Declining to follow a Sixth Circuit holding to the contrary, a district judge in Pittsburgh decided that a suit by the government under the federal Fair Labor Standards Act falls within the Section 362(b)(4) “police and regulatory” exception to the automatic stay.
Years earlier, the U.S. Department of Labor had sued a corporation and its chief executive for wages and hours violations under FLSA. The government was seeking both an injunction to bar further violations and the recovery of back wages. This year, the corporation filed a petition to liquidate in chapter 7.
The debtor corporation filed a “suggestion of bankruptcy” with District Judge Mark R. Hornak, claiming that bankruptcy automatically enjoined the FLSA suit. The defendant CEO urged the court to extend the stay by enjoining the action as to him.
The government responded by arguing that the suit fell within the “police and regulatory” exception to the automatic stay. Section 362(b)(4) provides that a bankruptcy petition
does not operate as a stay . . . of the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s . . . police or regulatory power. . . .
The defendants relied heavily on a Sixth Circuit decision holding that the exception does not apply to a FLSA suit. See Chao v. Hospital Staffing Services, Inc., 270 F.3d 374 (6th Cir. 2001).
Judge Hornak observed that the Third Circuit had not ruled on the precise issue involving a FLSA suit. However, the Third Circuit applies two tests, he said.
First, the pecuniary purpose test focuses on whether the action seeks to protect the government’s pecuniary interest as opposed to protecting public safety and health. Second, the public policy test inquires whether the government is effecting public policy as opposed to adjudicating private rights.
Citing In re Nortel, 669 F.3d 128, 141 (3d Cir. 2011), Judge Hornak said that the Third Circuit has “suggested” that legislative history indicates that the regulatory exception applies to suits by the government to fix damages for violation of police or regulatory laws.
In his March 18 opinion, Judge Hornak gave “due respect” to the reasoning of the Sixth Circuit but disagreed. He concluded that the logic of the Sixth Circuit would “yield a result that runs contrary to that obtained by the persuasive application of legal principles previously applied by this Court and other courts in this Circuit.” Barring the government from obtaining an injunction and a judgment for back wages, he said, “would likewise substantially impair the core remedial purposes of the FLSA.”
Judge Hornak saw the Sixth Circuit as according “too little weight to the role and responsibility of the Secretary of Labor in enforcing the provisions of the FLSA by instituting this type of enforcement action in this Court.” In his view, a judgment for back pay would serve “a key purpose . . . to bring a culpable employer into compliance with the FLSA going forward.” He added that “sizeable money damages [are] intended to foster that result.”
Judge Hornak saw money damages as a “signal to the marketplace [about] the critical importance of employers’ compliance with that vital federal statute.”
By seeking a permanent injunction barring further violation of FLSA, Judge Hornak said that suit dealt with more than enforcing private rights. He therefore held that “this FLSA enforcement action falls within the police and regulatory exception to the automatic stay.”
Having ruled that the automatic stay did not apply, Judge Hornak had no reason to decide about extending the stay to cover the CEO.
Declining to follow a Sixth Circuit holding to the contrary, a district judge in Pittsburgh decided that a suit by the government under the federal Fair Labor Standards Act falls within the Section 362(b)(4) “police and regulatory” exception to the automatic stay.
Years earlier, the U.S. Department of Labor had sued a corporation and its chief executive for wages and hours violations under FLSA. The government was seeking both an injunction to bar further violations and the recovery of back wages. This year, the corporation filed a petition to liquidate in chapter 7.
The debtor corporation filed a “suggestion of bankruptcy” with District Judge Mark R. Hornak, claiming that bankruptcy automatically enjoined the FLSA suit. The defendant CEO urged the court to extend the stay by enjoining the action as to him.