b. Exception not applied
(1) Actions to protect pecuniary interest in property
In re Cox Cotton, 647 F.2d 768 (8th Cir. 1981), cert. denied, 454 U.S. 1162 (1982) (governmental regulation of grain elevators found to be intended to protect financial interests of farmers, not health or safety of public).
Kuck v. Alabama Dep't of Public Safety, 116 B.R. 821 (Bankr. S.D. Ala. 1990)(suspension of driver's license and automobile tag for failure to file accident report form was not excepted from automatic stay under § 362(b)(4) police power exception where only purpose for report was to ascertain whether the responsible person was financially capable of redressing the damages resulting from the accident).
In re North, 120 B.R. 592 (Bankr. D. Vt. 1991)(where proposed suspension of chiropractor's license was based solely upon non-payment of taxes, "police and regulatory power" exception to automatic stay does not apply).
(2) Action by state to enforce financial responsibility law
In re Sampson, 17 B.R. 528 (Bankr. D. Conn. 1982)
In re Butler, 74 B.R. 106 (W.D. Mo. 1987)
(3) Non-governmental units
(a) In re J.J. Bradley & Co., Inc., 6 B.R. 529 (Bankr. S.D.N.Y. 1980) (regulatory action by NASD not expected)
(b) In re Colin, Hochstin Co., 41 B.R. 322 (Bankr. S.D.N.Y. 1984) (regulatory activity of NYSE not excepted)
(c) In re Revere Copper & Brass, Inc., 32 B.R. 725 (S.D.N.Y. 1983) (environmental interest group suing debtor under private attorney general provisions of Clean Water Act does not qualify as governmental unit); In re Chateaguy, 118 B.R. 19 (Bankr. S.D.N.Y. 1990) (same).
(d) But see Wade v. State Bar of Arizona, 948 F.2d 1122 (9th Cir. 1991)(disciplinary proceeding initiated against a chapter 11 debtor attorney is exempt under § 362(b)(4); bar association deemed instrumentality of state supreme court for disciplinary purpose and thus fell within definition of "governmental unit" in § 101(26)).
(e) But see United States v. NBI, Inc., 141 B.R. 1 (D.D.C. 1992)(action to fix reasonable attorneys fees, costs and expenses by qui tam relator under False Claims Act in which U.S. intervened could proceed under police and regulatory power exception as long as action was "continuation of and integral to a governmental proceeding").
c. Post-petition conduct
(1) 28 U.S.C. § 959(b)
(a) 28 U.S.C. § 959(b) requires trustee or debtor in possession comply with most applicable laws as it continues its business.
(b) 28 U.S.C. § 959(b) provides:
(c) except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of thevalid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.
1) Because it refers only to state laws, must federal laws be observed?
2) Does it apply when debtor is liquidating rather than continuing in business? See In re Borne Chemical Co., Inc.. 54 B.R. 126 (Bankr. D. N.J. 1984) (§ 959 only applies when property is being managed for continuing operations, not liquidation)
(2) Int'l Assoc. of Machinists v. Continental Airlines, Inc. and National Mediation Board, 754 F. Supp. 892 (D.D.C. 1990)(action seeking injunctive and declaratory relief with respect to post-petition conduct not barred by automatic stay). See In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993),cert. denied, 114 S. Ct. 1576 (1994) (debtor must comply with environmental protection laws); In re Motel Investment, Inc., 172 B.R. 105 (Bankr. M.D. Fla. 1994) (chapter 7 trustee must comply with wetlands statutes).
3. Environmental Enforcement Cases:
Note: Consult the extensive ENR outline available from LEI.
a. Midlantic National Bank v. N.J. Dept. of Environmental Protection, 474 U.S. 494 (1986) (bankruptcy trustee may not abandon property under section 554(a) in contravention of state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards; before authorizing abandonment, court must formulate conditions that will adequately protect the public's health and safety); see also In re Peerless Plating Co., 70 B.R. 943 (Bankr. W.D. Mich. 1987) (trustee could not abandon debtor's plant in violation of the Comprehensive Environmental Response, Compensation, and Liability Act, and thereby avoid liability for postpetition cleanup costs)
b. State of Ohio v. Kovacs, 469 U.S. 274 (1985)
(1) Holding: Where a Receiver appointed prior to the debtor's filing of its petition seeks money to defray clean up costs of a hazardous waste disposal site, the clean up order is deemed an obligation to pay money and, as such, is dischargeable.
(2) What Was Not Decided
(a) That Kovacs could not be prosecuted criminally
(b) That any fine or penalty would or would not be dischargeable under § 523(a)(7)
(c) What the legal consequences would have been had Kovacs filed for bankruptcy before a Receiver was appointed
(d) That an injunction against bringing further toxic waste on the premises or against future conduct is dischargeable in bankruptcy
(e) That anyone who is in possession of the site can avoid compliance with state environmental laws
Compare In re Smith-Douglas, Inc., 856 F.2d 12 (4th Cir. 1988)(bankruptcy trustee permitted to abandon contaminated property whenno immediate threat to health and no funds for clean-up; Midlantic exception to abandonment found to be narrow, intended to protect imminent threat to public safety not "to shield state treasury"); In re L.F. Jennings Oil Co., 4 F.3d 887 (10th Cir. 1993) (same); In re Better-Brite Plating, Inc., 105 B.R. 912 (E.D. Wis. 1989)(trustee could abandon debtor's property, even though it was contaminated by hazardous waste, where trustee had no unencumbered assets and no imminent health risk existed); with Pennsylvania v. Conroy, 24 F.3d 568 (3d Cir. 1994); In re Commonwealth Refining Co., 805 F.2d 1175 (5th Cir. 1986) (applying § 362(b)(4) and (5) exceptions and refusing to apply § 105, court required debtor hazardous waste facility operator to comply with environmental laws, even though this required expenditure of funds); In re Penn Terra, Ltd., 733 F.2d 267 (3d Cir. 1984); In re Security Gas & Oil, Inc., 70 B.R. 786 (Bankr. N.D. Cal. 1987) (state's action requiring debtor to reclaim abandoned wells was excepted from automatic stay).
U.S. v. Mattiace Industries, Inc., 73 B.R. 816 (Bankr. E.D.N.Y. 1987)(Government's action to recover response costs under the CERCLA was not an action to protect its own "pecuniary interest," for purpose of automatic stay).
e. Ongoing Duties
In re Charles George Land Reclamation Trust, 30 B.R. 918 (Bankr. D. Mass. 1983) (chapter 7 case filed by owner of waste disposal facility dismissed because trustee could not comply with state environmental laws and therefore would violate 28 U.S.C. § 959(b) requiring compliance by trustee with state laws); see In re Torwico Electronics, Inc., 8 F.3d 146 (3d Cir. 1993), cert. denied, 114 S. Ct. 1576 (1994) (debtor must comply with environmental protection laws);
f. Plan Provisions
In re ElArk Industries, Inc., 122 B.R. 87 (Bankr. W.D. Ark. 1990) (reorganization plan cannot force EPA to accept title to contaminated property as claim payment).
See In re Chateaugay Corp., 944 F.2d 997 (2nd Cir. 1991) (CERCLA cleanup costs incurred by government responding to debtor's pre-petition release of hazardous substances gives rise to a "claim" that may be discharged in bankruptcy; however, such claims are entitled to priority, under § 503(b)(1)(A) as "actual, necessary cost and expenses of preserving the estate"); accord Pennsylvania v. Conroy, 24 F.3d 568 (3rd Cir. 1994); In re Chicago, Milwaukee, St. Paul & Pacific R.R. 974 F.2d 775 (7th Cir. 1992). But see Penn Central Corp. v. United States, 944 F.2d 164 (3rd Cir. 1991), cert. denied, 503 U.S. 906 (1992) (finding CERCLA liability for pre-petition acts could be raised eight years after plan confirmed because an insufficient basis previously existed to support earlier contingent claims); United States v. Hubler, 117 B.R. 160 (W.D. Pa. 1990)(order requiring cleanup of surface mine does not constitute a dischargeable right to money payment merely because enjoined party must spend money to fulfill cleanup obligations; discharge only occurs where money payment is sought; rejects United States v. Whizco, 841 F.2d 147 (6th Cir. 1988)(which held that a cleanup injunction requiring expenditures to comply can be discharged)).
4. Civil Fraud Cases
a. False Claims Act
In re Commonwealth Co., Inc., 913 F.2d 518 (8th Cir. 1990) (§ 362(b)(4) excepts False Claims Act action against debtors from the automatic stay up to and including entry of a money judgment) (collects and distinguishes contrary decisions, id. at 526, note 12.); accord United States v. NBI, Inc., 142 B.R. 1 (D.D.C. 1992)(action to fix reasonable attorneys fees, costs and expenses by qui tam relator under False Claims act in which U.S. intervened could proceeding under police and regulatory power exception as long as action was "continuation of and integral to a governmental proceeding); United States v. Mickman, 144 B.R. 259 (E.D. Pa. 1992) (following Commonwealth, holds False Claims Act civil action excepted from automatic stay); In re Selma Apparel Corp., 132 B.R. 968 (S.D. Ala. 1991) (same); In re MMR Corp., Case No. 90-00401 (Bankr. M.D. La. April, 1991). But see In re Bicoastal Corp., 118 B.R. 854 (Bankr. M.D. Fla. 1990) (False Claims Act action not excepted under § 362(b)(4)).
b. Res Judicata Effect Of Prior Fraud Judgments
(1) Grogan v. Garner, 498 U.S. 279 (1991) (standard of proof for fraud dischargeability exceptions in § 523(a) is ordinary preponderance-of-the-evidence standard). See Luce v. First Equipment Leasing Corp., 960 F.2d 1277 (5th Cir. 1992)(Grogan applies retroactively); Melton v. Moore, 946 F.2d 880 (9th Cir. 1992)(Grogan applies retroactively).
(2) M & M Transmissions, Inc. v. Raynor, 922 F.2d 1146 (4th Cir. 1991)(state court default judgment for fraud cannot be invoked as res judicata where issue of fraud was not actually litigated).
(3) In re Tapper, 123 B.R. 594 (Bankr. N.D. Ill. 1991) (state court judgment under Illinois Consumer Fraud Act does not automatically act as collateral estoppel to bar relitigation of fraud in a non-dischargeability action because statute "afforded broader consumer protection than does common law fraud action").
(1) In re Scheuer, 125 B.R. 584 (Bankr. C.D. Cal. 1991)(recognizing split in authority, court held treble damages portion of RICO judgment to be dischargeable, even though compensatory damages portion was nondischargeable under § 523(a)(2)(A) and (a)(4)).
(2) Sturge v. Smouha, 136 B.R. 921 (S.D.N.Y. 1992)(bankruptcy court could not enjoin BCCI's RICO plea agreement and asset forfeiture to preserve assets for creditors; instead, creditor had to seek relief from court where RICO proceeding was pending).
d. Damage Awards
(1) In re Bicoastal Corp., 134 B.R. 50 (Bankr. M.D. Fla. 1991)(because Code does not favor claims for fines, penalties or punitive damages, only actual (not trebled) damages under False Claims Act would be included in estimated claim); In re Kochekian, 175 B.R. 883 (Bankr. M.D.N.C. 1995)(same).
(2) Compare St. Laurent v. Ambrose, 991 F.2d 672 (11th Cir. 1993)(punitive damages awarded in fraud suit are non-dischargeable under § 523(a)(2)(A)) with In re Levy, 951 F.2d 196 (9th Cir. 1991) (such damages are dischargeable).
IV. USE OF SECTION 105 TO ENJOIN REGULATORY CONDUCT
A. Debtors, to enjoin regulatory activities, may affirmatively seek to utilize § 105:
The bankruptcy court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title.
B. Legislative history: generally indicates that use of § 105 to obtain injunction of actions otherwise excepted from § 362's automatic stay may be permissible. H.R. Rep. No. 95-595, pp. 392-93; S. Rep. No. 95-989, pp. 52-52.
C. Difficulty With Use Of § 105
1. Regulatory proceeding does not involve "property" which § 105 is intended to protect
2. General language of § 105 should not override specific provisions of § 362; however, argument undercut by legislative history
1. In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (§ 105 inapposite because landing slots are restrictions on the use of property (airplanes) and not property in themselves)
2. In re Commercial Motor Freight, Inc., 27 B.R. 293 (Bankr. S.D. Ind. 1983) (NLRB investigation of unfair labor practices, although exempt from automatic stay under § 362(b)(4), could be enjoined under § 105 if it constituted a threat to estate assets).
3. In re Sewanee Land, Coal & Cattle, Inc., 34 B.R. 696 (N.D. Ala. 1983) (bankruptcy court exceeded jurisdiction in enjoining under § 105 Interior's Office of Surface Mining from taking action against third party mining company without permit where no threat to debtor's assets shown)
4. 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).
5. 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).
V. BANKRUPTCY COURT EFFORTS TO USURP AGENCIES'
1. In contrast to regulatory agency seeking affirmatively to affect the debtor or its estate, the bankruptcy court seeks affirmatively to exercise the exclusive regulatory power of agency
2. Example: In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (bankruptcy court sought to exercise FAA's plenary authority to control nation's airways by ordering the allocation of landing slots to a particular carrier)
B. Jurisdictional Impediments
1. § 1334(b)
a. Statutory language limits concurrent jurisdictional grant to "civil proceedings" and overrides exclusive jurisdiction of other entities only in the case of a "court or courts"
b. Legislative history indicates jurisdictional grant extends only to "actions that formerly had to be tried in a state court or in federal district court." S. Rep. No. 95-989, p. 153.
c. MCorp v. Federal Reserve Board, 502 U.S. 32 (1992) (holding inter alia,reliance on § 1334(b) for jurisdiction to enjoin FRB administrative hearing misplaced as it grants bankruptcy courts concurrent jurisdiction only with other "courts").
2. § 1334(d)
a. Provides exclusive jurisdiction over "all property" of the debtor
b. Frequently, no "property" is involved; instead, restrictions on the use of property are at issue
c. Even if "property" is involved (e.g., a license), the "property" remains encumbered by and subject to the statutes creating the "property" [Example: transfer of liquor license barred so long as state taxes remain unpaid. In re Professional Bar, 537 F.2d 339 (9th Cir. 1976); In re Anchorage Int'l Inn, Inc., 16 B.R. 308 (Bankr. D. Alaska 1981).]
1. Medicare Disputes
Bankruptcy court must defer to conclusive determination of Social Security Administration regarding payments due Medicare providers
a. In re Clawson Medical Center, 12 B.R. 647 (E.D. Mich. 1981)
b. In re Berger, 16 B.R. 236 (Bankr. S.D. Fla. 1981)
c. Contra In re Town & Country Nursing Home, Inc., 963 F.2d 1146 (9th Cir. 1992)
2. Labor Disputes
NLRB has exclusive authority to determine existence of and prevent unfair labor practices and bankruptcy trustee committing such acts is subject to NLRB jurisdiction
a. Nathanson v. NLRB, 344 U.S. 25 (1944)
b. In re Brada Miller Freight Systems, Inc., 16 B.R. 1002 (N.D. Ala. 1981)
c. But see In re Unit Parts Co., 9 B.R. 380 (Bankr. W.D. Okla. 1981) (Code gives NLRB and bankruptcy court concurrent jurisdiction over claims arising out of unfair labor practices)
3. Landing Slots
FAA has exclusive authority to allocate airport landing slots
In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983)
In re Gull Air, Inc., 890 F.2d 1255 (1st Cir. 1989)
while noting that the nature of arrival and departure slots was modified after In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983)(holding that slots are not property but, instead, restrictions on the use of property) by the FAA's decision to permit their lease and sale, the court declines to decide whether slots now constitute "property" for purposes of section 362(a)(3); it finds that a carrier possesses a proprietary right in the slots but that it is limited by the superior rights and restrictions of FAA, including FAA's regulatory provision for mandatory withdrawal of slots for non-use.
once airline's rights in the slots expired, FAA's actions to reallocate the slots would not be subject to § 362(a)(1) because (1) it would not qualify as an action or proceeding against the debtor; and (2) it arose post-petition and thus "was [not] and could [not] have been commenced before commencement" of the case.
4. Customs Disputes
Apex Oil Co. v. U.S. Customs Service, 122 B.R. 559 (Bankr. E.D. Mo. 1990)(bankruptcy court can hear as a "core" matter a claim to liquidate customs duties notwithstanding CIT's exclusive jurisdiction, but court will defer to CIT for liquidation), aff'd in part and rev'd in part, 131 B.R. 712 (E.D. Mo. 1991)(abstaining in favor of CIT would not be in the interest of justice).
5. Contract Disputes
With respect to questions subject to disputes clause, "bankruptcy court should abstain and defer to ASBCA.In re American Pouch Foods, Inc., 30 B.R. 1015 (N.D. Ill. 1983), aff'd, 769 F.2d 1190 (7th Cir. 1985), cert. denied, 106 S. Ct. 1459 (1986); In re Gary Aircraft, 698 F.2d 775 (5th Cir.), cert. denied, 104 S. Ct. 82 (1983); In re Wincom, 76 B.R. 1 (Bankr. D. Mass. 1987); In re Misener Indus., Inc., 54 B.R. 89 (Bankr. M.D. Fla. 1985); In re Economy Cab & Tool Co., Inc., 47 B.R. 708 (Bankr. D. Minn. 1985); In re Vogue Instruments Corp., 31 B.R. 87 (Bankr. E.D.N.Y. 1983). Contra In re MacLeod Co., 935 F.2d 270 (6th Cir. 1991)(permitting debtor's counterclaim for damages permitted in bankruptcy court notwithstanding failure to comply with CDA jurisdictional requirement of CO's decision).