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Solis v. Koresko

United States District Court, Third Circuit

August 28, 2013

JOHN J. KORESKO, V, et al.


MARY A. McLAUGHLIN, District Judge.

This action by the Secretary of Labor arises out of alleged violations of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., in connection with a multiple-employer employee death benefit arrangement run by attorney John Koresko through a number of entities controlled by him.[1] That same death benefit arrangement is at issue in nine other cases pending before this Court.[2]

On July 23, 2013, six of the Koresko entities filed for bankruptcy pursuant to Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania.[3] Individual defendants John J. Koresko, V and Jeanne Bonney have not filed for bankruptcy. The Koresko Parties then filed a suggestion of bankruptcy on July 25, 2013 with regard to four cases before this Court. The Department of Labor ("DOL") stated its position that the case should proceed because the DOL's action is exempt from the automatic stay that resulted from the bankruptcy proceedings. The Court agreed, stating in a July 29, 2013 Order that the above-captioned case could proceed under the governmental regulation exception to the automatic stay, under 11 U.S.C. § 362(b)(4). The other three actions in which the suggestion of bankruptcy was filed were placed in civil suspense in response to the automatic stay.

On July 30, 2013, the Koresko Parties filed a motion for reconsideration of the Court's July 29, 2013 Order. Although the Koresko Parties' motion is styled as a motion for reconsideration, the Court will consider its arguments anew because this Court's July 29, 2013 Order was granted without full briefing by the parties.

The Koresko Parties' motion for reconsideration attached a brief filed in the Bankruptcy Court by proposed counsel for the debtors and debtors-in-possession, who is not counsel in this action. That brief made two arguments relevant to this Court as to why the DOL's action should be stayed: (1) the regulatory and police powers exception to the automatic stay does not apply because the DOL's case fails the pecuniary interest/public policy test; and (2) the Plans are not covered under ERISA, so the DOL's action is not properly within the DOL's enforcement or regulatory scope.[4] The Court will deny the motion.

A. Exemption from Automatic Stay for Enforcement of Police or Regulatory Power

11 U.S.C. § 362(b)(4) provides an exception to the automatic stay following the filing of a bankruptcy petition for the "commencement or continuation of an action or proceeding by a governmental unit... to enforce such governmental unit's... police or regulatory power."

To determine whether this exception applies, courts have applied two "related, and somewhat overlapping" tests: the pecuniary purpose test and the public policy test. In re Nortel Networks, Inc. , 669 F.3d 128, 139 (3d Cir. 2011) (quoting Lockyer v. Mirant Corp. , 398 F.3d 1098, 1108 (9th Cir. 2005)). The pecuniary purpose test asks whether the government primarily seeks to protect a pecuniary governmental interest in the debtor's property, as opposed to protecting the public safety and health. The public policy test asks whether the government is effectuating public policy rather than adjudicating private rights. If the purpose of the law is to promote public safety and welfare or to effectuate public policy, then the exception to the automatic stay applies. If, on the other hand, the purpose of the law is to protect the government's pecuniary interest in the debtor's property or primarily to adjudicate private rights, then the exception is inapplicable. Id. at 139-40 (citing Chao v. Hosp. Staffing Servs., Inc. , 270 F.3d 374, 385 (6th Cir. 2001)).

The Third Circuit has held that regulatory proceedings related to environmental hazards, health and safety violations, and employment discrimination all fall within the police power exception to the automatic stay. Nortel , 669 F.3d at 139-40 (citing cases). Courts in other circuits have held that a case brought by the federal government to redress ERISA violations is an action to enforce the government's police or regulatory powers and thus excepted from the application of the automatic stay. See e.g., Solis v. Caro, No. 11 C 6884, 2012 WL 1230824, at *3-5 (N.D. Ill. Apr. 12, 2012); Chao v. Bennett, No. 97-CV-0148, 2006 WL 1994838, at *1 (N.D.N.Y. July 14, 2006); Chao v. Johnson, No. H-03-5394, 2005 WL 2095109, at *1 n.1 (S.D. Tex. Aug. 30, 2005); Metzler v. Bennett, No 97-CV-0148 , 1998 WL 187454, at *4-5 (N.D.N.Y. Apr. 15, 1998); Martin v. Friedman , 133 B.R. 609, 611-12 (N.D. Ohio 1991); Dole v. Hansbrough , 113 B.R. 96, 97-98 (D.D.C. 1990); In re Incor, Inc., No. AZ 88-1082-AsRV, 1988 Bankr. LEXIS 2586, at *6-7 (B.A.P. 9th Cir. Dec. 9, 1988); McLaughlin v. Craig, No. 4-87-189-E, 1988 U.S. Dist. LEXIS 15904, at *3-6 (N.D. Tex. Nov. 10, 1988); Donovan v. Porter , 584 F.Supp. 202, 207 (D. Md. 1984).

The Court finds the reasoning of these cases persuasive. In this case, the DOL is not seeking its own pecuniary interest in the debtors' property, but rather acting to further its public policy interest in enforcing the requirements of ERISA. Cf. United States v. Nicolet, Inc. , 857 F.2d 202, 207-210 (3d Cir. 1998) (describing the pecuniary interest and public policy test for whether a government's action falls within the regulatory powers exception).

The fact that the DOL's action may benefit private employees does not convert this suit into one pursuing the pecuniary interest of private parties. The DOL is not seeking its own pecuniary interest, or the pecuniary interests of the United States, in this litigation.[5]

The Koresko Parties rely on Nortel, which held that the automatic stay applied to a U.K. Pensions Regulator's proceedings against an allegedly underfunded pension plan. Nortel is distinguishable from this case because there, the Third Circuit found that neither the Trustee of Nortel Networks U.K. Pension Plan or the U.K. Board of the Pension Protection Fund were governmental units, and therefore the police power and regulatory exception could not apply to their efforts. 669 F.3d at 138-139. In contrast, the DOL is a governmental unit.

The Koresko Parties also cite the Sixth Circuit's decision in Chao v. Hospital Staffing Services, which found that a suit filed by the Secretary of Labor passed the pecuniary interest test but failed the public policy test, and therefore did not fall within the police power exception. There, the DOL brought a "hot goods" suit against a bankruptcy trustee to prevent the movement of medical records in violation of the Fair Labor Standards Act. The Sixth Circuit held that such a suit served little public purpose because the main remedy of that suit would be to recover wages and liquidated damages, and protect the property interest held by affected employees, rather than to benefit any interest of the public. 270 F.3d at 391-93.

In contrast, actions by the Secretary of Labor to enforce ERISA are intended to further public policy. The text ...

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