FALSE CLAIMS ACT – BANKRUPTCY

U.S. ex rel. Fullington v. Parkway Hosp., Inc., No. 98-CV-3618 (JFB)(RLM) (E.D.N.Y. Sept. 19, 2006)

The United States District Court for the Eastern District of New York held that the automatic stay in Section 362 of the Bankruptcy Code did not prevent the government from proceeding with its claim under the False Claims Act ("FCA") against a hospital that had filed for bankruptcy. The government chose to intervene on one count in the qui tam relator's claim. The hospital subsequently filed for bankruptcy. Under Section 362(a)(1) of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays the commencement or continuation of judicial proceedings against a debtor. However, Section 362(b)(4) of the Code provides an exception to this rule for actions brought by a governmental unit that is seeking to enforce its police or regulatory powers. The district court found this exception applied because the FCA claim served the important government interest of deterring fraud against the government. Therefore, the government could proceed with its FCA claim. However, the qui tam relator's other claims, for which the government did not intervene, would be stayed, as the relator was not a governmental unit and would not fall under any exception to the automatic stay rule.