Automatic Stay: Police Power Exception

Police or Regulatory Power Exception to Automatic Stay

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws.   It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove it into bankruptcy. When a company files a petition in bankruptcy under chapter 11 of the Bankruptcy Code, the filing automatically stays specified proceedings against the debtor. Under 11 U.S.C. §362(a)(1), the petition generally stays the commencement or continuation of judicial, administrative or other proceedings against the debtor that were, or could have been, brought before the bankruptcy petition was filed. Certain proceedings, however, are excepted from the automatic stay under 11 U.S.C. §362(b). One of these exceptions provides that the automatic stay does not apply to:

. . the commencement or continuation of an action or proceeding by a governmental unit … 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 ….

11 U.S.C. §362(b)(4).

This “police or regulatory power” exception applies to a governmental unit’s enforcement of laws “affecting health, welfare, morals, and safety, ‘but not to regulatory laws that directly conflict with the control of the res or property by the bankruptcy court.'” Matter of Currency Exchange, Inc., 762 F.2d 542, 555 (7th Cir. 1985) (quoting State of Missouri v. United States Bankruptcy Court, 647 F.2d 768, 776 (8 th Cir. 1981)). “Congress clearly intended for the police power exception to allow governmental agencies to remain unfettered by the bankruptcy code in the exercise of their regulatory powers.” Word v. Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988). Thus, a proceeding by a governmental unit enforcing such laws may proceed to entry of a money judgment, although actions to collect such a judgment fall outside the exception and are stayed. See generally Board of Governors of the Federal Reserve System v. MCorp. Financial Inc., 502 U.S. 32, 41 (1991) (stay applies to agency action to enforce final agency order that affects Bankruptcy Court’scontrol over property of estate, but not to agency’s making of final order).

To determine whether proceedings fall within the police or regulatory power exception to the automatic stay, “courts have applied two ‘related, and somewhat overlapping’ tests:  the pecuniary purpose test and the public policy test.”  See Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 374, 385 (6th Cir.2001) and  In re Spookyworld, Inc., 346 F.3d 1, 9 (1st Cir.2003). “The pecuniary purpose test asks whether the government primarily seeks to protect a pecuniary governmental interest in the debtor’s property, as opposed to protecting the public safety and health.”   In re Nortel Networks, Inc.., 669 F.3d 128, 139-140 (3d Cir.2011).  “The public policy test asks whether the government is effectuating public policy rather than adjudicating private rights.”  Id. at 140.   Thus, “[i]f the purpose of the law is to promote public safety and welfare or to effectuate public policy, then the exception to the automatic stay applies.   If, on the other hand, the purpose of the law is to protect the government’s pecuniary interest in the debtor’s property or primarily to adjudicate private rights, then the exception is inapplicable.”  Id.; See also In re Gandy, 327 B.R. 796, 803 (Bankr.S.D.Tex.2005).   The pecuniary purpose and public policy tests both “contemplate that the bankruptcy court, after assessing the totality of the circumstances, [will] determine whether the particular regulatory proceeding at issue is designed primarily to protect the public safety and welfare, or represents a governmental attempt to recover from property of the debtor estate, whether on its own claim, or on the nongovernmental debts of private parties.”  In re McMullen, 386 F.3d 320, 325 (1st Cir.2004);  See also Hosp. Staffing, 270 F.3d at 389 (stating that the tests “are designed to sort out cases in which the government is bringing suit in furtherance of either its own or certain private parties’ interest in obtaining a pecuniary advantage over other creditors”).

By: Jamie L. Harris, Esq.


One Reply to “Automatic Stay: Police Power Exception”

  1. What are your thoughts about a real estate receiver appointed pursuant to state law that was appointed to correct problems with a property? If a Debtor files bankruptcy does the automatic stay prevent the trustee from pursuing the Debtor for his pre-petition fees in state court while the bankruptcy is proceeding?

Leave a Reply

Your email address will not be published. Required fields are marked *