Chao v. Hospital Staffing Services

Citation270 F.3d 374
Decision Date25 January 2001
Docket NumberNos. 99-6147,s. 99-6147
Parties(6th Cir. 2001) 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. /6487 Argued:
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

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. Department of 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.

I

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...

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