Elaine Chao, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee,
v.
Hospital Staffing Services, Inc.; Capital Factors, Inc.; Ron Lusk, individually and as President of Hospital Staffing Services, Inc., Defendants,
Kenneth Welt, Bankruptcy Trustee for Hospital Staffing Services, Inc., Defendant-Appellant.
Nos. 99-6147/6487
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
Argued: January 25, 2001
Decided and Filed: October 31, 2001
Appeal from the United States District Court for the Western District of Tennessee at Memphis.[Copyrighted Material Omitted][Copyrighted Material Omitted]
Ellen R. Edmond, Paul Frieden, U.S. DEPARTMENT OF LABOR, OFFICE OF THE SOLICITOR, Washington, D.C., Brian Dougherty, U.S. Departmentof Labor, Office of the Solicitor, Nashville, TN for Plaintiff-Appellee.
Peter G. Herman, Ft. Lauderdale, FL, for Defendant-Appellee.
Arthur H. Rice, Lisa M. Schiller, RICE & ROBINSON, Miami, Florida, for Defendants-Appellants.
Before: BOGGS and MOORE, Circuit Judges; and BELL, District Judge.*
OPINION
BOGGS, Circuit Judge.
In the United States District Court for the Western District of Tennessee, the Secretary of Labor filed suit seeking an injunction to prohibit the trustee of a bankrupt corporation then undergoing liquidation in the bankruptcy court for the Southern District of Florida from moving in commerce certain records that the Secretary deemed "hot goods." The workers who produced the records for the corporation had not been paid in accordance with the minimum wage and overtime provisions of the Fair Labor Standards Act. The Trustee claimed the district court lacked jurisdiction to entertain the injunction action because the records had become subject to the exclusive jurisdiction of the bankruptcy court. The district court disagreed and, after permitting the Trustee to consolidate all the tainted goods in Memphis and dispose of them as he saw fit, entered a preliminary injunction ordering the Trustee to deposit with the clerk of the court the amount the Secretary claimed was necessary to "purge the taint" from the records, i.e., to change the status of the records from "hot goods" to ordinary goods. Viewed in light of the particular facts of this case, the Secretary's suit is not in furtherance of her statutory powers to regulate and enforce labor standards, but rather is designed to and would, if allowed to proceed, promote the private rights of unpaid workers vis-a-vis other creditors of the debtor's estate. Such a suit does not fall within the Bankruptcy Code's § 362(b)(4) exception to the automatic stay. Therefore, the district court has no jurisdiction to entertain the Secretary's suit. We reverse the district court, vacate its orders, and remand with instructions to dismiss the case.
* Hospital Staffing Services, Inc., and fourteen affiliated companies (collectively "HSSI" or the "debtor") unsuccessfully engaged in the business of providing home health care and other health-related services to patients in various locations throughout the country, primarily in Tennessee and New England. While much of HSSI's revenue came from Medicare and private insurance reimbursements, it relied on a secured revolving loan agreement with Capital Healthcare Financing ("CHF"), a division of Capital Factors, Inc., for most of its operating capital. On March 16, 1998, HSSI filed a petition for Chapter 11 reorganization in the Bankruptcy Court for the Southern District of Florida (the "bankruptcy court").
As Debtor in Possession, HSSI stayed afloat for almost one year. In order to fund its operations, HSSI sought bankruptcy court approval to incur debt and obtain credit from CHF. On July 7, 1998, the bankruptcy court approved the credit relationship: it granted CHF an $8,000,000 super-priority lien, pursuant to 11 U.S.C. § 364(d), on all of the debtor's assets, in exchange for CHF's continuing to advance funds under a formula dependent upon the debtor's accounts receivable, billing, and collections. Pursuant to the terms of the bankruptcy court's order, CHF applied funds from all receivables collected during the pendency of the Chapter 11 case to pay off HSSI's pre-petition debts. By May 1998, only post-petition debts remained.
HSSI did not emerge from Chapter 11. In late January 1999, the borrowing base on which the debtor's financing relied had deteriorated, to the extent that its financing agreement left it only $240,000 in available credit to fund overhead expenses, including employee salaries. CHF extended this final amount on February 5, 1999. The debtor nevertheless stopped paying certain employees' wages as of January 23, 1999. HSSI's president ordered cessation of all Tennessee operations by February 17, 1999, and all New England operations by February 18, 1999. HSSI converted its Chapter11 reorganization to a Chapter 7 liquidation the following day. The bankruptcy court appointed Kenneth Welt as the debtor's trustee ("Trustee"). Welt ultimately represented to the bankruptcy court that he expected to marshal and liquidate approximately $5,000,000 in assets of the debtor, a figure well below the amount of CHF's loan secured by the super-priority § 364(d) lien.
On February 25, 1999, six days after the conversion to Chapter 7, Alexis Herman, then United States Secretary of Labor ("Secretary"),1 filed suit in the United States District Court for the Western District of Tennessee ("district court") to enforce certain provisions of the Fair Labor Standards Act ("FLSA"). The FLSA requires, among other things, payment of minimum and overtime wages to certain employees. See 29 U.S.C. §§ 206 (minimum wage), 207 (maximum hours and overtime), 213 (exemptions). The Secretary contended that certain of the debtor's records, including clinical patient reports and billing information, had been produced in violation of the FLSA's wage provisions because approximately 600 HSSI employees had not been paid their wages during the company's last weeks of operation. The Secretary sought an injunction barring the Trustee from transporting such records across state lines under the "hot goods" provision of 29 U.S.C. § 215(a) (making it "unlawful for any person-- (1) to transport, offer for transportation, ship, deliver, or sell in commerce . . . any goods in the production of which any employee was employed in violation of section 206 or section 207 of this title . . . .").2 The Secretary claims she initiated this case in the district court under the enforcement powers conferred upon her in the FLSA.3
The district court entered a temporary restraining order a week later, permitting the Trustee to marshal the debtor's assets but enjoining the Trustee from transferring or removing any messages, documents, bills, invoices, or other goods from the debtor's headquarters in Memphis. The Trustee needed these records of and relating to services rendered by HSSI employees in order to bill patients and seek Medicare and private insurance reimbursement. The Trustee questioned the district court's jurisdiction to entertain the suit, and the court took his dismissal motion under advisement. In response to a series of motions by both sides, the district court held that it had jurisdiction over the Secretary's suit and the allegedly hot goods, reasoning that the suit was an exercise of the Secretary's police power, which excepted it from the automatic stay provision of 11 U.S.C. § 362(a). Nevertheless, the district court permitted the Trustee to proceed with any steps necessary to collect outstanding debts owed to the debtor for services rendered by HSSI's employees in the waning days of operations. The court later issued a preliminary injunction ordering the Trustee to deposit $616,158, the amount the Secretary estimated was necessary to purge the "taint" from the allegedly hot goods, with the Clerk of the District Court for the Western District of Tennessee.
Meanwhile, in Florida, CHF and the trustee reached an agreement, approved by the bankruptcy court with minor modifications, to distribute the debtor's assets. Under the plan, the Trustee would marshal and liquidate all of the debtor's assets. The plan included using the records originally subject to the Secretary's suit for purposes of billing clients, Medicare, and private insurance. From the Trustee's collections, CHF would immediately receive $50,000 that it had paid to finance certain aspects of the bankruptcy proceeding after the Chapter 7 conversion. After receiving this initial payment, CHF agreed to pay for any professionals engaged and expenses incurred by the Trustee in completing the liquidation, and then split the remaining assets with other creditors. Under the plan, CHF would receive 75% of the remaining assets collected by the Trustee, with 25% going to a Creditor Pool containing the other outstanding claims against the estate, all of which were post-petition administrative expenses. The Trustee was to draw his statutory fee from the Creditor Pool's share. However, if the Secretary's suit were ultimately successful, any funds used to pay a judgment (or "clear a taint" from the goods) would come out of the Creditor Pool's share.
Following the district court's denial of his motion to dismiss, the Trustee moved the bankruptcy court to assert its jurisdiction over the debtor and all its assets to the exclusion of all other courts. The bankruptcy court apparently agreed with the Trustee's view of the case. In recommended findings of fact and conclusions of law, the bankruptcy court determined that the Secretary had engaged in forum-shopping and that the district court for the Western District of Tennessee had interfered with the bankruptcy court's exclusive jurisdiction over the debtor's estate because the Secretary's suit was tantamount to an action to collect a debt rather than an exercise of a governmental unit's police power. "[D]ue to the sensitive nature of the jurisdictional issue at hand," the bankruptcy court declined to enter an order and referred the matter to the district court for the Southern District of Florida.
The district court for the Western District of Tennessee first addressed the jurisdictional issue in its July 27, 1999, findings and conclusions associated with its Order Denying the Motion to Dismiss. The court effectively incorporated these findings and conclusions in its Order on Welt's Motion for Reconsideration, which resulted in the preliminary injunction. The Trustee timely appealed from the preliminary injunction, which appeal was consolidated with his earlier appeal from the order directing him to deposit $616,158 with the clerk of the court. In this court, the Trustee challenges the district court's assertion of jurisdiction to entertain the Secretary's suit.
II
This court reviews a district court's decision to grant a preliminary injunction for abuse of discretion. See Sandison v. Michigan High Sch. Athletic Ass'n,
The Trustee advances an argument based on bankruptcy policy: if the Secretary's suit were allowed and she obtained a judgment requiring the estate to pay more than half a million dollars to clear the taint on the records in question, she will have essentially elevated the unpaid workers' claim against the estate from the level of an administrative expense to a super-super-priority claim that trumps even CHF's secured super-priority § 364(d) interest by making the estate's access to the records dependent upon payment of the employees' wage claims. In support of this contention, the Trustee reasons that the bankruptcy court assumed jurisdiction over the debtor and all of its assets as of the original Chapter 11 filing in March 1999, nearly a year before the Secretary filed suit in the district court. See 11 U.S.C. §541 (defining property of a debtor's estate as any and all interests in property no matter where located and by whomever held as of the date of filing the petition). The Trustee asserts that the vesting of jurisdiction over the debtor's property in the bankruptcy court was to the exclusion of all other courts. Concerned that the Secretary's suit in the district court will disrupt the Bankruptcy Code's equitable distribution scheme and interfere with the bankruptcy court's jurisdiction over the liquidation, the Trustee draws a contrast between the Code's omission of any reference to the applicability and operation of the FLSA in bankruptcy proceedings and the Code's specific mention of certain other federal statutes. See 11 U.S.C. §§ 525, 742 (explaining interaction between certain Bankruptcy Code provisions and the Perishable Agricultural Commodities Act of 1930 and the Securities Investor Protection Act of 1970). This absence of reference to the FLSA, the Trustee contends, means that bankruptcy's equitable distribution scheme trumps the social policy embodied in the FLSA. See Def. Br. at 28.
For her part, the Secretary does not invoke FLSA social policy but instead relies directly on the Bankruptcy Code for two arguments in the alternative: the automatic stay provision, 11 U.S.C. § 362(a), does not apply to post-petition actions; and the automatic stay provision's exception, permitting enforcement actions by a governmental unit undertaken in furtherance of its police or regulatory power, see 11 U.S.C. §362(b)(4), applies to this suit.
Unlike the Trustee's policy arguments, his point concerning the jurisdiction of the bankruptcy court is well-taken. But it controls only to the extent that the Bankruptcy Code forbids, through the automatic stay, proceedings that involve the debtor or its estate. That is, the bankruptcy court has exclusive jurisdiction over the debtor only to the extent that the Code makes its jurisdiction exclusive. See infra Part II.B. The automatic stay provision protects the bankruptcy court's jurisdiction by forbidding the commencement or prosecution of most actions against the debtor or its property, but the automatic stay has exceptions. See infra Part II.A. The police power exception ordinarily would permit FLSA "hot goods" actions to proceed. See infra Part II.C. The peculiar circumstances of this case, however, reveal that the Secretary has undertaken this enforcement action not in furtherance of public policy but primarily to assert and protect the private rights of certain individuals. See infra Part II.C. Accordingly, the police power exception does not apply, the automatic stay governs, and the district court therefore had no jurisdiction to entertain the Secretary's suit.
* Filing a petition under the Bankruptcy Code, see 11 U.S.C. §§301, 302, 303, creates an estate consisting of all-- subject to certain exemptions for individual debtors, see 11 U.S.C. §522-- of the debtor's property, broadly defined, see 11 U.S.C. § 541, at the moment of the filing and certain other property recaptured by the estate during the bankruptcy proceeding, see, e.g., 11 U.S.C. §§ 547 (preferences), 548 (fraudulent transfers). This property becomes the "pot" from which all claims against the debtor, see 11 U.S.C. §§ 101(5), 502, will be paid pursuant to the Code's priority scheme, see 11 U.S.C. § 507. Commencement of a suit automatically imposes a broad stay of other proceedings against the debtor and its property. See11 U.S.C. § 362(a).4 "The purpose of the automatic stay is to protect creditors in a manner consistent with the bankruptcy goal of equal treatment. The stay of pre-petition proceedings enables the bankruptcy court to decide whether it will exercise its power under § 502(b) of the Bankruptcy Code to establish the validity and amount of claims against the debtor or allow another court to do so . . .." Hunt v. Bankers Trust Co.,
Companies or individuals attempting to reorganize their affairs under Chapter 11 continue to conduct business during the pendency of the proceedings, with the bankruptcy case designed to give the debtor a second chance by permitting discharge of certain pre-petition debts, payment (over time and under court supervision) of certain pre-petition creditors, and use by the debtor of proceeds from ongoing operations to finance continuing operations and get the debtor back on its feet. A Chapter 11 debtor in possession remains obligated to pay most liabilities arising after commencement of the bankruptcy proceeding: post-petition debts are generally treated as administrative expenses to which the automatic stay provision does not apply. See 11 U.S.C. §§ 362(a)(1); 503(b); In re Hemingway Transp., Inc.,
B
"The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute."Celotex Corp. v. Edwards,
Once a bankruptcy proceeding begins in one court, the concurrent jurisdiction of other courts is partially stripped. See In re United States Brass Corp.,
Not surprisingly, courts have uniformly held that when a party seeks to commence or continue proceedings in one court against a debtor or property that is protected by the stay automatically imposed upon the filing of a bankruptcy petition, the non-bankruptcy court properly responds to the filing by determining whether the automatic stay applies to (i.e., stays) the proceedings. See In re Baldwin-United Corp. Litig.,
If the non-bankruptcy court's initial jurisdictional determination is erroneous, the parties run the risk that the entire action later will be declared void ab initio. See Schwartz v. United States,
C
In concluding that it had jurisdiction over this case, the district court relied exclusively on the police-power exception to the automatic stay provision, which provides that "[t]he filing of a petition . . . 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 . . . 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 . . . to enforce" such power. 11 U.S.C. § 362(b) (1998).6 By this provision, Congress declared that the policy set forth in the Bankruptcy Code's automatic stay provision yields to state and federal governmental interests in securing compliance with certain aspects of those authorities' respective regulatory and police powers. See Midatlantic Nat'l Bank v. New Jersey Dept. of Envtl. Prot.,
To determine whether an action qualifies as a proceeding pursuant to a governmental unit's police or regulatory power, and therefore falls outside the ambit of the automatic stay, this court applies two tests: the pecuniary purpose test and the public policy test.
Under the pecuniary purpose test, reviewing courts focus on whether the governmental proceeding relates primarily to the protection of the government's pecuniary interest in the debtor's property, and not to matters of public safety. Those proceedings which relate primarily to matters of public safety are excepted from the stay. Under the public policy test, reviewing courts must distinguish between proceedings that adjudicate private rights and those that effectuate public policy. Those proceedings that effectuate a public policy are excepted from the stay.
In re Commerce Oil Co.,
Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory power. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay. Paragraph (5) makes clear that the exception extends to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment.
Commerce Oil Co.,
To support her contention that the instant suit furthers the Department of Labor's public policy goals, the Secretary directs us to the Supreme Court's description, see Citicorp Indus. Credit, Inc. v. Brock,
Since some of the goods in the secured creditor's hands had been produced in violation of the FLSA, see id. at 33, the Secretary of Labor filed suit to enjoin the creditor from introducing the goods into commerce, i.e., selling them and using the proceeds. See id. at 30-31. The creditor urged the Court to recognize an unwritten exception to 29 U.S.C. §15(a)(1) that would permit "innocent" secured creditors to traffic in "hot goods." The Supreme Court refused, relying first on contrary "plain language of the statute," and additionally discerning Congressional intent make the "hot goods" provision applicable to all persons, innocent or not, other than those specifically exempted by § 215(a)(1) (i.e., common carriers and good faith purchasers). See id. at 35.
The financing company asked the court to look beyond the plain language of the statute, citing Holy Trinity Church v. United States,
Citicorp did not address the application of §§ 215(a)(1) and 216(c) in the context of a bankruptcy, but the Eleventh Circuit has. That court relied on the Supreme Court's description of Congressional policy as embodied in the FLSA to conclude that a "hot goods" action falls within the § 362(b)(4) police power exception to the automatic stay. See Brock v. Rusco Indus.,
The Eleventh Circuit's analysis falls short of the mark, particularly as applied to the facts of this case.
Through her "hot goods" action, the Secretary is not attempting to protect the United States's pecuniary interest in the debtor's property, nor would maintenance of her action "result in a pecuniary advantage to the government vis-a-vis other creditors of the debtor's estate." In re Commonwealth Cos.,
All acts of Congress by definition declare national policy, and lawsuits to enforce those acts necessarily effectuate the public policy of the United States. But Rusco Industries failed to recognize that the public policy test calls upon courts to analyze whether a particular lawsuit is undertaken by a governmental entity in order to effectuate public policy or, instead, to adjudicate private rights. This is true because, in fashioning § 362(b)(4), Congress did not except from the automatic stay all lawsuits undertaken by appropriate governmental authorities; it expressly limited the exception to suits by a governmental unit "to enforce such governmental unit's police and regulatory power." This court's pecuniary interest and public policy tests recognize this limitation and are designed to sort out cases in which the government is bringing suit in furtherance of either its own or certain private parties' interest in obtaining a pecuniary advantage over other creditors. See Missouri v. Bankruptcy Court,
Applying this test is a difficult undertaking, and many cases will be close. For example, the Eighth Circuit held a suit by the EEOC against a debtor-employer for alleged sex discrimination within the police power exception because the EEOC acted "'at the behest and for the benefit of specific individuals [but] also to vindicate the public interest in preventing employment discrimination.'" EEOC v. The Rath Packing Co.,
This case illustrates well the distinction between general public policy interests and the private rights at stake when a governmental unit engages in a particular enforcement action. Congress made specific findings and declared national policy in the FLSA itself:
The Congress finds that the existence, in industries engaged in commerce or in the production of goods for commerce, of labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers (1) causes commerce and the channels and instrumentalities of commerce to be used to spread and perpetuate such labor conditions among the workers of the several States; (2) burdens commerce and the free flow of goods in commerce; (3) constitutes an unfair method of competition in commerce; (4) leads to labor disputes burdening and obstructing commerce and the free flow of goods in commerce; and (5) interferes with the orderly and fair marketing of goods in commerce. ... It is declared to be the policy of this chapter . . . to correct and as rapidly as practicable to eliminate the conditions above referred to in such industries . . . ."
29 U.S.C. § 202. Congress proceeded to establish a minimum wage (§ 206), overtime pay requirements (§ 207), regulations of child labor (§ 212), and exemptions from the FLSA's coverage (§ 213) in furtherance of these policy goals. These regulations all stated national labor policy.
In 29 U.S.C. § 216, Congress imposed penalties for violations of the FLSA and created two parallel vehicles for enforcement. Section 216(b) confers on employees the right to sue for unpaid minimum wages, unpaid overtime wages, and an equal amount as liquidated damages. Section 216(c) authorizes the Secretary of Labor to bring an action for the same wages and damages, and automatically terminates the right of the individual employee to sue for wages covered by the Secretary's suit, further specifying that "[a]ny sums thus recovered by the Secretary of Labor on behalf of an employee pursuant to this subsection shall be held in a special deposit account and shall be paid . . . directly to the employee or employees affected." 29 U.S.C. § 216(c). This provision authorizes the Secretary to bring an action against employers to recover exactly the same wages and damages as the individual employee whose rights were violated could obtain in his own suit-- and the provision further specifies that any such recovery be forwarded to the employee for his personal benefit. A § 216(c) suit thus does no more than ascertain the rights of a private individual and obtain a judgment for that individual's benefit. A § 216(c) suit is, therefore, a prime example of a suit by a governmental unit to adjudicate private rights. See Wirtz v. C & P Shoe Corp.,
Still, as explained above, this fact does not end the inquiry. A suit must be undertaken principally to adjudicate private rights, with only an incidental public interest in the litigation, for it to fall outside the police power exception. A pure §216(c) suit, which does not even attempt to exclude from interstate commerce goods produced under substandard conditions but seeks merely to recover unpaid minimum wages, unpaid overtime, and liquidated damages, only incidentally serves the public interest. A § 216(c) suit does seek (via the liquidated damages award) to punish wrongdoers and thereby provide a general deterrent to unfair labor practices, but even this award is remitted to affected employees. The Secretary's prosecution of such a suit serves little public purpose other than a general interest in seeing laws enforced-- a public interest no greater than that served by the hypothetical state attorney general suing to enforce a private contract.14 Pure § 216(c) suits fail the public policy test and are, therefore, not covered by the police power exception to the automatic stay. To the extent the Secretary brought this action under § 216(c), then, the exception does not apply and the automatic stay does.
In certain cases-- perhaps most cases-- a FLSA "hot goods" action by the Secretary serves significant public interests apart from an attempt to vindicate the private rights of employees. The Secretary has long treated this lawsuit as a "hot goods" action, and her complaint invoked 29 U.S.C. §217 in addition to § 216(c) as authority for her power to file suit. Section 217 does no more than confer jurisdiction on district courts "to restrain violations of section 215 of this title." It does not parallel § 216(c) by explicitly conferring on the Secretary authority to bring a suit for an injunction to prevent movement of tainted goods in interstate commerce. Yet courts have long held that the Secretary has implicit power under § 217 to sue to enjoin movement of "hot goods" in interstate commerce. See, e.g., Powell v. State of Florida,
These cases recognize the important continuing public interest in restraining future violations of the FLSA's minimum wage and overtime provisions. The Supreme Court in Citicorp discerned the significant public interest in restraining lingering consequences of past FLSA wage and hour violations. In that case, the Court rejected the argument that a FLSA "hot goods" action should not be brought against a secured creditor when the employer has ceased operations because the "hot goods," garments in that case, maintained their ability to compete unfairly in the marketplace even after Citibank seized them as collateral. The Eleventh Circuit extended this reasoning to a defunct manufacturer of windows and doors.See Rusco Indus.,
In this particular case, however, that significant public interest in protecting other businesses from unfair competition is not present because the "goods" are merely records relating to services already rendered by employees. The records have little intrinsic value; they will not be sold in interstate commerce; they can be used by the Trustee only to generate accounts receivable.15 Indeed, their "movement" in interstate commerce is extremely limited: the Trustee asked to move them in commerce only for purposes of bringing them to Memphis, where he would gather information from the records in order to bill customers for services rendered. The Secretary's suit, therefore, does not prevent unfair competition.16 It does, however, promote a significant property interest-- a property interest held by the affected employees.
Citicorp's application of the FLSA to failed businesses and their creditors who seize tainted collateral seemed to create a new property right. In deciding the case, the Supreme Court noted that application of the "hot goods" provision does not grant employees a priority in the goods superior to that given a secured creditor under state law because the creditor still owns the goods and the employees have no possessory interest in them. "That [the secured creditor] can cure the employer's violation of the FLSA by paying the employees the statutorily required wages does not give the employees a 'lien' on the assets superior to that of a secured creditor." Citicorp,
The Supreme Court treated § 215 as declaring contraband any goods tainted by their having been produced in substandard conditions. The Eleventh Circuit added that "Congress established the payment of a minimum wage as a condition precedent to the shipment of manufactured goods." Rusco Indus.,
As Bregstein concluded, the property interest at stake in a "hot goods" action is best described as a fair-labor servitude, with the unpaid workers as its beneficiaries. See id. at 1978-82. Ordinarily, the Secretary's enforcement suit vindicates the interests of both the unpaid-worker beneficiaries of the fair-labor servitude and, derivatively, "all of the workers who are employed in commerce or the production of goods for commerce whose livelihoods are threatened by the introduction of tainted goods into the national economy." Id. at 1982.
In this particular case, however, as described above, the Secretary's enforcement action does not protect other workers in the economy because the records at issue here will not-- unlike garments or windows and doors-- enter commerce and compete with fairly produced goods. Instead, the purpose served by the Secretary's "hot goods" injunction action is merely to enforce against the Trustee the fair-labor servitude, the beneficiaries of which are the workers who went unpaid by HSSI in late January and February 1999.17 In this particular case, then, the injunction action is merely a vehicle to enforce the private rights of the employees to the minimum portion of their wages Congress guaranteed. Therefore, to the extent this lawsuit is a "hot goods" action pursuant to § 217, it is not covered by the police power exception.
Under whichever authority the Secretary brought this suit, it fails the "public policy" test of whether a governmental unit brought suit "to enforce such governmental unit's . . . police and regulatory power," so the § 362(b)(4) exception to the automatic stay does not apply to the instant action. Because the police power exception does not apply, the automatic stay bars "the commencement or continuation . . . of [this] judicial . . . proceeding against the debtor that was or could have been commenced before the commencement of the" debtor's bankruptcy case, 11 U.S.C. § 362(a)(1), and prevents this "act to obtain possession of property of the estate . . . [and] exercise control over property of the estate . . . ." 11 U.S.C. §362(a)(3). Hence, the Bankruptcy Court for the Southern District of Florida had exclusive jurisdiction over the debtor and the property of its bankruptcy estate. The district court should have dismissed the case for lack of jurisdiction.
III
The Secretary presents an alternative argument. She claims that § 362(a)(1) does not stay the instant action because this judicial proceeding relates to post-petition conduct of the debtor insofar as the records in question did not exist at the time of the original bankruptcy filing and the debtors' employees had not performed the work that generated them. As the Secretary formulates it, her argument apparently seeks to invoke the limitation on the § 362(a)(1) automatic stay, which applies only to an "action or proceeding against the debtor that . . . could have been commenced before the commencement of the case under this title." 11 U.S.C. §362(a)(1). The Secretary's argument depends further on her contention that HSSI's conversion of its bankruptcy from Chapter 11 to Chapter 7 had no effect on attempts to collect a post-petition-debt because such conversion does not re-trigger the automatic stay provision, so as to reimpose the stay. See In re State Airlines, Inc.,
The Code does not clearly address whether conversion "reimposes" the automatic stay and courts have split on the question. But this notion of inquiring whether conversion "reimposes" the stay for purposes of analyzing the limitation on § 362(a)(1) seems academic because other Code provisions adequately address the question at issue. The Code provides that "[a] claim against . . . the debtor that arises after the order for relief [i.e. the original filing of the petition, see 11 U.S.C. § 301] but before conversion in a case that is converted under section 1112 . . . of this title, other than a claim specified in section 503(b) of this title [an administrative expense], shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition." 11 U.S.C. § 348(d) (emphasis added). Thus, claims other than those for an administrative expense that arise after the original filing but before conversion are treated, for purposes of the § 362(a)(1) limitation on the automatic stay, as if they had arisen before the original filing and are, accordingly, covered by the stay. Claims specified in § 503(b), however, are not treated as if they arose before the original petition and retain their administrative expense status even after conversion. Any such claim must be filed with the bankruptcy court as a motion for allowance of an administrative expense, see 11 U.S.C. § 503(a), or an ordinary claim against the estate, see 11 U.S.C. § 501. See also Fed. R. Bankr. P. 5005(a)(1) (specifying that proofs of claim "shall be filed with the clerk in the district where the case under the Code is pending"); cf. 11 U.S.C. § 362(a)(3) (staying-- without limitation as to when the acts giving rise to a claim took place or the claim itself arose-- any "act to obtain possession of property of the estate . . . or to exercise control over property of the estate").
If the Secretary's suit is a claim for an administrative expense-- on the theory that employees' 29 U.S.C. § 216(b) rights to back wages and damages for FLSA violations constitute administrative expenses of the estate and a pure §216(c) suit by the Secretary asserts those rights on behalf of the employees-- it had to be filed in the bankruptcy court. If the claim the Secretary's suit asserts is not a claim for an administrative expense, 11 U.S.C. § 348(d) directs that it be treated as if it arose prior to commencement of the original bankruptcy proceeding, and the instant action therefore falls within the reach of § 362(a)(1). In either event, district court had no jurisdiction to entertain the Secretary's suit.
IV
For the reasons set forth above, the judgment of the district court is REVERSED, its orders are VACATED, and this case is REMANDED with instructions to DISMISS for want of jurisdiction.
Notes:
Notes
The Honorable Robert Holmes Bell, Chief United States District Judge for the Western District of Michigan, sitting by designation.
Elaine Chao presently serves as Secretary of Labor. She has automatically been substituted as plaintiff-appellee in this matter for former Secretary Herman, pursuant to Fed. R. App. P. 43(c)(2). The "Secretary" refers to Chao, Herman, or their predecessors, as appropriate.
Because the Trustee has not appealed the district court's ruling that the records subject to the Secretary's action are "goods" within the meaning of 29 U.S.C. §§ 203(i), 215(a)(1), we express no opinion on the matter.
See 29 U.S.C. § 216(c) ("The Secretary may bring an action in any court of competent jurisdiction to recover the amount of unpaid minimum wages or overtime compensation and an equal amount as liquidated damages. The right provided by subsection (b) of this section to bring an action by or on behalf of any employee to recover [unpaid minimum wages and overtime compensation] shall terminate upon the filing of a complaint by the Secretary . . . . Any sums thus recovered by the Secretary of Labor on behalf of an employee pursuant to this subsection shall be held in a special deposit account and shall be paid . . . directly to the employee or employees affected."); see also 29 U.S.C. § 217 ("The district courts . . . shall have jurisdiction, for cause shown, to restrain violations of section 215 of this title.").
"Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities, of-- (1) the commencement or continuation . .. of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; [and] . . . (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate . . . ." 11 U.S.C. § 362(a).
If a non-bankruptcy forum correctly determines that an exception to the automatic stay applies and that, therefore, an action against the debtor or its property may proceed, "debtors are not left without an avenue for relief if they or the estate would be harmed . . . . The bankruptcy court has '"ample other powers'" to stay such an action, including the discretionary power under 11 U.S.C. § 105(a) to 'issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.'" United States v. Commonwealth Cos. (In re Commonwealth Cos.),
The Trustee's contention that the § 362(b)(4) exception to the stay only excepts actions mentioned in § 362(a)(1) (actions to recover a claim) and does not, therefore, permit actions described in § 362(a)(3) (acts to obtain possession or control over a debtor's property), suffers from a fatal flaw: it refers to a version of § 362 no longer in effect. Before 1998, the Trustee's argument would have warranted close examination, see Javens v. City of Hazel Park,
The Supreme Court expressly avoided considering the application of a § 215 "hot goods" action in the context of a bankruptcy proceeding. See id. at 39 n.10.
The financing company also argued, as does the Trustee here, that prosecution of a "hot goods" action against a party other than the producer of the goods when the producer has ceased operations does nothing to guarantee the minimum compensation levels sought by Congress. The Supreme Court dismissed that argument. See id. at 33 n.4 ("[T]he plain language of the Act . . . is not limited to ongoing concerns and makes no exception for employers who are financially or otherwise unable to comply with §§ [206, 207]. The proposition that an employer complies with the FLSA so long as its promised wage rates equal or exceed the statutory minimum, regardless of whether employees actually receive any compensation, would render illusory the Act's protections.")
We join the Eighth Circuit in refining the "pecuniary interest" test to focus our inquiry on whether the enforcement action would result in a pecuniary advantage to the government vis-a-vis other creditors of the bankruptcy estate. See In re Commonwealth Cos.,
Even if the Secretary's suit would result in a money judgment, that fact would not eliminate the jurisdiction of the district court. The police power exception allows actions that fix the civil liability of a debtor for violations of federal law, see Edward Cooper Painting,
Although the question is not before us, a cursory review of FLSA law suggests that the Trustee may clear the taint by paying significantly less than the full amount of all employees' contract-based wage claims against the estate, because the FLSA only covers certain employees, see 29 U.S.C. § 213 (creating exemptions), and mandates only a minimum hourly wage, see 29 U.S.C. § 206, and 150% of an employee's ordinary wage for overtime, see 29 U.S.C. § 207. Thus, even if the Secretary were to prosecute her suit successfully, some HSSI employees would receive nothing and others would receive only a fraction of their ordinary wages. Cf. Rusco Indus.,
Cf. In re Commerce Oil,
See, e.g, In re Mansfield Tire & Rubber Co.,
The rights conferred by FLSA §§ 206, 207, and 216(b), (c) are private rights to a minimum level of payment, a subject otherwise covered by the private relationship between employer and employee. A § 216 suit to enforce a Congressionally guaranteed minimum private right differs from an EEOC action to enforce Title VII in that the rights vindicated by a Title VII action are Congressionally created civil rights against discrimination in private employment, which is a policy overriding the specifics of private agreements.
The district court explained that the records are not just internal documents. They are produced by HSSI in part to fulfill its contractual obligation to patients to represent them in dealing with private insurers and Medicare and have some value to others, including patients and doctors who use them to develop a plan of care. These aspects of the records' limited intrinsic value confirm that their use in interstate commerce will not engender unfair competition with service providers who pay minimum wages.
Any unfair competition that may have occurred in late January and February 1999 resulted not from the services of HSSI's employees being rendered in substandard conditions but HSSI's insolvency. The unfairness to HSSI's competitors came not from a violation of the FLSA but the fact that HSSI was marketing its services at a time when it was not meeting its continuing financial obligations as they came due. This unfairness inevitably occurs in an economy that permits companies to go bankrupt. It stems not from a violation of wage and hour laws but from the ability of businesses to pay creditors-- including employees-- less than the market value, or other agreed-upon price, for the services rendered or goods supplied to the failing business.
The Secretary did not object to the district court's order allowing the Trustee to move the records in interstate commerce to Memphis and then use the records to generate accounts receivable. Instead, she adopted the novel theory of describing funds collected on the accounts receivable as "tainted funds" and sought the order directing deposit of enough funds to clear the taint from the goods with the district court clerk. Although the Secretary's action in the course of litigation cannot, of course, be used to remove any jurisdiction the district court may have had, it does confirm that the Secretary's real interest in prosecuting this enforcement action is the vindication of the workers' private rights.
KAREN NELSON MOORE, Circuit Judge, dissenting.
The district court held that the Labor Department's "hot goods" action at issue in this case falls within the Bankruptcy Code's police powers exception, 11 U.S.C. §362(b)(4), and thus is not subject to the automatic stay. The majority disagrees, concluding that, based on "the particular facts of this case," the police powers exception does not apply. Because I do not agree with the majority's narrow interpretation of the police powers exception, I respectfully dissent. In sum, I do not believe that the "the particular facts of this case" can plausibly be distinguished from other cases -- including Sixth Circuit precedents -- in which the police powers exception has been held to apply.
In the present case the majority concludes that the Labor Department's action "incidentally serves public interests but more substantially adjudicates private rights" and thus falls outside of the police powers exception. The action "more substantially adjudicates private rights" because, in the majority's estimation, this case involves only the recovery of wages owed by the debtor to its employees and thus does not implicate broader public interests. Even the Labor Department's effort to cast this as a "hot goods" action, i.e., as an action to enjoin the movement of tainted goods in interstate commerce, fails, according to the logic of the majority, as the "hot goods" in question are hospital records and thus not really "goods" at all. Because the records in question will not compete with goods produced in compliance with federal wage and hours standards, the majority reasons that no broader public interest is implicated by the Labor Department's action. In the majority's view, then, this is not really a "hot goods" case -- for most such actions will fall within the police powers exception, as even the majority concedes -- but simply an action by the Labor Department to recover unpaid wages on behalf of particular individuals.
In my view, however, it is irrelevant whether this case involves "hot goods," because under our precedents the police powers exception would apply even if this were a "pure" §216(c) suit to recover unpaid wages. In Ohio v. Mansfield Tire & Rubber Co. (In re Mansfield Tire & Rubber Co.),
Similarly, in NLRB v. Edward Cooper Painting, Inc.,
Other circuits have reached similar conclusions. In EEOC v. Rath Packing Co.,
At the same time, the majority is correct to note that all government actions are not covered by the police powers exception to the automatic stay. Thus, in Missouri v. U.S. Bankruptcy Court,
Thus, a number of courts, including this one, have held that the police powers exception to the automatic stay applies where, in the majority's words, the government agency's "suit serves little public purpose other than a general interest in seeing law enforced," at least where the law at issue is related to health, welfare, morals, or safety. The wage and hours laws at issue in this case are related to such concerns, and thus the majority's holding cannot be reconciled with many precedents -- including our own -- interpreting and applying the public policy exception to the automatic stay. For this reason, I respectfully dissent.
Note:
See, e.g., Eddleman v. Dep't of Labor,