By Ryan C. Wood
The single most important grant of power to the bankruptcy court is the power of the automatic stay. The automatic stay is the backbone of the bankruptcy process. The automatic stay stops any and all collection activity including lawsuits, wage garnishment, foreclosure and repossession to name a few. Whether the automatic stay is in effect is one of the most litigated issues in bankruptcy cases. Whether there is a pending foreclosure, repossession or pending lawsuit there are any number of grounds a creditor can seek to lift the automatic stay. There are exceptions to the automatic stay though. If you believe the automatic stay is not in effect regarding the collection activity you want to take it is a good idea to retain or speak with a bankruptcy lawyer. It is also prudent to file a motion to lift the stay or have the bankruptcy court rule there is not stay. Taking action that may or may not violate the automatic stay is a recipe for disaster. You do not want to find yourself in the position of defending the collection activity you took without the bankruptcy court’s blessing.
The exception to the automatic stay this article focuses on is 11 U.S.C. §362(b)(4). This exception provides: (b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay— (4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental unit’s or organization’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 or organization’s police or regulatory power.
This issue recently arose in a case when two defendants in a federal district court lawsuit brought by the Secretary of Labor of the United States Department of Labor. According to court documents the two defendants filed a motion to continue the jury trial in the federal district court case only to be denied. The two defendants filed skeleton bankruptcy petitions without the assistance of bankruptcy attorneys under Chapter 13 of the Bankruptcy Code to stop the lawsuit. The Secretary of Labor, Thomas E. Perez, immediately filed a motion to lift the automatic stay in the bankruptcy court and federal district court.
The motion to lift the automatic stay references a two part test to determine if the exception to the stay pursuant to 11 U.S.C. §362(b)(4) is applicable. The original lawsuit is for the enforcement of the Fair Labor Standards Act. A government action is within a governmental unit’s police or regulatory powers if it satisfies one of two tests: (1) Public Policy – government actions that effectuate public policy may proceed, or (2) Pecuniary Purpose Test – if the government action is not primarily to advance the pecuniary interest of the government itself may proceed. See N.L.R.B. v. Continental Hagen Corp., 932 F.2d 828, 833-34 (9th Cir. 1991). In this case the Secretary of Labor filed an action against the defendants for back wages, liquidated damages, and injunctive relief under the Fair Labor Standards Act (“FLSA”).
The Secretary of Labor argues that there is little doubt the lawsuit serves the public purpose test given the lawsuit is enforcing the Secretary’s regulatory powers under the FLSA. In addition the Secretary of Labor argues it has no pecuniary purpose of his own in the FLSA lawsuit against the defendants. Any money judgment or restitution judgment award will be passed on to the former employees of the defendants. As a parting shot the Secretary of Labor argues the defendants last minute bankruptcy filing are in bad faith given the filings were four days before a long standing trial date. The timing of filing is a factor to consider in determining whether a filing is in bad faith.
As of the writing of this article the bankruptcy court has not ruled on the Secretary of Labor’s motion to lift the automatic stay. Everything depends upon the facts in the defendants individual bankruptcy cases. There may very well be a legitimate reason for the defendants’ bankruptcy filings independent of the lawsuit brought by the Secretary of State.
