viewed in the light most favorable to the nonmoving party, only factual
disputes that might affect the outcome of the lawsuit can defeat a summary
judgment motion. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986); Lopez v. Smith, 203 F. 3d 1122, 1131 (9th Cir. 2000) (en banc).
The bankruptcy court may grant summary judgment in a
nondischargeability proceeding based on the issue preclusive effect of an
arbitration award confirmed by a California state court. See Khaligh v.
Hadaegh (In re Khaligh), 338 B.R. 817, 826, 832 (9th Cir. BAP 2006), aff’d, 506
F.3d 956 (9th Cir. 2007). To do so, the bankruptcy court must apply
California’s law on issue preclusion. Migra v. Warren City Sch. Dist. Bd. of
Educ., 465 U.S. 75, 81 (1984).
California law provides that issue preclusion, also known as
collateral estoppel, prevents a party from relitigating a previously decided
issue in a second suit where: (1) the issue is identical to what was decided
in the first suit; (2) the issue was actually litigated in the first suit; (3) the
issue was necessarily decided in the first suit; (4) the decision in the first
7
suit is final and on the merits; and (5) the party against whom preclusion is
sought is the same as, or in privity with, a party to the first suit. Lucido v.
Super. Ct., 51 Cal. 3d 335, 341 (1990). Even where these five requirements
are met, a court may not apply issue preclusion unless its application is
consistent with sound public policy. Id. at 343.
The party advocating for issue preclusion must prove all the criteria
for its application by presenting a record sufficient to reveal the controlling
facts and issues litigated in the first suit. Kelly v. Okoye (In re Kelly), 182 B.R.
255, 258 (9th Cir. BAP 1995), aff’d, 100 F.3d 110 (9th Cir. 1996). Any
reasonable doubt regarding what was decided in the first suit will weigh
against application of issue preclusion. Id.B. Issue preclusion is available.
On appeal, we need not, and do not, address the bankruptcy court’s
unchallenged determination that the fourth (final judgment on the merits)
and fifth (same parties) issue preclusion criteria are met. And we conclude
that Ms. Anderson produced evidence showing that there is no genuine
issue as to any material fact that the other criteria are met.
1. Willful injury
A creditor seeking to hold a debt nondischargeable under § 523(a)(6)
has the burden of proving by the preponderance of the evidence that the
debt is “for willful and malicious injury by the debtor to another entity or
to the property of another entity.” § 523(a)(6); Grogan v. Garner, 498 U.S.
279, 289 (1991). The requirements of “willful” and “malicious” are
8
considered separately. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146 (9th Cir.
2002).
a. Intentional tort
A “willful” injury is “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) (emphasis in original). “[T]he (a)(6) formulation
triggers in the lawyer’s mind the category ‘intentional torts,’ as
distinguished from negligent or reckless torts. Intentional torts generally
require that the actor intend ‘the consequences of an act,’ not simply ‘the act
itself.’” Id. at 61-62 (emphasis in original) (citation omitted). Thus, tortious
conduct is a required element for a § 523(a)(6) nondischargeability finding.
Lockerby v. Sierra, 535 F.3d 1038, 1040-41 (9th Cir. 2008). A tort-like statutory
injury suffices. See Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1205-06
(9th Cir. 2001).
This requirement is easily met here; because pregnancy
discrimination violates the California Constitution’s ban on sex
discrimination, 8 an employer who fires an employee based on her
pregnancy may be subject to tort liability for wrongful discharge in
violation of public policy. See id. at 1206 (holding that the court must look
to state law to determine whether conduct is tortious and determining that
debtor’s nonpayment of wages was tortious because it violated California
8
California Constitution, article I, section 8, provides that “[a] person may not be
disqualified from . . . pursuing . . . employment because of sex . . . .”
9
Labor Code § 216); Kelley v. Conco Cos., 196 Cal. App. 4th 191, 214, (2011)
(“Sex discrimination in employment may support a claim of tortious
discharge in violation of public policy.” (citation omitted)); Badih v. Myers,
36 Cal. App. 4th 1289, 1296 (1995) (“[W]e conclude that pregnancy
discrimination is a form of sex discrimination under article I, section 8 of
the California Constitution. Since article I, section 8 expresses a
fundamental public policy against sex discrimination in employment,
[Plaintiff] was properly allowed to maintain her cause of action for
wrongful discharge in contravention of public policy.” (internal citation
omitted)). So, Ms. Anderson holds a claim that may form the basis for
§ 523(a)(6) nondischargeability.
b. Intentional discrimination
A determination of willful injury also requires that the debtor either
had the subjective motive to inflict injury or committed a “deliberate act
with knowledge that the act is substantially certain to cause injury. . . .” In
re Jercich, 238 F.3d at 1208 (citation omitted). Mr. Khabushani, thus,
contends § 523(a)(6) liability is not established for issue preclusive
purposes because the Arbitrator neither was required to find, nor actually
found, that he had the subjective intent to injure Ms. Anderson or believed
her injury was substantially certain to occur as a result of his conduct. We
disagree with his conclusion.
We begin with the elements of Ms. Anderson’s discrimination claim
under the FEHA. The FEHA prohibits an employer from discriminating
10
against any person in terms, conditions, or privileges of employment
because of the person’s sex, which includes pregnancy or medical
conditions related to pregnancy. Cal. Gov. Code §§ 12926(r)(1), 12940(a). As
relevant here, disparate treatment discrimination under the FEHA is
intentional discrimination against a person on prohibited grounds. See Guz
v. Bechtel Nat’l, Inc., 24 Cal. 4th 317, 361 (2000). To establish an employer’s
liability for such discrimination, a plaintiff must demonstrate that her
protected characteristic was a substantial motivating factor in the
challenged employment decision. Harris v. City of Santa Monica, 56 Cal. 4th
203, 231-32 (2013); Cal. Code Regs., tit. 2, § 11009(c). Judicial Council of
California Advisory Committee on Civil Jury Instructions 2507 provides
that “[a] ‘substantial motivating reason’ is a reason that actually
contributed to the [. . . adverse employment action]. It must be more than a
remote or trivial reason. It does not have to be the only reason motivating
the [adverse employment action].” (Emphasis in original).9
In analyzing claims of disparate treatment discrimination under the
FEHA, California courts employ a three-stage burden-shifting approach
established by the United States Supreme Court in McDonnell Douglas Corp.
v. Green, 411 U.S. 792 (1973). Husman v. Toyota Motor Credit Corp., 12 Cal.
App. 5th 1168, 1181 (2017). The McDonnell Douglas three-step approach is
9 “The Judicial Council endorses [model jury] instructions for use and makes
every effort to ensure that they accurately state existing law. The articulation and
interpretation of California law, however, remains within the purview of the
Legislature and the courts of review.” Cal. R. of Court 2.1050(b).
11
as follows: (1) the plaintiff must establish a prima facie case by a
preponderance of evidence that: (a) she had a protected characteristic;
(b) she was qualified for her position or performed competently in it;
(c) she suffered an adverse employment action; and (d) her protected
characteristic motivated the action; (2) the employer may rebut a
presumption of discrimination established by the plaintiff’s prima facie
case by proffering a nondiscriminatory reason for the action; and (3) the
plaintiff then will bear the burden to show by a preponderance of the
evidence that the employer’s proffered reasons are pretexts for
discrimination. Id.; Heard v. Lockheed Missiles & Space Co., 44 Cal. App. 4th
1735, 1749 (1996).
The McDonnell Douglas framework:
presupposes that the employer has a single reason for taking an
adverse action against the employee and that the reason is
either discriminatory or legitimate. By hinging liability on
whether the employer’s proffered reason for taking the action is
genuine or pretextual, the McDonnell Douglas inquiry aims to
ferret out the “true” reason for the employer’s action.
Harris, 56 Cal. 4th at 215.
With respect to the employer’s reason for termination, if it is
nondiscriminatory:
“[i]t is the employer’s honest belief in the stated reasons for
firing an employee and not the objective truth or falsity of the
underlying facts that is at issue in a discrimination case.” (King
v. United Parcel Service, Inc. (2007) 152 Cal. App. 4th 426, 436, 60
12
Cal. Rptr. 3d 359 (King).) As the Supreme Court explained in
Guz, “if nondiscriminatory, [the employer’s] true reasons need
not necessarily have been wise or correct. [Citations.] While the
objective soundness of an employer’s proffered reasons
supports their credibility . . . , the ultimate issue is simply
whether the employer acted with a motive to discriminate
illegally. Thus, ‘legitimate’ reasons [citation] in this context are
reasons that are facially unrelated to prohibited bias, and which, if
true, would thus preclude a finding of discrimination.
[Citations.]” (Guz, supra, 24 Cal. 4th at p. 358, 100 Cal. Rptr. 2d
352, 8 P.3d 1089, original italics.).
Wills v. Super. Ct., 195 Cal. App. 4th 143, 170-71 (2011), as modified on denial
of reh’g (May 12, 2011).
Thus, and contrary to Mr. Khabushani’s urging, the objective truth or
falsity of Mr. Khabushani’s alleged nondiscriminatory reason for
terminating her—i.e., an alleged rapid deterioration of the financial
condition of his business and his need to cut costs by eliminating
employees, including Ms. Anderson—was not at issue. Rather, the
Arbitrator was charged with assessing whether Mr. Khabushani honestly
believed he must terminate Ms. Anderson to eliminate costs and whether
that belief motivated his decision to terminate her. And faced with
Ms. Anderson’s and Mr. Khabushani’s competing proffered explanations
for Ms. Anderson’s termination, the Arbitrator ruled that Mr. Khabushani
wrongfully terminated Ms. Anderson based on her sex and the fact that she
was pregnant and not on the subjective nondiscriminatory reason claimed
by Mr. Khabushani.
13
c. Natural consequences of intentional discrimination
While the Arbitrator did not need to go a step further and find that
Mr. Khabushani had the subjective intent to injure Ms. Anderson or that he
believed that her injury was substantially certain to occur as a result of his
conduct, Mr. Khabushani is charged with knowledge of the natural
consequences of his intentional discrimination. Ormsby v. First Am. Title Co.
of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). He must have
known that it was substantially certain that Ms. Anderson would suffer
injury as a result of the wrongful termination. After all, emotional and
financial damages are normal, natural, and direct consequences of a
wrongful termination decision.10
Willfulness is established by the Arbitration Judgment. The
Arbitrator necessarily decided an actually litigated issue as to
Mr. Khabushani’s intentional commitment of a wrongful act, pregnancy
discrimination. And as to intent to injure, Mr. Khabushani is charged with
knowledge of the natural consequences of his wrongful act. And while he
10
Indeed, some courts take a more per se approach and hold that a discriminatory
employment action taken in violation of laws comparable to the FEHA meets the
requisite intentional injury requirement of § 523(a)(6). See, e.g., Jones v. Svreck (In re
Jones), 300 B.R. 133, 141 (1st Cir. BAP 2003) (“This Panel concludes that a finding of
sexual harassment constitutes the requisite injury and is equivalent to a finding of
malicious and willful injury for dischargeability purposes under § 523(a)(6).”); Fuller v.
Rea (In re Rea), 606 B.R. 531, 537-39 (Bankr. S.D.N.Y. 2019) (“This Court now holds that
discriminatory termination is the injury Plaintiff suffered and that a judgment finding a
Defendant intentionally caused that injury, particularly when an unlawful
discriminatory animus is apparent, is enough to meet the prong of willfulness under
§ 523(a)(6) of the Bankruptcy Code.”).
14
argues vehemently that the Arbitrator was incorrect in his determination of
wrongful intent, he has never argued that he did not know that termination
would harm Ms. Anderson. To the contrary, before the bankruptcy court,
he emphasized how upset he was at taking this action. 11 The record and a
common sense determination regarding knowledge of the natural
consequences of his actions support the bankruptcy court’s conclusion that
Mr. Khabushani acted with certainty of the harmful impact of an act that
the Arbitrator found to be wrongful.
d. Lack of punitive damages
Nevertheless, Mr. Khabushani contends that the Arbitrator’s decision
to not award punitive damages creates a triable issue of fact regarding his
intent to injure. Put another way, he asserts that this creates sufficient
uncertainty that retrial is required. We disagree.
As explained above, the parties actually litigated and the Arbitrator
necessarily decided that Mr. Khabushani intentionally discriminated
against Ms. Anderson when he terminated her employment. And as
Mr. Khabushani is charged with knowledge of the natural consequences of
this wrongful termination, he necessarily willfully injured Ms. Anderson
by wrongfully terminating her employment. The Arbitrator’s decision not
to award punitive damages does not undercut this conclusion.
While punitive damages findings under Cal. Civ. Code § 3294 that
In his declaration, he stated that “When I had to lay off the Plaintiff, I was sick
11
to my stomach having to break the news to her . . . ”
15
“are clearly and solely based on a finding of Intentional Malice, fraud, or
both . . . are sufficient to meet the willfulness requirement of § 523(a)(6)[,]”
Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 470 (9th Cir. BAP
2015), 12 the Arbitrator was not compelled to award punitive damages even
if he found “Intentional Malice, fraud, or both” because an award of
punitive damages is always a discretionary matter. Brewer v. Second Baptist
Church of L.A., 32 Cal. 2d 791, 801 (1948) (“Upon the clearest proof of malice
in fact, it is still the exclusive province of the jury to say whether or not
punitive damages shall be awarded. A plaintiff is entitled to such damages
only after the jury, in the exercise of its untrammeled discretion, has made
the award.” (citation omitted)). Ms. Anderson had no “right” to punitive
damages as she was presumptively made whole by the compensatory
damages award. See State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408,
419 (2003) (“It should be presumed a plaintiff has been made whole for his
injuries by compensatory damages, so punitive damages should only be
awarded if the defendant’s culpability, after having paid compensatory
damages, is so reprehensible as to warrant the imposition of further
sanctions to achieve punishment or deterrence.” (citation omitted));
12 In Plyam, we defined “Intentional Malice” as “conduct that the defendant
intends to cause injury to the plaintiff” and “Despicable Malice” as “despicable conduct
carried on by the defendant with a willful and conscious disregard of the rights or
safety of others . . . ” 530 B.R. at 465. We additionally held that “a punitive damages
award based on Despicable Malice or oppression does not establish the subjective intent
required for § 523(a)(6) willfulness.” Id. at 470.
16
Ferguson v. Lieff, Cabraser, Heimann & Bernstein, LLP, 30 Cal. 4th 1037, 1051
(2003).
Also, in assessing whether to award punitive damages, the Arbitrator
was confined to awarding damages that were proportionate to the
defendants’ ability to pay. Adams v. Murakami, 54 Cal. 3d 105, 112 (1991).
After all, “the purpose of punitive damages is not served by financially
destroying a defendant. The purpose is to deter, not to destroy.” Id. It
appears probable from the Arbitrator’s findings that Ms. Anderson failed
to establish that the defendants’ financial condition permitted an award of
punitive damages. Id. at 119 (“In light of our holding that evidence of a
defendant’s financial condition is essential to support an award of punitive
damages, Evidence Code section 500 mandates that the plaintiff bear the
burden of proof on the issue. A plaintiff seeking punitive damages is not
seeking a mere declaration by the jury that he is entitled to punitive
damages in the abstract. The plaintiff is seeking an award of real money in
a specific amount to be set by the jury. Because the award, whatever its
amount, cannot be sustained absent evidence of the defendant’s financial
condition, such evidence is ‘essential to the claim for relief.’ (Evid. Code,
§ 500.)”).
Specifically, the Arbitrator found that within a few months of
terminating Ms. Anderson, Mr. Khabushani terminated all of M+V’s
employees, “except himself and maybe one other employee. There was no
new income because [he] had let go all of the sales personnel.” Thus, the
17
defendants’ ability to pay punitive damages was dubious at best.
The Arbitrator, however, did not explain why he declined to award
punitive damages. But this gap does not require retrial on the intent to
injure element, because even if the Arbitrator denied punitive damages on
the alternative basis that Ms. Anderson failed to prove Intentional Malice
or fraud, his ruling would be immaterial to the issue of whether the
Arbitrator’s intentional discrimination findings should preclude
Mr. Khabushani from litigating the “willful injury” requirement of
§ 523(a)(6). Intentional Malice and fraud for the purpose of awarding
punitive damages involve a higher standard of proof than is required for a
“willful injury” finding under § 523(a)(6) or for a determination of sex-
based discrimination. For an award of punitive damages, clear and
convincing evidence must be presented. Cal. Civ. Code § 3294(a). But for
determinations of nondischargeability and intentional discrimination, the
elements need only be proven by a preponderance of the evidence. Grogan,
498 U.S. at 279; Heard, 44 Cal. App. 4th at 1749.
We discussed the consequences of the different burdens of proof in
Branam v. Crowder (In re Branam), 226 B.R. 45, 47 (9th Cir. BAP 1998), aff’d,
205 F.3d 1350 (9th Cir. 1999). In Branam, the bankruptcy court granted a
creditor summary judgment on its § 523(a)(6) claim solely based on the
preclusive effect of a California state court judgment for assault and battery
under Cal. Labor Code § 3601(a). We affirmed, notwithstanding that the
state court jury failed to find “malice” for the purpose of awarding
18
punitive damages. We reasoned that the failure to find malice was
irrelevant to the issue of nondischargeability under § 523(a)(6) in part
because malice under Cal. Civ. Code § 3294(a) involves a different (higher)
standard of proof. Id. at 53; accord Hernandez v. Powers & Effler Ins. Brokers
(In re Hernandez), BAP No. EC-10-1025-JuMkZi, 2011 WL 3300927, at *6
(9th Cir. BAP Jan. 5, 2011) (relying on Branam). Thus, it is irrelevant
whether the Arbitrator failed to find Intentional Malice or fraud. 13
For all these reasons, we determine that the bankruptcy court
properly found that the Arbitrator’s findings were entitled to preclusive
effect on the issue of willful injury.
2. Malicious injury
The bankruptcy court likewise properly found that the Arbitrator’s
findings were entitled to preclusive effect on the issue of malicious injury.
An injury is malicious if it is “a wrongful act, done intentionally, which
necessarily causes injury, and which is done without just cause or excuse.”
Thiara v. Spycher Bros. (In re Thiara), 285 B.R. 420, 427 (9th Cir. BAP 2002)
(citing In re Jercich, 238 F.3d at 1208). We agree with the bankruptcy court
that the Arbitrator’s determination that Mr. Khabushani unlawfully
terminated Ms. Anderson based on her sex and the fact that she was
pregnant establishes three of the four maliciousness elements: a legally
wrongful act, done intentionally, which necessarily caused injury.
13
But, we acknowledge, liability under Cal. Labor Code § 3601(a) requires a
specific intent to injure. In re Branam, 226 B.R. at 53.
19
As for the fourth and final maliciousness element—the absence of just
cause or excuse—the record did not contain any argument of just cause or
excuse, except for Mr. Khabushani’s contention that he subjectively
believed that the termination was justified by the financial deterioration of
his business and his need to cut costs. But this contention is barred by the
preclusive effect of the Arbitrator’s findings regarding the true motivation
behind Ms. Anderson’s termination. The Arbitrator expressly rejected this
stated reason for terminating Ms. Anderson. Mr. Khabushani also
necessarily failed to prove that he would have made the same decision to
terminate Ms. Anderson for lawful reasons even if he had not taken
Ms. Anderson’s sex and pregnant status into account because
Ms. Anderson would not have been entitled to an award of damages had
he done so. See Harris, 56 Cal. 4th at 241 (“If the employer proves by a
preponderance of the evidence that it would have made the same decision
for lawful reasons, then the plaintiff cannot be awarded damages, backpay,
or an order of reinstatement.”).
Accordingly, we perceive no error in the bankruptcy court’s holding
that the Arbitrator’s factual determinations established, for issue preclusion
purposes, § 523(a)(6) maliciousness.
C. Any failure to conduct a public policy analysis constituted harmless
error.
After determining that the five threshold criteria for issue preclusion
were met, the bankruptcy court was required to consider whether
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imposing issue preclusion would be fair and consistent with sound public
policy. In re Khaligh, 338 B.R. at 824-25. We agree with Mr. Khabushani that
the record does not clearly reflect that the bankruptcy court conducted a
public policy inquiry. There was no discussion of this element at the
hearing but in finding number twelve there is a discussion of those
elements typically considered in such an analysis—conservation of judicial
resources and avoidance of multiple, and potentially inconsistent, results.
The bankruptcy court found these interests served by an application of
issue preclusion here.
And we disagree that if there was an oversight, it constitutes
reversible error because we can conduct the analysis in the first instance
given that the record allows a complete understanding of these issues.
Delannoy v. Woodlawn Colonial, L.P. (In re Delannoy), 615 B.R. 572, 583
(9th Cir. BAP 2020) aff’d, 2021 WL 1923744 (9th Cir. 2021) (citing Swanson v.
Levy, 509 F.2d 859, 861 (9th Cir. 1975)).
In Vandenberg v. Superior Court, the California Supreme Court held
that in deciding whether there is “fairness and sound public policy,”
“courts consider the judicial nature of the prior forum, i.e., its legal
formality, the scope of its jurisdiction, and its procedural safeguards,
particularly including the opportunity for judicial review of adverse
rulings.” 21 Cal. 4th 815, 829 (1999). Thus, when applying issue preclusion
based on a confirmed arbitration award, a court must examine “whether
the underlying arbitration followed basic elements of adjudicatory
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procedure and was, thus, ‘adjudicatory in nature.’” In re Khaligh, 338 B.R. at
828 (quoting Kelly v. Vons Cos., 67 Cal. App. 4th 1329, 1336 (1998)); see also
Jacobs v. CBS Broad., Inc., 291 F.3d 1173, 1177–79 (9th Cir. 2002). The
arbitration proceedings must be adjudicatory in nature even if the award
was confirmed by the state court. In re Khaligh, 338 B.R. at 829. In other
words, the arbitration should afford the parties “the opportunity for a
hearing before an impartial and qualified officer, at which they may give
formal recorded testimony under oath, cross-examine and compel the
testimony of witnesses, and obtain a written statement of decision.” Kelly,
67 Cal. App. 4th at 1336.
Nothing in the record causes us to question the adjudicatory nature
of the arbitration here. The parties agreed to settle any dispute regarding
the termination of Ms. Anderson’s employment by final and binding
arbitration. During the arbitration proceedings, they were represented by
counsel who filed written arguments, submitted exhibits, and presented
three days of testimony by multiple witnesses. The Arbitrator was a retired
judge who presided over numerous discovery disputes and status
conferences in the arbitration. And after considering the evidence, the
Arbitrator produced his five-page Award setting forth the bases for his
decision to award $537,214.18 to Ms. Anderson. Mr. Khabushani fails to
raise any public policy concern; reversal on this point is not appropriate.
CONCLUSION
Based on the foregoing, we AFFIRM.
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