## Facts

- The U.S. Department of Labor (DOL), through the Secretary of Labor, sued SCA Restaurant Corp., doing business as an Italian restaurant, and its owner, Luigi Quarta.
- The complaint alleged violations of the Fair Labor Standards Act (FLSA), including failures to pay minimum wage and overtime and failures to keep required wage-and-hour records.
- The DOL sought an injunction barring future violations and sought monetary relief for employees, including unpaid overtime (and related statutory relief requested in the complaint).
- After the DOL filed suit, Quarta filed a voluntary Chapter 7 bankruptcy petition.
- Quarta argued that the Bankruptcy Code’s automatic stay barred continuation of the DOL’s FLSA action against him.
- SCA Restaurant Corp. did not file for bankruptcy.

## Issues

1. Whether the DOL’s FLSA enforcement action against Quarta was barred by the automatic stay under 11 U.S.C. § 362(a), or instead fit within the governmental “police and regulatory power” exception in 11 U.S.C. § 362(b)(4).
2. Whether any automatic stay applied to the non-debtor corporate defendant, SCA Restaurant Corp., which had not filed for bankruptcy.

## Decision

- The court denied defendants’ request to apply the Bankruptcy Code’s automatic stay to the DOL’s FLSA case.
- The court held the DOL could proceed against Quarta because the action fit within § 362(b)(4)’s police-and-regulatory-power exception.
- The court stated the stay question did not apply to SCA Restaurant Corp. because it was not a bankruptcy debtor and there was no basis to stay the case as to the corporation.

## Legal Principles

- A bankruptcy filing generally stays the commencement or continuation of a judicial proceeding against the debtor. 11 U.S.C. § 362(a).
- Section 362(b)(4) excepts from the stay an action by a governmental unit to enforce its police or regulatory power.
- Courts assess § 362(b)(4) using two related inquiries:
  - the pecuniary purpose test (whether the action is mainly a debt-collection effort for a governmental or creditor financial interest), and
  - the public policy test (whether the action effectuates public policy rather than deciding private rights).
- Government wage-and-hour enforcement actions that seek to stop ongoing violations and obtain statutorily authorized monetary remedies may qualify under § 362(b)(4), even if employees may receive restitutionary payments.

## Conclusion

The court held that the DOL’s FLSA lawsuit sought to stop and remedy wage-and-hour and recordkeeping violations and therefore operated as an exercise of governmental police and regulatory authority under § 362(b)(4), so Quarta’s Chapter 7 filing did not stay the case; the stay also did not extend to the non-debtor corporate defendant, SCA Restaurant Corp.


Solis v. SCA Restaurant Corp., 463 Bankr. 248 (2011)