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Federal Court rules that an EEOC lawsuit is not barred by Bankruptcy Code’s automatic stay

Seyfarth SynopsisThe government’s anti-discrimination watchdog can be extremely aggressive in pursuing discrimination claims, including pursuing those claims after an employer files for bankruptcy. Normally, after a bankruptcy petition is filed, the Bankruptcy Code’s automatic stay enjoins other actions against the debtor. But in EEOC v. Tim Shepard M.D., PA d/b/a Shepherd Healthcare, 17-CV-02569 (N.D. Tex. Oct. 11, 2018), the U.S. District Court for the Northern District of Texas sided with the EEOC and concluded that the EEOC’s Title VII lawsuit fell within an exception to the Bankruptcy Code’s automatic stay. This case is a good reminder that the Bankruptcy Code’s protections do not necessarily stave off an EEOC action. Importantly, the EEOC often will not back down from a fight simply because its target filed a bankruptcy petition, and depending on the nature of the EEOC action, it may fall within an exception to the automatic stay.  

The Decision

In EEOC v. Tim Shepard M.D., PA d/b/a Shepherd Healthcare, 17-CV-02569 (N.D. Tex. Oct. 11, 2018), the EEOC filed suit in the U.S. District Court for the Northern District of Texas for alleged violations of Title VII of the Civil Rights Act of 1964. After a year of litigation, the defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code. As a result of the bankruptcy proceeding, the court entered an automatic stay under 11 U.S.C. § 362 and administratively closed the EEOC’s action.

The Bankruptcy Code’s automatic stay provides fundamental protection to a debtor in a bankruptcy by automatically enjoining certain actions against the debtor. The purpose of the automatic stay is to preserve the bankruptcy estate so that it can be orderly distributed to creditors.

Although the court stayed and administratively closed the EEOC’s enforcement action, the EEOC filed a motion to reopen the case, arguing that its discrimination lawsuit fell within the governmental unit or police and regulatory exception to the automatic stay found in 11 U.S.C. § 362(b)(4). Section 362(b)(4) provides that the filing of a bankruptcy 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 to enforce such governmental unit’s . . . police or regulatory power.

11 U.S.C. § 362(b)(4).

Because Fifth Circuit has not addressed whether an EEOC enforcement action under Title VII falls within Section 362(b)(4)’s exception to the automatic stay, the court explained that it “must assess whether the EEOC’s primary purpose for bringing this action is to protect public policy and welfare as opposed to adjudicating private rights or represents an attempt to recover property from [the defendant’s] bankruptcy estate.” Id. at 2. The court then analyzed the nature of the lawsuit and the relief sought to make this determination.

Specifically, the court found that the EEOC was primarily seeking a permanent injunction and that there was no indication that it was protecting a pecuniary interest in the bankruptcy estate. In addition, the court highlighted that the EEOC was vindicating the public interest by seeking to prevent discrimination in the workplace. Based on these findings, the court concluded that the EEOC’s primary purpose for bringing the action was to protect public policy and welfare. Thus, the court held that the EEOC’s action was not subject to the Bankruptcy Code’s automatic stay.

Implication For Employers:

This case is a valuable reminder for employers that the EEOC will not be deterred by the threat, or filing of, a bankruptcy petition. Employer’s facing bankruptcy and enforcement actions should assess whether the EEOC’s action will likely be an exception to the automatic stay. As this case makes clear, if the EEOC is primarily seeking injunctive relief, there is a good chance that the Bankruptcy Code’s automatic stay will not enjoin the EEOC’s enforcement action.

This article was originally posted by www.seyfarth.com.

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