United States: The Bankruptcy Code's Automatic Stay Is Not So Automatic For DOL Wage And Hour FLSA Enforcement Actions

The U.S. Bankruptcy Code (the "Code") § 11 U.S.C. § 362(a)(1) provides that when a party files for bankruptcy, an automatic stay is triggered. However, it turns out that there are limitations to the type of cases that these automatic stays extends, and in the employment context, this may not necessarily include wage and hour claims.

For example, in the recent case of Stewart v. Holland Acquisitions, Inc. Case No. 2:15-cv-01094 (W.D. Pa. Feb. 2, 2021), the U.S. District Court for the Western District of Pennsylvania held that the U.S. Bankruptcy Code's automatic stay does not extend to enforcement actions brought by the U.S. Department of Labor (DOL) under the Fair Labor Standards Act (FLSA). In applying section 362(b)(4) of the Bankruptcy Code to renounce the application of the stay, the court rejected a contrary holding out of the Sixth Circuit (which hears appeals from district courts in Kentucky, Michigan, Ohio, and Tennessee) that an employer cannot shield itself from FLSA enforcement actions brought by the DOL by seeking to trigger the automatic stay protection under the Bankruptcy Code. The court is now persuasive authority in the Third Circuit (which hears appeals from district courts in areas of Pennsylvania, New Jersey, Delaware, and the Virgin Islands).

So, how did this happen? First, Section 362(b)(4) of the Code carves out a number of exceptions to the reach of the automatic stay, including one for certain police and regulatory actions as follows:

The filing of a 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's...police or regulatory power[.]

In Stewart, the DOL filed a civil complaint against Holland Acquisitions, Inc. (Holland), claiming that Holland willfully and repeatedly failed to pay its employees overtime and maintain proper wage and hour records in violation of the FLSA. Holland later filed for chapter 11 bankruptcy protection and sought to have the FLSA action stayed under the automatic stay provision of the Code.

The court first found the DOL fell within the definition of a "governmental unit" as defined by section 101(27) of the Code. The court then found that the DOL was not seeking to enforce a pre-existing monetary judgment. Rather, the DOL was seeking to stop further FLSA violations and obtain back wages and liquidated damages on behalf of the impacted employees.

Holland relied on Chao v. Hospital Staffing Services, Inc., 270 F.3d 374 (6th Cir. 2001) in arguing that the FLSA action was not rooted in public policy because the DOL was seeking back pay, which is a private right, not a public one. The court rejected Holland's attempt to stay the FLSA action and found that the Sixth Circuit's reasoning in Chao conflicted with Third Circuit principles and, if applied to Holland, would "substantially impair the core remedial purposes of the FLSA."

In other words, even though the FLSA litigation could result in an award of back pay to specific individuals, the DOL's enforcement power is there to bring violating employers into compliance with the FLSA. Accordingly, the court held that the DOL could proceed with 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 entering judgment against Holland, to the extent the DOL obtained any judgment against Holland, enforcement would have to be adjudicated by the bankruptcy court, meaning the collection of any such monetary award would be subject to creditor priority rights as otherwise structured under the Code.

Employer Take Away

Holland's application is limited. First, it only applies to employers within the Third Circuit. Second, it is limited to only wage and hour enforcement actions brought by the DOL. It is not applicable to private causes of actions pursued by employees directly. The Holland decision does, however, create a circuit split on this issue, which could drive the issue to the U.S. Supreme Court as more and more circuits have the opportunity to weigh in on this issue. So, while not binding outside the Third Circuit, the Holland decision will provide persuasive authority within the Third Circuit that the police and regulatory exception under section 362(b)(4) extends to FLSA enforcement actions, meaning the Code's automatic stay protections will not protect a violating employer from the DOL's wage and hour division's grasp.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.