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Civil Resource Manual 54. Bankruptcy And The Government As Regulator -- Part I

54.

Bankruptcy and the Government as Regulator -- Part I

July 1995

BANKRUPTCY AND THE GOVERNMENT AS REGULATOR

I. INTRODUCTION

A. Conflicting Societal Interests

1. Bankruptcy interests: enhancing rehabilitation; maximizing recovery by and equitable distribution to creditors and stockholders; saving jobs; maintaining tax base; giving "fresh start"

2. Governmental interests: protecting/promoting health, safety and morals of all citizens

B. Relevant Code Sections

1. § 525: prohibits discrimination by governmental unit based solely upon person's bankruptcy or failure to pay debt discharged in bankruptcy

2. § 362(b)(1), (4), (5): exceptions to automatic stay for police or regulatory activities

3. § 362(b)(14)-(16): exceptions to automatic stay for regulation of educational institutions

4. 28 U.S.C. §§ 1334(b) and 1334(d): limits on jurisdiction

5. § 105: general injunctive power of bankruptcy court

II. PROHIBITION ON BANKRUPTCY BASED DISCRIMINATION

A. § 525: prohibition on discrimination must be based solely on bankruptcy. See In re Bradley, 989 F.2d 802 (5th Cir. 1993) (license may be revoked due to concern that public safety will be harmed but not to exact a discharged debt as price for retaining license); In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983); In re National Cattle Congress, Inc., 179 B.R. 588, 598 (Bankr. N.D. Iowa 1995) (revocation of pari-mutual dog racing license permissible when based upon general lack of financial responsibility, not solely on bankruptcy); In re Will Rogers Jockey & Polo Club, Inc., 111 B.R. 948, 954 (Bankr. N.D. Ohio 1990) (same); In re Christmas, 102 B.R. 447, 448 (Bankr. D.Md. 1989) (same).

B. Areas of application

1. Award or renewal of license, permit, charter, or franchise

2. Employment

3. Student loans

C. Exceptions - agricultural regulation

D. Examples of § 525 Governmental Discrimination

1. Eligibility for loan programs. See, e.g, Rose v. Conn. Housing Finance Authority, 23 B.R. 662 (Bankr. D. Conn. 1982) (could not deny mortgage based on failure to pay discharged student loan, but could deny for current bad financial condition); In re Haffner, 25 B.R. 882 (Bankr. N.D. Ind. 1982) (CCC refusal to permit farmer to participate in crop storage program until he paid his discharged debts to CCC held to violate § 525). But see Watts v. Pa. Housing Finance Co., 876 F.2d 1090 (3rd Cir. 1989)(non-discrimination provisions of § 525 not intended to cover loan programs); accord In re Goldrich, 771 F.2d 28 (2d Cir. 1985); Cleasby v. United States, 139 B.R. 897 (W.D. Wis. 1992) (§ 525 does not prohibit FmHA from denying bankrupts benefit of loan restructuring provisions of Agricultural Credit Act; financial assistance is not a "similar grant" within meaning of § 525); Lee v. Yeutter, 106 B.R. 588 (D. Minn. 1989), aff'd 917 F.2d 1104 (8th Cir. 1990) (same); In re Helms, 46 B.R. 150 (Bankr. E.D. Mo. 1985).

2. Disciplinary action for chapter 13 wage deductions. In re Latchaw, 24 B.R. 457 (Bankr. N.D. Ohio 1982).

3. Cannot deny government contract based solely on chapter 11 filing. In re Exquisito Services, Inc., 823 F.2d 151 (5th Cir. 1987) (Air Force's refusal to exercise option in § 8(a) contract due solely to debtor's bankruptcy deemed violation of § 525) (note strong dissent opining that decision constitutes a de facto amendment of § 525 to cover contracts); In re Sonshine Grading, Inc., 27 B.R. 693 (Bankr. E.D.N.C. 1983); In re Marine Electric R.R. Products, 17 B.R. 845 (Bankr. E.D. N.Y. 1982); Coleman American Moving Services, Inc. v. Tullos, 8 B.R. 379 (Bankr. D. Kan. 1980).

4. Bar Admission. In re Williams, (58 B.R. 493 (Bankr. D. Idaho 1993) (§ 525 proscribes denying reinstatement until discharged costs of disciplinary proceeding are paid); Kwasnik v. State Bar of California, 2 BNA Bankr. L. Rptr. 653 (Cal. Sup.Ct. 1990)(imposing continuing moral obligation to pay wrongful death judgment discharged in bankruptcy as grounds for denying applicant admission to the bar would contravene the Supremacy Clause and § 525(a) of the Bankruptcy Code).

5. Membership in credit union. Compare B.F. Goodrich Employees Federal Credit Union v. Patterson, 967 F.2d 505 (11th Cir. 1992) (credit union violated § 525 by terminating debtors' membership services based solely on their bankruptcy filing) with In re Henry, 129 B.R. 75 (Bankr. E.D. Va. 1991) (credit union's policy of revoking membership privileges of member who caused credit union to suffer loss did not violate § 525 because policy applied in a nondiscriminatory manner, regardless of bankruptcy, to any member who caused financial loss.)

6. Medicare. In re St. Mary Hospital, 89 B.R. 503 (Bankr. E.D. Pa. 1988) (HCFA could not compel hospital to pay prepetition Medicare overpayments as condition for continued participation in Medicare program.)

7. Insurance license. See In re Bradley, 989 F.2d 802 (5th Cir. 1993)(bankruptcy court has jurisdiction, even after case was closed, to consider whether Texas Commission of Insurance violated § 525 by conditioning debtor's license on payment of a fraud claim discharged in bankruptcy).

8. Public Housing. In re Curry, 148 B.R. 966 (S.D. Fla. 1992)(eviction of public housing resident for failure to pay discharged, pre-petition rent violates § 525). See In re Syzmecki, 87 B.R. 14 (Bankr. W.D. Pa. 1988); In re Sudler, 71 B.R. 780 (Bankr. E.D. Pa. 1987).

E. Application of § 525 to Non-Governmental Persons

The 1984 Act amended section 525 by adding a new subsection (b) which deals with private, as opposed to governmental, discrimination. It proscribes a private employer's termination of or discrimination with respect to employment against an individual based solely upon his or her having been a debtor or insolvent or having not paid a debt that is dischargeable.

F. 1994 Student Loan Amendments

The Bankruptcy Reform Act of 1994 amended section 525 to provide that a governmental unit that operates a student grant or loan program and a person or entity that makes federally insured or guaranteed student loans cannot deny an educational benefit based upon the applicant's prior filing or discharge. Pub. L. No. 103-394, tit. III, § 313, 108 Stat. 4140 (1994).

III. GOVERNMENTAL EXCEPTIONS TO AUTOMATIC STAY

A. Code Provisions

1. § 362(b)(1): permits commencement or continuation of a criminal action or proceeding

2. § 362(b)(4): permits commencement or continuation of action to enforce police or regulatory powers

3. § 362(b)(5): permits enforcement of judgment, other than money judgment, issued in furtherance of police or regulatory powers

4. § 362(b)(8): permits commencement (but not continuation) of action by HUD to foreclose mortgage on multi-family project

5. § 362(b)(9): permits an audit to determine tax liability, issuance of a notice of tax deficiency, a demand for tax returns, or the making of an assessment and the issuance of a notice and demand for payment of a tax (expanded by 1994 Amendments)

6. § 362(b)(14): permits action by an accrediting agency regarding accreditation status of the debtor as an educational institution;

7. § 362(b)(15): permits action by a State licensing body regarding licensure of the debtor as an educational institution;

8. § 362(b)(16): permits any action by a guaranty agency or the Secretary of Education regarding eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965.

B. Criminal Proceedings

1. § 362(b)(1) excepts from the automatic stay "the commencement or continuation of a criminal action or proceeding against the debtor"

2. Cases

a. Asset Forfeitures.

Note: Consult with the extensive outline on Asset Forfeitures In Bankruptcy available from LEI.
(1) In re Ryan, 15 B.R. 514 (Bankr. D. Md. 1981)("Ryan I")

Facts: Complaint to declare forfeiture named as defendants both debtor and the money being forfeited. Statute provided: "All rights, title and interest in and to money or currency shall immediately vest in . . . the State" when money found in close proximity to contraband.
Decision: Not Property of the Estate Argument: State argued that because its interest vested upon the arrest, debtor had no interest in the funds when he filed his petition and, hence, the money was not property of estate under § 541(a).
§ 541(a) is "broad and all embracing" and brings into the estate "all legal and equitable interests of the debtor in property."
Debtor's right to claim the property at the post-seizure hearing mandated by the statute is property of the estate.
Were the claim not an asset of the estate, and if the debtor prevailed at the post-seizure hearing, the debtor would receive a windfall at the expense of his creditors.

Excepted From The Stay Argument:

Updated February 19, 2015