Hayung Park

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Under section 541 of title 11 of the United States Code (the “Bankruptcy Code”), all “legal or equitable interests” of the debtor, including claims held by the debtor that have accrued as of the bankruptcy petition, become part of the bankruptcy estate.[1] In Bercy v. City of Phoenix, the United States Court of Appeals for the Ninth Circuit (“Court”) held that an employment discrimination claim that included post-petition conduct rooted in pre-petition actions, belonged to the bankruptcy estate, allowing only the bankruptcy trustee to prosecute the claim.[2]

In this case, a city employee, Rhita Bercy, sued her employer, the City of Phoenix (the “City”), for a hostile work environment claim, alleging that the discrimination continued beyond the petition date of her bankruptcy case.[3] When Ms. Bercy filed her petition for bankruptcy she knew that the City’s discriminatory conduct was illegal, but failed to disclose as an asset any claims against third parties, including for “employment disputes.”[4] Following the discharge of her debts in bankruptcy, she filed a lawsuit against the City, alleging violations of Title VII of the Civil Rights Act of 1964 and section 1981 of the Civil Rights Act of 1866.[5] In the lawsuit, Ms. Bercy argued that because the hostile work environment continued after she filed for bankruptcy, the claim was not “property of the estate” under Bankruptcy Code section 541, and, therefore, she could seek damages for the post-petition conduct.[6] The district court granted summary judgment for City, determining that Ms. Bercy lacked standing to bring the claim.[7] Ms. Bercy appealed, and the Court reviewed the decision de novo.[8]

In assessing whether Ms. Bercy had standing to bring her discrimination claim, the Court evaluated the timing of when the claim accrued.[9] First, the Court articulated that under section 541 of the Bankruptcy Code, if the debtor could have brought the action at the time of petition, then it belongs to the bankruptcy estate.[10] The Court noted that because Ms. Bercy was aware of the illegality of the harassment at the time she filed her voluntary petition, she could have brought this claim then, and thus the claim belonged to the bankruptcy estate.[11] Second, the Court rejected Ms. Bercy’s standing to sue for conduct that occurred post-petition, reasoning that the bankruptcy estate was the sole proprietor of “[p]roceeds, product, offspring, rents or profits of or property of the estate,” which were “sufficiently rooted in the prebankruptcy past.”[12] The Court highlighted that Ms. Bercy’s complaint alleged a continuous pattern of harassment, demonstrating the “sufficient root[] [to] the prebankruptcy past.”[13] In addition, the Court found that acts giving rise to the Title VII complaint were inseparable, suggesting that Mr. Bercy could not sue for post-petition conduct alone – i.e., her lawsuit would need to include all conduct, including prepetition acts.[14] Last, the Court distinguished this case from O’Loghlin v. County of Orange, which Ms. Bercy relied on, by explaining that O’Loghlin involved a creditor’s claim for debt, whereas Ms. Bercy’s claim was a debtor’s claim for property of the bankruptcy estate.[15]  Further, adopting language from O’Loghlin, the Court articulated the possibility of “unfairly ‘doubly advantag[ing]’” a debtor by permitting a claim like Ms. Bercy’s, and enabling her to recover on accrued claims while also granting her a “fresh start” by discharging her debts.[16] The Court concluded that only the trustee had standing to sue on Ms. Bercy’s employment claims.[17]

Accordingly, in the Ninth Circuit at least, in bankruptcy cases where a debtor seeks to recover damages on a claim that accrued before filing a bankruptcy petition, the claim belongs to the bankruptcy estate, even if the conduct giving rise to the claim persisted after the petition, so long as the conduct sufficiently ties back to the original claim.[18]