A suit brought by an individual acting as a private attorney general is not a governmental police or regulatory action excepted from the automatic stay, according to an April 20 decision from the Ninth Circuit.
A worker complained to the California Labor & Workforce Development Agency, contending that his employer violated state labor law. When the state regulators did not act, the employee filed suit in state court under California’s Private Attorney General Act, which allows individuals to sue seeking penalties for violating state labor law. If successful, the employee would recover 25% of the civil penalties and attorneys’ fees, with the remainder earmarked for the state labor department.
The employer removed the case to federal court, where the district judge compelled arbitration and dismissed the suit. The employee appealed to the Ninth Circuit. While the appeal was pending, the employer filed a chapter 11 petition and filed a so-called suggestion of bankruptcy in the appeals court.
The employee responded with a motion arguing that the exception to the automatic stay in Section 362(b)(4) permitted the appeal to proceed. That section provides an exception to the automatic stay for a “governmental unit’s . . . police and regulatory power.”
In his opinion ruling that the automatic stay applied to the appeal, Circuit Judge Richard R. Clifton said that similar labor-law suits have been held to be a type of a qui tam action. He cited courts “consistently” holding that the exception for police and regulatory actions does not apply to qui tam suits, at least when the government has not intervened.
The employee’s argument, according to Judge Clifton, reads the phrase “by a governmental unit” out of Section 362(b)(4). He therefore held that the automatic stay applied to privately prosecuted suits under state labor law. Since the state had not intervened, he noted that the employee retained complete control over the suit, including the right to settle.