2008 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-16-2008

In Re: Mystic Tank

Precedential or Non-Precedential: Precedential

Docket No. 06-4033

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Recommended Citation

"In Re: Mystic Tank " (2008). 2008 Decisions. Paper 283.

http://digitalcommons.law.villanova.edu/thirdcircuit_2008/283
 Hon. Louis H. Pollak, Senior Judge, United States District *

Court for the Eastern District of Pennsylvania, sitting by

designation.

 PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 06-4033

 

IN RE: MYSTIC TANK LINES CORPORATION,

 Appellant

 

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 05-cv-04783)

District Judge: Honorable Anne E. Thompson

 

Submitted Under Third Circuit LAR 34.1(a)

October 7, 2008

Before: SLOVITER and AMBRO, Circuit Judges, and

POLLAK, District Judge *

(Filed: October 16, 2008 )

_______

Albert A. Ciardi, III

Nicole M. Nigrelli

Ciardi Ciardi & Astin

Philadelphia, PA l9l03

Attorneys for Appellant
2

Oren L. Zeve

Office of Attorney General of the

 State of New York

New York, NY 10271

Attorney for Appellee

_____

OPINION OF THE COURT

_______

SLOVITER, Circuit Judge.

In this appeal we revisit the police power exception to the

automatic stay in bankruptcy and consider the extent to which a

bankruptcy court has exclusive subject matter jurisdiction.

I.

Factual Background and Procedural History

R.J. Guerrera, Inc., the predecessor in interest of appellant

Mystic Tank Lines Corporation (hereafter “Mystic”), was one of

a number of companies that delivered gasoline to a New York

gas station. In 1997, the State of New York (hereafter “New

York”) learned that a leak at the station had contaminated the

local soil and groundwater with petroleum products. As the

New York court held in rendering the default judgment against

Mystic, New York state law allows the state to recover damages

from any shipper for discharged petroleum if the leak can be

traced to the delivery of the gasoline and the shipper had control

over delivery. N.Y. Nav. Law § 181 (McKinney 2004). In May

2004, New York brought suit in the Supreme Court of New York

(a trial court) against “all potential dischargers on the site,”

naming Guerrera as a defendant. App. at 295. Neither Guerrera

nor its successor Mystic ever answered the New York complaint.

On June 1, 2004, Mystic filed for bankruptcy in the

United States District Court for the District of New Jersey. In
3

September 2004, Mystic informed New York both that it had

filed for bankruptcy and that it had acquired Guerrera, one of the

defendants in New York’s action. On October 18, 2004, New

York filed a proof of claim against Mystic in the Bankruptcy

Court (Claim Number 161) based on the damages for the cleanup of the contamination. Thereafter, matters proceeded in both

the New York state court and the New Jersey Bankruptcy Court.

In June 2005, New York obtained a default judgment

against Guerrera in its state court action in light of Guerrera’s

failure to file an answer to its complaint. In the same month,

June 2005, Mystic filed objections to New York’s bankruptcy

claim. Mystic alleged that the “claim was based on pre-petition

litigation wherein the Debtor disputed all such liability.” App. at

50. The next month Mystic filed another motion to expunge the

claim, arguing that the claim had been filed late and that even if

the claim were allowed, it would be covered by the insurance

Guerrera had in place when delivering the fuel.

The Bankruptcy Court held a hearing on the claim. 

During this hearing the lawyer representing New York State

argued that the claim had been filed on time and that the claim

should be allowed regardless of whether the insurance

companies were willing to pay. New York also countered

Mystic’s argument that liability was still disputed by pointing out

that a judgment had been entered in the New York state court

action. When Mystic attempted to argue that it had never been

served with the complaint in the New York action, the

Bankruptcy Judge responded:

[B]ut they attached the judgment to their response, so I

can’t set aside the judgment in New York State. I don’t

have the right to do that. We have the Full Faith and

Credit Statute. Federal Courts have to recognize State

judgments. All right? So if you want to attack that

judgment you’ve got to go to New York State . . . .

App. at 23. Thus, the Bankruptcy Court allowed New York’s

Claim Number 161 based on the state court judgment. However,

New York’s additional claim for other cleanup costs (designated
As defined in Black’s Law Dictionary, c.a.v. is an 1

abbreviation for curia advisari vult, meaning “the court will be

advised, will consider, will deliberate.”

4

Claim Number 207) was expunged after New York conceded it

filed that claim late.

Mystic appealed the allowance of Claim Number 161 to

the District Court, which affirmed the decision of the

Bankruptcy Court. The District Court rejected Mystic’s

argument that New York violated the automatic stay by

obtaining the default judgment after it filed the claim in the

Bankruptcy Court. The District Court held New York’s claim

fell within the police power exception to the automatic stay. 

Mystic’s timely appeal of that decision is before us now.

While the case was on appeal, there was a relevant

development in the New York state action. Because New York

had failed to include affidavits establishing the connection

between the gasoline deliveries and the gasoline leak, the New

York Supreme Court, Appellate Division, reversed the state trial

court’s default judgment without prejudice to New York

renewing its application. The parties notified this court and we

held the appeal c.a.v. pending further action in the state court. 

1

New York renewed its motion for default judgment in the state

court action, this time including affidavits establishing the

necessary connection. The New York court again granted the

default judgment over the objection of Mystic. Both parties then

asked that this court reinstate the appeal to the calendar.

II.

Jurisdiction and Standard of Review

This court has jurisdiction to review the decision of the

District Court upholding the decision of the Bankruptcy Court

under 28 U.S.C. § 158(d)(1). The appeal is from a final order

and was timely filed.
5

Mystic raises only legal issues. The legal conclusions of

the District Court and Bankruptcy Court are subject to de novo

review. In re Indian Palms Assocs., Ltd., 61 F.3d 197, 203 (3d

Cir. 1995).

III.

Discussion

Mystic makes only two arguments in its opening brief. It

contends: “(1) The Filing Of The Default Judgment Against The

Debtor Constituted An Attempt to Enforce A Money Judgment

And Therefore Violated The Automatic Stay Arising Under 11

U.S.C. § 362(a),” Appellant’s Br. at 12; and “(2) The Judgment

Is Void Ab Inito [sic] Because New York Violated The

Automatic Stay Arising under 11 U.S.C. § 362(a) And Once

New York Filed A Proof Of Claim New York Submitted To The

Jurisdiction Of The Bankruptcy Court,” Appellant’s Br. at 16. 

As New York points out in its brief, both arguments are soundly

foreclosed by our precedents and by the statutory text.

A. The Automatic Stay

Under the Bankruptcy Code, the filing of a bankruptcy

petition generally “operates as a stay . . . of the commencement

or continuation . . . of a judicial . . . action or proceeding against

the debtor that was or could have been commenced before the

commencement” of the bankruptcy case. 11 U.S.C. § 362(a)(1). 

There are exceptions to this rule, however. One of the principal

exceptions to the automatic stay is for the exercise of police

power, as the Code provides that the stay does not apply to

the commencement or continuation of an action or

proceeding by a governmental unit . . . to enforce such

governmental unit’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 . . . police or regulatory power . . . .
6

11 U.S.C. § 362(b)(4).

Although on its face the default judgment New York

obtained against Guerrera in state court appears to fall within the

police power exception to the automatic stay, Mystic argues that

New York is attempting to enforce a money judgment, which is

expressly excluded from the police power exception (sometimes

referred to as “the exception to the exception”). Mystic views

the New York state default judgment as an attempt to enforce a

money judgment because New York sought the judgment for

money already expended in cleanup. Mystic relies on our

decisions in Penn Terra Ltd. v. Dep’t of Envlt. Res., 733 F.2d

267 (3d Cir. 1984), and United States v. Nicolet, Inc., 857 F.2d

202 (3d Cir. 1988). It misreads those cases. Although both

cases examine the intersection of environmental cleanup costs

and bankruptcy claims, they do not support the proposition for

which Mystic cites them.

In Penn Terra, we considered whether the debtor’s

obligation, pursuant to a pre-petition consent decree to remedy

some of its environmental protection violations incorporated into

a state court injunction order, fell within the exception to the

automatic stay. This court held that an order compelling the

debtor to clean up an environmental hazard was not enforcement

of a money judgment. 733 F.2d at 278. We explained that it is

the enforcement of a money judgment by a seizure or an attempt

to seize a debtor’s property that is proscribed by the automatic

stay.

Penn Terra was followed by Nicolet, which presented

facts nearly identical to those in the present case. The United

States sought to bring to trial its claim to recover the costs it

expended in the cleanup of a hazardous waste site that Nicolet

owned at the time the site was contaminated. 857 F.2d at 202. 

Nicolet contended that because the government sought to secure

a judgment for pre-petition expenditures, it was simply

attempting to collect money, and thus was outside the scope of

the police power. The District Court rejected that argument, and

we agreed. We examined the legislative history of the automatic

stay provision, and noted that both the Senate and House
7

Committee Reports stated that an action by a governmental unit

attempting to fix damages for violation of, inter alia, an

environmental law is not stayed under the automatic stay. We

stated that the police power exception permits “the entry of a

money judgment, but does not extend to permit enforcement of a

money judgment.” Id. at 208 (emphasis omitted) (citing S. Rep.

No. 989, at 52, as reprinted in 1978 U.S.C.C.A.N. at 5838; H.R.

Rep. No. 595, at 343, as reprinted in 1978 U.S.C.C.A.N. at

6299).

In Nicolet, as in this case, the government merely sought

to reduce to judgment its claim for the costs it expended for the

pre-petition site clean-up, an action we held was not one

enforcing a money judgment because the debtor’s property had

not been seized. Nicolet, 857 F.2d at 208. There is no

meaningful distinction between Nicolet and this case. As in

Nicolet, New York’s state court action sought only the entry of a

judgment. New York’s action in obtaining the default judgment

was therefore within the police power exception and was not a

violation of the automatic stay.

This conclusion also requires rejection of Mystic’s

argument that the default judgment is void ab initio because it

was obtained in violation of the automatic stay. As the judgment

was not obtained in violation of the automatic stay, it cannot be

held void ab initio. We therefore hold that the District Court did

not err in rejecting Mystic’s reliance on the automatic stay.

B. Whether the Bankruptcy Court Jurisdiction was Exclusive

In its second argument, Mystic contends that the New

York state court did not have subject matter jurisdiction to issue

the default judgment. Mystic argues that because New York had

submitted its claim to the New Jersey Bankruptcy Court before

New York sought default judgment in the New York state court,

its claim fell within the sole jurisdiction of the Bankruptcy

Court. This argument fails as well.

Before we consider whether the New York state court had

jurisdiction to issue the default judgment, we must first inquire
8

whether we should entertain this argument in light of Mystic’s

apparent failure to raise the issue in the District Court. “This

court has consistently held that it will not consider issues that are

raised for the first time on appeal.” Harris v. City of

Philadelphia, 35 F.3d 840, 845 (3d Cir. 1994). We depart from

this rule, which is one of waiver, only in exceptional

circumstances. Delaware Nation v. Pennsylvania, 446 F.3d 410,

416 (3d Cir. 2006). Although Mystic did argue in the District

Court that the New York state court judgment was void ab initio,

it based its argument entirely on whether the New York court’s

issuance of the default judgment was a violation of the automatic

stay. It did not argue that the Bankruptcy Court had exclusive

jurisdiction over the validity of the claim. Although we could

view this argument as waived, it does trench upon the

jurisdiction of the Bankruptcy Court, which Mystic contends is

exclusive, and we will exercise our discretion to consider

Mystic’s argument. Under the statutory scheme for bankruptcy

matters, established following the decision in N. Pipeline Constr.

Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the district

courts have original jurisdiction in all cases arising under title 11

of the United State Code. 28 U.S.C. § 1334(a). They generally

refer such matters to bankruptcy judges. 28 U.S.C. § 157(a). 

District courts have original, but not exclusive, jurisdiction over

all civil suits related to the bankruptcy filing. 28 U.S.C. §

1334(b). Of note, this section also specifically states,

nothing in this section prevents a district court in the

interest of justice, or in the interest of comity with State

courts or respect for State law, from abstaining from

hearing a particular proceeding arising under title 11 or

arising in or related to a case under title 11.

28 U.S.C. § 1334(c)(1).

It is without a doubt, as Mystic argues, that when New

York filed its proof of claim in the Bankruptcy Court, it

submitted to the jurisdiction of the Bankruptcy Court. It does

not follow that the Bankruptcy Court had exclusive jurisdiction

over all aspects of the claim. No provision of the Bankruptcy

Code requires the Bankruptcy Court to hear all “related to”
9

claims.

New York has not disputed the authority of the

Bankruptcy Court to allow or disallow claims. Indeed, the

Bankruptcy Court in this case allowed Mystic’s Claim Number

161, while disallowing its Claim Number 207. It disallowed

Claim Number 207 without inquiring into the validity of the

claim under state law because it was filed late. As is evident

from the language of 28 U.S.C. § 1334(c)(1), the district courts

may, but are not required to, proceed concurrently with a state

court on some aspects of a bankruptcy claim. Thus, in Penn

Terra, we acknowledged the right of the Pennsylvania state court

to issue its order compelling the debtor to proceed with

remediation of the contaminated site, notwithstanding that the

claim for recovery of the costs was pending in the Bankruptcy

Court. This would not have been possible had the jurisdiction of

the Bankruptcy Court been exclusive.

The issue was succinctly discussed in Sanders v. City of

Brady (In re Brady Mun. Gas Corp.), 936 F.2d 212, 218 (5th Cir.

1991), where the court held that

the only aspect of the bankruptcy proceeding over which

the district courts and their bankruptcy units have

exclusive jurisdiction is “the bankruptcy petition itself.”

See In re Wood, 825 F.2d 90, 92 (5th Cir.1987). In other

matters arising in or related to title 11 cases, unless the

Code provides otherwise, state courts have concurrent

jurisdiction . . . .

As the New York state court had jurisdiction to enter the

default judgment, the Bankruptcy Court properly allowed the

claim.

IV.

Conclusion

For the foregoing reasons, we will affirm the judgment of

the District Court that the Bankruptcy Court properly allowed
10

Claim Number 161.