The federal government does not violate the automatic stay by filing a suit in district court under the False Claims Act that includes claims for common law fraud, according to a decision by Chief Bankruptcy Judge Stephani W. Humrickhouse of Raleigh, N.C.
The opinion implies that the government nonetheless might violate the automatic stay by attempting to collect a judgment from property of the estate.
The U.S. Agriculture Department granted loans to a woman to buy a farm. After she defaulted, the government got a judgment for almost $125,000 that became a lien on her home. She then filed a chapter 13 petition and prevailed on Judge Humrickhouse to void the judicial lien as an impairment of the exemption on her home, rendering the judgment unsecured. The government had filed a claim in the chapter 13 case.
After the judicial lien was avoided, the government filed a complaint in district court seeking damages for fraudulent conduct, including claims under the False Claims Act and claims for common law fraud.
The debtor filed a motion contending that the suit in district court violated the automatic stay. The government defended by arguing that the suit in its entirety was protected by Section 362(b)(4), which excepts the government’s “police and regulatory power” from the automatic stay. The government prevailed in Judge Humrickhouse’s Oct. 13 opinion.
Relying on district court authority from the Eastern District of Virginia, Judge Humrickhouse held that claims under the False Claims Act seeking a money judgment “fall squarely” within the police power exception to the automatic stay.
Next, Judge Humrickhouse addressed the question of whether common law fraud claims also fell within the exception. Noting that the common law claims were based on “identical facts,” Judge Humrickhouse said it was “clear” from the statutory language and legislative history that Section 362(b)(4) allows continuation of suits by the government “to fix damages resulting from fraud or similar conduct.”
Finding “no direct authority” from the Fourth Circuit, Judge Humrickhouse was persuaded by a district judge in Pennsylvania who held in 1992 that the exception to the stay applies to all claims “‘intended to remedy the defendants’ commission of fraud against the U.S.’”
Several times in the opinion, Judge Humrickhouse mentioned that initiation of the suit fell within the exception to the stay, although the opinion implies that the automatic stay might bar the government from collecting a judgment from property of the estate.
Were the debtor in chapter 7, the government probably could enforce a judgment against post-petition wages and after-acquired property, and possibly also against exempt assets, assuming the debt were declared nondischargeable.
It is less clear how or when the government could enforce a judgment since the debtor was in chapter 13. The government might be barred from enforcing the judgment unless the chapter 13 case were dismissed or until the debtor completes plan payments and receives a discharge.
But a chapter 13 discharge would seemingly cover the underlying debt, or however much remained after payments through the plan. Presumably, therefore, the government would be obliged to obtain a declaration of nondischargeability under Section 523 or obtain a judgment in district court and utilize the judgment to except the debt from discharge by using collateral estoppel.