By Matthew Santoni

Law360 (January 7, 2021, 5:49 PM EST) -- The Allegheny County, Pennsylvania Health Department can proceed with a lawsuit seeking to shut down a Pittsburgh-area restaurant for refusing to follow pandemic precautions, after a federal bankruptcy judge on Thursday lifted the stay imposed when the restaurant filed for Chapter 11 protection.

After reciting the state, national and worldwide death tolls of the COVID-19 pandemic, U.S. Bankruptcy Judge Jeffery Deller's opinion said the Health Department could pursue its enforcement action against The Crack'd Egg and its parent company, The Cracked Egg LLC, for ignoring statewide orders regarding facemasks and indoor occupancy limits, even though the business filed for bankruptcy.

"The mere fact that a debtor has filed for bankruptcy protection does not obviate the requirement that a debtor abide by applicable law," Judge Deller wrote. "The automatic stay in bankruptcy is a shield and not a sword designed to afford a party with a litigation advantage. While the automatic stay in bankruptcy is designed to afford the honest but unfortunate debtor with respite from creditor collection activities ... the automatic stay does not provide a debtor in bankruptcy with a carte blanche excuse to avoid health and safety regulations."

Judge Deller's orders Thursday lifted the automatic stay on the county's case and remanded it to the Allegheny County Court of Common Pleas.

The restaurant had allegedly ignored statewide mandates that all employees wear face coverings and that customers cover their faces when not eating or drinking, and it had operated at full capacity despite mitigation orders limiting indoor occupancy to 25% or 50% of its usual limits. The health department suit, filed in state court in September, said the county had cited the restaurant repeatedly and revoked its operating permit, but the owners remained open anyway.

The Cracked Egg filed a federal counter-suit trying to overturn the mitigation measures, but also filed for bankruptcy in early October and brought a halt to all the litigation.

The Cracked Egg's attorney argued Tuesday that the pandemic mandates the health department sought to enforce were illegal, and thus the lawsuit was not an enforcement action exempt from the bankruptcy stay.

But Judge Deller said it was not for the bankruptcy court to decide whether the state's orders were legal.

"The debtor's defense to the motion is to essentially request that this court declare the COVID-19 Control Measure Orders unconstitutional and therefore deny the motion for relief from automatic stay," he wrote. "The court, however, declines to accept the debtor's invitation to insert itself into the fray."

Federal law does not require the bankruptcy court to be a "gatekeeper" that determines whether a police or regulatory action is legitimate in the first place, Judge Deller said, and even if he did have the power to weigh the legality of the restrictions, there were contradicting federal rulings on other mitigation orders. The other state and federal courts would be able to decide the legality of those measures as The Cracked Egg's cases moved ahead, he said.

"This court is not undertaking an exhaustive analysis of the constitutional issues presented by the debtor's challenge to the COVID-19 control measure orders. The court is merely pointing out the fact that the debtor's case is hardly the proverbial 'slam-dunk," the judge wrote. "Given the fact that the debtor's objection... does not lend itself to an obvious ruling in the debtor's favor, the court's discretion is that it is better to leave the determination of these issues to the court of competent jurisdiction that will ultimately preside over this dispute."

James R. Cooney of Robert O. Lampl Law Office, representing the restaurant, said he didn't agree with the judge's opinion but it was well reasoned, and the restaurant would still have the opportunity to argue its opposition to the pandemic orders in the other courts.

"The bright spot for us is that he did not decide the merits of the opposition," he told Law360 Thursday.

Representatives of the Health Department declined to comment.

The Allegheny County Health Department is represented in-house by Michael A. Parker and Vijya Patel, and by Frances Liebenguth of the Allegheny County Law Department.

The Cracked Egg is represented by James R. Cooney, Robert O. Lampl, Sy O. Lampl, Alexander L. Holmquist and Ryan J. Cooney of Robert O. Lampl Law Office.

The cases are In re: The Cracked Egg LLC, case number 20-22889, in the U.S. Bankruptcy Court for the Western District of Pennsylvania; County of Allegheny v. The Cracked Egg LLC, case number GD-20-9809, in the Court of Common Pleas of Allegheny County, Pennsylvania; and The Cracked Egg LLC v. The County of Allegheny et al., case number 2:20-cv-01434 in the U.S. District Court for the Western District of Pennsylvania.

--Editing by Adam LoBelia.

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