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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

December 1, 2011


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


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


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:


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 ...

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