BANKRUPTCY AND THE GOVERNMENT AS REGULATOR
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
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 PersonsThe 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"
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:
Not excepted by ð¨·‚(b)(1) because it is not a criminal proceeding against the debtor. Maryland law regards forfeiture as a civil in rem proceeding distinct from the criminal proceeding against the individual from whom the property was seized.
§ 362(b)(4) only excepts stay imposed by § 362(a)(1), i.e., actions against the debtor. The stay of actions against property in §ð¨·‚(a)(2)(3) and (4) are unaffected by (b)(4). Forfeiture is at least in part an action against property.
Forfeiture is intended neither to protect health or safety nor to stop or prevent fraud, environmental or consumer protection, safety, or similar powers.
Inconsistency With § 726: § 726(a) (4) subordinates in a chapter 7 claim for any "fine, penalty, or forfeiture." Clear congressional intent to relegate these claims to a position behind that of unsecured creditors so that they are protected from debtor's wrongdoing.
(2) In re Ryan, 32 B.R. 794 (Bankr. D. Md. 1983)("Ryan II")
Court lifted the automatic stay to permit the forfeiture action to proceed.
If state court determines that the currency was not forfeitable, funds would be turned over to the trustee.
If the money is found to be forfeitable, funds still would be turned over to the trustee and state would have a claim against the estate which would be subordinated under ð¨¼®(a) (4) and nondischargeable under ð¨¹£(a)(7).
(3) In re Reid, 60 B.R. 301 (Bankr. D. Md. 1986)
In turnover proceeding, rejects Ryan II, finding that estate's interest in the forfeited property is only the debtor's right to claim the money in a forfeiture hearing, and that turnover should be ordered only to the extent, if any, to which currency is found not to be forfeitable.
Without discussion, the bankruptcy court conducted a forfeiture hearing to determine amount forfeitable (unlike Ryan II where court deferred to state court).
(4) In re Bridge, 90 B.R. 839 (Bankr. E.D. Mich. 1988)
Facts: Debtor carried $670,000 in Canadian Treasury Bills into Detroit from Ontario without declaring them, in violation of 31 U.S.C. § 5311 et seq. United States commenced post-petition forfeiture action against the bills pursuant to 31 U.S.C. § 5317.
Held: Forfeiture deemed act "to exercise control over property of the estate "and not proceeding "against the debtor," and hence subject to § 362(a)(3) and not subject to § 362(a)(1). Exception in § 362(b)(4) applies only to stay of § 362(a)(1) and therefore is inapposite.
See also In re Bridge, 106 B.R. 474 (Bankr. E.D. Mich. 1989)(awarding trustee prepetition interest).
(5) Cf. In re Blair, 14 B.C.D. 1000 (Bankr. N.D. Ala. 1986)
Action by state to issue execution to sell property to satisfy a criminal fine is not excepted from the automatic stay under (1) § 362(b)(1) because it is an action against the debtor's property, not a criminal action against the debtor; (2) § 362(b)(4) because this exception is only for actions against the debtor stayed under § 362(a)(1); or (3) § 362(b)(5) because this exception does not apply to enforcement of a money judgment (which includes fines).
(6) James v. Draper, 940 F.2d 46 (3rd Cir. 1991)(civil forfeiture proceeding falls within "police or regulatory power" exception to automatic stay; neither bankruptcy court nor district court has power to collaterally attack merits of facially valid state court judgment); accord Boricua Motors Leasing Corp. v. Commonwealth of Puerto Rico, 154 B.R. 834 (Bankr. D.P.R. 1993).
(7) In re Goff, 159 B.R. 33 (Bankr. N.D. Okla. 1993) (to extent forfeiture is genuinely remedial, it is excepted under § 362(b)(4); but to extent forfeiture is intended to punish and/or make money for the state [as in this case where mobile home used to facilitate sale of drugs was forfeited] it is not an exercise of police or regulatory power and not excepted).
(8) § 304 Proceedings.
Sturge v. Smouha, 136 B.R. 92 (S.D.N.Y. 1992)(bankruptcy court lacked jurisdiction to enjoin forfeiture by debtor BCCI's plea agreement in criminal RICO case; injunction also barred by 18 U.S.C. § 1963(i); creditor required to file claim under § 1963(l).
(1) In re Newton, 15 B.R. 708 (Bankr. N.D. Ga. 1981) (upon finding that restitution was part of criminal sentence imposed upon debtor, stay found inapposite to enforcement proceeding);accord In re Button, 8 B.R. 692 (Bankr. W.D.N.Y. 1981); but see In re Barnett, 15 B.R. 504 (Bankr. D. Kan. 1981) (enforcement of restitution order imposed under civil remedy portion of statute found to be stayed). See Nelson v. County of Santa Clara, 91 B.R. 904 (N.D. Cal. 1988)(payment of restitution imposed in criminal sentence not subject to avoidance as preference).But see Heart of Dixie Nissan, Inc. v. Reynolds, 946 F.2d 780 (11th Cir. 1991), cert. denied, 112 S. Ct. 1949 (U.S. 1992) (payment of restitution pursuant to agreement with district attorney deferring prosecution for issuing worthless checks subject to avoidance as preference); In re Currey, 144 B.R. 490 (Bankr. D. Idaho 1992) (same).
(2) Restitution and Criminal Fines In Chapter 13 Cases
(a) The Comprehensive Crime Control Act of 1990 legislatively overturns Davenport, infra. It amends § 1328(a)(2) to include § 523(a)(9) (making nondischargeable debts arising from drunk driving) and to make nondischargeable debt "for restitution included in a sentence on the debtor's conviction of a crime." The amendment became effective on December 1, 1990, but does not apply to cases commenced before that date.
(b) The Bankruptcy Reform Act of 1994 amends § 1328(a)(3) to make criminal fines nondischargeable in chapter 13.
(c) See Pennsylvania v. Davenport, 110 S.Ct. 2126 (1990) (criminal restitution obligations are dischargeable under chapter 13); see generally Kelly v. Robinson, 479 U.S. 36 (1986)(obligation to make restitution, imposed by a criminal court that found the debtor guilty, held nondischargeable in a chapter 7 proceeding under § 523(a)(7); see also id. at 59, note 6 (dissent) (Marshall, J.)(criticizing decision and suggesting it "left open the possibility that such obligations will be dischargeable under chapter 13"); United States v. Vetter, 895 F.2d 456, 459 (8th Cir. 1990) (Kelly rationale applies in chapter 7 whether or not restitution order is issued by state or federal court, and whether or not it is issued before or after petition is filed); In re Kochekian, 175 B.R. 883 (Bankr. M.D.N.C. 1995); In re Drimmel, 143 B.R. 249 (Bankr. D. Mont. 1992) (restitution condition in pre-Amendment chapter 13 debtor's sentence not "provided for by the plan" and hence not discharged).
(d) Bad check prosecutions. Excepted, so long as subject to criminal statutes and not simply intended as means to collect debt. E.g., In re Schake, 154 B.R. 270 (D. Neb. 1993); In re Wagner, 18 B.R. 339 (Bankr. W.D. Mo. 1982); But see In re Asay, 141 B.R. 201 (Bankr. D. Mont. 1992) (rejects "principal motivation" test in favor of "bad faith" test in deciding whether to enjoin bad check prosecution); cf. In re Heincy, 858 F.2d 548 (9th Cir. 1988); In re Alteu 108 B.R. 16 (Bankr. D.R.I. 1989). See Heart of Dixie Nissan, Inc. v. Reynolds, 946 F.2d 780 (11th Cir. 1991), cert. denied, 504 U.S. 913 (1992) (payment of restitution pursuant to agreement with district attorney deferring prosecution for issuing worthless checks subject to avoidance as preference); In re Currey, 144 B.R. 490 (Bankr. D. Idaho 1992) (same).
(e) Criminal contempt. Excepted from automatic stay. In re Kearns, 168 B.R. 423 (D. Kan. 1994) (to extent contempt proceedings initiated for non-payment of support obligations were intended to uphold dignity of the court and punish debtor for not complying with earlier orders, it was exempt); Martin-Trigona v. Gouktas, 15 B.R. 645 (N.D. Ill. 1980). See In re Betts, 160 B.R. 233 (E.D. La. 1993) (state court sanctions are excepted).
(f) Bail Bond Collections. In re Scott, 106 B.R. 698 (S.D. Ala. 1989)(automatic stay did not apply to state's garnishment of debtor's wages due to forfeiture of bail bond; action was not to advance state's pecuniary interest but, instead, to enforce criminal bail proceeding); accord In re Bean, 66 Bankr. 454 (Bankr. D. Colo. 1986), aff'd, 72 B.R. 503 (D. Colo. 1987).
(g) Child Support. In re Kearns, 168 B.R. 423 (D. Kan. 1994) (to extent contempt proceedings initiated for non-payment of support obligations were intended to uphold dignity of the court and punish debtor for not complying with earlier orders, it was exempt); In re Williams, 72 B.R. 508 (Bankr. M.D. Fla. 1987) (automatic stay did not apply to attorney's conduct relating to order of arrest and confinement for nonpayment of child support).
(h) Revocation of Probation. Hucke v. State of Oregon, 992 F.2d 950 (9th Cir.), cert. denied, 114 S.Ct. 178 (1993) (state court order revoking chapter 13 debtor's probation did not violate automatic stay when it was not intended as a collection device for a prepetition compensatory fine but, instead, a continuation of a criminal action caused by the debtor's subsequent callous and disrespectful acts).
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