Opinion
Case No. 8:01 CV6, Chapter 7 Case No. BK99-80515, Adversary Proceeding, No. A99-8058
June 28, 2001
MEMORANDUM OPINION
Before me is Patrick Lashley's appeal, Filing No. 2, from the judgment entered by United States Bankruptcy Judge Timothy Mahoney finding that Lashley's debt to Billy J. Kramer was nondisehargeable under 11 U.S.C. 523(a)(6). I have reviewed the record, the parties' briefs and arguments made during a telephonic oral argument on June 28, 2001, and the applicable law, and I find that the judgment of the bankruptcy court should be affirmed.
Standard of Review
The district court acts as an appellate court when reviewing the judgment of a bankruptcy court. The district court reviews the bankruptcy court's legal determinations de novo and its findings of fact for clear error. In re Lauer, 98 F.3d 378, 382 (8th Cir. 1996) (citing Rine Rine Auctioneers, Inc. v. Douglas Cnty. Bank Trust Co., 74 F.3d 854, 857 (8th Cir. 1996), and Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987)). "`A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.'" In re Fors, 259 B.R. 131, 135 (B.A.P. 8th Cir. 2001) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)). The district court particularly defers to the bankruptcy court's assessment of witnesses' credibility and the sufficiency of the evidence. Id. at 136.
Background
Patrick Lashley's wood business involved buying trees, milling them to certain lengths, then selling the planks. Kramer, who worked for Lashley, was injured when cutting down a tree to be milled at Lashley's sawmill. The Nebraska Workers' Compensation Court awarded Kramer $42,892.18 for medical expenses incurred as a result of the accident plus temporary total and partial permanent disability benefits. The Nebraska Court of Appeals affirmed the judgment. When Kramer attempted to recover the judgment, the Lashley's filed a joint Chapter 7 bankruptcy petition.
Patrick Lashley did not have workers' compensation coverage for any of his employees, nor had he furnished proof that he qualified as a self-insurer as required by Nebraska law. Based on information from acquaintances in the wood business, Lashley believed he was not required to carry workers' compensation insurance on Kramer because he considered Kramer an independent contractor rather than an employee. Lashley told Kramer that Lashley did not carry workers' compensation insurance. TR 22:13-24. Lashley never deducted any amounts from Kramer's paycheck to cover workers' compensation premiums. TR 22:25-23:3.
Judge Mahoney's Findings of Fact. Judge Mahoney found that while Kramer might have been an independent contractor when he first began working for Lashley, he became an employee when Lashley provided Kramer with all the necessary tools and equipment to perform his duties and directed Kramer to locations where Lashley had purchased trees for
Kramer to cut down. R., Filing No. 23 at 2, ¶ 7. Judge Mahoney also noted that despite having been in the insurance sales business before he began his wood business, Lashley claimed not to know why workers' compensation insurance was needed or what the law required of employers. Id. at 2-3, ¶ 8. Judge Mahoney found that Lashley's testimony was not credible.
9. His testimony is inconsistent and unbelievable. He had been in business several years before Mr. Kramer's injury. He had purchased business insurance, both on his vehicle and equipment. He was aware of health insurance obligations. He had talked to, received advice from, and relied upon statements of others in the wood business concerning his workers' compensation insurance obligations. At the time of Mr. Kramer's injury, Mr. Lashley was not totally ignorant of or innocent about either the existence of workers' compensation insurance or the fact that the business in which he was engaged, and in which he employed the services of others, was a risky and dangerous business and one in which it was not unlikely that a worker could be seriously injured.Id. at 3, ¶ 9. Judge Mahoney said that Lashley refused to purchase workers' compensation insurance merely because "he had heard from others in the wood business that it was too expensive, " yet without doing any research to determine its actual cost. Id., ¶ 10. Consequently, Judge Mahoney found that Lashley's "willful and intentional refusal" to provide worker's compensation coverage was a "willful act as the term "willful' is defined by the case law interpreting 11 U.S.C. § 523 (a)(6)." Id., ¶
11. Lashley's refusal to obtain workers' compensation insurance injured Mr. Kramer's statutory right to insurance protection for monetary loss due to injuries suffered at work. This refusal to obtain workers' compensation insurance is "malicious, ' as that term is used in 11 U.S.C. § 523 (a)(6), because it was targeted at Mr. Kramer, at least in the sense that the conduct was certain or almost certain to cause Mr. Kramer financial harm.Id. at4, ¶ 14.
Judge Mahoney's Conclusion of Law. Judge Mahoney pointed out that the Nebraska Workers' Compensation Act, Neb. Rev. Stat. § 48-145 et seq., requires employers either 1) to obtain workers' compensation insurance, or 2) to provide proof that the employer can pay compensation in the amount and manner provided by the statute. Failure to comply with the statute is a Class I misdemeanor. Id., ¶¶ 1-2.
Judge Mahoney said that an employer's failure to obtain workers' compensation insurance injures the employee's statutory right of "insurance protection for monetary loss due to injury suffered at work." Id., ¶ 3. The court thus can find the employer-debtor to have acted maliciously if the employer could have foreseen "that an employee could be injured and the failure to obtain workers' compensation insurance would injure the employee's statutory right to insurance benefits.... Such a determination is particularly apt depending upon the hazards of the business being engaged in by the employer." Id.
To succeed in having a debt declared nondischargeable under section 523(a)(6), a creditor must show that the debtor intended the act giving rise to the debt and that the debtor knew that the consequence of the act would be injury to another or the property of another. Id., ¶ 4 (citing Geiger v. Kawaauhau, 523 U.S. 57, 61-62 (1998)). For purposes of section 523(a)(6), "malicious" conduct is "targeted at the creditor, at least in the sense that the conduct is certain or almost certain to cause financial harm." Id. at 4-5, ¶ 4 (citing In re Long, 774 F.2d 875, 880-88 1 (8th Cir. 1985)).
Judge Mahoney therefore concluded that Lashley "knew that failure to obtain workers' compensation insurance, or to be financially stable enough to pay the compensation provided by the statute, would cause Mr. Kramer financial harm if Mr. Kramer became injured on the job." Id. at 5, ¶ 4. He ruled that Lashley's debt to Kramer was nondischargeable under section 523(a)(6) "as a debt resulting from a willful and malicious injury to property of Mr. Kramer, that property being his statutory right to workers' compensation." Id. at 5.
Discussion
Lashley argues on appeal that the bankruptcy court erred in finding that the award from a workers' compensation court to Kramer was a debt for a willful and malicious injury by Lashley and was therefore nondischargeable. The Bankruptcy Code provides that an individual debtor will not be discharged from any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523 (a)(6). While neither the District of Nebraska nor the Eighth Circuit has directly addressed the issue of the dischargeability of a workers' compensation award, Lashley contends that the terms "willful and malicious" in section 523(a)(6) should be interpreted narrowly to exclude a workers' compensation award.
Whether a party acted willfully and maliciously for purposes of section 523(a)(6) is a question of fact. Waugh v. Eldridge, 95 F.3d 706, 710 (8th Cir. 1996). In this circuit, "[a]n act done willfully means an act done deliberately and intentionally, and a malicious act is an act which is certain or substantially certain to cause injury." Pechar v. Moore, 98 B.R. 488, 489 (D. Neb. 1988) (citing In re Long, 774 F.2d at 880-88 1). In Pechar, the district court found that a debtor's failure to obtain automobile liability insurance as required by Nebraska law did not render a debt arising out of the debtor's negligent use of an automobile nondischargeable as a debt for willful and malicious injury under section 523(a)(6). The court reasoned that the debtor's negligent driving was the cause of the injury giving rise to the debt, not the debtor's "intentional acts of failing to procure insurance or failing to assure ability to compensate an injured party." Id. at 490. The court therefore found the judgment was a debt for a negligent injury rather than for a willful and malicious injury. The court observed, "Even if a driver has no liability insurance or financial means to compensate an injured party, an injury will not occur unless the driver causes an accident. . . . The mere act of driving without insurance or ability to compensate an injured party is not substantially certain to cause injury." Id. See also In re Kimsey, 97 B.R. 1003, 1004 (Bankr. D. Neb. 1989) (finding dischargeable a debt created when judgment was entered against an uninsured debtor whose negligent driving caused damage to parked vehicles).
Lashley urges me to adopt the Pechar analysis in his situation since, like the debtor in Pechar, he too was found liable by a state court for failure to procure insurance in violation of Nebraska law. Lashley contends that his conduct is even less "egregious" than that of the debtor in Pechar since that debtor actually caused the injuries to the judgment creditor by negligently running a red light and colliding with the judgment creditor; Lashley, however, was not involved in the accident in which Kramer was injured. "The only wrong [Lashley] committed in the present case is that he failed to carry workers [sic] compensation insurance." Debtor's Brief at 10.
Under this analysis, section 523(a)(6) should only apply to "acts done with the actual intent to cause injury, " rather than to "acts, done intentionally, that cause injury." Kawaauhau v. Geiger, 523 U.S. at 61 (medical malpractice judgment attributable to negligently or recklessly inflicted injury held dischargeable because judgment was not a debt for a "willful and malicious" injury under section 523(a)(6)). The courts following this line of reasoning to hold that state workers' compensation awards are dischargeable under section 523(a)(6) generally do so because "the debtor's failure to obtain insurance is not the direct cause of the creditor's injury." In re Bailey, 171 B.R. 703, 705 (Bankr. N.D. Ga. 1994). "More specifically, these cases hold that because another event must occur, namely, an injury to a person, the failure to procure insurance does not "necessarily' or "inevitably' lead to either personal injury or financial loss." In re Poudras, 206 B.R. 516, 519-20 (Bankr. S.D. Ill. 1997) (debtor's failure to obtain required insurance was willful but not malicious).
See also, e.g., In re Brown, 201 B.R. 411, 414-15 (Bankr. W.D. Pa. 1996) (strictly interpreting section 523(a)(6) as requiring a debtor to "either have a purpose of producing injury or take actions that have a substantial certainty of producing injury"); In re Kemmerer, 156 B.R. 806, 809-810 (Bankr. S.D. md. 1993) ("Even if an employer's failure to provide Workers' Compensation insurance is willful, wrongful, and without just cause or excuse, it is not "malicious' because harm to an employee is not substantially certain to follow."); In re Frias, 153 B.R. 6, 8 (Bankr. R.I. 1993) (failing to procure insurance created "risk that the employer might incur a personal financial liability, but that result was not so predestined that the Debtors' conduct may be deemed willful or malicious, as a matter of law"); In re Walker, 48 F.3d 1161 (11th Cir. 1995); In re Hall, 194 B.R. 580 (W.D. Mich. 1996); In re Fields, 203 B.R. 401 (Bankr. M.D. La. 1996).
But not all courts take this approach to the dischargeability of workers' compensation judgments. courts finding workers' compensation claims nondischargeable look not at who caused the actual physical injury to the judgment creditor, but instead "focus on the economic loss suffered by the creditor.... These courts emphasize the foreseeability that the plaintiff will be injured and reason that if there is an insurable event, the failure to obtain insurance "necessarily leads to' or is "substantially certain to cause' a separate economic injury." Id. at 520.
Using this reasoning, if the employer knew of the obligation to provide workers' compensation insurance, especially for employees engaged in hazardous occupations, the employer can be charged with actual knowledge that the failure to provide workers' compensation insurance was wrongful. Furthermore, if the defendant knew that an employee could be seriously injured and that without workers' compensation coverage the employee would have no compensation as required by the state statute, the accident and the ensuing injury were clearly foreseeable to the employer. The employer's intentional failure to purchase the required insurance thus violated the employee's statutory right to be protected. See In re Peel, 166 B.R. 735, 739 (Bankr. W.D. Okla. 1994).
See also, e.g., In re Leahy, 170 B.R. 10, 14, 16 (D. Me. 1994) (no evidence of Congressional intent to create an "across-the-board discharge exemption" for workers' compensation claims, but failure to provide insurance may still be a willful and malicious injury, such as where employer "deliberately or intentionally conducted business without required insurance"); In re Atkins, 183 B.R. 702, 707 (Bankr. M.D.N.C. 1995) (if employee can show employer engaged in "egregious conduct, " debt resulting from intentional failure to comply with state law requiring workers' compensation insurance may be nondischargeable); In re Verhelst, 170 B.R. 657, 661-62 (Bankr. W.D. Ark. 1993); In re Ussery, 179 B.R. 737 (Bankr. S.D. Ga. 1995); In re Erickson, 89 B.R. 850 (Bankr. D. Idaho 1988).
Like Judge Mahoney, I am persuaded by the reasoning of this second line of cases. Lashley claimed that he did not know he was obligated to purchase workers' compensation insurance, but Judge Mahoney properly discredited Lashley's testimony in finding Lashley had acted maliciously. See In re Fors, 259 B.R. at 140 ("bankruptcy court's disbelief of a debtor/defendant's testimony in a section 523(a)(6) matter properly can be used to support a finding that the debtor acted maliciously"). Lashley had previously been in the insurance business, had purchased other types of insurance for his wood business, knew that his wood business subjected workers to dangerous conditions, and had discussed how to avoid workers' compensation obligations with acquaintances also in the wood business. Lashley deliberately attempted to evade his responsibility to Kramer under Nebraska law by calling Kramer an independent contractor, but Kramer was clearly an employee. As such, Kramer was entitled to workers' compensation coverage, particularly in view of the hazardous activities his job entailed.
Simply put, the debtor's failure to procure workman's compensation insurance immediately places all employees of the debtor at risk to the kind of loss suffered by Mr. Zielinski and immediately deprives all employees of the statutorily mandated protection and security of workman's compensation insurance. Again, this risk is particularly egregious in the context of a construction business such as the appellant's.
A debtor, who despite this knowledge of foreseeable injury, refuses to procure workman's compensation is acting "maliciously.' In other words, a debtor possesses "knowledge' sufficient for finding "malice' when said debtor knows beforehand that if a workman's compensation claim does arise his or her actions preclude an injured employee from receiving compensation.
In re Strauss, 99 B.R.'B