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Court Rules that Fines Under California’s Private Attorney General Act Are Not Dischargeable in Chapter 7 Bankruptcy

By Government of California (Government of California) [Public domain], via Wikimedia CommonsA California federal district court ruled that fines assessed under a California law that allows employees to enforce state labor law as “private attorneys general” are not dischargeable in a Chapter 7 bankruptcy proceeding. Medina v. Poel, No. 1:14-cv-01302, order (E.D. Cal., Jan. 20, 2015). Federal bankruptcy law excepts certain fines and other penalties payable to a government entity from discharge. 11 U.S.C. § 523(a)(7). The debtor argued that any damages awarded in a lawsuit brought by an individual under the California Private Attorney General Act (PAGA), Cal. Labor Code § 2698 et seq., do not fit the definitions established in § 523(a)(7) and therefore should be subject to discharge. While the bankruptcy court agreed with the debtor, the district court reversed that holding, finding that PAGA provides for civil penalties that are excepted from discharge.

The creditor filed suit under PAGA against the debtor in state court in 2010 for alleged wage and hour law violations. PAGA allows employees to sue an employer for civil penalties for violations of state labor laws. The California legislature enacted PAGA in recognition of state officials’ inability to “keep pace with the sprawling and often ‘underground’ economy.” Medina, order at 5, citing Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348, 379 (2014). It therefore decided to “deputize and incentivize employees uniquely positioned to detect and prosecute[] violations.” Id.

The state PAGA lawsuit was still pending when the debtor filed for Chapter 7 bankruptcy in August 2012. The debtor filed an adversary proceeding against the creditor. In a motion for summary judgment, the debtor claimed that any liability under the PAGA lawsuit was not excepted from discharge under § 523(a)(7), and that any liability had already been discharged by the general discharge issued by the bankruptcy court in June 2013. The bankruptcy court granted the debtor’s motion, and the creditor appealed to the district court. The two questions presented to the district court on appeal were whether the bankruptcy court erred in ruling that civil penalties under PAGA do not fall under the exception to discharge in § 523(a)(7), and whether the court erred in ruling that the creditor’s claims were already discharged.

The district court held that PAGA penalties meet the four-part legal definition of a nondischargeable government debt:  (1) a “fine, penalty, or forfeiture” (2) payable to a government entity (3) for the benefit of that entity (4) that is not “compensation for actual pecuniary loss.” Medina at 4, citing In re McDowell, 415 B.R. 612, 617 (Bankr. S.D. Fla. 2008). Civil penalties under PAGA are assessed “per aggrieved employee per pay period.” Medina at 6. A plaintiff in a PAGA suit has no specific claim to these penalties, which are payable to California’s labor agency. The district court therefore found that PAGA penalties are excepted under § 523(a)(7) and reversed the bankruptcy court’s order.

Since 1997, bankruptcy attorney Devin Sawdayi has helped individuals and families in the Los Angeles area repair and rebuild their finances through the Chapter 7 and Chapter 13 bankruptcy processes. Contact us today online or at (310) 475-939 to schedule a free and confidential consultation with an experienced and knowledgeable financial advocate.

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Debtor’s “Tortious Conduct” May Prevent Discharge of Debt in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, May 5, 2015

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

Embezzlement Judgment Does Not Prevent Debtor From Exempting Proceeds of Civil Lawsuit Against Creditor, Los Angeles Bankruptcy Lawyer Blawg, November 14, 2014

Photo credit: By Government of California (Government of California) [Public domain], via Wikimedia Commons.