Cite as: Keith M. Lundin, Lundin On Chapter 13, § 58.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
The Bankruptcy Code excepts from the automatic stay the “commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . police and regulatory power.”1 Prior to amendment in 1998, this exception read clearly as quoted. A convoluted amendment in 1998 has created some controversy whether the police and regulatory power exception survives in the Code.2 There is no legislative history to the 1998 amendment to suggest that Congress intended any change in the exception to the automatic stay for governmental police power or regulatory actions.3
The exception to the automatic stay in § 362(b)(4) for actions by a governmental unit to enforce police or regulatory powers is less broadly worded than the exception for the commencement or continuation of a criminal action in § 362(b)(1).4 Criminal proceedings are excepted from all of the automatic stay described in § 362(a); police and regulatory actions are excepted only from the stay described in subsections (a)(1), (a)(2), (a)(3) and (a)(6) of § 362.5 Prior to the 1998 amendment, the exception in § 362(b)(4) was even more limited to only actions prohibited by § 362(a)(1). The restricted nature of this exception to the automatic stay led one court to conclude that a bar association did not violate the automatic stay by requiring a debtor to pay the costs and expenses of the disciplinary proceeding that led to suspension of the debtor’s law license; however, once the debtor filed a Chapter 13 case, the bar association needed relief from the stay to condition reinstatement of the debtor’s law license upon payment of those costs and expenses.6
The stay exception in § 362(b)(4) is implicated when the Chapter 13 debtor has engaged in conduct that is subject to a state or federal regulatory scheme. For example, one court held that § 362(b)(4) permits the National Labor Relations Board to proceed in a contempt action against a Chapter 13 debtor for enforcement of orders for violation of the National Labor Relations Act.7 A lawsuit to stop unfair rental practices by a Chapter 13 debtor was a police or regulatory proceeding excepted from the stay by § 362(b)(4).8 State actions to remedy unfair trade practices and to enforce consumer protection laws may fall within the § 362(b)(4) exception to the automatic stay.9 In In re Bill10 and In re DeBaecke,11 the bankruptcy court held that imposition of surcharges under New Jersey law for refusal to submit to a Breathalyzer and for operating a motor vehicle under a suspended license is excepted from the stay as a proceeding to enforce the state’s regulatory power under § 362(b)(4). The enforcement of local law affecting “health, welfare and safety” includes a health inspection of a Chapter 13 debtor’s property.12 Enforcement of a federal agency’s anti–conflict-of-interest regulations is within the police and regulatory exception in § 362(b)(4).13
In re Dolen14 explores the difficult interaction between the enforcement of consumer protection statutes and the police and regulatory power exception to the automatic stay in a Chapter 13 case. The debtor in Dolen was the defendant in a consumer fraud action concerning work-at-home business opportunity programs. Before the petition, a U.S. district court entered a preliminary injunction freezing the debtor’s current and future assets and income. The proposed Chapter 13 plan would be funded from future income arguably unrelated to the Federal Trade Commission action.
The bankruptcy court determined that the police and regulatory power exception to the automatic stay in § 362(b)(4) permitted the FTC to continue its action against the debtor in the district court and held that no stay precluded the FTC from enforcing the conduct prohibitions in that injunction. The automatic stay did not thaw the debtor’s frozen assets. But with respect to the portion of the preliminary injunction that prohibited the debtor from using postpetition income, the bankruptcy court found liberation for the funding of the Chapter 13 plan:
If the court were to accept the Commission’s argument and conclude that the Commission’s actions in enforcing the preliminary injunction enjoining the debtor’s use of her post-petition income are excepted from the automatic stay, the resulting outcome would similarly give the Commission an unfair advantage over other creditors, subvert the scheme of priority set forth in Section 507, and deny to the debtor the benefits of reorganization and discharge. . . . To the extent that the Commission seeks to enforce the preliminary injunction to enjoin the debtor’s use of her post-petition earnings, it goes beyond “a reasonable measure to preserve the status quo pending final determination” of the merits of the district court action. . . . It is, instead, an act to effectuate a pre-judgment attachment of monies wholly unrelated to the illegal conduct about which it complains in the district court action. . . . The Commission’s enforcement of the preliminary injunction as against the debtor’s post-petition earnings is therefore equivalent to an action taken to enforce a money judgment. . . . [T]he debtor may use her post-petition earnings . . . to pay her monthly expenses . . . and her plan payments.15
The jurisdictional problem mentioned above16 in the discussion of Gruntz v. County of Los Angeles (In re Gruntz)17 was addressed on interesting facts by the Bankruptcy Appellate Panel for the Ninth Circuit in a Chapter 13 case involving the police and regulatory power exception to the automatic stay. In In re Dunbar,18 the debtor was a concrete contractor who installed a faulty driveway before the petition. After the petition, the homeowner filed a complaint with the California Contractors State Licensing Board. The debtor wrote the Licensing Board, trying to stop an administrative hearing, arguing that the automatic stay prohibited any action with respect to the debtor’s contractor’s license or bond. An administrative law judge held that the Licensing Board was a governmental unit enforcing its police or regulatory power within the exception to the automatic stay in § 362(b)(4). The Licensing Board ordered the debtor to pay restitution of $27,000 and investigative expenses of $2,921.56. The Board also ordered the debtor to post a larger than usual bond.
The debtor then filed a complaint in the bankruptcy court for an injunction to prevent the Board from enforcing its order or from revoking his contractor’s license. The bankruptcy court held that the administrative law judge’s determination that the agency action was excepted from the automatic stay was binding on the bankruptcy court. On appeal, the BAP disagreed. Citing the panel decision in Gruntz and In re Pavelich,19 the BAP held that the bankruptcy court was not precluded from revisiting the question whether the § 362(b)(4) exception to the automatic stay applied because
an erroneous state court decision regarding the automatic stay . . . would ‘substantially infringe the authority’ of the bankruptcy court. . . . [N]either the so-called Rooker-Feldman doctrine nor principles of collateral estoppel apply to afford binding effect to an incorrect state court construction of the automatic stay . . . that is made in connection with determining its jurisdiction to proceed in a matter before it. Although a state tribunal certainly has the authority to determine its own jurisdiction and, in so doing, to construe the automatic stay . . . drawing the line in the wrong place may result in any ensuing judgment being treated as void ab initio.”20
As mentioned above, the Ninth Circuit en banc affirmed Gruntz on different grounds than the panel opinion relied on in Dunbar, but the ultimate outcome in Gruntz supports the jurisdictional holding in Dunbar, and the Ninth Circuit eventually also affirmed the BAP’s decision in Dunbar.21 As in Gruntz, the Ninth Circuit BAP in Dunbar went on to discuss whether the action by the Licensing Board was the exercise of police or regulatory power within the § 362(b)(4) exception or debt collection that was not excepted from the stay:
On remand, it will be appropriate for the trial court to consider the implications of the fact that the restitution requirement is for the same amount as the damages in the context of whether a personal liability of the debtor has been determined. To the extent the state agency instituted proceedings to seek restitution on behalf of the [homeowner] for Dunbar’s violations . . . such actions are not excepted from the automatic stay. . . . The bankruptcy court must decide whether the state agency’s imposition of costs upon Dunbar also falls within § 362(b)(4).22
The discussion in Dunbar of § 362(b)(4) demonstrates that regulatory action against a Chapter 13 debtor that contains damages, restitution or debt collection components may fail the exception to the automatic stay. For example, one bankruptcy court concluded that a proceeding by a state department of public safety to forfeit a Chapter 13 debtor’s car based on the debtor’s arrest for driving under the influence was not excepted from the automatic stay by the police and regulatory exception in § 362(b)(4).23 In contrast, when there is no evidence of postpetition debt collection, a city government is free to enforce its police and regulatory powers by refusing to lift a driver’s license suspension imposed before the petition when the Chapter 13 debtor failed to pay traffic fines.24
One reported decision discusses the boundaries of § 362(b)(4) when regulatory action includes withholding payments to the debtor. In In re Adamic,25 the Colorado Department of Labor determined in 1994 that the debtor received an overpayment of unemployment benefits based on false representations. The Department assessed a 50 percent monetary penalty and imposed a nonmonetary penalty of 40 weeks of future benefits—four weeks for each week in which the debtor falsely claimed benefits. In 1999, the debtor filed a Chapter 13 case, scheduled the Department and confirmed a plan that included the Department’s prepetition debt. In 2002, during the Chapter 13 case, the debtor lost his job and applied for unemployment benefits. The Department withheld benefits to collect its prepetition debt and imposed the 40-week denial-of-benefits penalty. The bankruptcy court found that withholding current benefits was a permitted recoupment26 and held that Colorado’s actions were excepted from the stay by § 362(b)(4):
In determining whether a governmental unit’s actions fall within the parameters of § 362(b)(4), . . . the Court must consider the “pecuniary purpose” test and the “public policy” test. . . . The Court . . . concludes that enforcement of the forty-week penalty is not primarily for recovery of the 1993 overpayments. If the primary purpose of the temporal penalty is to collect prior unemployment overpayments and the fifty percent monetary penalty, the statutory provisions for withholding current benefits and imposing the penalties would be mandatory, rather than permissive . . . . In addition, the amount of the overpayments has little monetary correlation, if any, to the duration of the penalty. . . . Accordingly, enforcement of the temporal penalty is not barred by the automatic stay under 11 U.S.C. § 362(b)(4).27
Exceptions to the automatic stay are not the only weapons available to governmental units in police and regulatory actions against Chapter 13 debtors. Eleventh Amendment immunity and sovereign immunity have become much the fashion in actions involving governmental units in bankruptcy cases.28 Chapter 13 has not escaped this trend. For example, Eleventh Amendment immunity has been raised as a defense in Chapter 13 cases when debtors seek to force a state to restore a suspended driver’s license.29 Debtor’s counsel can look forward to Eleventh Amendment and sovereign immunity arguments in any action by a Chapter 13 debtor asserting a violation of the stay by a governmental unit30 or in which the stay is offered as a bar to action by the government.
1 11 U.S.C. § 362(b)(4).
2 Section 603 of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1998, Pub. L. No. 105-277, 112 Stat. 2681 (1998), deleted 11 U.S.C. § 362(b)(4) and (b)(5) and substituted the following ambiguous reformulation of the police and regulatory power exception to the automatic stay:
(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 unit’s or organization’s 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 unit’s or organization’s police or regulatory power.
3 See Herman v. Hospital Staffing Servs., Inc., 236 B.R. 377, 382 n.1 (W.D. Tenn. 1999) (“The amended section 362(b)(4) incorporates the language of the previous sections 362(b)(4) and (b)(5) into one encompassing subsection without any substantive change which is relevant to this matter.”).
4 See § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7 Criminal Action or Proceeding Exception.
5 Compare 11 U.S.C. § 362(b)(1) (“[T]he filing of a petition . . . does not operate as a stay—(1) under subsection (a) of this section, of the commencement or continuation of a criminal action or proceeding against the debtor.”), with 11 U.S.C. § 362(b)(4) (“[T]he filing of a petition . . . does not operate as a stay— . . . (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 . . . to enforce such governmental unit’s . . . police and regulatory power.”).
6 In re Williams, 158 B.R. 493, 496 (Bankr. D. Idaho 1993) (Although bankruptcy court concluded in a prior Chapter 7 case that the Idaho State Bar Association did not violate the automatic stay by requiring the debtor to pay the costs and expenses of a disciplinary proceeding that led to suspension of the debtor’s law license, that decision was based on a holding that the costs and expenses were nondischargeable debts in the Chapter 7 case under § 523(a)(7), and thus the exception to the automatic stay in § 362(b)(4) was applicable. In this Chapter 13 case, the Idaho State Bar Association “would need relief from the stay to condition reinstatement upon [payment of costs and expenses]. . . . [B]y its express terms the section 362(b)(4) exemption applies only to those actions falling within subsection (a)(1); it has no relevance to subsection (a)(3). . . . The [Idaho State Bar’s] refusal to permit the hearing to go forward is both an ‘act to obtain possession of property of the estate’ in violation of subsection (a)(3) (the property here being future income), and an attempt to enforce a money judgment in violation of subsection (b)(5).”).
7 NLRB v. Sawulski (In re Sawulski), 158 B.R. 971, 978–79 (E.D. Mich. 1993) (District court, sitting as a special master appointed by the U.S. court of appeals to enforce an order of the National Labor Relations Board, holds that the filing of a Chapter 13 petition does not automatically stay contempt proceedings against a debtor. Debtor was found by the court of appeals to be in contempt of enforcement orders for violation of the National Labor Relations Act. “I conclude that the automatic stay is not applicable to this contempt proceeding. The NLRB has an interest in continuing this contempt proceeding to effectuate public policy and obtain compliance with federal labor laws. Accordingly, pursuant to § 362(b)(4), this court may continue the contempt proceeding initiated by the NLRB for [the debtor’s] noncompliance with the NLRA.”).
8 Wisconsin v. Weller (In re Weller), 189 B.R. 467 (Bankr. E.D. Wis. 1995).
9 See, e.g., In re Horne, 277 B.R. 320 (Bankr. E.D. Tex. 2002) (Action by Attorney General for damages and injunction for violations of the Texas Consumer Protection Act fits the police or regulatory power exception in § 362(b)(4).); In re Nelson, 240 B.R. 802 (Bankr. D. Me. 1999) (Action by state of Maine for violation of Unfair Trade Practices Act and Consumer Solicitations Sales Act falls within the police and regulatory power exception to the stay under § 362(b)(4) and state may continue its action including seeking restitution for landowners injured by debtor’s misrepresentations.).
10 90 B.R. 651 (Bankr. D.N.J. 1988).
11 91 B.R. 3 (Bankr. D.N.J. 1988).
12 In re Herrera, 194 B.R. 178, 186 (Bankr. N.D. Ill. 1996).
13 Asquino v. FDIC, 196 B.R. 25, 29–30 (D. Md. 1996) (Administrative proceeding by FDIC to terminate employment of a Chapter 13 debtor against whom the FDIC has a $92,000 judgment for the guarantee of a debt to a failed financial institution is not subject to review by the bankruptcy court for violation of the stay or violation of the antidiscrimination provisions of § 525 because 12 U.S.C. § 1822(f)(4)(D)(ii) puts such determinations by the FDIC beyond review by the bankruptcy court. “[T]he preclusive language of Section 1822(f)(4)(D)(ii) supersedes the Bankruptcy Code’s automatic stay and anti-discrimination provisions, thereby divesting this Court of jurisdiction. . . . [T]he police/regulatory exemption set forth at 11 U.S.C. § 362(b)(4) that the [In re Colonial Realty Co., 980 F.2d 125 (2d Cir. 1992),] court concluded was central to the holding in [Board of Governors of the Fed. Reserve Sys. v. MCorp Fin., Inc. (In re MCorp), 502 U.S. 32, 112 S. Ct. 459, 116 L. Ed. 2d 358 (1991),] is also implicated in this case. . . . Section 1822(f)(4) is a conflict of interest provision that requires FDIC employees and contractors to meet ‘minimum standards of competence, experience, integrity and fitness.’ Because this provision governs standards of conduct, it has obvious public policy ramifications, irrespective of any pecuniary interest. Accordingly, the enforcement of this provision constitutes an exercise of FDIC’s police or regulatory power.”).
14 265 B.R. 471 (Bankr. M.D. Fla. 2001).
15 265 B.R. at 483–86.
16 See § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7 Criminal Action or Proceeding Exception.
17 166 F.3d 1020 (9th Cir.), as modified, 177 F.3d 728, 736 (9th Cir.), withdrawn and reh’g granted, 177 F.3d 729 (9th Cir. 1999), after reh’g, 202 F.3d 1074 (9th Cir. 2000).
18 235 B.R. 465 (B.A.P. 9th Cir. 1999), aff’d, 245 F.3d 1058 (9th Cir. 2001).
19 229 B.R. 777 (B.A.P. 9th Cir. 1999).
20 235 B.R. at 472.
21 Contractors’ State License Bd. of Cal. v. Dunbar (In re Dunbar), 245 F.3d 1058 (9th Cir. 2001) (Because bankruptcy court was not required to give full faith and credit to decision by state contractors’ licensing board that its disciplinary action fell within the exception to the automatic stay in § 362(b)(4), remand was necessary to determine whether victim of debtors’ prepetition concrete work violated the stay by proceeding against the debtor before the contractors’ board.).
22 235 B.R. at 474–75.
23 Finley v. Mississippi Dep’t of Public Safety (In re Finley), 237 B.R. 890, 895 (Bankr. N.D. Miss. 1999) (“Relying on the [Weaver v. Knoxville (In re Thomas), 179 B.R. 523 (Bankr. E.D. Tenn. 1995),] analysis, this court concludes that the forfeiture proceeding is an act to obtain possession of property of this bankruptcy estate which is stayed automatically by § 362(a)(3). Revised subsection 362(b)(4) does not provide an exception permitting the Department to commence the forfeiture proceeding without first obtaining relief from the stay.”).
24 See § 73.1 [ Termination of Services to Debtor and Discrimination against Debtor ] § 58.13 Termination of Services to Debtor and Discrimination against Debtor. See, e.g., Kimsey v. Suskie (In re Kimsey), 263 B.R. 244, 247 (Bankr. E.D. Ark. 2001) (City did not violate stay when it revoked the debtor’s driver’s license before the Chapter 13 petition for failure to pay traffic fines but took no action after the petition with respect to the fines. “[T]his Court has consistently denied debtor requests for release from incarceration or similar requests to preclude governmental units from enforcing their police and regulatory powers.”).
25 291 B.R. 175 (Bankr. D. Colo. 2003).
26 See § 72.1 [ Setoffs and Recoupments ] § 58.12 Setoffs and Recoupments.
27 291 B.R. at 188–89.
28 See, e.g., Rose v. United States Dep’t of Educ. (In re Rose), 187 F.3d 926 (8th Cir. 1999); Virginia v. Collins (In re Collins), 173 F.3d 924 (4th Cir. 1999); Wyoming Dep’t of Transp. v. Straight (In re Straight), 143 F.3d 1387 (10th Cir.), cert. denied, 525 U.S. 982, 119 S. Ct. 446, 142 L. Ed. 2d 400 (1998); Texas v. Walker, 142 F.3d 813 (5th Cir. 1998), cert. denied, 525 U.S. 1102, 119 S. Ct. 865, 142 L. Ed. 2d 768 (1999); Sacred Heart Hosp. of Norristown v. Pennsylvania Dep’t of Pub. Welfare (In re Sacred Heart Hosp. of Norristown), 133 F.3d 237 (3d Cir. 1998).
29 See, e.g., In re Raphael, 238 B.R. 69, 77–83 (D.N.J. 1999) (Bankruptcy court is without statutory authority to order municipal court to direct the New Jersey Division of Motor Vehicles to restore a Chapter 13 debtor’s driver’s license that was suspended prepetition based on traffic violations and parking fines. If bankruptcy court does have statutory authority to order license reinstatement, Eleventh Amendment immunity prohibits the exercise of that authority. “[A] bankruptcy court does not have the power to relieve a party of all of the burdens that were created by nonpayment of debt. . . . This Court finds no authority in the Bankruptcy Code that indicates that the creation or approval of a payment plan may operate to lift the suspension of a license that was revoked pre-petition. . . . [T]he approval of a Chapter 13 plan does not carry with it the authority to restore a Debtor’s drivers license when such license was suspended pre-petition and the state has taken no action post-bankruptcy to compel payment. . . . This Court notes that a different result might arise if the suspension occurred after the bankruptcy petition was filed. Without reaching a determination on this issue, a post-petition revocation, particularly if done in connection with an effort to collect outstanding fines, would raise issues as to whether the State’s conduct violated the provisions of the automatic stay. . . . [T]his Court finds that a New Jersey Municipal Court is the State for purposes of sovereign immunity pursuant to the Eleventh Amendment. . . . [T]he bankruptcy judge lacked jurisdiction to order the municipal court to restore Rafael’s drivers license because a municipal court is entitled to Eleventh Amendment immunity and therefore is not subject to suit in federal court. Although this Court need not reach this issue, this Court notes that the Eleventh Amendment further bars the bankruptcy judge’s November 30, 1998, Order, because such order compels retroactive injunctive relief. . . . [A]n order to compel a municipal court to restore a Debtor’s drivers license mandates retrospective and not prospective relief . . . . Finally, this Court finds that even if the bankruptcy court’s November 30, 1998, Order is not prohibited by the Eleventh Amendment, such order violates the provisions of the Anti-Injunction Act, 28 U.S.C. § 2283. The Bankruptcy Court lacked the power to examine the state court proceeding, when the magistrate judge had entered a valid judgment on the merits.”); In re Burkhardt, 220 B.R. 837 (Bankr. D.N.J. 1998) (Reaffirming In re Perez, 220 B.R. 216 (Bankr. D.N.J. 1998), motion to require the New Jersey Division of Motor Vehicles to restore driver’s license suspended for motor vehicle violations is barred by Eleventh Amendment immunity, whether it sounds in violation of the stay under § 362 or the prohibition against discrimination in § 525.).
30 See § 76.1 [ What Court? ] § 62.2 What Court?.