The Ninth Circuit tells us that a claim of a debtor belongs to the estate if the claim is based on a course of conduct that began before bankruptcy and continues after filing. The debtor isn’t even entitled to recover damages for conduct occurring after the chapter 7 filing.

The debtor had been subjected to repeated racist attacks by a co-worker beginning more than a year before she filed a chapter 7 petition. The debtor had reported the conduct to her employer. The racist remarks continued after the bankruptcy filing.

In her schedules, the debtor did not disclose that she held any claims. After bankruptcy, though, she filed a lawsuit against her employer in federal district court, alleging violations of the Civil Rights Acts of 1964 and 1866. During discovery, the employer learned that the debtor had filed a bankruptcy petition and filed a motion to dismiss the civil rights suit.

The chapter 7 trustee learned about the suit and reopened the case. The trustee agreed to settle the entire suit with the employer, conditioned on dismissal of the suit with prejudice. The district court granted the employer’s motion to dismiss, ruling that the debtor lacked standing. The debtor appealed to the Ninth Circuit.

In a May 30 opinion, Circuit Judge Anthony D. Johnstone affirmed, stating the issue as “whether [the debtor] can recover damages on that claim for alleged harm arising from discriminatory conduct that occurred after she filed for bankruptcy.”

Citing Section 541(a)(1), Judge Johnson began by stating the obvious: “Only the bankruptcy trustee may bring claims that accrued before a debtor filed for bankruptcy.” He noted, however, that the claim “facially” belonged to the estate because the debtor “could have brought her hostile work environment claim before she began her bankruptcy case.”

In addition to claims in existence on filing, Judge Johnstone cited Section 541(a)(6), which provides that the estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate . . . .” As a result of Section 541(a)(6), he said that “the estate includes post-petition property ‘sufficiently rooted in the prebankruptcy past.’ Rau v. Ryerson (In re Ryerson), 739 F.2d 1423, 1426 (9th Cir. 1984) (quoting Segal v. Rochelle, 382 U.S. 375, 380 (1966)).”

Possibly narrowing the holding to cover only civil rights claims, Judge Johnstone said that “Title VII ‘does not separate individual acts that are part of the hostile environment claim from the whole for the purposes of timely filing and liability.’ Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 118 (2002) (emphasis added).’”

Based on Morgan, Judge Johnstone held, “The accrual of her claim before her petition, and the continuation of the underlying conduct after the petition, sufficiently roots her resulting claim in the prebankruptcy past.”

“When a plaintiff pleads a continuing course of conduct that straddles the filing of a bankruptcy petition,” Judge Johnstone explained, the “conduct gives rise to a single claim that accrued before the petition, [and] the sweep of § 541(a)(6) brings the entire claim within the bankruptcy estate.” He affirmed dismissal of the suit, holding that the trustee alone had standing to assert the civil rights claim.

Observations

It is the common view that Segal v. Rochelle remains good law, although it was handed down more than 10 years before adoption of the Bankruptcy Code. The question is this: Was Section 541(a)(6) designed or intended to incorporate the notion of “sufficiently rooted in the prebankruptcy past”?

Section 541(a)(6) brings in “[p]roceeds, product, offspring, rents, or profits of or from property of the estate,” except for a debtor’s personal services after filing. Do damages from a continuing course of conduct fall under the umbrella of proceeds, product, offspring, rents or profits?

These days, courts tend to base decisions more strictly on statutory language. Does “[p]roceeds, product, offspring, rents, or profits of or from property of the estate” encompass the breadth of property swept into the estate by Segal v. Rochelle?

In similar situations where debtors have filed suits after discharge based on undisclosed claims, courts have sometimes allowed a trustee to recover while using judicial estoppel to preclude recovery by the debtor. Perhaps invocation of judicial estoppel to bar recovery by the debtor would have been a better result to avoid the tricky question of estate property.