[Last Updated May 1, 2012]
FEDERAL COURT DECISIONS
BANKRUPTCY OF RESPONDENT; RELIEF FROM STAY TO PURSUE SOX WHISTLEBLOWER CLAIM
In In re The Project Group, Inc. , No. 05-4099 (Bkrtcy.S.D.Tex. June 28, 2006), the bankruptcy court granted retroactive relief from a bankruptcy stay in respect to a Sarbanes-Oxley Act whistleblower claim filed against the Debtor by one of the Debtor's former employees. The bankruptcy court had earlier issued a order granting relief from stay. Although that order had ignored the SOX action and focused on state court actions, the parties had proceeded before DOL as if the order applied to the SOX matter as well. When a trustee was appointed to replace the Debtor as the entity in control of the case, a new attorney for the trustee raised the issue of the applicability of the stay before the presiding ALJ, who directed the parties to return to the bankruptcy court for a clarification. In the interim, the Complainant removed the SOX claim to federal district court.
ADMINISTRATIVE REVIEW BOARD DECISIONS
BANKRUPTCY; WHERE PROOF OF CLAIM FILED WITH BANKRUPTCY COURT BY COMPLAINANT'S SOLELY OWNED COMPANY INCLUDED THE BASIS FOR THE SOX WHISTLEBLOWER COMPLAINT, BANKRUPTCY DISCHARGE OF THE COMPANY'S CLAIM ALSO BARRED COMPLAINANT'S SOX CLAIM AS AN INDIVIDUAL
In Mothershead v. Delphi Corp. , ARB No. 10-120, ALJ No. 2007-SOX-84 (ARB Apr. 26, 2012), the ARB noted that
Under Section 1141(d)(1)(A) of Title 11, the Bankruptcy Code, the effect of confirmation of a Chapter 11 reorganization plan "discharges the debtor from any debt that arose before the date of such confirmation." See also 11 U.S.C. 944(b)(1) ("[T]he debtor is discharged from all debts as of the time when . . . the plan is confirmed."). The discharge "operates as an injunction against the commencement or continuation of an action." 11 U.S.C. § 524(a)(2).
The ARB found that the ALJ properly dismissed the Complainant's SOX whistleblower proceeding against the Respondent under the terms of the bankruptcy court's Order that expressly disallowed and expunged the Complainant's solely-owned company's claims with prejudice, and the Confirmed Plan and subsequent Modified Plan that discharged the Respondent's debtors and enjoined any person from "commencing or continuing any action" that was otherwise discharged.
The Complainant contended that his whistleblower complaint was not discharged under the terms of the bankruptcy proceeding because his SOX claim, which he brought as an individual, was distinctly different from the claims discharged in bankruptcy, which were against his company of which he is sole owner. The ARB noted that it had rejected a similar contention raised in Hafer v. United Airlines , ARB No. 06-132, ALJ No. 2006-CAA-6 (ARB Aug. 29, 2008), and found that the facts of the instant case did not warrant a different result. The Complainant's SOX claim was filed prior to the bankruptcy action, and stemmed from a project that the Respondent retained the Complainant's company to perform. The Complainant was the sole owner of his company and was named in the Proof of Claim filed with the bankruptcy court. The Proof of Claim listed as part of the basis for the claim that the Respondent used inadequate internal controls that could possibly violate SOX.
The ARB also rejected the Complainant's argument that his claims fall within the government exception under the Bankruptcy Code. The ARB noted that the automatic stay provision in the Bankruptcy Code contains an exception for the "continuation of an action or proceeding by a governmental unit" to "enforce such governmental unit's or organization's police and regulatory power." The ARB stated that this exception, however, does not apply where a complainant has brought a case as an individual, and that that in the instant SOX proceeding, the Department of Labor was "acting in a quasi-judicial capacity, seeking to adjudicate private rights". The ARB likewise rejected the Complainant's argument that the exception set out at 11 U.S.C. § 523(a)(19) that excludes debts associated with "violation of any of the Federal securities laws."
BANKRUPTCY; AUTOMATIC STAY OF ADMINISTRATIVE PROCEEDING; STIPULATION UNDER BANKRUPTCY RULE 9019
In Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the Respondent had filed for Chapter 11 bankruptcy protection. The ARB, however, was enabled to issue its Final Decision and Order because the Bankruptcy Court issued an order under Rule 9019 of the Fed. R. of Bankruptcy Procedure approving a stipulation of the parties to modify the automatic stay to permit the ARB to issue its decision.