Opinion of Interest – When the Automatic Stay is No Shield – Pennsylvania Court Holds that Government’s Unfair Labor Claims Are Subject to Police Power Exception
Breaking with a Sixth Circuit decision to the contrary, in a March 2021 decision in Stewart v. Holland, the District Court for the Western District of Pennsylvania held that unfair labor claims brought by the Department of Labor against a debtor under the Fair Labor Standards Act (“FLSA”) were not barred by the automatic stay but could instead proceed under the “police powers exception.”1
A debtor’s bankruptcy filing triggers the “automatic stay,” which immediately enjoins, among other things, the commencement and continuation of most litigation against the debtor.2 The purpose of the automatic stay is to afford the debtor “breathing room” either to reorganize or liquidate while also ensuring that property of the estate is preserved for the benefit of creditors generally. Nevertheless, the Bankruptcy Code also provides for a number of exceptions to the automatic stay that allow certain actions to proceed against the debtor. One such exception is commonly referred to as the “police powers exception” under Section 362(b)(4) of the Bankruptcy Code, which provides that the filing of 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…” (emphasis added).3 In other words, governmental units may continue to enforce their police and regulatory powers notwithstanding a debtor’s bankruptcy filing.
To determine whether a governmental unit’s action is brought under its “police and regulatory power” and not, for instance, for the government’s own monetary or economic benefit, courts typically employ one of two interrelated tests: the “pecuniary” test and the “public policy” test. The pecuniary test looks to whether the governmental unit is pursuing a matter of public safety and welfare versus whether the government instead is pursuing only its own pecuniary interest, only allowing the former type of action to proceed.4 Similarly, the public policy test looks to ascertain whether the government action is designed to effectuate public policy or adjudicate private rights, staying governmental claims that pursue traditionally private rights. 5
In Stewart, prior to the debtor’s bankruptcy filing, the U.S. Department of Labor had asserted multiple claims against Holland and its CEO for violations of the FLSA, namely, “failing to compensate employees for overtime work, failing to preserve adequate records of employees and wages, and failing to uphold other employment conditions.”6 In bringing its claim, the Department of Labor sought both the recovery of back wages as well as an injunction barring further violations of the FLSA.
Rejecting the Sixth Circuit’s holding in Chao v. Hospital Staffing Services to the contrary,7 Judge Hornak held in Stewart that the Department of Labor’s suit could continue as it fell within the police power exception. Specifically, applying both the pecuniary and public policy tests, Judge Hornak reasoned that because the Department of Labor’s suit sought a permanent injunction (barring future violations of the FLSA), its action “dealt with more than enforcing private rights,” and thus qualified for the police powers exception and could proceed.8 The court also stressed that an opposite conclusion would impair the “core remedial purpose of the FLSA,” which is to “eradicate from interstate commerce, labor practices which thwarted a minimum standard of living necessary for health, efficiency and general well-being of workers.”9 Judge Hornak stressed his view that the Sixth Circuit’s opinion in Hospital Services, accorded “too little weight to the role and responsibility of the Department of Labor in enforcing” the FLSA.10
As noted in several of our prior posts, the police power exception to the automatic stay has been at issue in other recent litigation, including relating to the Town Sports bankruptcy in New York.11 12 Each of these proceedings demonstrates that the exact contours of when a government is acting for the general public, and when it is only acting in its own pecuniary interest, may be unclear and will likely need to be decided on a case-by-case basis.
1Opinion, ECF No. 255, Stewart v. Holland Acquisitions, No. 2:15-cv-01094 (W.D. Penn. March, 18 2021).
2 11 U.S.C. § 362(a) (2020).
3Id.
4 3 Collier on Bankruptcy ¶. 362.05 [5a], p.11 (16th ed. 2021).
5 Id.
6 Supra note 1 at 2.
7 See Chao v. Hospital Staffing Services, Inc., 270 F.3d 374 (6th Cir. 2001).
8 Supra note 1 at 4.
9 Id. at 5-6.
10 Id. at 6.
11 Sean T. Scott, Aaron Gavant & Samuel R. Rabuck, Regulator or Creditor: When is Enforcement of Consumer Protection Laws Exempt from the Automatic Stay, and Who Makes that Determination?, Mayer Brown Real Bankr. Intel Blog (Oct. 13, 2020), https://www.realbankruptcyintel.com/2020/10/regulator-or-creditor-when-is-enforcement-of-consumer-protection-laws-exempt-from-the-automatic-stay-and-who-makes-that-determination/.
12 Samuel R. Rabuck, Sean T. Scott & Aaron Gavant, Settled or Not? Town Sports Challenges Settlement it Purportedly Entered into with New York Attorney General, Mayer Brown Real Bankr. Intel Blog (March 17, 2021), https://www.realbankruptcyintel.com/2021/03/settled-or-not-town-sports-challenges-settlement-it-purportedly-entered-into-with-new-york-attorney-general/.
