Automatic Bankruptcy Code Suspension Not So Automatic for FLSA Enforcement Actions on DOL Wages and Hours | Dickinson wright
The US Bankruptcy Code (the “Code”) § 11 USC § 362 (a) (1) provides that when a party files for bankruptcy, an automatic stay is triggered. However, it turns out that there are limits to the type of cases these automatic suspensions extend, and in the context of employment this may not necessarily include claims for wages and hours.
For example, in the recent case of Stewart v. Holland Acquisitions, Inc. Case No.2: 15-cv-01094 (WD Pa. February 2, 2021), the United States District Court for the Western District of Pennsylvania has ruled that the automatic stay of the United States Bankruptcy Code does not occur did not extend to enforcement actions brought by the US Department. (DOL) under the Fair Labor Standards Act (FLSA). Applying Section 362 (b) (4) of the Bankruptcy Code to waive the application of the stay, the court dismissed a contrary decision by the Sixth Circuit (which hears appeals from the district courts of Kentucky, Michigan, Ohio and Tennessee) that an employer cannot protect itself from FLSA enforcement actions brought by the DOL by seeking to trigger automatic stay protection under the Bankruptcy Code. The court is now a persuasive authority in the Third Circuit (which hears appeals from district courts in the Pennsylvania, New Jersey, Delaware and Virgin Islands areas).
So how did this happen? First, section 362 (b) (4) of the Code provides for a number of exceptions to the scope of automatic suspension, including one for certain police and regulatory actions as follows:
The filing of an application … does not have the effect of suspending … the initiation or continuation of an action or proceeding by a government unit … in order to enforce the power of the police and regulation of that government unit, including the enforcement of a judgment other than a pecuniary judgment, obtained in an action or proceeding by the police or regulatory power of the government unit[.]
In Stewart, The DOL filed a civil lawsuit against Holland Acquisitions, Inc. (Holland), claiming that Holland deliberately and repeatedly failed to pay its employees overtime and to maintain proper pay and hour records in violation of the FLSA. Holland then filed for Chapter 11 bankruptcy protection and requested that the FLSA’s action be stayed under the Code’s automatic stay provision.
The court first concluded that the DOL fell within the definition of a “government unit” as defined by section 101 (27) of the Code. The court then concluded that the DOL was not seeking to enforce a pre-existing pecuniary judgment. Instead, the DOL sought to put an end to other FLSA violations and to obtain back wages and damages on behalf of the affected employees.
Holland relied on Chao v. Hospital Staffing Services, Inc., 270 F.3d 374 (6th Cir. 2001) arguing that the FLSA’s action was not rooted in public order because the DOL sought reimbursement of wages, which is a private right and not public. The court rejected Holland’s attempt to stay the FLSA’s action and concluded that the Sixth Circuit reasoning in Chao in conflict with the principles of the Third Circuit and, if applied to Holland, “Would significantly undermine the fundamental restorative objectives of the FLSA.”
In other words, even though the FLSA litigation could result in the awarding of salary arrears to specific people, the DOL’s enforcement power is there to get the offending employers to comply with the FLSA. As a result, the court ruled that the DOL could continue its action against Holland, notwithstanding the automatic stay, which was applicable to stay other claims. However, while the court noted that the automatic stay would not prevent the court from pronouncing a judgment against the Netherlands, as long as the DOL obtained a judgment against the Netherlands, the execution would have to be decided. by bankruptcy court, which means recovery of any money the auction would be subject to creditors’ priority rights as otherwise structured under the Code.
The Netherlands the application is limited. First, this only applies to employers in the third circuit. Second, it is limited only to actions to enforce wages and hours brought by the DOL. It is not applicable to private cases of actions pursued directly by employees. the Holland The ruling, however, creates a circuit split on this issue, which could lead the issue to the United States Supreme Court as more and more circuits have the opportunity to rule on this issue. Thus, without being binding outside the Third Circuit, the Holland The ruling will provide persuasive authority within the Third Circuit that the police and regulatory exception under Section 362 (b) (4) extends to the enforcement actions of the FLSA, meaning that the protections of Automatic suspension of the Code will not protect an employer in breach of the grip of the Wages and Hours division of the DOL.