FROM: Elizabeth I. Holland and Melissa B. Jacoby
DATE: June 16, 1997
RE: Memorandum for June 20 Discussion of Police and Regulatory Actions under 11 U.S.C. §§ 362(b)(4) & 105
The filing of a bankruptcy petition creates an automatic stay under section 362(a) that enjoins the initiation or continuation of civil actions that affect the debtor or property of the estate. This automatic stay applies to all parties, including government entities. A government entity that seeks to proceed with an action against the debtor or property of the estate has two potential options. First, the Bankruptcy Code provides exceptions to the automatic stay for certain types of governmental actions; an action that fits one of these exceptions can proceed without leave of the bankruptcy court. Second, for actions outside the scope of those exceptions, the government can seek permission from the bankruptcy court to go forward by bringing a motion for relief from the automatic stay. [ FN: 11 U.S.C. §362(d) (1994). "It is important to always remember that to say that an action is stayed does not mean that the government will be forever barred from acting. It merely means that the government will need to seek relief from the stay from the bankruptcy court. In view of the appropriate deference to be granted to state proceedings, obtaining such relief should not necessarily be difficult to obtain. " Karen Cordry, Bankruptcy Law and the Governmental Regulatory Process, at 10-33, n. 33 (LRP Publications 1995).]
In particular, under section 362(a)(1) of the Bankruptcy Code, the filing of a bankruptcy petition stays "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of a case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title." Section 362(b)(4) provides an exception to section 362(a)(1) and permits a governmental unit to commence or continue an action against a debtor to enforce such governmental units police or regulatory power without obtaining permission from the bankruptcy court. [ FN: "The filing of a petition . . . does not operate as a stay under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit s police or regulatory power. " 11 U.S.C. §362(b)(4) (1994). See also Board of Governors of the Federal Reserve System v. MCorp Financial Inc. , 112 S. Ct. 459 (1991) (section 362(b)(4) excepted from stay Federal Reserve Board s administrative proceedings against debtor). The Supreme Court was "not persuaded . . . that the automatic stay provisions have any application to ongoing, nonfinal administrative proceedings. " Id at 464. Similarly, section 362(b)(5) permits the enforcement of a prepetition judgment obtained in a police or regulatory action against the debtor or against property of the estate. 11 U.S.C. §362(b)(5) (1994).] The legislative history indicates that Congress created this carve-out to permit the continuation of proceedings by governmental units to "stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws."[ FN: H.R. Rep. 595, 95th Cong., 1st Sess. 342-43 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 51-52 (1978).]
The language of section 362(b)(4) does not give government entities unlimited ability to go forward in actions against the debtor without bankruptcy court permission. Because section 362(b)(4) provides an exception only to actions that fall under section 362(a)(1), a literal interpretation would imply that section 362(b)(4) exempts only actions against the debtor, not against property of the estate. Taking the literal reading one step further, section 362(b)(4) would appear to stop short of permitting the actual exercise of control over property of the estate, which generally is stayed under section 362(a)(3). [ FN: 11 U.S.C. §362(a)(3) stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. " Congress added the "exercise control over " language in the Bankruptcy Amendments and Federal Judgeship Act of 1984. See 2 Collier on Bankruptcy ¶ 362.04 (15th ed. 1996).]
The majority of courts have not adopted the literal construction. [ FN: See infra, note 10.] Some courts interpret this provision to provide broad automatic authorization for police and regulatory actions to proceed against both a debtor and property of the estate, as is illustrated by the recent decision of the Court of Appeals for the 6th Circuit: in Javens, the court found that the automatic stay did not prevent a municipality from condemning and demolishing three buildings belonging to the debtors without bankruptcy court permission. [ FN: See, e.g. , Javens v. City of Hazel Park (In re Javens), 107 F.3d 359, 370 (6th Cir. 1997) (affirming district court and bankruptcy court holdings that demolition of debtor s condemned property was a proper exercise of city s police and regulatory power; "the (b)(4) and (b)(5) exceptions are not intended to be limited to non-destructive exercises of governmental power. Many governmental actions clearly within the police or regulatory power destroy some or all of the value that property has to an estate ").] The court rejected the debtors argument that the government had acted in violation of the automatic stay under section 362(a)(3) by destroying the buildings. By interpreting the section 362(a)(1) and (a)(2) provisions as effectively permitting a governmental unit to exercise of control over property of the estate, the 6th Circuit found the language in these sections and section 362(a)(3) to be a distinction without a difference. [ FN: Id. at 367.] The Javens court concluded that the police and regulatory exceptions "are not intended to be limitedto non-destructive exercises of governmental power. Many governmental actions clearly within the police or regulatory power destroy some or all of the value that property has to an estate." [ FN: Id. at 370.] The 6th Circuit relied in part on the fact that numerous police and regulatory statutes are in rem actions that require control over property to enforce; thus, it concluded that section 362(a)(1), and, consequently section 362(b)(4), clearly were not limited to in personam actions. [ FN: "Numerous governmental aims falling plainly within the police and regulatory power are enforced by means of actions in rem. " Id. , citing 7 U.S.C. §136k(b) (authorizing in rem proceedings to seize adulterated or mislabeled pesticides); 15 U.S.C. §1195(b) (same, with respect to goods in violation of Flammable Fabrics Act); M.C.L.A. 289.711 (authorizing detention, embargo, and condemnation of adulterated or mislabeled food). If actions under these provisions were not excepted from the automatic stay, the purpose of §362(b)(4) would be grossly compromised. Id.]
Other courts have adopted a similar interpretation and have concluded that section 362(b)(4) permits government agencies to exercise control over property of the estate to enforce police or regulatory powers without seeking bankruptcy court permission. [ FN: See, e.g. , Cournoyer v. Lincoln , 790 F.2d 971 (1st Cir. 1986) (section 362(b)(4) exempts town s removal of used truck parts from debtors property, which had violated zoning ordinance);In re Yellow Cab Cooperative Ass n , 96 K 256, 1996 WL 520497 (D. Colo. Sept. 12, 1996) (reversing bankruptcy court s order enjoining public utilities commission from prohibiting debtor from transferring taxis to another company); In re Universal Life Church Inc. , 191 B.R. 433, 442 (E.D. Cal. 1995) (automatic stay does not bar revocation of tax-exempt status); Carr and Company Investments, Ltd. v. St. Tammany Parish Policy Jury , 88-0542, 1989 WL 65530 (E. D. La. June 13, 1989) (property rezoning exempted from stay under section 362(b)(4));In re Heritage Village Church & Missionary Foundation Inc. , 87 B.R. 401, 404 (D.S.C. 1988) (section 362(b)(4) precludes bankruptcy court from enjoining revocation of debtor s tax- exempt status), aff d , 851 F.2d 104 (4th Cir. 1988); Vaspourakan, Ltd. v. Licensing Bd. for the City of Boston , 85 B.R. 189 (D. Mass. 1988) (board s refusal to transfer liquor license to debtor not stay violation);In re Synergy Development Corp. , 140 B.R. 958 (Bankr. S.D.N.Y. 1992) (not stay violation to withhold debtor s license to operate health club for failure to post bond);In re Edwards Motor Home Sales Inc. , 119 B.R. 857 (Bankr. M.D. Fla. 1990) (state permissibly revoked mobile home dealer license for failure to be bonded);In re Christmas , 102 B.R. 447, 460 (Bankr. D. Md. 1989) (revocation of debtor s horse trainer license excepted from stay under section 362(b)(4)). See also In re Gull Air Inc. , 890 F.2d 1255 (5th Cir. 1989) (non-discretionary automatic termination of right to use landing slots under "use or lose " provision due to post-petition non-use did not violate section 362(a)(3));In re Grace Coal Co. , 155 B.R. 5 (Bankr. E.D. Ky. 1993) (debtor enjoined from mining without operating permit pursuant to 28 U.S.C. §959(b) ); Colonial Tavern Inc. v. Byrne , 420 F. Supp. 44 (D. Mass. 1976) (under Bankruptcy Act, bankruptcy court could not enjoin city licensing board from suspending debtors liquor licenses).]
However, some other courts have read section 362(b)(4) literally and thus have held that section 362(a)(3) stays governmental attempts to exercise control over property of the estate. [ FN: See, e.g. ,In re Draughon Training Institute Inc. , 119 B.R. 921 (Bankr. W.D. La. 1990) (although school license revocation proceeding was within section 362(b)(4) exception, actual revocation of school license violated automatic stay); In re Cattle Congress Inc. , 179 B.R. 588 (Bankr. N.D. Iowa 1995) (revocation of gaming facility license violated automatic stay), remanded on other grounds , 91 F.3d 1113 (8th Cir. 1996). Accord In re Hillis Motors Inc. , 997 F.2d 581 (9th Cir. 1993) (holding that section 362(b)(4) does not except acts that are described by section 362(a)(3), although also holding that commerce department s action of dissolving corporation was not police or regulatory action). See also In re Horizon Air Inc. , 156 B.R. 369 (N.D.N.Y. 1993) (district court issuing temporary restraining order against F.A.A. revocation of flight operating license for alleged safety violations pending resolution of preliminary injunction hearing).] Courts taking this view expect governmental entities to seek relief from the stay before controlling or seizing property.
If section 362(b)(4) extends to actions to control property of the estate, as the weight of the case law suggests, it only extends to those that are "police and regulatory." [ FN: See, e.g. , In re University Medical Center ,, 973 F.2d 1065 (3d Cir. 1992) (withholding Medicare payments was enforcement of contractual rights, not police and regulatory action, and violated automatic stay); In re Farmer s Market Inc. , 792 F.2d 1400, 1043 (9th Cir. 1986) (refusal to transfer liquor license due to nonpayment of taxes violated automatic stay);In re Corporacion de Servicios Medicos Hospitalarios de Fajardo , 805 F.2d 440 (1st Cir. 1986) (department of health s revocation of debtor s operating license was not police and regulatory action, but was contractual action) ;In re North , 128 B.R. 592 (Bankr. D. Vt. 1991) (state suspension of chiropractor s license to compel debtor to pay taxes was not within police and regulatory powers);In re Massenzio , 121 B.R. 688 (Bankr. N.D.N.Y. 1990) (insurance department s revocation action against debtor was triggered by debtor s failure to pay debt and violated stay);In re St. Louis South Park II Inc. , 111 B.R. 260 (Bankr. W.D. Mo. 1990) (forfeiture of nursing home debtor s certificate of need not police and regulatory action, violated stay); Island Club Marina Ltd. v. Lee Co., Fla. , 32 B.R. 331, 336 (Bankr. N.D. Ill. 1983) (due to lack of evidence that agency s withdrawal of building permit was pursuant to police and regulatory power, violated stay) . See also In re Medicar Ambulance Co. Inc. , 166 B.R. 918 (Bankr. N.D. Cal. 1994) (suspension of Medicare payments not police and regulatory action, violated stay) . Cf. In re Orthotic Center Inc. , 193 B.R. 832 (N.D. Ohio 1996) (Medicare overpayments not property of estate, but if they were, suspension would not violate stay because it was within police and regulatory powers).] As the phrase has been interpreted, "police and regulatory" does not refer only to actions dealing with imminent and identifiable harm or urgent public necessity. [ FN: See In re Crockett , 204 B.R. 705 (Bankr. W.D. Tex. 1997), citing In re Commonwealth Oil Refining Co. , 805 F.2d 1175 (5th Cir. 1986), cert. denied , 483 U.S. 1005 (1987).] However, government agencies cannot use section 362(b)(4) to enforce contractual rights without seeking automatic stay relief, [ FN: In re University Medical Center , 973 F.2d 1065, 1074 (3d Cir. 1992) (withholding Medicare payments not police and regulatory), citing In re Corporacion de Servicios Medicos Hospitalarios , 805 F.2d 440, 445 (1st Cir. 1986).] nor can they revoke a license as a means to collect a debt from the debtor or to advance the pecuniary interest of the government or a third party without permission in advance from the bankruptcy court. [ FN: Ohio v. Kovacs , 105 S. Ct. 705 (1985).] It could, however, revoke a license for noncompliance with safety standards. The bankruptcy court is not expected to look behind every exercise of police and regulatory authority to determine its legitimacy, [ FN: See Board of Governors of the Federal Reserve System v. MCorp Financial Inc. , 502 U.S. 32, 40 (1991).] but can assess whether a governmental unit exercises its police and regulatory power in bad faith. [ FN: See Javens v. City of Hazel Park (In re Javens), 107 F.3d 359, 365 (6th Cir. 1997), citing In re National Hospital and Institutional Builders Co. , 658 F.2d 39, 43 (2d Cir. 1981).]
Courts generally use one of several similar tests to discern the nature of the governments action. Using the "pecuniary purpose test," a court assesses whether the proceeding relates primarily to the protection of the governments pecuniary interest. [ FN: In re Eddleman , 923 F.2d 782, 791 (10th Cir. 1991); United States v. Nicolet Inc. , 857 F.2d 202 (3d Cir. 1988). "The terms ‘police and regulatory power as used in those exceptions refer to the enforcement of state laws affecting health, morals, and safety but not regulatory laws that directly conflict with the control of the res or property of the bankruptcy court. " Hillis Motors Inc. v. Hawaii Automobile Dealers Ass n , 997 F.2d 581, 591 (9th Cir. 1993), citing In re Missouri v. United States Bankr. Ct. for the E.D. of Ark. , 647 F.2d 768, 776 (8th Cir. 1981), cert. denied , 102 S. Ct. 1035 (1982) (state liquidation of grain warehouse violated stay). One court has offered a slight variation on the pecuniary purpose test: "as a general matter, section 362(b)(4) does not include governmental actions that would result in a pecuniary advantage to the government vis- à-vis other creditors of the debtor s estate. " In re Commonwealth Companies Inc. , 913 F.2d 518, 523 (8th Cir. 1990) (emphasis added).] The "public policy test" focuses on whether the proceedings are intended to effectuate public policy or whether they are adjudications of private rights. [ FN: NLRB v. Edward Cooper Painting Inc. , 804 F.2d 934 (6th Cir. 1986);In re Medicare Ambulance Co. Inc. , 166 B.R. 918 (Bankr. N.D. Cal. 1994) (considering whether action is attempt to prevent future violations of law or attempt to determine liability of private parties);In re Straight , 95-10007, 1997 WL 274282 (D. Wyo. May 15, 1997) (decertification of debtor in disadvantaged business program violated stay because not done to promote public safety).]
The parameters on police and regulatory actions and the scope of section 362(b)(4) regarding property of the estate are particularly relevant in the context of civil forfeiture actions. Civil forfeiture actions are in rem actions for remedial civil sanctions. [ FN: United States v. Ursery , 116 S. Ct. 2135, 2142 (1996) (in rem civil actions not punishment for purposes of Double Jeopardy Clause).] Unlike criminal forfeiture actions, they are not predicated on the outcome of a criminal trial. Federal and state statutes authorize government agents to seize property, including fungible property, [ FN: See 18 U.S.C. §984 (authorizing forfeiture of fungible property, such as cash or monetary instruments).] and the government entity initiates a civil forfeiture proceeding. A forfeiture judgment is a final adjudication of rights of all claimants to the property and establishes the governments unencumbered title to the property. The governments title to the property ultimately relates back to the date of the original offense, although relation back does not occur until the final adjudication proceeding. [ FN: United States v. 92 Buena Vista Ave. , 113 S. Ct. 1126, 1137 (1993).] Many forfeiture statutes enable co-owners and lienholders to file claims in the forfeiture action. However, not all statutes authorizing forfeitures have such "innocent owner" defenses. [ FN: See, e.g. , Bennis v. Michigan , 116 S. Ct. 994 (1996) (upholding Michigan statute allowing car to be forfeited as abatable nuisance after man engaged services of prostitute in car, notwithstanding state s failure to reimburse man s wife s part ownership interest).] In addition, there generally is no formal recognition of claims of unsecured creditors in judicial forfeiture proceedings.
The law is not settled on whether civil forfeiture actions initiated prepetition can go forward without bankruptcy court permission under section 362(b)(4). The answer is partly dependent on whether property seized prepetition is property of the estate at all, [ FN: Because the government does not obtain title to seized property until the conclusion of the forfeiture proceeding, one might conclude that the seized property remains property of the estate. However, this remains somewhat unclear. In the context of a criminal forfeiture, one court has held that property that was seized prepetition was not property of the estate. In re Thena Inc. , 190 B.R. 407 (D. Or. 1995) (debtor owned only bare legal title without right of possession on property seized prepetition and subject to criminal forfeiture action). See generally Karen Cordry, Bankruptcy Law and the Governmental Regulatory Process, at 10-35 (LRP Publications 1995).] although that has not been the central inquiry in the few published opinions that have discussed this issue. Assuming that the bankruptcy estate holds at least some interest in property seized prepetition, discussions of whether forfeiture proceedings are excepted from the automatic stay primarily have focused on whether a forfeiture proceeding is a police or regulatory action that properly fits the scope of the section 362(b)(4) exception. [ FN: One commentator has noted that "it must be recognized that [civil forfeiture] is, essentially, asserting a right to a claim for a penalty. To the extent the [Bankruptcy] Code subordinates collections of such a penalty, that same principle may well be applied to any request by the government to enforce the forfeiture. " Karen Cordry, Bankruptcy Law and the Governmental Regulatory Process, at 10-35 (LRP Publications 1995).]
The Court of Appeals for the 3rd Circuit has held that a civil forfeiture action resulting from the seizure of cash was excepted from the automatic stay under section 362(b)(4). [ FN: In re James , 940 F.2d 46, 51 (3d. Cir. 1991) (bankruptcy court erroneously vacated state forfeiture judgment on $7,990 in cash found in car).] The 3rd Circuit explicitly rejected narrow interpretations of "police and regulatory" and reasoned that "a civil forfeiture action is an action by a governmental unit to enforce its police or regulatory power to combat the problem of illicit drugs." [ FN: Id. , 940 F.2d at 51. However, no drug related criminal charges were brought against the debtor or her associates. I d. at 47.] Several other courts have endorsed the 3rd Circuits holding. [ FN: See, e.g. , Smith v. Alabama , 176 B.R. 221 (Bankr. N.D. Ala. 1995) (following James with no discussion, holding that state forfeiture proceeding against mobile home and real estate was not stayed); Boricua Motors Leasing Corp. v. Puerto Rico , 154 B.R. 834 (D. P. R. 1993) (holding that civil forfeiture action against automobile was within police power, and debtor should not have waited a year to challenge action and seizure using section 542(a)).]
Some courts have concluded that civil forfeiture actions are not within the ambit of the governments police and regulatory power when they do not vindicate or secure the public welfare. [ FN: See In re Goff , 159 B.R. 33, 40 (Bankr. N.D.Okla. 1993) (forfeiture judgment against land and mobile home of chapter 13 debtor is stayed until discharge or until further order of court) citing Austin v United States , 113 S. Ct. 2801 (1993) ;In re Ryan , 15 B.R. at 519 (staying forfeiture action against $5,562 in cash that was found in house that also contained a bag of marijuana and water pipe). The Goff court suggested that a genuinely remedial forfeiture action might constitute a proper exercise of the police and regulatory power. Goff , 159 B.R. at 40. See also In re Thomas , 179 B.R. at 528 (holding that city s seizure of truck and subsequent proceedings violated automatic stay and that section 362(b)(4) is inapplicable because seizure occurred postpetition);In re Bridge , 90 B.R. 839, 840 n. 1 (Bankr. E.D. Mich. 1988)(stating legal proposition in footnote without discussion , and avoiding postpetition seizure of $670,000 worth of Canadian Treasury Bills that were traceable proceeds of debtor s husband s fraudulent transfer of ranch) .] Courts also have expressed concern that in the context of a bankruptcy proceeding,civil forfeiture actions do not punish the debtor, but rather, the unsecured creditors of the bankruptcy estate; as such, some civil forfeiture proceedings have been described as "actions against property of the estate that resulted in a decrease of the property of the estate which will ultimately punish the creditors by enriching the seizing agency at the expense of the creditors." [ FN: In re Thomas , 179 B.R. 523, 528 (Bankr. E.D. Tenn. 1995) (section 362(b)(4) inapplicable to postpetition seizure and civil forfeiture actions, which also do not fit within criminal proceeding exception under section 362(b)(1)). See alsoIn re Goff , 159 B.R. at 42 ( "These creditors are not criminals. They are innocent, taxpaying citizens, who do not deserve to be victimized by their own State government ").] In addition, because section 362(b)(4) applies to actions against the debtor and because civil forfeiture is in rem, a literal and narrow interpretation of the exception has led some courts to conclude that the exception is inapplicable, even if civil forfeiture proceedings could be characterized as police and regulatory. [ FN: See In re Bridge , 90 B.R. at 840, n. 1;In re Ryan , 15 B.R. 514, 519 (Bankr. D. Md. 1981).]
Prior Commission Proposal to Amend 11 U.S.C. § 362(b)(4)
At the Commissions meeting in Santa Fe, NM, in September, 1996, government representatives highlighted certain gaps in the application of section 362(b)(4). [ FN: Government working group A heard from a wide variety of interested parties, including representatives of the Department of Justice, the National Association of Attorneys General, the Securities and Exchange Commission, as well as representatives of individual state attorneys general. National Bankruptcy Review Commission Minutes, September 18-19, 1996, at 13.] In the courts that do not permit a governmental unit to "exercise control over property of the estate," for example, the governmental unit would have to seek court permission before it could revoke a debtors license for an ongoing infraction. In response, the Commission considered a proposal to amend section 362(b)(4) to except from the automatic stay the exercise of control over property of the estate in a police or regulatory action. The Proposal provided a specific amendment to section 362(b)(4):
11 U.S.C. § 362(b)(4) should be amended to read as follows:
(b) the filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay -
. . .
(4) under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental units police and regulatory power, including an act to exercise control over property of the estate.
At the Commissions plenary discussion on this proposal in December, it was noted that some people did not think that the Proposal went sufficiently far to provide adequate redress for the governments stated problems, while others were concerned that the Proposal might create too broad an exception to the automatic stay. [ FN: National Bankruptcy Review Commission Minutes, December 17-18, 1996 at 31.] The Proposal was held for further review. [ FN: Id.]
The Department of Justice and the National Association of Attorneys General submitted a proposal to the Commission that would amend section 362(b)(4) to include the following acts -
·230·the commencement or continuation of a proceeding against the debtor (included under current section 362(b)(4));·230
·230·the enforcement against the debtor or property of the estate of a judgment obtained prepetition (included under current section 362(b)(5));·230
·230·any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate (additional provision);·230
·230·any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case (additional provision). [ FN: "Sections 105, 362 Protection of Governmental Police and Regulatory Powers " Proposal submitted by the Department of Justice and the National Association of Attorneys General, at 2, dated January 17, 1997 (on file with the National Bankruptcy Review Commission) (hereinafter cited as "DoJ/NAAG Proposal ").] ·230
The DoJ/NAAG proposal differs from the Commissions prior proposal in two primary ways. First, it would authorize a government unit to seize property as well as to exercise control over property. Second, the proposal would allow government agencies to pursue actions "to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title," currently stayed by section 362(a)(6), without seeking stay relief from the bankruptcy court. [ FN: See Letter of J. Christopher Kohn to Brady C. Williamson, at 7, dated December 12, 1996 (on file with the National Bankruptcy Review Commission).] Because the language of section 362(a)(6) is so broad, it was reasoned, section 362(a)(6) arguably "puts every creditor into a stay violation" even if the activity appearsto fit the section 362(b)(4) exception. [ FN: Id. See In re Mateer , 205 B.R. 915, 921 (C.D. Ill. 1997) (although section 362(a)(6) facially appears to apply to any act, such a reading would render section 362(b)(4) meaningless; subsection (a)(6) was intended to stay non-police and regulatory extra-judicial collection activities, not actions that are permitted under section 362(b)(4)).]
The proponents of this proposal also asserted that the Commissions prior Proposal was inadequate because it failed to recommend corollary amendments to section 362(b)(5). Without similar language in section 362(b)(5), they argued that the government potentially would not be able to control or seize property on account of a prepetition judgment. [ FN: Letter of J. Christopher Kohn to Brady C. Williamson, dated December 12, 1996, at 2.]
The Department of Justice also has argued that its proposed amendment will clarify that a government entity can go forward on a civil forfeiture action without the interference of the bankruptcy court. [ FN: Letter of J. Christopher Kohn to Brady C. Williamson, at 6, dated December 12, 1996.] However, as discussed, infra, some courts have not found civil forfeiture actions to be police and regulatory actions; conceivably, an expansion of the exception to the automatic stay would not affect the outcome in these courts.
In response to these proposals, other parties in interest have argued that bankruptcy courts can resolve lift stay actions expeditiously and therefore it is not an undue burden on government entities to require them to have the stay lifted before they take final acts to control property of the estate. [ FN: See Letter of Honorable Samuel L. Bufford to Brady C. Williamson, dated February 10, 1997 (on file with the National bankruptcy Review Commission) ( "The impact of the automatic stay (if it applies) in these circumstances is principally to allocate the burden of going to court for relief. Absent an automatic stay, a debtor can come to court to seek an injunction which, if granted, would give the debtor the same relief that the automatic stay provides. ")] Thus, they conclude that an expansion of section 362(b)(4) is not necessary and supplies additional leverage to government entities by providing greater leeway to pursue pecuniary actions without court authority or supervision. [ FN: See Statement of the National Bankruptcy Conference, January 22-23, 1997, at 6 (on file with the National Bankruptcy Review Commission) ( "It would be unwise to broaden this exception to permit a governmental unit to exercise it police or regulatory power to seize, interfere, or otherwise exercise control over assets of the debtor outside the protective context of a court proceeding. "); Statement of the Commercial Law League of America, Position Paper in Response to Government Working Group A Working Group proposal #7: Section 362(b)(4) and its Progeny, ( "if [Chemical Weapons Provision is] adopted, [it] would result in a significant expansion of specific exceptions to the automatic stay contained in the Bankruptcy Code and enhance the Government s rights to take actions against the debtor and the debtor s property in aid of its police and regulatory powers. " (on file with the National Bankruptcy Review Commission).]
Senate Amendment to 11 U.S.C. § 362(b)(4) & (5)
As part of the Chemical Weapons Implementation Act, which passed in the Senate on May23, 1997, section 362(b) was amended as follows:
"(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on their Destruction, opened for signature on January 13, 1993, to enforce such governmental units or organizations police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental units or organizations police or regulatory power;". [ FN: Chemical Weapons Implementation Act of 1997, S. 610 (May 23, 1997).]
This amendment is part of the Chemical Weapons legislation because:
[t]he international body which oversees enforcement of the Chemical Weapons Convention is non-governmental and therefore is not covered under the exemption. This means that under current law a bankruptcy court could issue an injunction preventing any inspection for, or seizure of, chemical weapons. If this law had not been changed, the United States would come into noncompliance with the treaty. [ FN: Press Release, Chuck Grassley, United States Senator, released May 23, 1997.]
Given the proposed language in section 603 of this legislation, which repeals sections 362(b)(4) and (5) in their entirety, the effects of the amendment would appear not to be limited to actions in connection with the Chemical Weapons Convention, but rather, would extend to all governmental units and all types of actions. [ FN: Electronic Mail Transmission from Stephen H. Case to John Gose et al., dated May 29, 1997 (on file with National Bankruptcy Review Commission).]
This legislation has been referred to the House.
11 U.S.C. § 105 and Police and Regulatory Actions
Section 105(a) permits the bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions" of title 11. Power under section 105 is similar in nature to the All Writs Power granted to Article III courts under 28 U.S.C. § 1651. [ FN: The All Writs Statute provides that "the Supreme Court and all courts established by Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law. " 28 U.S.C. §1651. All writs power grants courts the flexibility to address unique situations requiring process for which no statutory guidance exists. It is important to note that, like section 105, the All Writs Statute "is not an independent source of jurisdiction, but rather it grants the courts flexibility to issue orders which preserve and protect their jurisdiction. " 2 Collier on Bankruptcy ¶ 105.01, 105-3 ( Lawrence P. King, et al. eds. 15th ed. 1996).] The pertinent legislative history of section 105 provides that "the court has ample other powers to stay actions not covered by the automatic stay. Section 105, of proposed title 11, derived from Bankruptcy Act section 2a(15), grants the power to issue orders necessary or appropriate to carry out the provisions of title 11." [ FN: H.R. Rep. No. 595, 95th Cong., 1st Sess. 342, reprinted in 1978 U.S.C.C.A.N. at 5963, 6298.] Section 105 can be used to fill in gaps in section 362 "but does not authorize the bankruptcy court to create rights not otherwise available under applicable law." [ FN: Southern Ry. v. Johnson Bronze Co. , 758 F.2d 137, 141 (3d Cir. 1985).]
Standard for a Section 105 Injunction. A majority of courts use the traditional Rule 65 standard to gauge whether to issue an injunction under section 105. [ FN: See, e.g., Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 765 (5th Cir. 1995); American Imaging Servs. Inc. v. Eagle-Picher Indus. Inc. (In re Eagle-Picher Indus. Inc.), 963 F.2d 855, 858 (6th Cir. 1992); Commonwealth Oil Ref. Co. v. EPA (In re Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1188-89 (5th Cir. 1986) ( "The legislative history of §105 makes clear that stays under that section are granted only under the usual rules for the issuance of an injunction. "), cert. denied , 483 U.S. 1005 (1987); Whitaker v. ICC (In re Olympia Holding Corp.), 161 B.R. 524, 528 (M.D. Fla. 1993); Costa and Head Land Co. v. National Bank of Commerce (In re Costa and Head land Co.), 68 B.R. 296, 298 (N.D. Ala. 1986).] Commentators agree that this is the appropriate standard. [ FN: 2 Collier on Bankruptcy ¶ 105.02, 105-10 (Lawrence P. King et al. eds. 15th ed. 1996)( "Because a request for an injunction pursuant to section 105 is akin to a request for a preliminary injunction, the party seeking injunctive relief must satisfy the requirements of Rule 65 of the Federal Rules of Civil Procedure as applied to bankruptcy by Bankruptcy Rule 7065. ")] Failure to establish these prerequisites has resulted in a denial of injunctive relief. [ FN: See, e.g., Glassman v. Electronic Theatre Restaurants Corp. (In re Electronic Theatre Restaurants Corp.), 53 B.R. 458 (N.D. Ohio 1985) (reversing section 105 injunction; bankruptcy court failed to establish risk of irreparable harm);In re Trails End Lodge Inc. , 45 B.R. 597, 601 (Bankr. D. Vt. 1984) (court denied section 105 injunction, citing failure to meet preliminary injunction standard); Venture Prop. Inc. v. Norwood Group Inc. (In re Venture Prop. Inc.), 37 B.R. 175 (Bankr. D.N.H. 1984) (lack of irreparable injury warranting denial of section 105 injunction); Wolf Financial Group Inc. v. Hughes Construction Co. (In re Wolf Financial Group Inc.), Civ. No. 94 B 44009/44010, (Bankr. S.D.N.Y. Dec. 14, 1994) (injunctive relief against NASD enforcement action denied, debtor failed to show possibility of a successful reorganization; stating, in dicta , that a limited exception to the irreparable harm requirment exists "where the conduct to be enjoined places the reorganization at risk or impairs the court s jurisdiction with respect to a case before it. ")] The traditional test has been modified by some courts to more closely fit therelevant inquiry in a bankruptcy case. [ FN: In re Monroe Well Service Inc. , 67 B.R. 746, 752-53 (Bankr. E.D. Pa. 1986) ( "The first requirement is that there be the danger of imminent, irreparable harm to the estate or the debtor s ability to reorganize. Second, there must be a reasonable likelihood of a successful reorganization. Third, the court must balance the relative harm as between the debtor and the creditor who would be restrained. Fourth, the court must consider the public interest in successful bankruptcy reorganizations with other competing societal interests. "); see also North Ala. Anesthesiology Group, P.C. v. Zickler (In re North Ala. Anesthesiology Group, P.C.) , 154 B.R. 752, 764 (N.D. Ala. 1993);In re Environmental Waste Control Inc. , 125 B.R. 546, 551 (N.D. Ind. 1991).] Modification of the traditional standard has yielded a more flexible standard in some cases, leading courts to conclude that certain requirements, e.g. the lack of an adequate remedy at law, may be unnecessary when considering whether to enjoin certain activities. [ FN: "In other words, the court does not need to demonstrate an inadequate remedy at law or irreparable harm. "In re L&S Indus. Inc. , 989 F.2d, 929, 932 (7th Cir. 1993). See also Monarch Life Ins. Co. v. Ropes & Gray , 65 F.3d 973, 978-79 (1st Cir. 1995) ( "We have held that Bankruptcy Code §105(a) confers ample power upon the bankruptcy court to enjoin the initiation or continuation of judicial proceedings in a nonbankruptcy forum against nondebtors during the pendency of a chapter 11 case, where the court reasonably concludes that such actions would entail or threaten adverse ‘impact on the administration of the chapter 11 estate. ");In re Baldwin-United Corp. , 79 B.R. 321, 328 (Bankr. S.D. Ohio 1987) (stating, in dicta , that SEC investigation was temporarily enjoined due to drain on estate and substantial duplication with Examiner s investigation; scope of investigations were soon settled between Examiner, SEC, and parties in interest).]
Use of Section 105 to Enjoin Police and Regulatory Actions. The police and regulatory exception applies to the automatic stay only; the court retains the power to stay a police or regulatory action under section 105. [ FN: See, e.g., Commonwealth Oil Refining Co. Inc. v. U.S. Envtl. Protection Agency , 805 F.2d 1175, 1187 (5th Cir. 1986) (court retains discretion to stay acts exempt from the automatic stay); Browning v. Navarro , 743 F.2d 1069, 1084 (5th Cir. 1984) (same); State of Missouri v. U.S. Bankruptcy Court , 647 F.2d 768, 776-77 (8th Cir. 1981) (same), cert. denied , 454 U.S. 1162 (1982);In re Bel Air Chateau Hosp. Inc. , 611 F.2d 1248, 1251 (9th Cir. 1979) (same).] The discretion of the court to enjoin police and regulatory actions is not without limitation: "[a]lthough there are limited circumstances in which a bankruptcy court may stay a state police power exercise under § 105, there must be a finding of serious conflict between the continuance of the state action and the policies of the bankruptcy code." [ FN: Brennan v. Poritz , 198 B.R. 445, 448, 450 (D. N.J. 1996) (reversing bankruptcy court decision enjoining state civil securities fraud action; "the bankruptcy code expressly exempts state actions brought under state police or regulatory powers from the automatic stay, it is only in rare cases that a §105 injunction of a police power exercise will "carry out " the code s provisions. ")] Another limitation is the fourth prong of the Rule 65 standard, requiring the court to find"that the granting of the injunction will not disserve the public." [ FN: Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 765 (5th Cir. 1995).] Where an injunction is sought against an ongoing state criminal prosecution, or a legitimate tax collection action, courts have acknowledged that public policy strongly supports allowing the nonbankruptcy action to proceed. [ FN: Barnette v. Evans , 673 F.2d 1250, 1251 (11th Cir. 1982) (in refusing to stay a state criminal action, court stated "There is a public interest in every good faith criminal proceeding . . . . which overrides any interest the bankruptcy court may have in protecting the financial interest of debtors. "); Office of Surface Mining v. Sewanee Land, Coal & Cattle Inc. , (In re Sewanee Land, Coal and Cattle Inc.), 34 B.R. 696, 702 (D. Ala. 1983) ( "granting of the injunction harms the public s interest as it circumvents the Congressionally mandated permitting process and allows L & R to mine not only without a valid permit, but allows additionally that L & R may mine anywhere without restriction except as to performance standards. ");In re Invesco Int l Corp. , 93 B.R. 296, 298 (Bankr. N.D. Ga. 1988) (state criminal action).]
Section 105 is subject to being overruled by other federal statutes; in these instances, bankruptcy policy is rightfully subordinated to police and regulatory considerations. [ FN: U.S. Dept. of Health and Human Services v. Noonan , No. 96-30064-FHF, 1996 WL 728352, *4 (D. Mass. Oct. 15, 1996) (court refuses to extend ch. 7 trustee s time to file Medicare cost reports; "Bankruptcy Court has inappropriately become entangled in construing the right and form of Medicare reimbursement, a right which remains exclusively within the domain of the Medicare Act and subject to the rules and determinations as promulgated by the Secretary of Health and Human Services. "); Sturge v. Smouha (In re Smouha), 136 B.R. 921, 927 (S.D.N.Y. 1992) (affirming bankruptcy court refusal to stay criminal proceedings; RICO provision precluded issuing injunction); Wilner Wood Prods. Co. v. State of Maine, Dept. of Evtl. Protection , 128 B.R. 1, 3 (D. Me. 1991) (section 105 could not override section 959(b) provision); Clark v. United States (In re Heritage Village Church and Missionary Fellowship), 87 B.R. 401 (D.S.C.) aff d , 851 F.2d 104 (4th Cir. 1988) (Anti-Injunction Act prohibited section 105 injunction); United States v. Condel Inc. (In re Condel Inc.), 91 B.R. 79 (Bankr. 9th Cir. 1988) (plan provision enjoining IRS violated Anti-Injunction Act).] Section 105 injunctions in the police and regulatory context also are subject to Younger abstention considerations. [ FN: See, e.g., City of New York v. 1820-1838 Amsterdam Equities Inc. , 191 B.R. 18, 21 (S.D. N.Y. 1996) (reversing bankruptcy court order enjoining criminal summonses for fire code violations; the bankruptcy order "appears to violate the fundamental principles of the Younger abstention doctrine, which holds that federal courts should not interfere, by way of an injunction or declaration, with state or local criminal and quasi-criminal administrative proceedings, in the absence of extraordinary circumstances ").] However, in some instances, police and regulatory actions have been enjoined. The grounds for injunctions of police and regulatory actions have included: extraordinary circumstances; [ FN: Pennsylvania Public Utility Commission v. Metro Transportation Co. , 64 B.R. 968, 972 (Bankr. E.D. Pa. 1986) (extraordinary circumstances (loss of 1500 jobs, elimination of significant portion of public transportation in city) warranted bankruptcy court stay of Commission order denying debtor s application for self-insurance on 800 taxicabs, but bankruptcy stay required debtor to comply with terms in partial settlement to safeguard public safety concerns). See Smouha , 136 B.R. at 927 ( "It is axiomatic that ‘equity will not interfere with the criminal processes, by entertaining actions for injunction or declaratory relief in advance of criminal prosecution . . . general principle holds firm except in the most extraordinary and compelling circumstances, ") citing Zemel v. Rusk , 381 U.S. 1, 19 (1965).] significant or unwarranted threat to estate assets as determined under thetraditional preliminary injunction standards; [ FN: National Labor Relations Board v. Superior Forwarding Inc. , 762 F.2d 695, 698 Cir. 1985) (NLRB proceeding for fifty-two unfair labor practice grievance stayed under section 105; NLRB conceded "court s authority to enjoin Board proceedings when they directly threaten the assets of the bankrupt s estate "); Whitaker v. Interstate Commerce Commission (In re Olympia Holding Corp.), 161 B.R. 524 (M.D. Fla. 1993) (ICC stayed from requiring debtor to participate in show cause proceedings on 32,000 claims based on rules recently struck down as invalid by 3rd Circuit); Landmark Land Co. of Carolina v. Resolution Trust Corp. (In re Landmark Land Co.), 134 B.R. 557 (D. S.C. 1991) (RTC stayed from calling shareholders meeting to vote in new board of directors when evidence demonstrated that vote intended to cause shareholders to usurp creditors rights in contravention of bankruptcy priority), reversed on other grounds , 973 F.2d 283 (4th Cir. 1992).] and bad faith prosecution. [ FN: In re Jerzak , 47 B.R. 771, 773 (Bankr. W.D. Wis. 1985) (staying "nominally criminal " proceeding intended to bring pecuniary relief by recovering prepetition wages; criminal charges apparently based only on allegation that financially strapped debtor/employer owed wages to employee).] Section 105 injunctions also have been issued, usually in conjunction with section 362, to stay an action that actually was pecuniary in nature. [ FN: Hunt v. CFTC (In re Hunt), 93 B.R. 484 (Bankr. N.D. Tex. 1988) (balancing equities under traditional Rule 65 test, CFTC action to collect assessed damages would be stayed, and action to impose fine not stayed under section 362(b)(4)) mod. on other grounds , No. 388-35725, 1989 WL 67827 (Bankr. N.D. Tex. Jan. 31, 1989); Organized Maintenance Inc. v. Ford , 47 B.R. 791, 795 (Bankr. E.D.N.Y. 1985) (Dept of Labor action was pecuniary in nature and was properly stayed); Sam Daily Realty Inc. v. Dept of Commerce and Consumer Affairs (In re Sam Daily Realty Inc.), 57 B.R. 83 (Bankr. D. Hawaii 1985) (entry of money judgment by government not stayed; proceeding to enforce money judgment resulting from proceeding was stayed).]
Prior Commission Recommendation on 11 U.S.C. § 105
At the Commissions meeting in Santa Fe, NM, in September 1996, government representatives expressed concern that bankruptcy courts were enjoining police and regulatory actions under section 105 in an effort to promote debtors reorganization. The Commissioners agreed that power under section 105 should not reach beyond the Bankruptcy Code envelope, but concluded that a statutory amendment to section 105 was not an advisable response to address a limited number of aberrational cases that largely have been corrected by reviewing courts. Altering the language of section 105 could have unanticipated consequences and provoke a new wave of litigation. [ FN: September Minutes at 13-14.] Thus, the Proposal did not recommend a statutory amendment, but rather offered precatory language indicating that courts should not use section 105 to stay police and regulatory actions that would be allowable outside of bankruptcy. [ FN: National Bankruptcy Review Commission Minutes, October 18-19, 1996 at 28.] This issue was discussed further at the Commissions meeting in San Diego, CA in October, 1996.
DoJ/NAAG Proposal to Amend Section 105
The Department of Justice and the National Association of Attorneys General also have proposed an amendment to section 105, recommending the following addition:
(e) In issuing an injunction, the court shall apply the standards and procedures applicable to a district court under nonbankruptcy law, except to the extent procedures are modified by the Federal Rules of Bankruptcy Procedure.
(f) A police or regulatory act of a government unit that is not stayed or proscribed by a specific provision of this title may be enjoined to the extent authorized by nonbankruptcy law. [ FN: Id. at 3.]
The first prong of this proposal apparently would apply not only to governmental entities, but to all parties. This proposal also conceivably would change the intentionally-created dual nature of section 105 as a jurisdictional aid (as a bankruptcy All Writs power) and a "discretionary" stay device in conjunction with Fed. Rule Bankr. P. 7065 (providing the standards for issuing a temporary restraining order in adversary proceedings and certain contested matters). As a result, parties in interest have argued that the DoJ/NAAG proposal unduly hamstrings the court contrary to Congressional intent. [ FN: See Statement of the National Bankruptcy Conference, January 22-23, 1997, at 6-7 (on file with the National Bankruptcy Review Commission).]
Implications of Seminole Tribe of Florida v. Florida [ FN: 116 S. Ct. 1114 (1996).]
Prior to Seminole, it was widely believed that Congress was empowered to abrogate expressly a states sovereign immunity in federal court as provided by the Eleventh Amendment to the U.S. Constitution. However, under Seminole, Eleventh Amendment sovereign immunity arguably insulates a state from bankruptcy court jurisdiction. [ FN: See, e.g., In re Charter Oak Assoc. , 203 B.R. 17 (Bankr. D. Conn. 1996);In re York-Hannover Dev. Inc. , 201 B.R. 137 (Bankr. E.D.N.C. 1996);In re Burke , 200 B.R. 282 (Bankr. S.D. Ga. 1996);In re Headrick , 200 B.R. 963 (Bankr. S.D. Ga. 1996);In re Lazar , 200 B.R. 358 (Bankr. C.D. Cal. 1996);In re William Ross Inc. , 199 B.R. 551 (Bankr. W.D. Pa. 1996).] Thus, Seminole conceivably invalidates Congress express abrogation of the sovereign immunity of states and state agencies, which otherwise permitted private parties to sue states without their consent in bankruptcycourt. [ FN: See 11 U.S.C. §106(a)(1) (abrogating sovereign immunity of governmental units with respect to numerous Bankruptcy Code provisions, including section 362). But see In re Straight , 95-10007, 1997 WL 274282, *20 (D. Wyo. May 15, 1997) (notwithstanding Seminole and Eleventh Amendment, Section 5 of Fourteenth Amendment of U.S. Constitution authorizes Congress to abrogate state sovereign immunity in bankruptcy); Headrick v. State of Georgia , 203 B.R. 805, 807 (Bankr. S.D. Ga. 1996) (same).]
Because the Eleventh Amendment protects only the states, the ability to bring actions against federal and municipal agencies remains unaffected. [ FN: "From a bankruptcy perspective, the unfortunate result of this partial invalidation of §106 is the asymmetry it creates. Of all the parties who might be involved in a bankruptcy case, only state governments are given the special shield of immunity. Other creditors, including other governmental units, are subject to suit in the bankruptcy court to recover preferences or to answer for violating the automatic stay or to determine the validity and priority of liens. But state governmental units are immune from such suits. Presumably the Supreme Court would opine that this lack of equality is the price we must pay for the Constitution's continuing recognition of the sovereignty of the states. " S. Elizabeth Gibson, "Sovereign Immunity in Bankruptcy: The Next Chapter, " 70 Am. Bankr. L. J. 195, 202 (1996).] Thus, if a federal agency obtained possession of property of the estate in violation of the automatic stay, a debtor could seek to recover this property on an expedited basis in the bankruptcy court. However, unless a state waives its sovereign immunity, it may not be possible to bring that same action in the bankruptcy court against a state agency. Before a state actor actually has completed an act of wrongfully obtaining property, a debtor may be able to use an Ex Parte Young injunction to enjoin the state actor from completing the seizure. [ FN: 209 U.S. 123 (1908). An Ex Parte Young injunction can only be issued against a state officer to prevent an ongoing constitutional rights violation for which money damages will not suffice. Once the state has acted, an Ex Parte Young injunction is not a viable option.] Once the state has obtained the property, however, clearly this option is no longer available.
In the event of a wrongful seizure by a state actor, the debtor may be able to proceed on an action to recover the property in state court. [ FN: The Eleventh Amendment does not apply to causes of action brought in state court. See Hilton v. South Carolina Pub. Rys. Comm'n , 502 U.S. 197, 205 (1991).] State civil litigation, with its concomitant delays, might not provide an adequate substitute for the expedited hearing that otherwise would have been available in the bankruptcy court. In such a circumstance, an improper seizure could have the effect of unraveling the bankruptcy case, shutting down the business, and potentially undercutting the interests of creditors and employees of the debtor. The effects of multiple proceedings pending simultaneously in different courts can increase the costs and delay of the bankruptcy case, which the Bankruptcy Reform Act of 1978 was designed to avoid. Administrative expense costs of litigating in state court under these circumstances will be borne by the creditors.
In addition to authorizing the recovery of property, the Bankruptcy Code entitles debtorsto bring motions for sanctions or contempt for willful violations of the automatic stay against governmental entities that pursue actions outside of the scope of the section 362(b)(4) exception without seeking permission from the bankruptcy court. [ FN: 11 U.S.C. §§362(h), 105. See In re Straight , 95-10007, 1997 WL 274282, *20 (D. Wyo. May 15, 1997) (ordering Wyoming Department of Transportation to pay debtor s fees and costs).] However, the ability to obtain damages for stay violations by states may be substantially limited under Seminole as well, [ FN: But see Id. , at *17 (Congress had authority to abrogate state s sovereign immunity pursuant to section 5 of the Fourteenth Amendment of U. S. Constitution, permitting debtor to enforce automatic stay provisions and obtain sanctions for violation of automatic stay), citing Headrick v. State of Georgia , 203 B.R. 805,807 (Bankr. S.D. Ga. 1996) (notwithstanding Seminole , Fourteenth Amendment authorizes Congress to abrogate state sovereign immunity in bankruptcy);In re Southern Start Foods Inc. , 190 B.R. 419 (E.D. Okla. 1995) (reaching same conclusion prior to Seminole ).] although it may be possible for the state court to grant damages to the debtor under section 362(h). [ FN: The Supreme Court has held that a state may not immunize a state from activity that is wrongful under a federal statute. See Howlett v. Rose , 496 U.S. 356 (1990). See also Hilton v. South Carolina Pub. Rys. Comm'n , 502 U.S. 197, 205 (1991) (Congress has authority to render states liable for damages pursuant to federal cause of action ).]
A recent case is illustrative. In Tri-City Turf Club Inc. v. Kentucky Racing Commission, the debtor sued the state racing commission for violating the stay when the commission revoked the debtors operating license to conduct live horse races and intertrack betting. [ FN: 203 B.R. 617 (Bankr. E.D. Ky. 1996).] The court found that the states actions violated the stay and awarded attorneys fees, but reserved the amount of the damages until the fee hearings. [ FN: Id.] In the interim, the Supreme Court issued the Seminole decision. The Tri-City court found that, under Seminole, it had no jurisdiction over the state commission to award damages remedying a present violation, and therefore lacked jurisdiction to hear the debtors adversary proceeding against the state. [ FN: Id.] Thus, the debtors only option to recover property wrongfully taken was to delay the bankruptcy proceeding and to sue the state commission in state court.
The proposals discussed will not broaden the implications of Seminole and state
sovereign immunity under the Eleventh Amendment. However, if the exceptions to the automatic
stay are expanded to give greater authority for government units to obtain property of the estate
without seeking court permission in advance, this may lead to more frequent litigation over
whether the state has properly exercised the power at issue. The hurdles for pursuing any such
litigation against non-consenting state agencies will be much higher than for pursuing the same
litigation against federal or local agencies.