Anyone who believes that filing a chapter 11 petition will enjoin prosecution of a lawsuit under the federal False Claims Act had better think twice. The automatic stay does not apply, at least in cases where the government has taken over prosecution of the qui tam action.
Two corporations and their officers and directors were defendants in an FCA suit in district court when they filed chapter 11 petitions in the same district. They immediately filed suggestions of bankruptcy with the district court, but to no avail.
District Judge Roy B. Dalton, Jr. of Orlando, Fla., conceded in his April 26 opinion that the automatic stay “ordinarily” halts lawsuits against debtors. He went on to cite the Eighth Circuit’s 1990 decision in In re Commonwealth Companies Inc., 913 F.2d 518, for the proposition that the “police or regulatory” exception to the automatic stay in Section 362(b)(4) allows qui tam suits to proceed.
Judge Dalton, like the Eighth Circuit, allowed the suit to continue to the entry of judgment.
The Eighth Circuit debunked the notion that subsection (b)(4) does not apply when the government is seeking only monetary relief in compensation for fraud. The appeals court said that public health and safety can be protected when the government seeks only money damages.
As a footnote, the suit settled one month after Judge Dalton ruled that the automatic stay does not apply.
Neither Judge Dalton nor the Eighth Circuit discussed whether the exception to the automatic stay applies in qui tam suits where the government has not intervened.