Bankruptcy Court Must Be Told Of Your Wrongful Termination Claim Or Your Case Can Be Dismissed


February 20, 2014
By Christopher W. Taylor, Esq.

It is not uncommon for someone who has lost his or her job to wind up in financial trouble. This is especially true where the loss of a job is the result of wrongful termination. No one plans ahead to be terminated unlawfully. Money is tight for most American families, and this is especially true in California, where unemployment currently stands at 8.3%, landing the state as the fourth highest in unemployed working-age citizens. Add to this the fact California is among the top 10 states for “cost of living” and the reality that Congress has come up short in passing an extension for unemployment benefits, and it is no wonder many responsible, hardworking individuals suddenly find themselves faced with the prospect of bankruptcy as the only means to recover from the financial and psychological strain caused by unpaid debt.

But how does this affect someone who was wrongfully terminated from his or her job? Maybe you were sexually harassed by your boss, and a complaint landed you on the unemployment line or serious illness caused you to take a medical leave of absence, only to find that when you recovered, your employer had already filled your job and did not want you back. An illegal termination gives you the “right” to sue your employer, and if all goes well the lawsuit will result in the recovery of money for the wages you lost and the emotional distress you suffered as a result of your ex-employers callous actions. Nobody can tell you in advance whether a lawsuit will succeed and result in financial compensation, but under the law, the mere fact you could recover money in an employment lawsuit means your “right” to sue is a potential asset.

When filing for bankruptcy, you are required to list all assets, and this includes your potential lawsuit against a former employer. Maybe you have an attorney who has already filed your lawsuit and it is underway, or maybe you are in the earliest of stages investigating if you have a viable claim and have not even consulted with an employment lawyer yet. No matter where you stand in your process of deciding what to do with your “right” to sue, you MUST include this right – this actual or potential lawsuit – on your bankruptcy schedule.

If you fail to notify the bankruptcy court of your legal claim or potential legal claim against an ex-employer, your ex-employer can turn this failure against you and ask the court to dismiss your lawsuit. Your ex-employer may file a motion to dismiss your lawsuit, arguing you’ve hidden your lawsuit from the bankruptcy court so you can keep any recovery all to yourself and away from creditors, and the court will not allow you this unfair advantage. In Dzakula v. McHugh (9th Cir. – Dec. 11, 2013), the court dismissed Plaintiff Dzakula’s discrimination lawsuit against his ex-employer, Defendant McHugh, because Plaintiff had not listed his potential lawsuit on his bankruptcy schedule at the time he filed for bankruptcy. The Dzakula court made it clear it was Plaintiff’s burden to make sure he understood his obligations when filing for bankruptcy, and Plaintiff’s mere assertion the omission of his claim from the bankruptcy court was due to inadvertence or mistake was not enough to save his lawsuit. The court in Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir.2001) makes the reasoning very clear: “[Plaintiff’s] failure to list his claims against [his ex-employer] as assets on his bankruptcy schedules deceived the bankruptcy court and [Plaintiff’s] creditors, who relied on the schedules to determine what action, if any, they would take in the matter.” Id. (emphasis added).

If you believe you have a potential employment lawsuit, whether it involves discrimination, harassment, retaliation, wrongful termination, unpaid wages or any other theory, the best thing you can do is inform counsel advising you on your bankruptcy as soon as possible, even if your bankruptcy filings have already been made because the case can be reopened to amend the paperwork to list your lawsuit as an asset. In many cases, the Court discharges the lawsuit or potential lawsuit to you anyway, leaving you free to pursue your claim as you see fit. In other cases, the Court may hold onto the claim, hoping to use any recovery from a lawsuit to pay your creditors. And, if you have an ongoing employment lawsuit, make sure to inform your employment attorney if you are unsure if you’ve reported the case correctly in bankruptcy court. Errors may be fixed, but the sooner the better.

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