By: Julia Guthy
St. John’s University School of Law
American Bankruptcy Institute Law Review, Staff Member
The filing of a petition for relief under chapter 7 or chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) typically results in an “automatic stay” enjoining creditors from taking certain actions against a debtor. In Equal Employment Opportunity Commission v. Krystal Co., the United States District Court for the Northern District of Georgia held that the Equal Employment Opportunity Commission (“EEOC”) was exempt from the automatic stay because it was acting within the scope of its police power.[1] Maxine Wilson (“Wilson”), an employee of Krystal Co. (“Krystal”), sued her employer for certain employment practices. Thereafter, the EEOC filed a separate complaint, on behalf of Wilson, seeking injunctive relief for unlawful employment practices under the Americans with Disabilities Act.[2] Following the consolidation of the two lawsuits, the EEOC and Wilson jointly requested mediation [3]. Before the parties met with the mediator, Krystal Co. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[4] The EEOC requested that the district court lift the stay and allow the litigation against Krystal to proceed, arguing that the claims of the agency are “excepted because the agency is acting under its police or regulatory power.”[5]
Here, the district court held that the agency was acting within the scope of its police power when it filed a complaint against Krystal Co., and thus, the automatic stay should be lifted to permit the EEOC to proceed with litigation against Krystal Co. The district court was not troubled that the defendant would have to incur costs to defend the litigation.[6] According to 11 U.S.C. §362(b)(4), an agency is exempt from a stay if the agency is acting under its police and regulatory power.[7] Citing to decisions from the United States Court of Appeals for the Fourth and Eighth Circuits, the district court, which is located in the Northern District of Georgia and bound to the decisions of the Eleventh Circuit, found that the EEOC acts “for the benefit of specific individuals [but is still acting] to vindicate the public interest in preventing employment discrimination.”[8] Furthermore, the district court did not see it appropriate to issue a discretionary stay[9], explaining that it was most likely the intent of Congress to have some litigation be exempt from the stay.[10]
Creditors are generally enjoined from litigating against a debtor. However, a defendant that has filed for bankruptcy may still be subject to litigation if the complaint filed against them is from an agency seeking to enforce their regulatory authority. Absent extreme circumstances, the district court will permit agency litigation despite the grave financial burden imposed on the defendant.[11] In order for a defendant to override the police power exception and petition for a discretionary stay to be issued, the defendant will be required to present a sufficient reason to “preclude application of the police-power exception to the automatic stay.”[12] The district court in Equal Employment Opportunity Commission v. Krystal Co concluded that the burden of steep litigation costs imposed on bankrupt defendants does not outweigh the Congressional intent of protecting employees from discrimination.[13]
[1] Equal Employment Opportunity Commission v. Wilson, Case No. 18-cv-04536 332, 333 (N.D. Ga. May 21, 2020).
[2] Id. at 333.
[3] Id.
[4] Id.
[5] Id. at 333. In response to the EEOC, the defendant claims that (1) injunctive relief will be moot because the defendant intends to sell all of its assets to another company; (2) the defendant is not aware of similar cases where the police power exception applies to agencies and private litigants; (3) even if the police power exception applies, the Court should use its discretion to stay the resolution because of the similarities between the EEOC’s claims and Wilson’s and; (4) allowing the stay to continue would promote judicial efficiency and protect the resources that the parties have. Id at 333-334.
[6] Id. at 335.
[7] Id. at 333 (citing to 11 U.S.C. §362(b)(4)).
[8] Id. (citing Gen. Tel. Co. v. EEOC, 446 U.S. 64 L.Ed.2d 319 (1980).
[9] Krystal Co. is requesting that even if the EEOC is able to continue with litigation despite the automatic stay, the court should issue a discretionary stay to bar the agency from action due to the financial status of the defendant. Id at 336. Krystal Co. argues that it “should not have to spend limited financial resources on litigation while it is in bankruptcy proceeding.” Id. The court responds by stating that “Congress obviously anticipated some litigation expenses when it elected to create exceptions to the automatic stay provision.” Id.
[10] Id. at 336.
[11] Id.
[12] Id. (citing Noble Metal Processing, 2009 WL 1868002, at 1).
[13] See Id. at 336. Although the agency was permitted to continue, Wilson’s claim was stayed. Id.