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Ninth Circuit Holds the Trustee Has Standing, Not the Employee, to Title VII Claims Rooted in the Pre-Bankruptcy Past



The Ninth Circuit’s May 30, 2024 decision in Bercy v. City of Phoenix precludes employees from bringing Title VII employment claims that the employee could have brought before filing for personal bankruptcy. These claims belong to an employee’s bankruptcy estate, not the employee personally, and the only person with standing to bring such claims, in a Chapter 7 bankruptcy case, is the bankruptcy trustee.

As a reminder, Title VII allows employees to bring claims for discrimination based on a federally-recognized protected status, such as race, gender, religion, and national origin. In hostile work environment cases under Title VII, the claim is premised on the cumulative effect of individual acts that combine to create a hostile work environment. Generally, claims under Title VII based on conduct that occurred before an employee’s personal bankruptcy filing belong to the bankruptcy estate. When the events in hostile work environment claims straddle the date of the bankruptcy filing, the Ninth Circuit has now held the claim belongs to the employee’s bankruptcy estate, because the claim is rooted in the pre-bankruptcy past. If all the events constituting the allegedly hostile work environment occurred after the bankruptcy filing, the claim would belong to the employee exclusively. 

In the case giving rise to the Ninth Circuit’s decision, Rhita Bercy filed a personal Chapter 7 bankruptcy petition. However, before her bankruptcy filing, Bercy allegedly began to be subjected to harassment from a coworker, giving rise to a later hostile work environment claim under Title VII. Once Bercy’s bankruptcy petition was filed, all of her property became property of her bankruptcy estate, and a trustee was appointed to administer that property. The “property” she owned at the time of her bankruptcy filing included the right to bring a hostile work environment claim against her employer under Title VII. Bercy did not list the Title VII claim in her bankruptcy schedule of assets. Nevertheless, the claim still became a part of her bankruptcy estate, even though the bankruptcy trustee was not alerted to its existence at the time. Bercy’s debts were eventually discharged in her bankruptcy case. Because she failed to disclose the Title VII claim in her schedule of assets, the claim did not revert to her personally when the bankruptcy case closed.

After her bankruptcy case was closed, Bercy sued her employer in federal district court under Title VII, alleging workplace conduct that created a hostile work environment. Bercy alleged the employer’s unlawful conduct occurred over a two-year period that began before the bankruptcy filing. Bercy’s former employer then learned that she had filed for bankruptcy during that period and asserted that the bankruptcy court rules meant the claim was the property of her bankruptcy estate, and she could not personally bring the lawsuit. This is because the bankruptcy trustee owned the claim on behalf of her bankruptcy estate and was the only person with standing to pursue the claim or lawsuit. The employer then negotiated a settlement of the claim with Bercy’s bankruptcy trustee. The federal district court dismissed the claim, and the employee appealed that decision to the Ninth Circuit.

On appeal, the Ninth Circuit reiterated that filing for bankruptcy automatically creates a “bankruptcy estate” that encompasses all of the debtor’s assets at the time of the bankruptcy filing, including the right to bring claims against third parties that could have been brought before the bankruptcy filing. The Court noted that Bercy was aware of the conduct underlying the Title VII claims at the time she filed for bankruptcy. Furthermore, the allegedly unlawful conduct that occurred after the bankruptcy filing was part of the same course of conduct that began before the filing and constituted a single injury, hostile work environment, and not separate acts that could be separated into pre-bankruptcy and post-bankruptcy claims. Consequently, the Title VII claims were sufficiently rooted in Bercy’s pre-bankruptcy past that the claims belonged to the bankruptcy estate. For these reasons, Bercy did not have standing to bring her Title VII claims after her bankruptcy case closed. Instead, the bankruptcy trustee retained standing to pursue and settle any claims that belonged to the bankruptcy estate. The Ninth Circuit held that the claim later brought by the employee was properly dismissed.

Key Takeaways for Employers and Creditors

  • Creditors in bankruptcy should consider whether an individual bankrupt person is or has been an employee prior to the bankruptcy filing and, if so, if the individual has any potential claims against any current or former employers, including discrimination or harassment claims or wage and hour claims (including overtime, minimum wage, or other wage violations).
  • Employers should verify whether an employee bringing Title VII or other employment discrimination claims has filed for bankruptcy after or during the course of conduct that gave rise to the claims, and whether the debtor listed the claims as assets in the bankruptcy schedules. Employers also should investigate whether the employee’s Title VII claims are based on any conduct that the employee knew about or reported before filing for bankruptcy. If so, the claims almost certainly belong to the bankruptcy estate, and the employee likely cannot bring them post-bankruptcy. It would be the prerogative of the employee’s bankruptcy trustee to pursue and/or settle the claims.
  • Even if unlawful conduct is alleged to have occurred after an employee’s bankruptcy filing, the employer should evaluate whether it was part of the same course of conduct that began before filing. Those claims also belong to the bankruptcy estate, not to the employee. Only claims that arose entirely after the bankruptcy filing would belong to the employee personally.
  • If the employee did not list the claims in the schedules, or if they are listed in the schedules and the trustee decides to pursue them, the bankruptcy trustee will be the one with standing to bring and settle the claims. However, if the debtor does list the claims, and the trustee decides not to pursue them and “abandons” them, the right to bring the claims will revert to the debtor.

Editor's Note: Javier Torres, a 2024 Miller Nash summer associate, contributed to this blog post.

This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.

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