Khabushani v. Anderson (In re Khabushani)

In re: MAZIYAR JAMES KHABUSHANI, Debtor.

MAZIYAR JAMES KHABUSHANI, Appellant, v. KILEY TASLITZ ANDERSON, Appellee.

BAP No. CC-20-1242-TFL

Adv. No. 2:19-ap-01096-BR

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

June 22, 2021

NOT FOR PUBLICATION

Bk. No. 2:19-bk-11796-BR

MEMORANDUM^*

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 expresslyrejected Mr. Khabushani's assertion that the termination was motivated by M+V's financial condition, not unlawful discrimination.

Mr. Khabushani later filed a chapter 7¹ 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.

FACTS²

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, andfinally, 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[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[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 onMs. 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.

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 firstsuit 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" areconsidered 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...