Opinion ID: 201293
Heading Depth: 2
Heading Rank: 1

Heading: The Complaint Submitted to the Division of Registration

Text: 16 McMullen first contends that the bankruptcy court misapplied Bankruptcy Code § 362(b)(4) in determining that the complaint submitted by the Sevignys before a state regulatory agency— viz., the Board of Registration—could never, as a matter of law, constitute a violation of the automatic stay. She cites authority which states that the bankruptcy court must assess each state agency proceeding on a case-by-case basis in order to determine, inter alia, (i) whether the state places such importance upon the particular regulatory scheme at issue as to outweigh the public policy objectives sought to be served by the automatic stay, and (ii) whether the creditor knew of the pending bankruptcy case, yet either intentionally or in bad faith sought to employ the regulatory proceeding as an end-run to collect its disputed claim outside of bankruptcy. McMullen suggests that the bankruptcy court in this case failed to undertake the requisite fact-specific inquiry. 17 Following an intermediate appeal to the district court, the findings of fact arrived at by the bankruptcy court are independently reviewed by the court of appeals for clear error; its conclusions of law de novo. See In re Charlie Auto Sales, Inc., 336 F.3d 34, 37 (1st Cir.2003). 18 Subsection 362(a) of the Bankruptcy Code ordains that a bankruptcy petition shall operate as an automatic stay of the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor. Bankruptcy Code § 362(a)(1); 11 U.S.C. § 362(a)(1). By thus safeguarding the debtor estate from piecemeal dissipation, the automatic stay efficiently ensures that the assets remain within the exclusive jurisdiction of the bankruptcy court pending their orderly and equitable distribution among the creditors, better enabling the debtor's fresh start. See In re Jamo, 283 F.3d 392, 398 (1st Cir.2002) (The automatic stay is one of the fundamental protections that the Bankruptcy Code affords to debtors.). 19 Nonetheless, although the Code accords broad scope to the automatic stay, it expressly excepts certain postpetition proceedings from the operation of the stay, including any action brought before a governmental regulatory agency to enforce its police or regulatory powers. See Bankruptcy Code § 362(b)(4), 11 U.S.C. § 362(b)(4). This exception discourages debtors from submitting bankruptcy petitions either primarily or solely for the purpose of evading impending governmental efforts to invoke the governmental police powers to enjoin or deter ongoing debtor conduct which would seriously threaten the public safety and welfare ( e.g., environmental and/or consumer protection regulations). See In re First Alliance Mortgage Co., 263 B.R. 99, 107 (BAP 9th Cir.2001) (noting that fundamental policy of § 362(b)(4) is to prevent[] the bankruptcy court from becoming a `haven for wrongdoers') (citation omitted); see also H.R.Rep. No. 95-595, pt. 1, at 343 (1977); S.Rep. No. 95-989, pt. 2, at 51-52 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5836, 5963, 6299. Nevertheless, given the expansiveness of subsection 362(a), the exception contained in subsection 362(b)(4) is to be narrowly construed. See Corporacion de Servicios Medicos Hospitalarios de Fajardo v. Mora ( In re Corporacion de Servicios Medicos Hospitalarios de Fajardo ), 805 F.2d 440, 447 (1st Cir. 1986). 20 To that end, the courts have devised two interrelated, fact-dominated inquiries —the so-called public policy and pecuniary purpose tests—for assessing whether a particular governmental proceeding comes within the subsection 362(b)(4) exception. See In re Spookyworld, Inc., 346 F.3d 1, 9 (1st Cir.2003); Corporacion de Servicios, 805 F.2d 440, 445 n. 4; In re Mohawk Greenfield Motel Corp., 239 B.R. 1, 6 (Bankr.D.Mass.1999). These inquiries contemplate that the bankruptcy court, after assessing the totality of the circumstances, 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. See id.; In re Fitch, 123 B.R. 61, 63 (Bankr.D.Idaho 1991). 21 Tested against these criteria, there can be little doubt that the Board proceeding brought against McMullen in the instant case is excepted from operation of the automatic stay by virtue of Bankruptcy Code § 362(b)(4). The complaint alleged that McMullen, acting as a licensed real estate broker, improperly retained the cash deposit made by the Sevignys during the course of the aborted real estate transaction. State law expressly empowers the Board to suspend, revoke, or refuse to renew a real estate broker license where the broker has failed, within a reasonable time, to account for or remit any moneys belonging to others which have come into his possession as a broker or salesman. Mass. Gen. Laws ch: 112, § 87AAA(d); see 254 C.M.R. § 3.00(10)(a) ([A] broker shall be responsible for such money until the transaction is either consummated or terminated, at which time a proper account and distribution of such money shall be made.). 22 Consequently, we next inquire whether subsection 362(b)(4) contemplates that the state power to regulate the licensure of real estate brokers is designed to advance a sufficiently important public policy so as to trump the competing interests fostered by the automatic stay. The state power of licensure, which safeguards the public from wrongful future conduct of corrupt or incompetent professionals, falls squarely within the purview of the subsection 362(b)(4) exception to the automatic stay. See S.Rep. No. 95-989, at 52 (1978), reprinted in 1978 U.S.C.C.A.N. 5838 ([Section 362(b)(4)] excepts ... governmental units ... suing a debtor to prevent or stop violation of fraud, environmental protection, [or] consumer protection. ) (emphasis added); see also, e.g., Thomassen v. Div. of Med. Quality Assurance ( In re Thomassen ), 15 B.R. 907, 909 (BAP 9th Cir.1981) (observing that revocation of medical license for medical malpractice and professional incompetence protects public); Dep't. Disciplinary Comm. for the First Judicial Dep't ( In re Friedman & Shapiro, P.C. ), 185 B.R. 143, 145 (S.D.N.Y.1995) (same, concerning revocation of license to practice law); Fitch, 123 B.R. at 63 (noting that insurance license revocation proceedings were designed to punish [the licensee] for his alleged fraudulent conduct, and to deter others from engaging in such activities, rather than to attempt to recover any alleged misappropriated funds or to recompense any insurers); Christmas v. Md. Racing Comm'n ( In re Christmas ), 102 B.R. 447, 460-81 (Bankr.D.Md.1989) (concerning revocation of horse trainer's license); Beker Indus. Corp. v. Fla. Land and Water Adjudicatory Comm'n ( In re Beker Indus. Corp. ), 57 B.R. 611, 631 (Bankr.S.D.N.Y.1986) (involving revocation of license to transport phosphate rock). More specifically, these same policy considerations are cited in relation to the revocation or suspension of the licenses of real estate brokers or salesmen. See, e.g., Sam Daily Realty, Inc. v. Dep't. of Commerce and Consumer Affairs, State of Hawaii ( In re Sam Daily Realty, Inc. ), 57 B.R. 83, 85-86 (Bankr.D.Haw.1985) (holding that state real estate commission's suspension of realtor's license and imposition of $5,000 fine were exempt from stay pursuant to § 362(b)(4), because the commission's interest in this matter is in punishing misconduct and preventing future acts of the type [the licensee] has been accused); cf. Granger v. Harris ( In re Harris ), 85 B.R. 858, 863 (Bankr.D.Colo. 1988) (same, distinguishing punitive fines against realtor from compensatory awards). Further, the Board's power to revoke or suspend realtor licenses plainly implements Commonwealth policy. See Greater Boston Real Estate Bd. v. Bd. of Registration of Real Estate Brokers & Salesmen, 405 Mass. 360, 540 N.E.2d 1313, 1315 n. 7 (1989) (The conduct described in [Mass. Gen. Laws ch. 112, § 87AAA(d)] clearly relates to discipline and to acts which are either criminal or against public policy. ) (emphasis added). 23 Although it is conceivable that a state might assert a public-policy purpose in order to mask some improper pecuniary aim, see In re North, 128 B.R. 592, 602 (Bankr.D.Vt.1991), most assuredly this case is not such an instance, since neither the Commonwealth nor the Board could have any conceivable pecuniary interest in property of the McMullen chapter 7 estate or chapter 13 estate. See Spooky-world, 346 F.3d at 9 (noting that government had no pecuniary interest in enforcing building code). Although it is alleged that the Sevignys harbored such a pecuniary interest in the recovery of their deposit from McMullen's funds, the suspension, revocation, or refusal to renew a real estate broker license are the only enumerated powers accorded the Board. See Mass. Gen. Laws ch. 121, § 87AAA(d). 1 Hence, the Board was neither empowered to compel McMullen to repay the deposit to the Sevignys, nor to award any other restitutionary remedy. See id. (Any person whose licensure is suspended or revoked shall also be liable to such other punishment as may be provided by law.). 2 Finally, even if the Board were so empowered, it did not order such relief, but instead ultimately dismissed the Sevigny complaint on the merits. Cf. Bd. of Governors of Fed. Reserve Syst. v. MCorp. Fin., Inc., 502 U.S. 32, 41, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991) (noting that order for money judgment may be entered in a proceeding, as long as it is not enforced, and the mere possibility that proceedings ultimately have some effect on the property of the bankrupt estate does not make subject to the automatic stay a proceeding which is otherwise exempt from stay under section 362(b)(4)). Thus, the disciplinary proceeding before the Board was designed to serve—and did in fact principally serve— to protect the public in the future, rather than to seek recompense for the alleged financial losses sustained by the Sevignys. 24 Citing In re Byrd, 256 B.R. 246 (Bankr. E.D.N.C.2000), McMullen maintains that the above-cited cases are apposite only if the proceedings are initiated by the government, whereas the Board proceedings commenced with the Sevignys' postpetition filing of a verified complaint. See Mass. Gen. Laws ch. 121, § 87AAA. In Byrd, the court stated that a private third party may lodge a prepetition criminal complaint against a debtor, and any post-petition proceeding on that complaint would still be exempt from the automatic stay under subsection 362(b)(4), even if the proceeding were designed to recover a private debt. See Byrd, 256 B.R. at 251. On the other hand, the court opined that once the bankruptcy petition has been filed the third party cannot approach governmental authorities with a complaint, and any proceedings based upon that postpetition complaint would be stayed. Id. 25 Byrd is readily distinguishable. First, the Byrd complaint involved a criminal proceeding, which implicated unique federal-court abstention issues. See id. at 250 (We maintain the `deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.' This rule reflects a `fundamental policy against federal interference with state criminal prosecutions.') (citations omitted). 26 Even more importantly, the second prong of the Byrd rule—whether or not it offers a sound interpretation of subsection 362(b)(4)—is mere dicta, since the complainants in Byrd had lodged their complaint before the debtor filed for bankruptcy, and the court held that the proceedings on the complaint were not stayed. Id. at 256. 3 Thus, Byrd does not support the McMullen contention that postpetition proceedings initiated by a private party are outside the subsection 362(b)(4) exception to the automatic stay. See Municipality of San Juan v. Rullan, 318 F.3d 26, 28 n. 3 (1st Cir.2003) (Dicta—as opposed to a court's holdings—have no binding effect in subsequent proceedings in the same (or any other) case.). 27 The last statement in Byrd is not only dicta, but in our view, overbroad. A private party's reporting of wrongful conduct to governmental regulatory authorities is neither the commencement of a proceeding under subsection 362(a)(1), nor necessarily an act to collect under subsection 362(a)(6). Although we broadly construe the automatic stay in many contexts, the same sound public policy reasons which undergird the subsection 362(b)(4) exception counsel against any rule which might dissuade private parties from providing governmental regulators with information which might require enforcement measures to protect the public from imminent harm. McMullen surmises that the Sevignys' Board complaint was motivated by their desire to force McMullen into repaying the alleged debt, but the Sevignys made no postpetition threat to file a complaint which might constitute an act to collect under § 362(a)(6), cf. In re Diamond, 346 F.3d 224 (1st Cir.2003), 4 nor was the continued prosecution of the Board proceeding made contingent on whether McMullen repaid the deposit, cf. In re Massenzio, 121 B.R. at 692; see supra note 2. 28 Additionally, McMullen argues that even if these sorts of professional licensing proceedings normally are not stayed by subsection 362(b)(4), the instant case differs in that the Sevignys submitted their complaint in bad faith. Although we have yet to decide this issue on its merits, we have noted in dicta the tenuousness of the arguments for engrafting such a bad faith exception onto subsection 362(b)(4), noting the emergent rule that bankruptcy courts should not inquire into the `legitimacy' of ongoing administrative enforcement proceedings in determining whether the police power exception applies to them. See Spookyworld, 346 F.3d at 9-10 & n. 5 (noting that plaintiff alleged that government acted vindictively in closing down its park due to fire code violations) (citing In re Javens, 107 F.3d 359, 365-67 & n. 6 (6th Cir.1997)); see also Beker Indus. Corp., 57 B.R. at 631. Whether or not bad faith is alleged on the part of the regulators or of the complainants, such an exception would immerse the bankruptcy courts in `mini-trials of purely state regulatory issues,' which are far better left to the state courts through recourse to available state-law remedies. See Spookyworld, 346 F.3d at 9-10. 29 In any event, even if we were to decide, as a matter of law, that a bad faith exception is available, the record facts in the instant case amply warrant the bankruptcy court finding of fact that the Sevignys did not submit their Board complaint in bad faith. Whether a party has acted in bad faith constitutes a quintessential issue of fact, which must be determined by the factfinder following an examination of the totality of the circumstances. See Official Unsecured Creditors Comm. v. Stern ( In re SPM Mfg. Corp. ), 984 F.2d 1305, 1316-17 (1st Cir.1993) (The bankruptcy court, not the district court or court of appeals, is the only tribunal equipped to make evidentiary findings on relevant factual matters such as whether the parties acted in bad faith.); Palmacci v. Umpierrez, 121 F.3d 781, 788-89 (1st Cir.1997); In re Harris, 279 B.R. 254, 262 (BAP 9th Cir.2002). The findings of fact determined by the bankruptcy court are reviewed for clear error only, with `due regard ... to the opportunity of the bankruptcy court to judge the credibility of witnesses,' In re Carp, 340 F.3d 15, 21-22 (1st Cir.2003) (citation omitted). See, e.g., N. Light Tech., Inc. v. N. Lights Club, 236 F.3d 57, 64 (1st Cir.2001) (undertaking clear error review of bad faith finding). Accordingly, such findings of fact are not to be disturbed if supportable on any reasonable view of the record, viz., `unless, on the whole of the record, we form a strong, unyielding belief that a mistake has been made.' Carp, 340 F.3d at 22 (citations omitted). 30 McMullen points to the following record evidence, as compelling a finding that the Sevignys acted in bad faith, inter alia: the Sevignys (i) did not inform the Board regarding McMullen's pending chapter 13 case; (ii) falsely alleged before the Board that McMullen (rather than Lestor Pryor) had received and held their deposit; and (iii) gave the Board only the 1997 purchase and sales agreement, which named McMullen as the escrow agent, and did not submit the 1998 superseding agreement, which named a different agent. None of the record evidence cited by McMullen even remotely suffices to establish clear error. 31 First, the bankruptcy court explicitly held that the Sevignys did not conceal the McMullen bankruptcy case from the Board. The Sevignys testified at the bench trial that the reason they did not inform the Board of the McMullen bankruptcy was that they believed at the time they filed their Board complaint that the McMullen bankruptcy proceedings were no longer active. The Sevignys also testified that: (i) they did not understand how their deposit, which McMullen simply held in escrow, could become property of her bankrupt estate; 5 (ii) they interpreted their attorney's June 13, 2000 notification —that the McMullen chapter 7 case was being converted to chapter 13—to mean that the McMullen bankruptcy case was being withdrawn, viz., that it was being terminated; (iii) they were unable to contact their attorney after receiving his letter to ask him followup questions, and eventually had to discharge him; (iv) they received no further notices from the bankruptcy court, possibly because the creditor matrix in the McMullen bankruptcy case did not list their correct address; and (v) neither Richard not Lori Sevigny is an attorney, nor are they otherwise knowledgeable about bankruptcy law or terminology. 32 Second, the Sevignys testified that at the time they filed their complaint with the Board they did not know that Lester Pryor had their deposit. The reverse side of the deposit check did reflect that Pryor had endorsed the check, and listed an account number, but the Sevignys had no way of knowing that the listed bank account was that of Pryor, and they assumed that Pryor might have endorsed the check and that McMullen had deposited it into the escrow account without adding her own endorsement. Indeed, the purchase and sales agreement designated McMullen as the custodian of the deposit. 33 Finally, Richard Sevigny testified that he submitted the original purchase and sales agreement to the Board in the belief that it contained the same terms as the superseding purchase and sales agreement, that he had not realized that the superseding agreement contained the new term which designated a United Realty as the escrow agent, and hence that he had not acted with any intent to conceal that provision from the Board. 34 As each of these findings turns primarily upon the factfinder's assessment of the credibility of the Sevignys' plausible explanations, we can discern no clear error on the present record. See Carp, 340 F.3d at 21-22. Thus, even if we were to assume that subsection 362(b)(4) might allow for a bad faith exception, the McMullen claim must fail.