ETHAN M. POSNER
Deputy Associate Attorney General
Office of the Associate Attorney General
U.S. Department of Justice
Subcommittee on Commercial and Administrative Law
Committee on the Judiciary
United States House of Representatives
April 11, 2000
Mr. Chairman, Congressman Nadler, and Members of the Subcommittee:
I appreciate the invitation to provide the Department of Justice's views of the police and regulatory exception to the bankruptcy automatic stay. The Department of Justice - and the public at large - have a strong interest in this exception, as it protects vital health, safety, and regulatory interests by ensuring that bankruptcy does not afford a haven for criminals and the violators of federal or state regulatory laws and programs. We believe that the current Bankruptcy Code provisions strike an appropriate and important balance between protecting the public interest and recognizing the primacy of important regulatory functions, on the one hand, and promoting the needs of debtors and creditors in the bankruptcy process, on the other hand.
Under section 362 of the Bankruptcy Code, upon the filing of a petition for bankruptcy, the debtor is entitled to an automatic stay from adverse creditor actions. As the legislative history to this section recognizes, the automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his or her creditors; and it stops collection and foreclosure efforts, enabling the debtor to reorganize her finances or businesses and/or liquidate assets in a rational manner. The automatic stay also benefits creditors by promoting the orderly administration of the estate as well as the bankruptcy policy of equality of distribution among claimants.
But the Bankruptcy Code also recognizes a very important set of exceptions to the automatic stay. "Congress recognized . . . that the stay provision was particularly vulnerable to abuse by debtors improperly seeking refuge under the stay in an effort to frustrate necessary governmental functions." United States v. Nicolet, Inc., 857 F.2d 202, 207 (3d Cir. 1988). Under section 362(b)(4) of the Code, the automatic stay for the debtor does not extend to the commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, for example, federal and state governments may enforce and pursue actions under the criminal, environmental, or labor laws against the debtor or the estate - whether those actions were filed before or after the bankruptcy petition. Similarly, regulatory agencies such as the FCC or FAA, so long as they act in their regulatory capacity, may enforce their regulations and regulatory programs against debtors. To prevent governmental and regulatory agencies from doing so would transform the bankruptcy process into a shield, immunizing debtors from actions that protect public safety and enforce important and longstanding regulatory priorities.
Recognizing these fundamental interests, in 1998 Congress confirmed that the police and regulatory exception permits police and regulatory actions against estate property. Although applicable generally, the clarification was enacted in a bill to implement the United States' obligations under the Chemical Weapons Convention. The 1998 amendment ensured that dangerous chemicals banned by the Convention could be seized without awaiting permission from the bankruptcy court. Securing bankruptcy court permission requires formal and often time-consuming legal action. Such delay in seizing hazardous materials obviously places the public at risk. For this reason, we strongly supported the 1998 amendment confirming the broad scope of the police and regulatory exception.
The police and regulatory exception is not unlimited, however. Federal and state governments may not, for example, use the exception to enforce a money judgment without first obtaining relief in the bankruptcy court. Thus, an appropriate balance exists between the public interest in regulatory enforcement and the interest of the bankruptcy court in managing the finances of the debtor.
The ways in which the police and regulatory exception have been applied in practice is perhaps the best illustration of its importance. Over the past 20 years, the police and regulatory power exception has been applied to permit governmental units to pursue actions that protect the health and safety of the public, including environmental enforcement actions, labor law enforcement actions, employment discrimination enforcement actions, and medical license revocation proceedings. Similarly, the regulatory aspect of the police and regulatory exception has been applied broadly to require the enforcement of many important regulatory priorities. The Securities and Exchange Commission, for example, has relied upon the police and regulatory exception to maintain its enforcement actions to disgorge illicit profits and enjoin fraudulent activity.
Examples where the police and regulatory exception has been used to protect the health and welfare of the public include:
an action by the Pennsylvania Department of Environmental Resources to require a debtor to comply with a pre-bankruptcy consent order to clean up the pollution on its property. The court refused to stay that action even though the debtor asserted that it would have to spend money to continue cleaning up its property. Penn Terra Ltd. v. Department of Environmental Resources, 733 F.2d 267 (3d Cir. 1984).
United States could pursue action against debtor under the Safe Drinking Water Act to protect health and safety of residents. United States v. Merritt, No, 94-CV-026 (D. Wyo. 1994).
an action by a state medical quality assurance board to determine whether a doctor's license to practice should be revoked. The doctor attempted to invoke the automatic stay but section 362(b)(4) was held to apply and the hearings proceeded. Thomassen v. Division of Medical Quality Assurance, 15 B. R. 907 (B.A.P. 9th Cir. 1981).
an investigation by a state agency into age and sex discrimination and sexual harassment allegations. A debtor motel had sought to invoke the automatic stay to stop these proceedings but the court permitted them to proceed under the police and regulatory exception. In re Mohawk Greenfield Motel Corp., 239 B.R. 1 (Bankr. D. Mass. 1999).
an employment discrimination action by the EEOC against the Rath Packing Company, which had sought to enjoin the EEOC after filing for bankruptcy. The Eight Circuit firmly rejected this effort, relying expressly on the police and regulatory exception. EEOC v. Rath Packing Co., 787 F.2d 318 (8th Cir. 1984).
a city's condemnation and demolition action, which had determined that a dilapidated building owned by the debtor posed a serious threat to the community. The debtor attempted to avoid the demolition by invoking the automatic stay but the court applied the (b)(4) exception. Javens v. City of Hazel Park, 107 F.3d 359, 365 (6th Cir. 1997).
These examples -- all of which protected the public good -- serve to illustrate the continuing importance of the police and regulatory exception.
The police and regulatory exception is not limited to actions taken to protect public health or safety. See In Re Commonwealth Companies, Inc., 913 F.2d 518, 521 (8th Cir. 1990) (rejecting "view that section 362(b)(4) applies only to actions to protect public health or safety"); In re Commonwealth Oil Refining Co., 805 F.2d 1175, 1184 (5th Cir. 1986) (exception is "not . . . limited to those situations where imminent and identifiable harm to the public health and safety or urgent public necessity is shown"), cert. denied, 483 U.S. 1005 (1987). Section 362(b)(4) also applies when a federal or state governmental entity seeks to vindicate and enforce regulatory powers. The Supreme Court made that clear in MCorp v. Board of Governors of the Federal Reserve System, 502 U.S. 32 (1991), holding that the automatic stay did not shield a debtor bank from pre-bankruptcy regulatory proceedings instituted by the Federal Reserve's Board of Governors, which sought to require the debtor to recapitalize its subsidiary banks in order to preserve the strength and safety of the federal banking system. In so holding, the Supreme Court rejected the argument, advanced by the debtor, that the Federal Reserve could proceed only if the bankruptcy court first determined "whether the proposed exercise of police or regulatory power is legitimate . . . ." 502 U.S. at 40. That "broad reading of the stay provision would require bankruptcy courts to scrutinize the validity of every administrative or enforcement action" brought against a debtor, the Court concluded. Such scrutiny "conflicts with the broad discretion Congress has expressly granted many administrative entities and [conflicts with] the limited authority Congress has vested in bankruptcy courts." 502 U.S. at 40.
Other cases in which important regulatory interests have prevailed over the interests of the debtor include:
an action by the FAA to allocate critical landing slots in the face of a challenge by bankrupt airlines. The courts rejected efforts to delay or interfere with the FAA's regulatory proceedings. In re Gull Air, Inc., 890 F.2d 1255 (1st Cir. 1989); In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983).
an enforcement action by the Securities and Exchange Commission, which asserted that debtor Paul Bilzerian had committed violations of the securities laws. The bankruptcy court refused to invoke the automatic stay to block the SEC's regulatory action. In re Bilzerian, 146 B.R. 871 (Bankr. M.D. Fla. 1992).
Furthermore, section 362(b)(4)'s "regulatory power exception applies to acts by the government to obtain possession of property of the Bankruptcy estate or to exercise control over Bankruptcy estate property." In re PMI-DVM Real Estate Holdings, LLP, 240 B.R. 24, 30 (Bankr. D. Ariz. 1999). Indeed, "[m]any actions against a debtor taken under governmental police or regulatory power have the effect of controlling the property of the estate." In re Javens, 107 F.3d 359, 367 (6th Cir. 1997). As the Supreme Court concluded in the MCorp. case, the possibility that regulatory actions may conclude with the entry of an order that will affect the bankruptcy court's control over property of the estate "cannot be sufficient to justify the operation of a stay against" a regulatory action under section 362(b)(4). "To adopt such a characterization of enforcement proceedings would be to render subsection (b)(4)'s exception meaningless."
One of the most recent examples of a court recognizing the primacy of important regulatory interests occurred in In Re Nextwave Personal Communications, Inc., 200 F.3d 42 (2d Cir. 1999), which involved the ability of the Federal Communications Commission to establish and enforce the terms under which certain C-block personal communications licenses would be auctioned and allocated. In the Nextwave case, the debtor filed for bankruptcy to avoid paying the $4.74 billion that it incurred by submitting winning bids for 63 licenses in the FCC's auction program. The bankruptcy judge voided $3.7 billion of this obligation and entered judgment permitting Nextwave to retain the licenses it had won at auction. On appeal, the Second Circuit concluded that the bankruptcy judge had no authority to interfere with the FCC's exclusive authority to regulate the radio spectrum and establish a process to select and allocate licensees. Although the court did not cite section 362(b)(4) as the basis for its decision, it did conclude that important regulatory interests must prevail over the interests of an individual debtor. That principle, which the Department strongly supports, is at the heart of section 362(b)(4).
The Justice Department strongly supports the police and regulatory exception in the Bankruptcy Code. We believe section 362(b)(4) protects public safety and vindicates important regulatory interests. The Department of Justice would oppose any effort to narrow or restrict section 362(b)(4) or any other provision of the Bankruptcy Code that would undermine these important principles.
Mr. Chairman, thank you for the opportunity to present the views of the Department of Justice on this important topic. I would be pleased to answer any questions you might have.