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H Ilda L. S Olis, Secretary of L Abor, U Nited States D Department of L Abor v. Sca R Estaurant C Orp. D/B/ A L Uigi Q I Talian Restaurant

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK


December 1, 2011

H ILDA L. S OLIS, SECRETARY OF L ABOR, U NITED STATES D DEPARTMENT OF L ABOR PLAINTIFF,
v.
SCA R ESTAURANT C ORP. D/B/ A L UIGI Q I TALIAN RESTAURANT, A C ORPORATION AND L UIGI Q UARTA, I NDIVIDUALLY AND AS O WNER DEFENDANTS.

The opinion of the court was delivered by: Joseph F. Bianco, District Judge:

MEMORANDUM AND ORDER

the automatic stay, pursuant to 11 U.S.C. § 362(b)(4).*fn1

I. BACKGROUND

This action was commenced by plaintiff Hilda L. Solis, Secretary of the United States Department of Labor ("DOL") , pursuant to Sections 16(c) and 17 of the Fair In a complaint filed against Quarta and Labor Standards Act ("FLSA"), 29 U.S.C. SCA Restaurant Corp. on May 21, 2009, the §§ 201, et seq. Defendant Luigi Quarta DOL alleges that defendants violated ("Quarta"), the owner of defendant SCA Sections 7 and 15(a)(2) of the FLSA by Restaurant Corp., is in the midst of a failing to pay minimum wage and overtime Chapter 7 bankruptcy proceeding, and compensation to the employees of SCA contends that the automatic stay arising Restaurant Corp., and that defendants under Section 362 of the Bankruptcy Code violated Sections 11(c) and 15(a)(5) of the serves to stay the instant action. For the FLSA by failing to keep full and accurate reasons stated below, the Court finds that the records concerning their employees' wages, government may proceed with its FLSA claim against defendant Quarta under the hours, and conditions of employment. 29 component of a bankruptcy petition, as it U.S.C. §§ 207, 211(c), 215(a)(2), 215(a)(5). "provides the debtor with a breathing spell The DOL sought an injunction pursuant to from his creditors" and "allows the Section 17 of the FLSA permanently bankruptcy court to centralize all disputes restraining defendants from violating concerning property of the debtor's estate in Sections 7, 11(c), 15(a)(2), and 15(a)(5) of the bankruptcy court so that reorganization the FLSA, and an order pursuant to Section can proceed efficiently, unimpeded by 16(c) finding defendant liable for unpaid uncoordinated proceedings in other arenas." overtime compensation and an equal amount Shugrue v. Air Lines Pilots Ass'n, Int'l (In re of liquidated damages. Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir. 1990) (internal citations and After the DOL filed the instant suit, quotation marks omitted).

Quarta filed for voluntary bankruptcy under Chapter 7 of the Bankruptcy Code in the Section 362(b)(4) of the Bankruptcy Eastern District of New York. In the instant Code provides an exception to the automatic motion, Quarta urges the Court to find that stay for actions by a governmental unit to the DOL's action is stayed under the enforce its police or regulatory power. automatic stay provision pursuant to Section Specifically, it provides that the filing of a 362 of the Bankruptcy Code. bankruptcy petition does not operate as a stay against:

II. LEGAL STANDARDS

commencement or continuation of an Under 11 U.S.C. § 362(a)(1), the filing action or proceeding by a of a bankruptcy petition automatically stays governmental unit . . . to enforce the commencement or continuation of*fn2 such governmental unit's or judicial proceedings against the debtor. See organization's police and regulatory E. Refractories Co. Inc., v. Forty Eight power, including the enforcement of Insulations, Inc., 157 F.3d 169, 172 (2d Cir. a judgment other than a money 1998). The automatic stay is a fundamental judgment, obtained in an action or proceeding by the governmental unit

action or proceeding is not stayed under the Other courts have backed away from the automatic stay.'" Id. (quoting H.R. Rep. No. "pecuniary purpose" test, and apply a 95-595 at 343). broader "pecuniary advantage" test. United States v. Commonwealth Cos. (In re In attempting to apply the § 362(b)(4) Commonwealth Cos.), 913 F.2d 518, 523-25 exception, courts look to the purposes of the (8th Cir. 1990); see also United States ex law that the government seeks to enforce to rel. Jane Doe 1 v. X, Inc., 246 B.R. 817, 820 distinguish between situations in which a (E.D. Va. 2000). Under the "pecuniary "state acts pursuant to its 'police and advantage" test, the relevant inquiry is not regulatory power,' and where the state acts whether the governmental unit seeks merely to protect its status as a creditor." property of the debtor's estate, but rather Safety-Kleen, Inc. v. Wyche (In re whether the specific acts that the Pinewood), 274 F.3d 846, 865 (4th Cir. government wishes to carry out would create 2001) (quoting Universal Life Church, Inc. a pecuniary advantage for the government v. United States (In re Universal Life vis-a-vis other creditors. See Commonwealth Church, Inc.), 128 F.3d 1294, 1297 (9th Cir. Cos., 913 F.2d at 523; Jane Doe 1, 246 B.R. 1997)); United States ex rel. Fullington v. at 820. Thus, the "pecuniary advantage" Parkway Hosp., Inc., 351 B.R. 280, 282-83 analysis has been used as an alternative (E.D.N.Y. 2006). Two tests have been formulation of the first test. historically applied to resolve this question:

(1) the "pecuniary purpose" test (also known The second test -- namely, the public as the "pecuniary interest" test), and (2) the policy test -- distinguishes "'between "public policy" test. See In re Methyl proceedings that adjudicate private rights Tertiary Butyl Ether ("MTBE") Products and those that effectuate public policy.'" Liab. Litig., 488 F.3d 112, 133 (2d Cir. Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 2007); Universal Life Church,128 F.3d at 374, 385-86 (6th Cir. 2001) (quoting In re 1297; Parkway Hosp., 351 B.R. at 283; see Commerce Oil Co., 847 F.2d 291, 295 (6th also In re Chateaugay Corp., 115 B.R. 28, Cir. 1988)); see Eddleman, 923 F.2d at 791. 31 (Bankr. S.D.N.Y. 1988). Under the An action may further both public and pecuniary purpose test, a court looks to private interests. Where "an action furthers whether a governmental proceeding relates both public and private interests," reviewing to public safety and welfare, which favors courts should exempt the action from the application of the stay exception, or to the automatic stay if "the private interests do not government's interest in the debtor's significantly outweigh the public benefit property, which does not. See MTBE, 488 from enforcement." Chao, 270 F.3d at 390.

F.3d at 133; Lockyer v. Mirant Corp., 398 F.3d 1098, 1108-09 (9th Cir. 2005). "If it is The tests are overlapping to some extent, evident that a governmental action is and there also appears to be some confusion primarily for the purpose of protecting a in the case authority as to whether both the pecuniary interest, then the action should not pecuniary test and the public purpose test be excepted from the stay." Eddleman v. must be satisfied for an action to be U.S. Dep't of Labor, 923 F.2d 782, 791 exempted, or whether one is sufficient. In (10th Cir. 1991), overruled in part on other fact, the Ninth Circuit has discussed this grounds by Temex Energy, Inc. v. specific issue. Compare Lockyer v. Mirant Underwood, 968 F.2d 1003 (10th Cir. 1992). Corp., 398 F.3d at 1108 ("A suit comes within the exception of § 362(b)(4) if it satisfies either test.") with City & Cnty. of 3

S.F. v. PG&E Corp., 433 F.3d 1115, 1125 test is utilized -- as well as the "public

n.11 (9th Cir. 2006) ("Our controlling policy" test. See, e.g., In re Trinity Meadows precedent, as we have discussed, quite Raceway, Inc., Adversary No. 06-04165, plainly states satisfying either the 'pecuniary 2007 WL 2713920, at *6 n.29 (N.D. Texas interest' or 'public policy' test will suffice. Sept. 11, 2007) ("Although it is not clear That being said, '[v]iewing the tests as whether a governmental unit must pass disjunctive perhaps does not always make either or both tests, the inquiry is sense, however.'") (quoting Fed. Trade inconsequential because, as the court Comm'n v. First Alliance Mortg. Co. (In re addresses below, Defendants' actions pass First Alliance Mortg. Co.), 264 B.R. 634, both the pecuniary interest and public policy 647 n.11 (Bankr. C.D. Cal. 2001)); see also tests.").

Eddleman, 923 F.2d at 791 ("In the case at bar, we conclude that DOL's enforcement III. DISCUSSION proceedings are exempt from the stay under either test."); Massachusetts v. New England A. Pecuniary Purpose or Pecuniary Pellet, LLC, 409 B.R. 255, 259 (D. Mass. Advantage Test 2009) ("If either test is satisfied the case is considered an enforcement action.") First, the instant case is exempt from the stay under the pecuniary purpose or interest The Second Circuit has not yet ruled on test, as well as the pecuniary advantage which test to apply. See MTBE, 488 F.3d at test.*fn3

133 ("we do not find it necessary to pass on the validity of these tests at this time"); Fed. With respect to the pecuniary purpose or Trade Comm'n v. Consumer Health Benefits interest test, the government has no Ass'n, 10-CV-3551 (ILG), 2011 U.S. Dist. pecuniary interest in defendants' estate. See LEXIS 61305, at *9 (E.D.N.Y. June 8, Eddleman, 923 F.2d at 791 ("DOL's pursuit 2011) ("The Second Circuit has yet to pass of debarment and liquidation of back-pay on the validity of any particular test."). In a claims" was not "designed to advance the prior opinion, this Court held that the government's pecuniary interest," but rather pecuniary advantage test, rather than the was intended "primarily to prevent unfair pecuniary interest test, should be utilized. competition in the market by companies See Parkway Hospital, 351 B.R. at 286 who pay substandard wages."); Martin v. ("The Court agrees that the pecuniary Safety Elec. Const. Co., 151 B.R. 637, 639 advantage test is the appropriate standard to (D. Conn. 1993) (DOL action seeking apply regarding the § 362(b)(4) injunction and monetary damages for exception . . . ."). violations of minimum-wage provisions of the FLSA was "not designed to advance the However, in an abundance of caution, government's pecuniary interest"). The the Court has examined the facts of this case government seeks an injunction to prevent competition in the market from companies further violations of the FLSA, as well as who pay substandard wages." Chao v. BDK liquidated damages equal to the amount of Indus., LLC, 296 B.R. 165, 168 (C.D. Ill. the employees' unpaid overtime 2003). Moreover, should the DOL succeed compensation. If the government succeeds, in obtaining a money judgment against the the DOL will not obtain title to any goods, defendant, such a judgment could deter nor be able to enforce a monetary judgment unlawful behavior by others. See Parkway against defendants. See Chao v. Mike & Hosp., 351 B.R. at 287 ("the imposition of Charlie's Inc., No. Civ.A. H-05-1780, 2006 financial liability on a party deters unlawful U.S. Dist. LEXIS 2178, at *8 (S.D. Tex. Jan. behavior and thus serves the police and 4, 2006) ("The Secretary would not obtain regulatory efforts of the government"). title to any goods nor be able to enforce a Thus, this Court holds that actions money judgment. These remedies are not undertaken by the DOL to enforce wage and designed to advance the government's hour protections fall squarely within the pecuniary interest."); Martin, 151 B.R. at § 362(b)(4) exemption. 639 ("individuals claiming unpaid wages will not receive any extra priority by virtue Although never addressed by the Second of this action" since "collection of the back Circuit, numerous courts have reached a pay and liquidated damages claims must similar conclusion in analogous cases. For proceed according to normal bankruptcy example, in Eddleman v. U.S. Dep't of procedures"). Labor, the DOL filed an administrative action against a mail-hauling business that For the same reasons, the action at issue worked under a contract with the United passes the broader pecuniary advantage test. States Postal Service. The DOL alleged Should the government succeed in winning a violations of the Service Contract Act monetary judgment against defendants, ("SCA"), 41 U.S.C. §§ 351-358, now 41 enforcement of the money judgment will U.S.C. §§ 6701-6707, which requires federal take place in bankruptcy court. government contractors to pay certain Consequently, the suit's monetary claims minimum wages and benefits, and to keep would be subject to bankruptcy procedures adequate records of hours worked and wages just like any other claim against the debtor, paid. 923 F.2d at 783. The DOL sought to and would not, therefore, confer any liquidate claims for back wages owed to the advantage on the government vis-a-vis other Eddlemans' employees, and to put the creditors. Eddlemans on a list of SCA violators, which would debar them from contracting with the

B. Public Policy Test government for three years. Id.

The DOL's action also satisfies the In the Eddleman case, the Tenth Circuit public policy test. The action enforces the held that the DOL action was exempt from DOL's regulatory powers under the FLSA -- the automatic stay under § 362(b)(4). Id. at specifically, ensuring that covered 791. The "public policy" test presented "no employees receive minimum wage and barrier" to the DOL action because seeking overtime compensation, and that employers back pay on behalf of specific individuals maintain proper wage and hour records. The was not "an assertion of private rights." Id. injunction sought by DOL would serve to Instead, it was a method of "enforcing the prevent further violations, protect labor policies underlying the SCA." Id. This was conditions, and prevent "unfair labor especially true because back-pay claimants would not receive any extra priority as a Secretary is suing under the government's result of the DOL action, since collection of police power, his suit is exempted from the the claims would proceed in bankruptcy automatic stay provision.") (footnote court. Id. omitted).

Although the violations at issue in Indeed, a number of district courts have Eddleman concerned the SCA and not the also ruled that suits by the Secretary seeking FLSA, both acts seek to ensure that to enjoin defendants from violating the employers pay their employees in FLSA's minimum wage, overtime, and accordance with overtime and minimum record-keeping requirements, and seeking wage laws, and that they keep adequate and liquidated damages for those violations, fall accurate records reflecting those payments. within the police and regulatory power Accordingly, the same analysis would apply exemption from the automatic stay. See in determining whether an action concerning Martin, 151 B.R. at 639 (DOL action unpaid minimum wages or overtime seeking injunction and monetary damages compensation satisfies the relevant tests, for violations of minimum-wage provisions regardless of whether the action is brought of the FLSA was exempt from stay because pursuant to the SCA or the FLSA. the remedies acted as a mechanism to enforce the policies underlying the FLSA, Defendant seeks to distinguish and because the employees would not Eddleman, arguing that while the DOL's receive priority over other creditors); Martin pursuit of liquidated damages was an v. Chambers, 154 B.R. 664, 667 (E.D. Va. assertion of private rights that would not, 1992) (action seeking injunction and accordingly, pass the public policy test, the damages was exempt from stay because it Eddleman court exempted the action from was brought pursuant to DOL's "mandate to the automatic stay because DOL also sought regulate and enforce fair labor standards"); an injunction debarring the defendants from Dole v. Sears, No. 88-6160-CV-SJ-8, 1989 contracting with the government. Yet the U.S. Dist. LEXIS 15149, at *2 (W.D. Mo. Eddleman court made clear that the public June 16, 1989) (FLSA action seeking policy test "present[ed] no barrier to DOL's injunction and damages was actions," because the liquidation of back-pay "unquestionably an exercise of police or claims was not an assertion of private rights, regulatory powers"); see also Chao v. Mike but was "another method of enforcing the & Charlie's Inc., 2006 U.S. Dist. LEXIS policies underlying the SCA." Id. at 791. 2178, at *7-8 (DOL action seeking to enjoin Moreover, in the action at bar, the DOL does future minimum-wage violations of the not seek only liquidated damages, but also FLSA was exempt from stay); BDK Indus., an injunction preventing further violations LLC, 296 B.R. at 170 (DOL action seeking of the FLSA. Thus, the Eddleman case is to enjoin future minimum-wage violations directly on point and this Court finds the of the FLSA was exempt from stay because analysis persuasive. See also Brock v. the primary purpose of the action was "to Rusco Indus., 842 F.2d 270, 273 (11th Cir. protect workers and to prevent unfair 1988) ("We believe that the Secretary competition in the market by companies brought this suit under his police power. The who pay substandard wages"); Donovan v. Secretary brought this suit to protect Health Care Res., Inc., 44 B.R. 546, 547 legitimate businesses from unfair (W.D. Mo. 1984) (DOL action seeking to competition and to enforce the federal law enjoin future minimum-wage violations of regarding minimum wage. Since the the FLSA "constitute[d] an exercise of police or regulatory powers" and was had allegedly produced at a competitive therefore exempt from stay). disadvantage by paying employees a substandard wage. The Secretary sought an Courts have also applied the police and injunction to prevent the records from regulatory power exemption to analogous moving in interstate commerce. 270 F.3d at actions by federal agencies to enforce labor 378. and employment statutes. See, e.g., NLRB v. 15th Ave. Iron Works, Inc., 964 F.2d 1336, The Sixth Circuit held that the suit was 1337 (2d Cir. 1992) (per curiam) (NLRB not exempt from the automatic stay. Id. at unfair labor practice and enforcement 394. In particular, the court concluded that proceedings exempt from stay under the suit did not pass the public policy test § 362(b)(4)); NLRB v. Cont'l Hagen Corp., because it was brought primarily to assert 932 F.2d 828, 835 (9th Cir. 1991) (NLRB and protect the private rights of certain action seeking back-pay and other relief individuals. Id. at 393-94. The court exempt from stay); Pension Benefit Guar. explained that, although some "hot goods" Corp. v. LTV Corp., 875 F.2d 1008, 1020 cases would qualify for an exemption, this (2d Cir. 1989) (decision to restore full particular suit concerned medical records liability after corporation terminated pension relating to services already rendered by benefit plans was exempt from stay), rev'd employees, so the suit would not prevent on other grounds, 496 U.S. 633 (1990); unfair competition in the marketplace. Id. at NLRB v. Edward Cooper Painting, Inc., 804 392.

Moreover, a successful suit by the F.2d 934, 942-43 (6th Cir. 1986) (NLRB Secretary would result in an injunction that action seeking union members' lost wages would require the debtor to pay the exempt from stay); EEOC v. Rath Packing employees' wages in order to "free" the Co., 787 F.2d 318, 324-25 (8th Cir. 1986) goods. In the court's view, this requirement (EEOC employment discrimination action to created "a significant property interest" in recover back pay exempt from stay); the debtor, and enforcing an injunction to Parkway Hosp., 351 B.R. at 288-89 (DOL obtain that property interest would function action under False Claims Act exempt from as a "vehicle to enforce the private rights of stay because deterring fraud serves an the employees" to their wages." Id. at 393-important public policy purpose). 94.

Defendants' heavy reliance upon the The Chao case is clearly distinguishable Sixth Circuit decision in Chao v. Hospital from the instant case. First, the Sixth Staffing Services is entirely misplaced. The Circuit's holding in Chao (as noted above) Chao case addressed the narrow issue of was based upon the "peculiar whether an action seeking an injunction circumstances" of that case where the "hot under Section 17 of the FLSA to prevent goods" relief sought did not (in the court's "hot goods" from entering the market is view) trigger the FLSA's concern about exempt from the automatic stay. See Chao, preventing unfair competition in the 270 F.3d 374. "Hot goods" are goods marketplace. 270 F.3d at 382. In contrast, produced by employees who were paid the instant case is not a "hot goods" case; below the minimum wage. In the Chao rather, the DOL seeks an injunction pursuant case, the Secretary of the Department of to Section 17 against further violations of Labor brought a "hot goods" action under the FLSA, as well as liquidated damages the FLSA to prevent the dissemination of under Section 16(c). Those types of relief business records that the debtor employer undoubtedly implicate a "public policy" interest. In fact, the Sixth Circuit IV. CONCLUSION recognized the "important continuing public interest in restraining future violations of the For the foregoing reasons, defendants' FLSA's minimum wage and overtime request that the automatic stay arising under provisions" and the "significant public Section 362 of the Bankruptcy Code be interest in protecting other businesses from found to apply to this action is denied. This unfair competition" in distinguishing the action is exempt from the automatic stay peculiar "hot goods" situation from other under the police and regulatory power situations. Id. at 392. ("In this particular exception set forth in Section 362(b)(4) of case, however, that significant public the Bankruptcy Code. interest in protecting other businesses from unfair competition is not present because the SO ORDERED. 'goods' are merely records relating to services already rendered by employees.").*fn4

Moreover, to the extent that the Sixth Circuit in Chao may have been concerned that the Judge Joseph F. Bianco "hot goods" relief sought could under the United States District Judge circumstances of that case force actual payment of back wages outside of the bankruptcy process (id. at 393), no such Date: December 1, 2011 concern exists in the instant case, since any Central Islip, NY judgment for damages entered against the defendant would be resolved in Bankruptcy * * * Court. Plaintiff is represented by Daniel M.

In sum, the DOL brings this action under Hennefeld and Elena S. Goldstein, U.S. Sections 16(c) and 17 of the FLSA to serve Department of Labor, Office of the Solicitor, the valid public policy purposes of enjoining 201 Varick Street, Room 983, New York, further violations of the FLSA, protecting N.Y. 10014. Defendant is represented by labor conditions, preventing unfair Raymond Nardo, 129 Third Street, Mineola, competition in the labor market, and N.Y. 11501. deterring unlawful behavior by others.

Successful prosecution of this action will not create a pecuniary interest for the government in the debtor's property, nor will it result in a pecuniary advantage to the government over other creditors.

Accordingly, this action is exempt from the automatic stay under § 362(b)(4), the police and regulatory power exemption.


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