Cabardo v. Patacsil

1 POSTED ON THE WEBSITE 2 NOT FOR PUBLICATION 3 4 UNITED STATES BANKRUPTCY COURT 5 EASTERN DISTRICT OF CALIFORNIA 6 7 In re: Case No. 20-23457-A-7 8 ERNESTO PATACSIL and MARILYN EMBRY PATACSIL, 9 10 Debtors. 11 12 JOSEPH CABARDO et al., Adv. No. 20-02167-A 13 Plaintiffs, FEC-4 14 V. MEMORANDUM 15 ERNESTO PATACSIL et al., 16 Defendants. 17 18 19 Argued and submitted on April 18, 2023 20 at Sacramento, California 21 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 22 Appearances: Stan S. Mallison, Hector R. Martinez, 23 Heather Hamilton, Mallison & Martinez and John R. Grele for plaintiffs Joseph 24 Cabardo, Donnabel Suyat, Marissa Bibat, Mactabe Bibat, Renato Manipon, Alicia 25 Bolling, Carlina Cabacongan, John Dave Cabacongan, Mallison & Martinez, and the 26 Law Offices of John R. Grele; Charles L. Hastings, Natali A. Ron, Law Offices of 27 Hastings & Ron for defendants Ernesto Patacsil and Marilyn Embry Patacsil 1 Article III standing is jurisdictional; it requires an injury in 2 fact, traceable to the defendant’s conduct that will likely be 3 redressed by a favorable decision. Acting as private attorneys 4 general, eight employees of the defendants sued them in District Court 5 for violations of California labor laws; the employees obtained a 6 substantial judgment, e.g., almost $2 million, against the defendants 7 for back wages, civil penalties arising from those violations, and 8 attorneys’ fees. As to the unpaid wages portion of the judgment, the 9 employees are the real parties in interest; as to the civil penalties, 10 the State of California is the real party in interest. After the 11 employers filed bankruptcy, the employees sought to except the State 12 of California’s portion of the judgment from dis charge as a penalty 13 “payable to and for the benefit” of the government. 11 U.S.C. § 14 523(a)(7). Do the employees have Article IIII standing to assert the 15 State of California’s interests in the judgment? 16 I. FACTS 17 Ernesto Patacsil and Marilyn Embry Patacsil (“Patacsils”) did 18 business as Patacsils Care Homes. Patacsil Care Homes operated seven 19 residential care facilities for mildly impaired developmentally 20 disabled persons. To assist them, the Patacsils employed the 21 plaintiffs and others to act as caregivers for their residents. 22 Patacsils did not pay their employees in an amount or manner 23 consistent with California’s wage and hours laws. 24 Aggrieved by the Patacsils’ treatment and after giving notice to 25 the California Labor and Workforce Development Agency, eight employees 26 and/or former employees (“the Cabardo plaintiffs”) sued the Patacsils 27 in District Court acting under the Private Attorney General Act, Cal. 1 collect damages for wages and hours violations. They also sought 2 Labor Code penalties for the Patascils’ violations of the labor laws. 3 The employees were represented by the law firm of Mallison & Martinez 4 and by John R. Grele (“Grele”). After trial, the District Court 5 awarded the Cabardo plaintiffs damages of $893,815, penalties of 6 $79,524 and attorneys’ fees of $1,077,218. Compl. ¶ 8, ECF No. 1. 7 Sometime later, the Patacsils ceased doing business. Id. at ¶ 8 33. 9 Predictably, the Patacsils filed a Chapter 7 bankruptcy. 10 In response, the eight employees, Mallison & Martinez, and Grele 11 filed an adversary proceeding to protect their judgment from 12 discharge. They advanced two theories for except ing their debt. 13 First, the Cabardo plaintiffs seek to perfect their rights in a debt 14 (here a judgment) that they contend was incurred willfully and 15 maliciously. 11 U.S.C. § 523(a)(6), (c)(1). Second, the Cabardo 16 plaintiffs and their counsel seek to determine the dischargeability of 17 the civil penalties, i.e., $79,524, as a debt “payable and for the 18 benefit of a governmental unit.” 11 U.S.C. § 523(a)(7); Fed. R. Bankr. 19 P. 4007(a). Leveraging their second theory, they suggest that the 20 $1,077,218 in attorneys’ fees awarded for recovering those civil 21 penalties is also nondischargeable.1 Patacsils filed an answer to the 22 complaint and the matter is ready for trial. 23 II. PROCEDURE 24 Recent case law from the Ninth Circuit, Magadia v. Wal-Mart 25 Associates, 999 F.3d 668, 674-678 (9th Cir. 20201), has brought 26 1 In some cases, attorneys’ fees awarded as damages for a debt not 27 dischargeable under 11 U.S.C. § 523(a) are also nondischargeable. Cohen v. de la Cruz, 523 U.S. 213, 218 (1998); In re Zito, 604 B.R. 388, 392-393 (9th 1 guidance to Article III standing in actions prosecuted under the 2 Private Attorney General Act. Believing that the plaintiffs may lack 3 Article III standing to assert the fine, penalty and forfeiture 4 exception, 11 U.S.C. § 523(a)(7), this court issued an order to show 5 cause regarding dismissal. Order to Show Cause, ECF No. 202. Each 6 side filed responsive briefs and the court entertained oral argument. 7 III. JURISDICTION 8 This court has jurisdiction. 28 U.S.C. §§ 1334(a)-(b), 157(b); 9 see also General Order No . 182 of the Eastern District of California. 10 Jurisdiction is core. 28 U.S.C. § 157(b)(2)(I); Carpenters Pension 11 Trust Fund for Northern Calif. V. Moxley, 734 F.3d 864, 868 (9th 12 2013); In re Kennedy, 108 F.3d 1015, 1017 (9th C ir. 1997). Plaintiffs 13 do not consent to the entry of final orders and judgments by this 14 court; defendants do so consent. 28 U.S.C. § 157(b)(3); Wellness 15 Int’l Network, Ltd. V. Sharif, 135 S.Ct. 1932, 1945-46 (2015). 16 Scheduling Order § 2.0, ECF No. 13. 17 IV. LAW 18 A. Article III Standing 19 1. Traditional analysis 20 Article III standing is jurisdictional. CGM, LLC v. BellSouth 21 Telecomms., Inc., 664 F.3d 46, 52 (4th Cir. 2011); Fed. R. Civ. P. 22 12(b)(1), incorporated by Fed. R. Bankr. P. 7012. Plaintiffs seeking 23 redress in the federal courts must show Article III standing. Lujan 24 v. Defs. Of Wildlife, 504 U.S. 555, 560 (1992). Standing implicates 25 the case And controversy provisions of the United states Constitution. 26 “In essence the question of standing is whether the litigant is 27 entitled to have the court decide the merits of the dispute or of Warth v. Seldin 1 In its constitutional dimension, standing imports justiciability: whether the plaintiff has made out a ‘case 2 or controversy’ between himself and the defendant within the meaning of Art. III. This is the threshold question in 3 every federal case, determining the power of the court to entertain the suit. As an aspect of justiciability, the 4 standing question is whether the plaintiff has ‘alleged such a personal stake in the outcome of the controversy’ as 5 to warrant his invocation of federal-court jurisdiction and 6 b ot e ro h a oj l tu f hs . et ri wf iy T sh ee e x te A or rc t pi . rs e oI t I eo I cf t j t uh ad ge i a c ic io nau sl tr t p i’ os nw jer ure r m yee xd tii osa tl ts h p eoo nw cle oyr m s pt loo a n ir neh idi nrs ge ss 7 cp oa lr lt ay t, e e rav le ln y .th Ao u fg eh d et rh ae l c co ou ur rt t’s ’ sj u jd ug rm ise dn it c tm ia oy n b te hn ee rf ei ft o ro et h ce ar ns 8 be invoked only when the plaintiff himself has suffered ‘some threatened or actual injury resulting from the 9 putatively illegal action . . ..’ 10 Id. (internal citations omitted) (emphasis added). 11 Federal courts must address the issue of standing whenever and 12 wherever it arises. United States v. Hays, 515 U.S. 737, 742 (1995); 13 Carrico v. City & County of San Francisco, 656 F.3d 1002, 1005 (9th 14 Cir. 2011). It must even do so sua sponte. Fed. R. Civ. P. 12(h)(3), 15 incorporated by Fed. R. Bankr. P. 7012. Where the issue arises in a 16 motion to dismiss, the court “must accept as true all material 17 allegations of the complaint, and must construe the complaint in favor 18 of the complaining party.” Id. At 501, citing Jenkins v. McKeithen, 19 395 U.S. 411, 421—422 (1969); W.R. Huff Asset Management, LLC v. 20 Deloitte & Touche LLP, 549 F.3d 100, 106 (2008). The party asserting 21 federal jurisdiction bears the burden of proof. Id. At 561; Cooksey 22 v. Futtrell, 721 F.3d 226, 234 (4th Cir. 2013). 23 Standing does not exist in gross and advances claim by claim and 24 as to each form of relief sought. Davis v. Federal Election Comm’n, 25 554 U.S. 724, 734 (2008); Friends of the Earth, Inc. v. Laidlaw 26 Environmental Services (TOC), Inc., 528 U.S. 167, 185 (2000). 27 Moreover, that the Cabardo plaintiffs enjoyed Article III standing in District Court does not assure them standing in this court. As the 1 Supreme Court phrased it: 2 The complaining party must also show that he is within the class of persons who will be concretely affected. Nor does 3 a plaintiff who has been subject to injurious conduct of one kind possess by virtue of that injury the necessary 4 stake in litigating conduct of another kind, although similar, to which he has not been subject. 5 6 Blum v. Yaretsky, 457 U.S. 991, 999 (1982) (emphasis added), citing 7 Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 166–167 (1972). 8 The “irreducible constitutional minimum of standing” has three 9 component parts. Lujan v . Defs. Of Wildlife, 504 U.S. 555, 560 10 (1992). “[T]raditional Article III standing” requires that the 11 plaintiff has “(1) suffered an injury in fact, (2) that is fairly 12 traceable to the challenged conduct of the defen dant, and (3) that is 13 likely to be redressed by a favorable judicial decision.” Spokeo, 14 Inc. v. Robins, 578 U.S. 330, 338 (2016), as revised (May 24, 2016); 15 Lujan at 560; Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668 (9th 16 Cir. 2021) (describing this as traditional Article III standing). 17 Each element is further particularized. “[I]njury in fact” means “an 18 invasion of a legally protected interest” that is “concrete and 19 particularized” and “actual or imminent, not conjectural or 20 hypothetical.” Spokeo, 578 U.S. at 339 (2016). “[F]airly traceable” 21 requires a causal connection between the injury that occurred and the 22 defendant’s conduct. Lujan, 504 U.S. at 559-560. “[L]ikely, to be 23 redressed” means that there is a “substantial likelihood” the relief 24 sought will redress injury. Duke Power Co. v. Carolina Env’t Study 25 Grp., Inc., 438 U.S. 59, 75 (1978). The relief granted must redress 26 the plaintiff’s, not the undifferentiated general public’s injury in 27 fact. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 106 1 bootstrap a plaintiff into federal court; that is the very essence of 2 the redressability requirement”). 3 The Article III standing applies to bankruptcy proceedings. In 4 re Sherman, 491 F.3d 948, 956-958 (9th Cir. 2007); Matter of 5 Spielbauer, 785 Fed. Appx. 369, 371 (9th Cir. 2019); In re Global 6 Technologies, Inc., 645 F.3d 201, 210 (3rd Cir. 2011). Outside the 7 bankruptcy, the injury in fact must be traceable to an illegal act, 8 Miller v. Nissan Motor Acceptance Corp., 362 F.3d 209, 221 (3rd Cir. 9 2004); inside bankruptcy, most courts trace the injury in fact not to 10 an illegal act, but to the bankruptcy and its effect on the party 11 before it. Sherman, 491 F.3d at 955 (motion to dismiss the petition); 12 Spielbaur, 785 Fed. Appx. at *3 (adversary proce eding under 11 U.S.C. 13 § 523(a)(6)). 14 2. Qui tam actions 15 Qui tam actions are a “well-established exception’ to the 16 traditional Article III analysis.” Magadia v. Wal-Mart Associates, 17 Inc., 999 F.3d 668 (9th Cir. 2021), quoting Spokeo, 136 S. Ct. at 1552 18 n.*; Vt. Agency of Nat. Res. v. U.S. ex. rel. Stevens, 529 US. 765, 19 769 n. 1, 774-776 (2000); Bennett v. Spear, 520 U.S. 154, 162 (1997) 20 (citizen-suit provisions of the Clean Air Act does not eliminate 21 Article III standing). “Qui tam is short for the Latin phrase qui tam 22 pro domino rege quam pro se ipso in hac parte sequitur, which means 23 ‘who pursues this action on our Lord the King's behalf as well as his 24 own.’” Vermont Agency, 529 U.S. at 768 n. 1. “A qui tam statute 25 permits private plaintiffs, known as relators, ‘to sue in the 26 government's name for the violation of a public right.’” Magadia, 999 27 F.3d at 674, quoting, Spokeo, 136 S. Ct. at 1552 n.* (Thomas, J., 1 rights to the relator plaintiff, U.S. ex. rel. Kelly v. Boeing Co., 9 2 F.3d 743, 748 (9th Cir. 1993), and “it is the government’s injury that 3 confers standing upon the private person.” Stalley v. Methodist 4 Healthcare, 517 F.3d 911, 917 (6th Cir. 2008), cited by Magadia, 999 5 F.3d at 674. 6 3. Private Attorney General Act plaintiffs 7 The Ninth Circuit has held that the Private Attorney General Act, 8 Cal. Labor Code § 2698 et seq., is not qui tam action for the purposes 9 of Article III standing. Magadia, 999 F.3d at 674-678 (“PAGA's 10 features diverge from Vermont Agency’s assignment theory of qui tam 11 injury, and they depart from the traditional criteria of qui tam 12 statutes”). 13 The full reach of Magadia was not apparent until almost a year 14 later when the Ninth Circuit decided Saucillo v. Peck, 25 F.4th 1118 15 1125 (9th Cir. 2022). Though Saucillo involved a non-PAGA party’s 16 right to appeal an order approving the settlement of a PAGA action, it 17 made clear that PAGA plaintiffs must show traditional Article III 18 standing, i.e., injury in fact and redressability, rather than relying 19 on their status of as qui tam plaintiffs: 20 Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668 (9th Cir. 2021)...concluded that the plaintiff—Roderick Magadia— 21 lacked Article III standing to bring a “meal-break claim” under PAGA “because he did not suffer an injury himself.” 22 This conclusion flowed from Magadia's core holding that plaintiffs seeking penalties under PAGA for California 23 labor law violations must satisfy the traditional Article III standing requirement of an injury in fact... Magadia 24 recognized that “PAGA has several features consistent with traditional qui tam actions.” However, we also explained 25 that “PAGA differs in significant respects from traditional qui tam statutes,” and so ultimately held that PAGA was not 26 “qui tam for purposes of Article III” because its features “depart from the traditional criteria of qui tam 27 statutes[.]” Saucillo 1 omitted). 2 That said, circuit law requires that Private Attorney General Act 3 plaintiffs, Cal. Labor Code § 2698 et seq., must satisfy the 4 traditional Article III analysis, i.e., injury in fact and 5 redressability, when demonstrating Article III standing. 6 B. 11 U.S.C. § 523(a)(7) 7 Most Chapter 7 debtors are entitled to the discharge of all, or 8 almost all, debts incurred prior to the petition date. In re Zhiry, 9 No. 21-22759-A-7, 2023 WL 2530252, at *1 (Bankr. E.D. Cal. Mar. 14, 10 2023). Debts excepted from discharge come in two flavors: exceptions 11 that exist as a matter of law (sometimes referred to as self- 12 executing), e.g., 11 U.S.C. § 523(a)(1), (a)(3), (a)(5), (a)(9)-(19), 13 and exceptions that require creditors to file, in a timely fashion, an 14 adversary proceeding to protect their rights. 11 U.S.C. § 523(a)(2), 15 (a)(4), (a)(6). Section 523(a)(7) governs debts for fines or 16 penalties that are due and payable to the government; it is excepted 17 from discharge as a matter of law. In re Scheer, 819 F.3d 1206, 1209 18 n. 1 (9th Cir. 2016); Matter of Towers, 162 F.3d 952, 953 (7th Cir. 19 1998) (“[d]ebts covered by this subsection thus pass through 20 bankruptcy unaffected; the creditor may disregard the [bankruptcy] 21 proceedings and enforce its rights later”); In re Williams, 438 B.R. 22 679, 687 (10th Cir. BAP 2010). Debts excepted from discharge as a 23 matter of law, including those described in § 523(a)(7), follow the 24 debtor out the backdoor of the courthouse, even though the creditor 25 has undertaken no action to perfect or enforce its rights. 26 The rudiments of § 523(a)(7) are well-known: 27 A discharge under section 727, 1141, 11921 1228(a), 1228(b), or 1328(b) of this title does not discharge an 1 ... 2 3 uf( no7 ir) tf t e ,o i t at u nh r de e ipe sax yt nae obn tlt e c s otu moc p h ea nnd sde a b tft io oi r ns t ff h oo e rr b aa e c n tf e ui f an i le t , p o ep f ce un a na il g at o ry v y, e r lo n or m s e sn ,t al other than a tax penalty-- 4 (A) relating to a tax of a kind not specified in 5 paragraph (1) of this subsection; or 6 (B) imposed with respect to a transaction or event that occurred before three years before the date of the 7 filing of the petition. 8 11 U.S.C. § 523(a)(7) (emphasis added). 9 Section 523(a)(7) has four elements: 10 To be nondischargeable, the debt must (1) arise as a punishment or sanction for some type of wrongdoing by the 11 debtor and not merely be an enhanced monetary remedy for what is essentially a breach of contract; (2) not be 12 compensation for actual pecuniary loss; (3) be payable to a governmental unit; and (4) be for the benefit of a 13 governmental unit. 14 4 Collier on Bankruptcy, Exceptions to Discharge ¶ 523.13 (16th ed. 15 2023). 16 “Governmental unit" is defined term. 17 The term “governmental unit” means United States; State; Commonwealth; District; Territory; municipality; foreign 18 state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a 19 trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a 20 foreign state; or other foreign or domestic government. 21 11 U.S.C. § 101(27). 22 The phrase “payable to and for the benefit of a governmental 23 unit,” 11 U.S.C. § 523(a)(7), has bedeviled courts for nearly 40 24 years. See e.g. Kelly v. Robinson, 479 U.S. 36 (1986) (restitution 25 ordered in a criminal proceeding are excepted from discharge); Matter 26 of Towers, 162 F.3d 952 955 (1998) (civil penalties payable to the 27 Illinois Attorney General, which distribute them to fraud victims are not excepted from discharge); Hughes v. Sanders, 469 F.3d 475 (6th 1 Cir. 2006) (judgment for legal malpractice and sanctions payable to 2 the client was not excepted from discharge). 3 When a party is unclear as to whether a particular debt falls 4 within one of enumerated debts excepted from discharge as a matter of 5 law, e.g., 11 U.S.C. § 523(a)(7), the aggrieved party may seek 6 declaratory relief from the bankruptcy court. Fed. R. Bankr. P. 7 4007(a). There are only two prerequisites to relief under Rule 8 4007(a); that the party seeking relief: (1) be a debtor or a creditor, 9 Cundiff v. Cundiff (In re Cundiff), 227 B.R. 476 (6th Cir. BAP 1998); 10 In re Spong, 661 F.2d 6 (2nd Cir. 1981); 9 Collier on Bankruptcy, 11 Chapter 4007 Determination of Dischargeability of Debt ¶ 4007.02 (16th 12 ed. 2023); and (2) subject matter jurisdiction, including standing. 13 In re Sherman, 491 F.3d 948, 958 n. 10 (9th Cir. 2007); In re Mlincek, 14 350 B.R. 764 (Bankr. N.D. Ohio 2006); In re Erikson, No. 12-59165, 15 2013 WL 2035875, at *2 (Bankr. E.D. Mich. May 10, 2013). In most 16 instances, a creditor’s Article III standing is, in fact, 17 unremarkable. 18 C. Private Attorney General Act 19 Historically, enforcement of the wage and hours law has been the 20 prerogative of the state. Arias v. Superior Ct., 46 Cal.4th 969, 980, 21 209 P.3d 923, 929 (2009). 22 That changed in 2003, when the California legislature enacted the 23 Labor Code Private Attorney Generals Act of 2004. Cal. Labor Code § 24 26988 et seq. As one court explained it: 25 The Legislature declared that adequate financing of labor law enforcement was necessary to achieve maximum compliance 26 with state labor laws, that staffing levels for labor law enforcement agencies had declined and were unlikely to keep 27 pace with the future growth of the labor market, and that it was therefore in the public interest to allow aggrieved 1 civil penalties for Labor Code violations, with the understanding that labor law enforcement agencies were to 2 retain primacy over private enforcement efforts. 3 Id. at 980. 4 Rather than relying on the state to enforce the wage and hours 5 laws, the Private Attorney General Act allows aggrieved workers to sue 6 a noncompliant employer for violation of the wage and hours laws. The 7 statute is procedural. Amalgamated Transit Union, Loc. 1756, AFL-CIO 8 v. Superior Ct., 46 Cal.4th 993, 1003 (2009). Injured employees who 9 wish to act as Private Attorneys General must comply with Labor Code § 10 2699(a). They start by giving written notice of the violation of both 11 the employer and the Labor and Workforce Development Agency; the 12 notice must describe both “the facts and theorie s supporting the 13 violation.” Cal. Labor Code § 2699.3(a)(1). If the agency 14 investigates the employees claim and issues a citation to the 15 employer, “the employee may not commence” a civil action under the 16 Private Attorney General Act. Cal. Labor Code § 2699.3(b)(2)(A)(i). 17 If the agency expressly declines to investigate or investigates but 18 does not issue a citation, generally within 65 days of the notice, the 19 employees may commence a civil action against the employer for 20 penalties. Cal. Labor Code § 2699.3(a)(2)(B). If the State of 21 California declines to issue a citation to the employer, it may have 22 no right to intervene in the Private Attorney General Act action. 23 Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348, 389-390 24 (2014); Magadia v. Wal-Mart Associates, 999 F.3d 668 (9th 2021); 25 contra Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906, 1914 n. 26 2 (2022). 27 Aside from any wages due by virtue of the violations, the employee may bring an action on behalf of himself and other employees 1 to recover the “civil penalties” otherwise due the State of 2 California: 3 Notwithstanding any other provision of law, any provision of this code that provides for a civil penalty to be 4 assessed and collected by the Labor and Workforce Development Agency or any of its departments, divisions, 5 commissions, boards, agencies, or employees, for a violation of this code, may, as an alternative, be 6 recovered through a civil action brought by an aggrieved employee on behalf of himself or herself and other current 7 or former employees pursuant to the procedures specified in Section 2699.3. 8 Cal. Labor Code § 2699(a) . 9 Likewise, California Labor Codes 2699(g)(1) provides that such an 10 aggrieved employee may recover the civil penalties and, if the 11 employee prevails, the attorneys’ fees expended in proving entitlement 12 to those penalties. 13 Except as provided in paragraph (2), an aggrieved employee 14 may recover the civil penalty described in subdivision (f) in a civil action pursuant to the procedures specified in 15 Section 2699.3 filed on behalf of himself or herself and other current or former employees against whom one or more 16 of the alleged violations was committed. Any employee who prevails in any action shall be entitled to an award of 17 reasonable attorney's fees and costs..., 18 Cal. Labor Code § 2699(g)(1) (emphasis added). 19 If civil penalties are recovered, they are--as the Cabardo 20 plaintiffs phrase it--“split,” Opp’n 7:20, 8:11, ECF No. 213--between 21 the Labor and Workforce Development Agency and the aggrieved 22 employees: 23 Except as provided in subdivision (j), civil penalties recovered by aggrieved employees shall be distributed as 24 follows: 75 percent to the Labor and Workforce Development Agency for enforcement of labor laws, including the 25 administration of this part, and for education of employers and employees about their rights and responsibilities under 26 this code, to be continuously appropriated to supplement and not supplant the funding to the agency for those 27 purposes; and 25 percent to the aggrieved employees. 1 V. DISCUSSION 2 The question is: whether the Cabardo plaintiffs, acting as 3 Private Attorneys General, Cal. Labor Code §§ 2698 et seq., have 4 Article III standing to except the District Court judgment for civil 5 penalties, $79,524 or some portion thereof, under § 523(a)(7). The 6 Ninth Circuit has not yet ruled on this question. Cf. In re 7 Schimmels, 127 F.3d 875, 880-882 (9th Cir. 1997) (False Claims Act and 8 § 523(a)(7), not reaching the merits);2 Porter v. Nabors Drilling USA 9 LP, 854 F.3d 1057, 1062-1 063 (9th Cir. 2017) (Private Attorney General 10 Act plaintiffs are not acting as “an agent of the government” for the 11 purposes of 11 U.S.C. § 362(b)(4) (exceptions to the stay)). 12 Moreover, the award of attorneys’ fees made ancillary to the 13 civil penalties do not provide a basis for standing. 14 [A]n interest that is merely a “byproduct” of the suit itself cannot give rise to a cognizable injury in fact for 15 Article III standing purposes. See Steel Co., 523 U.S., at 107, 118 S.Ct. 1003 (“[A] plaintiff cannot achieve standing 16 to litigate a substantive issue by bringing suit for the cost of bringing suit”); see also Diamond v. Charles, 476 17 U.S. 54, 69–71, 106 S.Ct. 1697, 90 L.Ed.2d 48 (1986) (holding that assessment of attorney's fees against a party 18 does not confer standing to pursue the action on appeal). 19 Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 773 20 (2000). 21 A. Direct Standing Under § 523(a)(7) 22 The grant of authority to act on behalf of the government does 23 not confer Article III standing. Hollingsworth v. Perry, 570 U.S. 24 693, 710 (2013); Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668, 25 2 In re Schmimmels is distinguishable from the present action because the 26 False Claims Act is, in fact, a qui tam action for the purposes of standing. U.S. ex rel. Kelly v. Boeing Co., 9 F.3d 743, 748 (9th Cir. 1993); compare 27 Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668, 674-678 (9th Cir. 2021) (Private Attorney General Act, Cal. Labor Code § 2698 et seq., is not a qui 1 674.3 States “have no power directly to enlarge or contract federal 2 jurisdiction.” Fiedler v. Clark, 714 F.2d 77, 80 (9th Cir. 1983). 3 “[S]tanding in federal court is a question of federal law, not state 4 law.” Hollingsworth, 570 U.S. at 715. 5 The Cabardo plaintiffs have not suffered a direct injury with 6 respect to § 523(a)(7). It is that statute that defines the scope of 7 the injury to be redressed. As the Supreme Court stated: 8 Although standing in no way depends on the merits of the plaintiff's content ion that particular conduct is illegal, 9 e.g., Flast v. Cohen, 392 U.S. 83, 99, 88 S.Ct. 1942, 1952, 20 L.Ed.2d 947 (1968), it often turns on the nature and 10 source of the claim asserted. The actual or threatened injury required by Art. III may exist solely by virtue of 11 ‘statutes creating legal rights, the invasion of which creates standing . . ..’ See Linda R.S. v. Richard D., 12 supra, 410 U.S., at 617 n. 3, 93 S.Ct., at 1148; Sierra Club v. Morton, 405 U.S. 727, 732, 92 S.Ct. 1361, 1364, 31 13 L.Ed.2d 636 (1972). 14 Warth v. Seldin, 422 U.S. 490, 500 (1975) (emphasis added). 15 1. Economic injuries 16 To be sure, an economic injury would suffice for Article III 17 standing. But no such injury exits here. As to the penalties, the 18 real party in interest is the State of California or, more properly, 19 it’s labor law enforcement agencies. Viking River Cruises, Inv. V. 20 Moriana, 142 S.Ct. 1906, 1914 (2022); Magadia at 677; Sakkab v. 21 22 3 This result is precisely the opposite of that in the District Court action. Both the District Court action to liquidate the debt and this action to 23 except the debt, 11 U.S.C. § 523(a)(7), are both governed by Magadia and its requirement that the plaintiffs suffer an injury in fact, apart from the 24 Cabardo plaintiffs’ standing as relators. In the District Court, the plaintiffs suffered injury and enjoyed a share of the economic pie. Cal. Labor Code § 2699(i) (relators received 25% of the civil penalties). Here, 25 as a matter of law, the only beneficiary of an action under § 523(a)(7) to except the debt from discharge is the State of California. Matter of Towers, 26 162 F.3d 952 (7th Cir. 1998). Any injury the Cabardo plaintiffs suffered as lost wages is not included within the scope of § 523(a)(7), which applies to 27 penalties, and not compensatory damages. Consequently, Magadia dictates precisely the opposite finding as to Article III standing in discharge 1 Luxottica Retail North America, Inc., 803 F.3d 425 (9th Cir. 2015) 2 (the state labor enforcing agencies are the real parties in interest); 3 Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 381 4 (2014), abrogated by Viking River Cruises, Inc. v. Moriana, 213 L. Ed. 5 2d 179, 142 S. Ct. 1906 (2022) (“[t]he civil penalties recovered on 6 behalf of the state under the [Private Attorney General Act] are 7 distinct from the statutory damages to which employees may be entitled 8 in their individual capacities”). By statute, the state retains 75% 9 of the penalty and the aggrieved employees retain 25%. Cal. Labor 10 Code § 2699(i); Magadia, 999 F.3d at 674-678; Saucillo, 25 F.4th at 11 1125. 12 At first blush, the 25% of the civil penalt y due employees looks 13 like an economic interest that would support Article III standing in 14 an action under § 523(a)(7). But that thinking fails upon analysis. 15 Section 523(a)(7) ever only applies to penalties paid to and retained 16 by a governmental unit. 11 U.S.C. § 523(a)(7) (“[a] discharge under 17 section 727...does not discharge an individual from any debt--...to 18 the extent that such debt is for a fine, penalty, or forfeiture 19 payable to and for the benefit of a governmental unit”). In a Private 20 Attorney General action, the State of California is the real party in 21 interest and, acting under the enabling statute, Cal. Labor Code § 22 2699(i),” and, after the fact, the State of California divides those 23 penalties with the employees who have acted to collect them. 24 That the plaintiff’s interest in those funds, i.e., 25% of the 25 civil penalty, is not protected by § 523(a)(7) has been resolved 26 definitively. Matter of Towers, 162 F.3d 952 (7th Cir. 1998). In 27 Towers, the court considered civil fraud restitution in the amount of 1 benefit of the victims of the [debtor’s] fraud.” Id. at 955. The 2 Seventh Circuit held that the civil restitution under the Illinois 3 consumer protection laws was “payable to, but not for the benefit of, 4 the Attorney General of Illinois” and was therefore dischargeable. 5 Finding the benefit to the State of Illinois insufficient, the court 6 stated: 7 Perhaps one could reply that the state's benefit need not be pecuniary. Deterrence of fraud is a benefit to all of 8 the state's citizens... But the context in which “benefit” appears—“payable to and for the benefit of a governmental 9 unit”—implies that the “benefit” in question is the benefit of the money that is “payable to” the governmental unit. 10 11 Id. at 956. 12 Having determined that it is only the 75% o f the penalty payable 13 to the State of California, and not the 25% reimbursed by the State of 14 California to aggrieved employees, that is protected by § 523(a)(7), 15 it is a short step to concluding that the 25% of the penalty does not 16 support Article III standing. “An interest unrelated to injury in 17 fact is insufficient to give a plaintiff standing. The interest must 18 consist of obtaining compensation for, or preventing, the violation of 19 a legally protected right.” Vt. Agency of Nat. Res. v. U.S. ex rel. 20 Stevens, 529 U.S. 765, 772 (2000). 21 Moreover, since the Cabardo plaintiffs have no economic interest 22 in the civil penalties that might be excepted from discharge, the 75% 23 of the penalty payable to the State of California does not give the 24 Cabardo plaintiffs standing under § 523(a)(7). Magadia at 674-678 25 (plaintiff who did not suffer “meal-break violations” himself lacked 26 Article III standing). That said, the Cabardo plaintiffs may not rely 27 on an economic interest in the civil penalties to find Article III 1 2. Nonpecuniary injuries 2 Certainly, non-economic injuries harm will suffice for Article 3 III standing. Griswold v. State of Conn., 381 U.S. 479, 484-485 4 (1965) (invasion of privacy); Fund for Animals, Inc. v. Lujan, 962 5 F.2d 1391, 1396 (9th Cir. 1992) (emotional distress); School Dist. of 6 Abington Township, Penn. v. Schempp, 374 U.S. 203, 224 fn. 9 (1963) 7 (free exercise of religion). But they do not do so here. 8 While civil penalties do have a deterrent effect on employers who 9 violate the wage and hours laws, in most cases, that is insufficient 10 to create standing. Private Attorney General Act plaintiffs seeking 11 to except debts from discharge under § 523(a)(7) are closely akin to 12 the standing issues that arise in citizen-suits. A “citizen suit” is 13 “[a]An action under a statute giving citizens the right to sue 14 violators of the law (esp. environmental law) and to seek injunctive 15 relief and penalties.” Black's Law Dictionary (11th ed. 2019). The 16 Supreme Court has consistently held that in the absence of a 17 continuing violation, a citizen-suit plaintiff may not establish 18 Article III standing (injury in fact) by virtue of a civil penalty 19 imposed against the defendant. Friends of the Earth, Inc. v. Laidlaw 20 Environmental Services (TOC), Inc., 528 U.S. 167, 185-187 (2000) 21 (Clean Water Act) (“private plaintiffs, unlike the Federal Government, 22 may not sue to assess penalties for wholly past violations”); Steel 23 Co. v. Citizens for a Better Env't, 523 U.S. 83, 90 (1998)(Emergency 24 Planning and Community Right–To–Know Act of 1986); Gwaltney of 25 Smithfield, Ltd. v. Chesapeake Bay Found., Inc., 484 U.S. 49, 59, 26 (1987) (Clean Water Act) (“the harm sought to be addressed by the 27 citizen suit lies in the present or the future, not in the past”). The citizen-suit comparison is particularly compelling. Like § 1 523(a)(7), both Clean Water Act and the Emergency Planning and Right- 2 to-Know Act of 1986 provide for penalties paid solely to the 3 government. See 33 U.S.C. § 1365(a) (Clean Water Act); 42 U.S.C. § 4 11045-11046 (Emergency Planning and Right to Know Act). While the 5 District Court judgment awarded civil penalties, which will ultimately 6 be divided, 75% to the State of California and 25% to the aggrieved 7 employees, it is only the portion of the civil penalty payable to the 8 government itself that is excepted from discharge. Matter of Towers, 9 162 F.3d 952 (7th Cir. 1998). As a result, the citizen-suit Article 10 III standing cases suggest that Private Attorney General Act 11 plaintiffs, Cal. Labor Code § 2698 et seq., lack standing to assert 12 the discharge exception in 523(a)(7) based on a similar penalty. 13 Moreover, the Cabardo plaintiffs admit that the Patacsils ceased 14 operations and, therefore, there is no continuing wage and hours 15 violation. Compl. at ¶ 33. From this, the court concludes that the 16 award of civil penalties is insufficient to find Article III standing. 17 B. Representational Standing 18 The Cabardo plaintiffs contend that they speak as representatives 19 of the State of California, the Labor and Workforce Development Agency 20 and, therefore, have standing to determine whether the $79,524 in 21 civil penalties awarded is non-dischargeable under § 523(a)(7). Opp’n 22 2:21-22 (“on behalf of the State”), 6:19, 7:6, ECF No. 213. 23 Whether Private Attorney General Act plaintiffs are characterized 24 as “agents” or “complete assignees” is disputed. Viking River 25 Cruises, Inc. v. Moriana, 142 S.Ct. 1906, 1914 n. 2 (2022). 26 The Supreme Court and circuit courts have ruled on a closely 27 related area: whether an assignee has Article III standing by virtue Sprint Communications Co., L.P. v. APCC 1 Services, Inc., 554 U.S. 269, 285 (2008) (assignee for the purposes of 2 collection who received “all rights, title and interest” for purposes 3 of collection); In re Boyajian, 564 F.3d 1088, 1089, 1091 (9th Cir. 4 2009) (assignment of “its right, title and interest” sufficient for 5 statutory standing); Connecticut v. Physicians Health Servs. of Conn., 6 Inc., 287 F.3d 110, 117 (2d Cir.2002) (“[A] valid and binding 7 assignment of a claim (or a portion thereof)—not only the right or 8 ability to bring suit—may confer standing on the assignee”). 9 Post-Sprint Communi cations, the Second Circuit Court of Appeals 10 decided W.R. Huff Asset Management, LLC v. Deloitte & Touche LLP, 549 11 F.3d 100, 106 (2008), cited by the Ninth Circuit with approval in 12 Northstar Financial Advisors, Inc. v. Schwab Inv estments, 779 F.3d 13 1036 (9th Cir. 2015). In W.R. Huff Asset Management, the plaintiff 14 was an investment advisor for institutional investors. As an 15 investment advisor, it acted as the investors’ attorney-in-fact for 16 the purposes purchasing securities and, if necessary, litigating 17 disputes. In fact, the plaintiff did not have an ownership interest 18 in the stocks purchased for its clients. The plaintiff advised some of 19 its clients to purchase debt securities from Adelphia Communications 20 Corporation. When it became known that Adelphia Communications had 21 committed widespread securities fraud and W.R. Huff’s clients suffered 22 financial losses, W.R. Huff sued Adelphia Communications on behalf of 23 its investors. The defendants moved to dismiss for lack of standing 24 and the District Court denied the motion. The Second Circuit of 25 Appeals reversed and remanded. Applying the teachings of Sprint 26 Communications, the Second Circuit held that an assignee may not show 27 Article III standing as an assignee unless the assignee has “legal 1 Addressing whether plaintiff W.R. Huff, acting on behalf of his 2 clients, had Article III standing, the court stated: 3 Huff has not alleged in its complaint that it suffered any injury; rather, the alleged injury was suffered by Huff's 4 clients. Therefore, the dispositive question is whether Huff, as the named plaintiff, can demonstrate an “injury- 5 in-fact” through some other means, such as an assignment of claims. Courts may permit a party with standing to assign 6 its claims to a third party, who will stand in the place of the injured party and satisfy the constitutional 7 requirement of an “injury-in-fact.” 8 Id. at 107 (emphasis added), citing Vermont Agency of Natural Res. v. 9 United States ex rel. Ste vens, 529 U.S. 765, 773 (2000). 10 The court continued and articulated Sprint Communications’ 11 standards for Article III standing. 12 In our view, Sprint makes clear that the mi nimum requirement for an injury-in-fact is that the plaintiff 13 have legal title to, or a proprietary interest in, the claim. Id. at 2543–44 (“There is an important distinction 14 between simply hiring a lawyer and assigning a claim to a lawyer (on the lawyer's promise to remit litigation 15 proceeds). The latter confers a property right (which creditors might attach); the former does not.”) 16 Id. at 108 (emphasis added). 17 Simply put, W.R. Huff’s teaches us that the minimum requirement for 18 standing by a third party, e.g., agent or attorney-in-fact, is “legal 19 title to, or proprietary interest in, the claim.” 20 As applied to the Cabardo plaintiffs, W.R. Huff precludes a 21 finding of Article III standing as to a § 523(a)(7) cause of action. 22 The problem is that Private Attorney General Act plaintiffs do not 23 enjoy legal title to, or a proprietary interest in, the civil 24 penalties.4 The weight of the authority treats these plaintiffs as an 25 4 In Sprint Communications, the Supreme Court acknowledged that if the 26 assignment conveyed less than all the assignors’ rights that the purported assignees would lack Article III standing. “Petitioners argue, for example, 27 that the aggregators have not themselves suffered any injury in fact and that the assignments for collection “do not suffice to transfer the payphone 1 “agent” or a “proxy” for the state. Viking River Cruises, Inv. V. 2 Moriana, 142 S.Ct. 1906, 1914 n. 2 (2022) (“[t]he extent to which PAGA 3 plaintiffs truly act as agents of the State rather than complete 4 assignees is disputed”); Sakkab v. Luxottica Retain N. Am. Inc., 803 5 F.3d 425, 435 (9th Cir. 2015); Saucillo v. Peck, 25 F.4th 1118, 1125- 6 1129 (9th Cir. 2022); Edward Borelli et al. v. Black Diamond 7 Aggregates, Inc., 2022 WL 2079375 *8 (E.D. Cal. 2022); Iskanian v. CLS 8 Transp. Los Angeles, LLC, 59 Cal4th 348, 382 (2014); Amalgamated 9 Transit Union, Loc. 1756, AFL-CIO v. Superior Ct., 46 Cal. 4th 993, 10 1003 (2009); contra Magadia v. Wal-Mart Associates, Inc., 999 F.3d 11 668, 677 (9th Cir. 2021) (the Private Attorney General Act “represents 12 a permanent, full assignment of California’s int erest to the aggrieved 13 employee”).5 The State of California is always the real party in 14 interest. Iskanian, 59 Cal4th at 382; Viking River Cruises Inv., 142 15 S.Ct. at 1914. Critically, the aggrieved employee has neither title, 16 nor ownership of the penalties. 17 A cause of action is transferable, that is, assignable, by its owner if it arises out of a legal obligation or a 18 violation of a property right. (Civ.Code, § 954.) The Labor Code Private Attorneys General Act of 2004 does not create 19 property rights or any other substantive rights. Nor does it impose any legal obligations. It is simply a procedural 20 statute allowing an aggrieved employee to recover civil penalties—for Labor Code violations—that otherwise would be 21 22 originally suffer any injury caused by the long-distance carriers; the payphone operators did. But the payphone operators assigned their claims to 23 the aggregators lock, stock, and barrel.” Sprint Communications, 554 U.S. at 286. 24 5 Magadia’s suggestion that the Private Attorney General Act as a “permanent, full assignment of California’s interest to the aggrieved employee” has been largely rejected. Viking River Cruises Inv., 142 S.Ct. at 1914 n. 2. 25 Moreover, suggesting that Magadia be construed as a full assignment within the meaning of W.R. Huff would run afoul of long-standing California 26 precedent, which prohibits the assignment of statutory penalties. Esposti v. Rivers Brothers, Inc., 207 Cal. 570, 573 (1929); Peterson v. Ball, 211 Cal. 27 461, 468–470 (1931); Western Mortgage etc. Co. v. Gray, 215 Cal. 191, 198 (1932); Amalgamated Transit Union, Loc. 1756, AFL-CIO v. Superior Ct., 46 1 sought by state labor law enforcement agencies. 2 Amalgamated Transit Union, 46 Cal. 4th 993, 1003 at (2009) (emphasis 3 added). Under this characterization, the Cabardo plaintiffs do not 4 meet the W.R. Huff “legal title or proprietary interest” rule. 5 C. Judgment Creditor Standing 6 Generally, uncertainty as to whether a pre-petition judgment (or 7 here, more properly a part of it) is affected—-“discharged” in 8 bankruptcy vernacular, is a sufficient injury in fact for Article III 9 purposes. In re Sherman, 491 F.3d 948, 965 (9th Cir. 2007) (that the 10 bankruptcy “might” discharge the creditor’s debt was a sufficient 11 basis for Article III standing); Matter of Spielbauer, 785 F. App'x 12 369, 371 (9th Cir. 2019) (state court judgment); Cf. In re Hawker 13 Beechcraft, Inc., 515 B.R. 416, 433 (S.D.N.Y. 2014) (relators seeking 14 to except an unliquidated debt from discharge, 11 U.S.C. § 1141(d)(6), 15 had Article III standing). 16 Here, there is no doubt that the Cabardo plaintiffs are 17 prepetition judgment creditors. Lawrence T. Lasagna, Inc. v. Foster, 18 609 F.2d 392, 395 (9th Cir. 1979); In re Jacks, 266 B.R. 728, 736 (9th 19 Cir. BAP 2001); 11 U.S.C. §§ 101(5) (claim), 101(10) (creditor). 20 The question is whether some of that judgment has been forgiven. 21 That judgment is comprised of unpaid wages due the Cabardo plaintiffs 22 and civil penalties due the State of California. Insofar as the civil 23 penalties within the judgment are concerned, the plaintiffs act as 24 agents for the State of California. In the absence of a declaration 25 by this court as to the dischargeability of the civil penalties (and 26 attorneys’ fees arising from that award), the Cabardo plaintiffs’ 27 ability to enforce their judgment will be impaired. They will be uncertain whether they may collect all of the judgment (if the civil 1 penalties are deemed accepted by § 523(a)(7)) or only the remainder of 2 the judgment, i.e., unpaid wages (if those are ultimately deemed 3 excepted from discharge, 11 U.S.C. $ 523(a)(6)). Magadia does not 4 suggest otherwise. That uncertainty is a sufficient injury in fact, 5 traceable to the bankruptcy, and that will likely be redressed for 6 Article III standing. 7 VI. CONCLUSION 8 Ordinarily, injury in fact—and by extension Article III standing— 9 in discharge exception adversary proceedings is obvious. Here, not so 10 much. In this action, the injury in fact, i.e., uncertainty as to the 11 application of the discharge to civil penalties that will be paid to 12 the State of California, falls just inside the third base line; the 13 question is in fair territory. Prior to bankruptcy, acting under the 14 Private Attorney Generals Act, the plaintiffs obtained a judgment 15 against the defendants for unpaid wages and civil penalties. But for 16 the plaintiffs’ need to know the extent to which their judgement 17 remains enforceable, i.e., only the unpaid wage portion (and not the 18 civil penalties) or the entire amount, Article III standing would not 19 exist. The order to show cause will be discharged; the court will 20 issue an order from chambers. 21 | Dated: April 25, 2023 USS. CLe7- 28 Fredrick E. Clement 24 United States Bankruptcy Judge 25 26 27 28 24 1 Instructions to Clerk of Court 2 Service List - Not Part of Order/Judgment 3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail. 5 6 Attorneys for the Plaintiff(s) Attorneys for the Defendant(s) 7 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee Robert T. Matsui United States Courthouse 8 501 I Street, Room 7-500 9 Sacramento, CA 95814 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27