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Civil Resource Manual 55. Bankruptcy And The Government As Regulator -- Part II


Bankruptcy and the Government as Regulator -- Part II

C. Police and Regulatory Power Exceptions [§ 362(b)(4) and (5)]
1. Tests:

a. The "Pecuniary Purpose Test"

(1) Protecting/promoting public health and safety or other police or regulatory interests - exception applies. See generally PBGC v. LTV Corp., 496 U.S. 633 (1990)(PBGC need not take bankruptcy law into account -- and instead may focus only on ERISA -- when making decisions concerning restoration of terminated pension plans); In re Smith-Goodson, 144 B.R. 72 (Bankr. S.D. Ohio 1992);

(2) Protecting/promoting pecuniary or financial interest - exception does not apply. See generally NLRB v. Sawalski, 158 B.R. 971 (E.D. Mich. 1993); Martin v. Safety Elec. Construction Co., 151 B.R. 637 (D. Conn. 1993); In re Corporacion de Services Medicos Hospital, 805 F.2d 440 (1st Cir. 1986); In re Medicar Ambulance Co., Inc., 166 B.R. 918 (Bankr. N.D. Calif. 1994).

(3) However, merely because action would result in a judgment for the governmental units does not disqualify it from the exceptions if policy/regulatory function is promoted. To decide otherwise would read § 362(b)(5) out of the Code. See, e.g., In re Commonwealth Cos., Inc., 913 F.2d 518 (8th Cir. 1990); United States v. Mattiace Indus. Inc., 73 B.R. 816, 818-19 (Bankr. E.D. N.Y. 1987).

b. The "Public Policy Test"

Proceedings that adjudicate and effectuate public policy, as distinguished from those that adjudicate or vindicate private rights, are excepted from the stay. NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 942 (6th Cir. 1986); accord In re Commerce Oil Co., 847 F.2d 291 (6th Cir. 1988); In re Christensen, 167 B.R. 213 (D.Ore. 1994); In re Smith-Goodson, Inc., 144 B.R. 72 (Bankr. S.D. Ohio 1992); In re Herr, 28 B.R. 465, 468 (Bankr. D.Me. 1983); cf. In re Commonwealth Cos., Inc., 913 F.2d 518, 523 n.6 (8th Cir. 1990). This test excepts actions to prevent future violations of the law rather than attempts to determine the liability of private parties. In re Medicar Ambulance Co., Inc., 166 B.R. 918 (Bankr. N.D. Calif. 1994).
2. Stay Provisions

a. § 362(a)(1)

The provisions of § 362(a)(1) stay, among other matters, the commencement or continuation of administrative proceedings against the debtor. Section 362(b)(4) excepts from the (a)(1) injunction only actions by governmental units to enforce their police or regulatory powers. The pecuniary interest test and public policy tests are used to measure the extent of this exception.
b. § 362(a)(3)

Section 362(a)(3) enjoins "any act . . . to exercise control over property of the estate." This provision was added by the 1984 Amendments and no legislative history explains the purpose for adding this "control" provision. See Southwest Equipment Rental, Inc., 1990 WL 129972, at *3 (Bankr. E.D. Tenn. Feb. 8. 1990). Term "control" is not defined in the 1984 Amendments nor is it otherwise generally defined in the Code. Although the exception in § 362(b)(4), by its own terms, does not apply to § 362(a)(3), courts have used it as a point of departure for analysis. See In re Beker Indus. Corp., 57 B.R. 611, 625 (Bankr. S.D.N.Y. 1986)("We thus hold that the scope of the control provision of § 362(a)(3), as applicable to governmental regulation, is governed by the contours of § 362(b)(4) as developed by case authority."); accord In re National Cattle Congress, Inc., 179 B.R. 588 (Bankr. N.D. Iowa 1995)("absent legislative history which shows a congressional intent to change the present balance between a state's right to protect its public health and welfare and the bankruptcy court's statutory obligations to protect assets of the estate . . . the courts must seek an accommodation which is consistent with the existing balance."); but see In re Mount Moriah Elevator, Inc., 143 B.R. 905 (Bankr. W.D. Mo. 1992) (grain seized by state agriculture department was property of estate; state could not distribute to farmers absent relief from stay). The agency should be afforded a reasonable opportunity to carry out its duties within the governmental framework. See Board of Governors v. MCorp Financial, Inc., 502 U.S. 32, 39 (1991). And administrative proceedings can continue until an actual issue of control exists. But if a governmental unit ultimately attempts to exercise control of estate property, it must first seek relief from the stay. E.g., In re National Cattle Congress, Inc., 179 B.R. 588 (Bankr. N.D. Iowa 1995)(revocation of pari-mutual dog racing license); cf., In re Central Arkansas Broadcasting Co., 170 B.R. 143 (Bankr. E.D. Ark. 1994); In re Draughon Training Institute, Inc., 119 B.R. 921 (Bankr. W.D.La. 1990)(business license for proprietary school).
3. Exception is not limited only to actions to protect public health or safety. See Midlantic National Nat'l Bank v. N.J. Dep't of Environmental Protection, 474 U.S. 494, 503 (1986) ("one of the purposes of [§ 362(b)(4)] is to protect health and safety") (emphasis added); accord In re Commonwealth Cos., Inc., 913 F.2d 518 (8th Cir. 1990); cf. EEOC v. Rath Packing Co., 787 F.2d 318, 323-25 (8th Cir.) (Title VII employment discrimination action), cert. denied, 479 U.S. 910 (1986); SEC v. First Financial Group, 645 F.2d 429 (5th Cir. 1981) (action to enjoin sale of securities).

4. Exception is not limited only to actions to prevent or stop an imminent or ongoing harm to the public. In re Commonwealth Cos., Inc., 913 F.2d 518, 519 (8th Cir. 1990); In re Commonwealth Oil Refinery Co., Inc., 805 F.2d 1175, 1184-86 (5th Cir. 1986), cert. denied, 483 U.S. 1005 (1987). Thus, the fact that the company is no longer engaged in business is irrelevant.

5. The government's motive in bringing the action is irrelevant. The appropriate focus is on the purposes underlying the law the government is enforcing. EEOC v. Rath Packing Co., 787 F.2d 318, 324-25 (8th Cir.), cert. denied, 479 U.S. 910 (1986); accord In re Commonwealth Cos., Inc., 913 F.2d 518, 523 n.6 (8th Cir. 1990).

6. Cases

a. Exception applied
(1) Commodities Futures Trading Commission

(a) In re Hunt, 93 B.R. 484 (Bankr. N.D. Tx. 1988)(action to impose civil penalties exempt from automatic stay; but action enjoined under § 105 where costs and distraction of agency proceeding would interfere with reorganization effort and where debtors not likely to engage in any future questioned conduct)

(b) CFTC v. Incomco, Inc., 649 F.2d 128 (2nd Cir. 1981) (access to books and records)

(c) In re Co Petro Marketing Group, 6 B.R. 119 (Bankr. C.D. Cal.), rev'd on other grounds, 11 B.R. 546 (B.A.P. 9th Cir. 1980) (injunctive action against unlawful dealing in futures contracts)

(2) National Labor Relations Board

(a) NLRB v. Evans Plumbing Co., 639 F.2d 291 (5th Cir. 1981) (enforcement proceedings involving unfair labor practice ordering debtor to reinstate discriminatorily discharged employees)

(b) Ahrens Aircraft, Inc. v. NLRB, 703 F.2d 23 (1st Cir. 1983) (enforcement proceedings to determine amount of back pay order)

(c) NLRB v. 15th Ave. Iron Works, Inc., 964 F.2d 1336 (2nd Cir. 1992) (NLRB unfair labor practice enforcement proceeding could continue to point of entry of money judgment but judgment must be brought back to the bankruptcy court). Compare NLRB v. E.D.P. Medical Computer Systems, Inc., 6 F.3d 951 (2nd Cir. 1994) (action to obtain prejudgment writ of garnishment to enforce back pay order not excepted).

(3) Department of Labor

(a) Eddleman v. Dep't of Labor, 923 F.2d 782 (10th Cir. 1991) (DOL suit against debtor employer to liquidate back wage claims and disqualify debtor from future government contracts for violations of minimum wage requirements of Service Contract Act, 41 U.S.C. § 351 et seq., excepted from automatic stay under § 362(b)(4) as "police or regulatory action"); accord In re Western Drywall, Inc., 150 B.R. 774 (Bankr. D. Id. 1993).

(b) Donovan v. TMC Indus., Inc., 20 B.R. 997 (N.D. Ga. 1982) (action to enjoin sale of goods produced by unfairly compensated employees)

(c) In re Tauscher, 7 B.R. 918 (Bankr. E.D. Wis. 1981) (action to assess penalties for child labor violations permitted to point of judgment; enforcement of money judgment stayed)

(d) In re Quinta Contractors, Inc., 34 B.R. 129 (Bankr. M.D. Pa. 1983) (administrative proceedings to enforce Davis-Bacon Act)

(e) Martin v. Chambers, 154 B.R. 664 (E.D. Va. 1992) (action to enforce minimum wage and overtime provisions of FLSA excepted); accord Martin v. Safety Elec. Construction Co., 151 B.R. 637 (D. Conn. 1993).

(4) Equal Employment Opportunity Commission

Updated February 19, 2015