16: Automatic stay -- exceptions© Charles Tabb 2010

Place in statutory scheme

• Exceptions to stay in § 362(b) only are relevant if the act otherwise would be stayed under § 362(a)

• If act is excepted under (b), still possible, albeit difficult (unlikely?), to get court to issue an injunction

Problem 4.2(a)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

a. Debtor failed to pay court-ordered child support of $300 per month for a period of several months. Debtor then filed chapter 7. Debtor’s ex-wife garnishes Debtor’s wages.

Answer 4.2(a)

• Collection of child support

• Allowed § 362(b)(2)(B) – “collection of a domestic support obligation from property that is not property of estate”– If were in ch. 13, (b)(2)(C) would apply

Defer to domestic relations

• Bankruptcy law almost totally defers to domestic relations law of states

• Even if has financial impact, policy decision that alimony and child support claimants (“domestic support obligations”) nearly always win

• Rule of thumb: if not sure,assume family law wins

Problem 4.2(b)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

b. Same facts as in question a, except after Debtor files chapter 7, Debtor’s ex-wife files an action in state court seeking to increase the amount of child support to $400 per month.

Answer 4.2(b)

• Modification of child support

• Allowed, § 362(b)(2)(A)(ii): “modification of an order for domestic support obligations”

Problem 4.2(c)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

g. Same facts as in a, except after Debtor files chapter 7, Debtor’s ex-wife files an action in state court seeking to terminate Debtor’s visitation rights with respect to Debtor’s children.

Answer 4.2(c)

• Modify visitation

• Allow, § 362(b)(2)(A)(iii): “concerning child custody or visitation”

Problem 4.2(d)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

c. Debtor violated the labor laws in terminating certain employees. Those employees filed a complaint with the NLRB. Debtor filed chapter 11. The NLRB then held an administrative hearing and ordered Debtor to reinstate the employees.

Answer 4.2(d)

• NLRB reinstatement order

• Allowed, § 362(b)(4), “governmental unit … to enforce [its] … police and regulatory power”

Policy

• DR (as DIP) has to obey the law, even in bankruptcy

- See 28 USC § 959(b)

• Has to do with Dr’s future operations– if keep operating business, labor laws make DR

reinstate employees fired illegally

Level playing field

• If DR as DIP did NOT have to obey the law, would obviously give it a huge advantage vs. competitors– Pay < minimum wage?

– Violate child labor laws? ?– Ignore pollution controls?

• NO: has nothing to do with Bk’s collective action function

Other policies matter too

• Bankruptcy’s goal of maximizing value for Crs must give way to other legitimate societal goals

• Consistent too with Butner principle – Dr’s Crs do not have a legitimate claim to get paid more in bankruptcy than out by reason of Dr violating the law

Problem 4.2(e)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

d. Same facts as question d, except the NLRB also ordered Debtor to award the employees back pay.

Answer 4.2(e)

• NLRB back pay award

• Entry of back pay award – ok– police and regulatory powerexception, § 362(b)(4)

• Enforcement of back pay award? NO– Money judgment exception in (b)(4)

Two hats

• Government wears two hats:

Protector

only money

Two hat distinction

• As long as govt. is wearing its hat as protector of the common weal, enforcer of public health, safety, & welfare

• Ok –don’t want bankruptcy to be a haven to avoid the law

• Police and regulatory power exception

Money only?

• If, however, the govt action is only about $, then we don’t defer to the govt’s role in enforcing non-bk law as to $, because sorting out the $ question is exactly what Bk is about

• This is the “money judgment” exception to 362(b)(4)

How tell which hat?

• Can be hard to decide which hat the govt is wearing

• Tests:– “pecuniary purpose” test– “public policy” test

Back pay claims

• If NLRB is trying to make the DR pay the back pay claims to workers, that violates Bk’s $ sorting function.

• Those workers have to get in the bk payment line, wherever Congress put them in the Bk Code

Problem 4.2(f)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

e. Debtor operated a grain elevator in State. State’s grain regulatory laws provide that in the event a grain elevator becomes insolvent, State officials are to seize the grain immediately and distribute the grain or its proceeds in accordance with state law. Debtor filed chapter 11. State sent officers to seize the grain.

Answer 4.2(f)

• Grain elevator insolvency

• Not fall within “police and regulatory power” exception– No “public policy” function, of protecting public

health and welfare– Only trying to dictate which Crs get paid what – a

core bankruptcy function• Indeed state insolvency law would be preempted

Problem 4.2(g)

Is the following is excepted from the automatic stay under § 362(b)? If so, which subsection applies?

f. On May 1, Creditor sells Debtor a gizmo on credit and Debtor grants Creditor a purchase money security interest in the gizmo to secure the payments. Debtor takes possession of the gizmo immediately. On May 5, Debtor files chapter 7. On May 8, Creditor files a financing statement, perfecting the security interest.

Answer 4.2(g)

• Perfect PMSI

• Allow, §362(b)(3): “act to perfect … an interest in property to the extent the trustee’s rights are subject to such perfection under § 546(b)”

Relation back rules honored

• If a claimant would be able to perfect an interest outside of bk, with relation-back effect that trumped other CRs, they can do the same in bk (see 546(b))

• Consistent with Butner principle of anti-forum shopping – mirror bk & non-bk distributive effects

• And outside of Bk, under art. 9, PMSI can perfect with relation-back effect

Gruntz

• Facts:– Robert Gruntz owed child support• $300 month current, $291 past due• In chapter 13; converted to chapter 11

– Did not pay– Ex-wife filed criminal complaint for non-payment

of child support– Gruntz convicted (twice)– Sentenced to 360 days in jail

Criminal law as collection tool?

• “The D.A.'s office told Gruntz that it would bring criminal charges against him if he did not agree to an arrangement for payment of his past due child support obligation and pay his current support payments through the D.A.'s office.” 166 F.3d 1020, 1022

Tool?

• “The D.A.'s office offered to agree to a suspended sentence if Gruntz would plead guilty and pay the back child support.” 166 f.3d 1020, 1023

Bad check cases

• Same problem comes up in the “bad check” cases (see excerpt from Davis following case), where Dr is prosecuted for issuing a bad check

• Under state criminal law, drop charges if makes good on bad check

issues

• 1st issue Ct had to consider was whether state ct’s determination that bk auto stay n/a was preclusive on the federal cts– 9th Circuit held that states could not decide stay

issue that precluded federal cts

Stay issue

• 2nd issue: did stay exception in § 362(b)(1) for criminal proceedings apply?

Plain language

• The plain language of § 362(b)(1) appears to effect an absolute exception to the stay for “the commencement or continuation of a criminal action or proceeding against the debtor.”

• Which obviously would then apply to Gruntz

policies

• Bankruptcy not a haven for criminals• Police power: enforce public policy agst crime

Not a $ issue

• In criminal actions are enforcing the state’s public policies, on behalf of the whole society

• Not simply a Q about $

Federalism policy

• Federal deference to states in operation of their criminal justice systems

Debt collection exception?

• Issue, though, is whether the court should read in a “debt collection” exception to § 362(b)(1) if the sole purpose of the criminal action was to coerce the DR into paying a debt, then should stay exception still apply?

Justify a debt collection exception?

• Facts suggest that the State of California was interested in criminally prosecuting Gruntz ONLY to try to make him pay up

• If he paid, they’d have dropped the case• So in fact it really IS just about $– And that is a core bk Q

Court rejects debt collection exception

• Reversing earlier decision in Hucke, the 9th Circuit decides that there should NOT be a debt collection exception to 362(b)(1)

• Why?

• Do you agree?

What about an injunction?

• 9th Circuit notes that it would be theoretcially possible for the Dr to obtain an injunction against the state criminal action under § 105(a)

• Q then would be whether such an injunction should issue, on facts, such as in Gruntz, that suggest a pretty strong debt collection motive

Injunction?

• Younger v. Harris, 401 US 37 (1971)- general policy of “our federalism” NOT to enjoin state criminal proceedings

Very narrow exception:• Bad faith• harassment

Not within Younger exception

• Facts in “debt collection” cases have been almost uniformly held at appellate level, now, NOT to suffice as “bad faith” or “harassment.”

• Instead Cts conclude that it IS a legitimate part of the state’s public policy to “encourage” the repayment of certain types of debts through threat of criminal sanction– So mere fact is used as debt collection tool OK

Penn Terra

• Facts:– Penn Terra Ltd, a corporation, operated coal mines– Violated state environmental laws– Cited for violations– Agreed to consent order to clean up– Dr did not clean up– Filed chapter 7– Total assets = $14k; cleanup cost > $14k– State DER sought injunction to compel cleanup– Dr sought bk ct order enjoining state cleanup

Issue?

• Did State ct cleanup order violate stay?

statute

• Police and regulatory power exception, § 362(b)(4):– Not stayed if govt is enforcing its police and

regulatory powers– Unless is seeking to enforce a “money judgment”• The “exception to the exception”

The two hat problem

• The Q raises the “two hat” problem: is the govt wearing its hat as “protector” of all, in which case no stay, or is it just wearing its $ hat, in which case it is stayed

Environment as police power?

• Is the regulation of environmental pollution a “police and regulatory power”?

• Of course!

Ongoing operation

• If Penn Terra were continuing to operate coal mines as a chapter 11 DIP, would it have to comply with cleanup orders?

Yes must obey the law

• Ongoing operations – DIP must obey ALL laws, § 28 USC 959(b)

• And the law is, can’t operate a coal mine without cleaning up

Is this case different?

• The Third Circuit holds no – says was not the enforcement of a money judgment

rationale

• Doesn’t look like a money judgment in form

• In substance, Court says is only seeking to prevent future harm, rather than compensate for past injury, so ≠ money judgment

DR not operating?

• Should it matter that the DR was no longer operating?

• NOT continuing its business• No future operations whereby will continue to

violate law• This debtor only has a past– Corporate Dr– Chapter 7

Will this Dr actually clean up?

• Given court’s decision, will the Dr actually effect the clean up?

Of course not – no “DR” left

So who will clean up?

• Who will clean up?The Commonwealth of Pennsylvania

* Who then will seek to be reimbursed out of bankruptcy estate

Fight?

• What was actually at stake in the case?

Other CRs Pennsylvania

• Only issue – who gets paid what out of the pot of money

Effect of decision

• What is practical effect of decision?

Commonwealth of Pennsylvania

-- for $ spent on cleanup

Other Creditors? – nothing left

Which hat?

• Given that the only thing actually at stake is who gets paid out of pot of $, the State or competing CRs

isn’t the State wearing its hat, not its“protector” hat?

Brennan

• Facts– SEC fraud action vs. Brennan– Brennan hides assets in offshore trust– Judgment for $75 million– Brennan files chapter 11, trustee appointed– Brennan not turn over trust assets to estate– Bankruptcy Ct refuses to order repatriation– District Ct orders repatriation of trust assets

Issue?

• Issue – violate stay?– In particular – does repatriation order fall within

the police and regulatory power exception– Or within the “exception to the exception” for

enforcement of money judgments

Where draw line?

• Case turns on where draw the line between the entry of an order and the enforcement of an order for a money judgment

Majority’s line

• Majority holds: was the enforcement of a money judgment

• Reason: for anything beyond the mere entry of the money judgment, the government had taken off its regulatory hat and put on its CR hat– The entry suffices to establish the govt’s

protective role

Dissent’s line

• Judge Calabresi in dissent draws line between “entry” and “enforcement” only at the point where the government seeks to prefer itself as a CR

• And here that did not happen, b/c was simply preserving the asset for the possible benefit of ALL Crs

Line?

• Where should we draw the line?

Judgment Preserve $ Grab $

Court battle

• In Brennan, had added angle of a battle between the Bankruptcy Court, which had declined to enter repatriation order, and District Court, which did

• Arguably District Ct order interfered with bankruptcy Ct’s exclusive jurisdiction over property of estate