Chapter 13 debtor had right to file a claim that arose prepetition

In Wilson v. Dollar General Corporation, the U.S. Fourth Circuit Court of Appeals held that a Chapter 13 debtor had the legal right to file a lawsuit in his own name and sue his former employer on an unlawful discrimination claim under the Americans with Disabilities Act that arose prior to his filing his Chapter 13 petition.

Background and procedural history

The debtor was terminated from employment in April, 2010. Shortly after the termination, he filed discrimination charges against the employer in the federal Equal Employment Opportunity Commission. The claim was based on allegations that the debtor was disabled due to an eye condition, that the employer had unlawfully discriminated against him by failing to make reasonable accommodations for the disability, and that he was discharged as a result, in violation of federal law under the Americans with Disabilities Act.

In June 2010, while these charges were still pending, the debtor filed a petition for bankruptcy relief under Chapter 13. The debtor listed the potential claim as an asset in the bankruptcy.

In 2011, the Equal Employment Opportunity Commission issued a notice to the debtor of his legal right to file suit against the employer. The debtor subsequently filed the unlawful discrimination suit in federal district court.

The employer disputed the claim and sought a summary ruling in its favor on two separate grounds. First, the employer argued that because the claimant was a Chapter 13 debtor, he lacked "standing," the legal right to file the suit in his own name. Second, the employer argued that it was entitled a summary ruling in its favor because the debtor was not a "qualified individual," specifically that there was insufficient proof that the debtor had the capacity to perform his employment duties even if reasonable accommodations were provided by the employer.

The district court rejected the first argument regarding standing, but summarily ruled in the employer's favor on the second argument regarding the debtor's qualifications to perform the work. The debtor filed an appeal in the Fourth Circuit.

The Fourth Circuit's decision

The Fourth Circuit upheld the district court's ruling on standing, following prior court precedent from five other federal appeals circuits. The Fourth Circuit ruled that both the Chapter 13 debtor and the bankruptcy trustee have legal standing to file non-bankruptcy claims on behalf of the estate.

The reason for this holding, said the Fourth Circuit, is based on the differences between Chapter 7 bankruptcy and Chapter 13. In Chapter 7 cases, the debtor must surrender possession of the assets belonging to the estate so that they can be liquidated by the trustee and distributed to the creditors. The trustee must be free to manage the estate, including control over lawsuits belonging to the estate, without the debtor's interference.

In Chapter 13 cases, the debtor keeps possession of the property of the estate. The debtor makes payments to creditors from current earnings under a payment plan. The Chapter 13 debtor's right to possession and use of the property includes the right to file lawsuits on behalf of the estate, including prepetition claims. The Chapter 13 debtor's role is similar to that of the trustee, permitting the legal right to sue, and be sued, on behalf of the estate.

The Fourth Circuit also agreed with the district court's ruling regarding the debtor's lack of qualifications to perform the work.

Contact an attorney

Individuals facing bankruptcy should seek the advice of competent legal counsel experienced in such matters to assist them in the protection of their legal rights.