Hunton Employment & Labor Perspectives

Recently, we discussed a decision from the U.S. District Court for the District Columbia that considered whether a former employee’s failure to initially list an employment discrimination claim on her bankruptcy schedules barred her from pursuing the claim against her former employer under the doctrine of judicial estoppel.

On May 16, 2017, the U.S. District Court for the Southern District of Texas considered the related question of whether a former employee plaintiff must reopen her bankruptcy case to list a Fair Labor Standards Act (FLSA) claim for failure to pay overtime wages and other claims discovered after the employee filed bankruptcy.  Distinguishing between when a cause of action is discovered for purposes of a statute of limitations and when a cause of action accrues, the district court held that the plaintiff must reopen her bankruptcy case and list the claims because they accrued when she was employed prior to filing bankruptcy.  As a result, the court determined that the plaintiff lacked standing to proceed with litigating the claims until the Chapter 7 trustee in her bankruptcy case abandoned the claims.

The district court observed that when filing bankruptcy, debtors are under a continuing duty to disclose all pending and potential claims, including contingent and unliquidated claims.  See In re Coastal Plains, Inc., 179 F.3d 197, 207-08 (5th Cir. 1999).  There is no requirement that causes of action be formally filed.  In a Chapter 7 bankruptcy case, all causes of action of a debtor that have accrued at the commencement of a bankruptcy case become property of the estate and subject to the control of the Chapter 7 trustee.

In this case, the plaintiff unsuccessfully argued that her unpaid overtime wages and other claims did not accrue until after she filed bankruptcy under the continuing tort and fraudulent concealment doctrine, as she continued her employment for a time after filing bankruptcy.  The district court noted that Fifth Circuit law clearly states that the discovery rule to which plaintiff referred could toll the statute of limitations, but did not impact when the causes of action accrued.  In re Swift, 129 F.3d 792, 796 (5th Cir. 1997).  Since the claims belonged to the plaintiff’s bankruptcy estate, the court held she lacked standing to pursue them.  The court then ordered the plaintiff to reopen her bankruptcy case and disclose the claims to provide the Chapter 7 trustee the opportunity to file a motion to intervene in the litigation or abandon the claims.

One interesting note about the case is the unusual relief the court ordered.  There are many examples, including in the Fifth Circuit, where courts have barred plaintiffs from bringing employment claims that should have been disclosed in prior bankruptcy proceedings under the doctrine of judicial estoppel.  See, e.g., Jethroe v. Omnova Solutions, Inc., 412 F.3d 598 (5th Cir. 2005).  It is unclear in this instance why the court declined to address the employer’s judicial estoppel argument, except perhaps because the employer presented the judicial estoppel argument as alternative ground for relief, first seeking to dismiss solely for lack of standing.  Because the court stayed the matter for lack of standing pending the reopening of the bankruptcy case and a decision by the Chapter 7 trustee whether to pursue the claims or abandon them, the litigation may nonetheless proceed.