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Civil Resource Manual

55. 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

EEOC v. McLean Trucking Co., 834 F.2d 398 (4th Cir. 1987) (EEOC actions against employer-debtors under Title VII of 1964 Civil Rights Act and Age Discrimination Employment Act);EEOC v. Rath Packing Co., 787 F.2d 318 (8th Cir.), cert. denied, 479 U.S. 910 (1987); EEOC v. Guerdon Industries, 76 B.R. 102 (W.D. Ky. 1987) (EEOC's Title VII action against debtor excepted from automatic stay)

(5) Department of Interior

U.S. v. Energy Int'l, Inc., 19 B.R. 1020 (S.D. Ohio 1981) (civil penalty assessments for mining law violations)

(6) Department of Agriculture

In re Northern Boneless Meat Corp., 9 B.R. 27 (N.D.N.Y. 1981) (action to enjoin violations of Packers and Stockyards Act)

(7) PBGC

PBGC v. LTV Corp., 110 S.Ct. 2668 (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)

Cf. LTV Corp. v. PBGC, 130 B.R. 690 (S.D.N.Y. 1991) (in reconciling ERISA with the Bankruptcy Code, court held that debtor's post-petition termination of pension plans did not give rise to administrative priority claim; PBGC's claims deemed "pre-petition contingent claims because labor giving rise to pension obligation was performed pre-petition"; only pension related to post-petition labor of employees entitled to administrative priority as "actual and necessary" expense of preserving estate).

United States v. Mansfield Tire & Rubber Co., 942 F.2d 1056 (6th Cir. 1991), cert. denied, 112 S. Ct. 1165 (1992)(federal pension excise tax imposed under I.R.C. § 4971(a) is "excise tax" and not a penalty, and, as such, is entitled to § 507(a)(7)(E) priority; such taxes may not be equitably subordinated without showing of inequitable conduct by federal government).

(8) Securities and Exchange Commission

SEC v. Long, 106 B.R. 697 (D. Kan. 1989)(commencement of involuntary chapter 7 proceeding did not operate as automatic stay of pending action by Securities and Exchange Commission to enforce its police and regulatory powers).

SEC v. First Financial Group, 645 F.2d 429 (5th Cir. 1981) (receiver of debtor's property appointed to prevent further violations of securities laws)

See In re Knoell, 160 B.R. 825 (D. Az. 1993) (investigation by Arizona Corporation Comm'n of possible violations of state securities laws excepted)

Bilzarian v. SEC, 146 B.R. 871 (Bankr. M.D. Fla. 1992) (SEC's action to fix amount of profits to be disgorged excepted from stay)

(9) Department of Energy

(a) CPI Crude, Inc. v. U.S. Dept. of Energy, 77 B.R. 320 (D.D.C. 1987) (Department of Energy proceedings giving rise to remedial order designed to rectify overpricing practices on part of debtor reseller of crude petroleum products did not violate stay)

(b) In re County Fuel Co., Inc., 29 B.R. 534 (Bankr. D. Md. 1983) (administrative proceedings against debtor for violation of gasoline price guidelines excepted from automatic stay under § 362(b)(4))

(c) In re Vantage Petroleum Corp., 9 B.C.D. 1248 (Bankr. E.D.N.Y. 1982) (same holding as County Fuel but, nevertheless, enjoined proceeding under § 105)

(d) Davis v. Department of Energy, 950 F.2d 733 (TECA 1991), cert.denied 113 S.Ct. 59 (1992) (DOE claim for crude oil overcharges not a "penalty" subject to subordination under § 726(a)(4), even to the extent DOE cannot identify specific overcharge victims), Overruled by Texas American Oil Corp. v. United States Department of Energy, 44 F.3d 1557 (Fed. Cir. 1994).

(10) GNMA

(a) In re Commonwealth Mortgage Co., Inc., 145 B.R. 368 (Bankr. D. Mass. 1992)(automatic stay does not apply to GNMA actions when it is exercising its statutory duties under 12 U.S.C. § 1721(g), which provides that no state, local or federal law (except federal law expressly referring to this subsection) shall limit GNMA exercise of contractual rights; thus, GNMA could declare default and require turnover of pooled mortgages backing mortgaged backed securities serviced by debtor).

(b) In re Whitcomb & Keller Mortgage Co., Inc., 8 B.R. 83 (Bankr. N.D. Ind. 1980) (approving termination of issuer status and assumption of control of mortgage pools backing GNMA mortgage backed securities)

(c) But cf. In re Adana Mortgage Bankers, Inc., 12 B.R. 973 (Bankr. N.D. Ga. 1981), vacated as moot, 687 F.2d 344 (11th Cir. 1982) (lower court found termination of guaranty agreement with debtor-issuer under GNMA mortgage backed securities program subject to automatic stay)

(d) See generally 12 U.S.C. § 1721(g)(1) ("no state or local law, and no federal law (except Federal law enacted expressly in limitation of this subsection after October 8, 1980) shall preclude or limit" GNMA's exercise of powers); H.R. Rep. No. 979, 96th Cong., 2nd Sess. 48-49 (1980); H.R. Cong. Rep. on S. 2719, 96th Cong., 2nd Sess. 9814 (1980). H.R. Rep. No. 979, 96th Cong., 2nd Sess. 48-49 (1980).

(11) Federal Reserve Board

Federal Reserve Board v. MCorp Financial, Inc., 502 U.S. 32 (1991) (1) neither §§ 362 and 105 could not be invoked to enjoin FRB action to enforce "source of strength" requirement [requiring bank holding company to contribute assets to ensure adequate levels of capital at subsidiary bank] because (a) FRB's "plain, preclusive" anti-injunction language controls; (b) action falls "squarely in § 362(b)(4) exception; (c) §§ 362(a)(3) and (a)(6) staying acts to exercise control over debtor's property or collect a claim have no application to a "non-final administrative proceeding"; and (d) reliance on § 1334(b) for jurisdiction misplaced as it grants bankruptcy courts concurrent jurisdiction only with other "courts"; and (2) reversed 5th Circuit's ruling that it nevertheless could review FRB's "source of strength" doctrine, holding an adequate opportunity for review existed under non-bankruptcy law once FRB decides whether if MCorp violated the regulation).

(12) Office of Thrift Supervision

OTS v. Firstcorp. Inc., 967 F.2d 942 (4th Cir. 1992) (OTS regulatory action against debtor thrift holding company, in the form of ongoing administrative proceedings and a temporary cease and desist order, not stayed).


(a) Federal Reserve Board v. MCorp Financial, Inc., 502 U.S. 32 (1991), holding:

i) Anti-injunction provision in 12 U.S.C. § 1818(c)(1) not qualified or superseded by the automatic stay. FRB's administrative proceeding charging bank with violation of "source of strength" regulation falls squarely within "policy or regulatory powers" exception in 𨷂(b)(4).

ii) § 362(a)(3) and (a)(6) are inapposite to ongoing, nonfinal administrative proceeding.

iii) 28 U.S.C. § 1334(b), authorizing district courts to exercise concurrent jurisdiction, is inapposite because (1) the FRB is not another "court" and (2) prior to the entry of a final order, and commencement of any enforcement action, bankruptcy court's exclusive jurisdiction over property of the estate is unlikely to be impaired.

(b) In re Landmark Land Co. of Oklahoma, 973 F.2d 283 (4th Cir. 1992)(FIRREA's anti-injunction provisions precludes bankruptcy court from enjoining RTC's exercise of ownership rights after taking control of thrift's assets, including right to call special shareholders' meeting for wholly owned subsidiary, elect new directors, and dismiss subsidiary's chapter 11 bankruptcy proceedings).

(c) RTC v. Firstcorp, Inc., 973 F.2d 243 (4th Cir. 1992)(savings and loan holding company obligated under capital maintenance agreement to maintain capital of subsidiary thrifts required under 11 U.S.C. § 365(o) to cure any deficits under that agreement before it could reorganize under chapter 11).

(d) In re American Mortgage and Investor Services, Inc., 141 B.R. 578 (Bankr. D.N.J. 1992)(FIRREA prohibits bankruptcy court from asserting subject matter jurisdiction over assets, disputed or not, in which RTC claims ownership interest until and unless FIRREA claims procedures have been exhausted).

(14) FCC

Compare In re D.H. Overmyer Telecasting Co., 35 B.R. 400 (Bankr. N.D. Ohio 1983)(FCC broadcasting license is not property of the estate as FCC retains exclusive jurisdiction over its transfer) with In re Ridgely Communications, Inc., 139 B.R. 374 (Bankr. D. Md. 1992)(FCC license is property of the estate and may be pledged, notwithstanding contrary FCC policy). See In re Fugazy, 114 B.R. 865 (Bankr. S.D.N.Y. 1990), aff'd 124 B.R. 426 (S.D.N.Y. 1991).

(15) ICC

Compare In re Olympia Holding Corp., 141 B.R. 443 (Bankr. M.D. Fla. 1992)(ICC administrative proceeding to determine if debtor-carrier's freight undercharge actions against shippers enjoined as interfering with proceeding of the estate) with ICC v. Lifschultz Fast Freight Corp., 151 B.R. 150 (N.D. Ill. 1993) (action to enjoin collection of unauthorized rates excepted).

(16) Rate Regulatory Agencies

In re Timberon Water Co., 836 P.2d 73 (N.M. 1992) (New Mexico Public Service Commission's exclusion of "contributions in aid of construction" from debtor water company's rate base excepted under § 362(b)(4)).

Compare In re Public Service Co. of New Hampshire, 98 B.R. 120 (Bankr. D.N.H. 1989) (debtor utility was entitled under § 105 to preliminary injunction to prevent State Public Utilities Commission from proceeding with involuntary rate case, notwithstanding possibility that debtor was earning sum in excess of its allowed annual rate of return, where the Commission would be entitled to recover any overcharges, and diversion of debtor's employees from reorganization to prepare for full-blown rate case would jeopardize reorganization).

(17) Federal Trade Commission

FTC v. R.A. Walker & Assoc., Inc., 37 B.R. 608 (D.D.C. 1983)(district court retained jurisdiction and authority to continue freeze over debtors' assets, notwithstanding filing of bankruptcy case)

In re Namer, 141 B.R. 603 (Bankr. E.D. La. 1992) (FTC motion to dismiss chapter 11 petition for bad faith granted and debts to FTC for engaging in deceptive trade practice held nondischargeable).

(18) Federal Aviation Administration

In re Horizon Air, Inc., 156 B.R. 369 (N.D.N.Y. 1993)(withdrawing reference, vacating TRO issued by bankruptcy court, and upholding FAA's revocation of debtor airline's air carrier operating certificate)

In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (upholding FAA's withdrawal of landing slots and finding § 105 inapposite because landing slots are restrictions on the use of property (airplanes) and not property in themselves)

In re Gull Air, Inc., 890 F.2d 1255 (1st Cir. 1989)(carrier possesses a proprietary right in landing slots but it is limited by the superior rights and restrictions of FAA, including FAA's regulatory provision for mandatory withdrawal of slots for non-use)

(19) HCFA

In re Medicar Ambulance Co., Inc., 166 B.R. 918 (Bankr. N.D. Calif. 1994) (withholding of Medicare payments pending completion of investigation into alleged overpayment to provider-debtor not excepted from stay)