Opinion ID: 506230
Heading Depth: 2
Heading Rank: 2

Heading: the police power exception

Text: 17 The courts below ruled that the state's review of the assessment against Commerce was an action on a claim stayed by 11 U.S.C. Sec. 362(a)(1), but that the state's consideration of remedial measures and injunctive relief was within the police power exception to the automatic stay. We disagree with the lower courts' views for several reasons. 18 First, although the provisions of the automatic stay contained in 11 U.S.C. Sec. 362 are quite broad, the automatic stay is not all-encompassing. In particular, Sec. 362(b)(4) and 362(b)(5) of the automatic stay except both the commencement or continuation of an action or proceeding and the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory powers from the automatic stay. 11 U.S.C. Sec. 362(b)(4) and (5). Sections 362(b)(4) and (5) comprise the so-called police power exception to the automatic stay. 19 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. As explained in the House Report on Sec. 362(b)(4) and (5): 20 Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory power. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay. Paragraph (5) makes clear that the exception extends to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment. 21 S.Rep. No. 95-989, 95th Cong., 2d Sess. 52 (1978), reprinted in [1978], U.S. CODE CONG. & AD.NEWS 5787, 5838; H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 343 (1977), reprinted in [1978] U.S.CODE CONG. & AD.NEWS 5963, 6299 (emphasis added). Taking cognizance of the clearly expressed legislative intent of Congress, In re Arnett, 731 F.2d 358, 360 (6th Cir.1984), we have recognized that damages for civil liability may be assessed under section 362(b)(4) for violation of state and federal laws. See e.g., NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 942-43 (6th Cir.1986); U.S. v. Jones & Laughlin Steel Corp., 804 F.2d 348, 351 (6th Cir.1986); In re Kovacs, 717 F.2d 984, 988 (6th Cir.1983), aff'd sub nom Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985). We find these cases persuasive precedent in the present matter. 22 Second, we find that the actions of the state in this case were regulatory in nature and therefore fall within the police power exception to the automatice stay. As recognized by the bankruptcy court in In re Wellham, 53 B.R. 195 (Bankr.M.D.Tenn.1985), and as noted by this court in NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir.1986), there are two tests for determining whether an action by a governmental unit falls within the automatic stay or is excepted under the police power exception: the pecuniary purpose test and the public policy test. Under the pecuniary purpose test, reviewing courts focus on whether the governmental proceeding relates primarily to the protection of the government's pecuniary interest in the debtors property, and not to matters of public safety. Those proceedings which relate primarily to matters of public safety are excepted from the stay. Under the public policy test, reviewing courts must distinguish between proceedings that adjudicate private rights and those that effectuate public policy. Those proceedings that effectuate a public policy are excepted from the stay. NLRB v. Edward Cooper Painting, Inc., at 942. Under either test, the state's actions should have been stayed under 11 U.S.C. Sec. 362 if the state was seeking a monetary sum merely as collection of a debt or as compensation for reclamation it had already performed. 23 The state's actions in this case have not been undertaken for primarily pecuniary purposes. Neither the initial assessment, nor the administrative review of the assessment was primarily an adjudication of private rights or interests in the debtor's estate. The statute under which Tennessee assessed penalties here, the Tennessee Water Quality Control Act, TENN.CODE ANN. Sec. 69-3-101 et seq. (the Act), is primarily remedial in nature. See Big Fork Min. Co. v. Tenn Water Quality Ctrl. Bd., 620 S.W.2d 515, 519-20 (Tenn.App.1981). The express purpose of the Act is 24 to abate existing pollution of the waters of Tennessee, to reclaim polluted waters, to prevent the future pollution of the waters, and to plan for the future use of the waters so that the water resources of Tennessee might be used and enjoyed to the fullest extent consistent with the maintenance of unpolluted waters. 25 TENN.CODE ANN. Sec. 69-3-102(b). Under Sec. 69-3-116(c) damages may be assessed for violation of the Act to cover the costs involved in investigating and enforcing the law and in removing, correcting or terminating any pollution. See TENN.CODE ANN. Sec. 69-3-116(c). Under Sec. 69-3-115(a)(2)(D), penalties for violation of the Act may be assessed in light of such factors as whether the penalty imposed will be a substantial economic deterrent to the illegal activity, the amount of damage to the environment and costs of rectifying such damage, the cost of enforcing the law, the severity of the discharge, the effect of the discharge on the receiving waters, the technical and economic reasonableness of reducing or eliminating the discharge and the social and economic value of the discharge source. See TENN.CODE ANN. Sec. 69-3-115(a)(2)(D)(i)-(viii). 26 We do not find the rationale, policy and factors expressed in the Tennessee Water Quality Control Act to be based upon the state's ownership of or pecuniary interest in the natural resources of Tennessee. Punishing wrongdoers, deterring illegal activity, recovering remedial costs of damage to the environment, providing for the costs of administration and weighing the social and economic value of a discharge source are exercises of the state's regulatory power to effectuate public policy and are not actions based upon the state's property interests. Likewise removing, correcting or terminating pollution and determining the severity and effect of discharges on the receiving waters are actions to protect the public health and safety, and are not grounded upon the state's property interests. 27 The proprietary or pecuniary reward in assessing penalties under the Act is apparently of only secondary importance to the state. In this regard, although the state contends that if may fix civil liability under Sec. 362(b)(4), it concedes that it may not collect any penalties assessed or any judgment entered by the Board. The state likewise concedes that even if it had been allowed to fix fines and penalties in this case, that it still would have to pursue its claim subject to the jurisdiction of the bankruptcy court. Furthermore, the state points out that any money eventually collected from Commerce for violation of the Act must be placed in a special fund used only for administration of the act and restoration and maintenance of the environment. See TENN.CODE ANN. Sec. 69-3-119. 4 Given the state's position, it is difficult to see what pecuniary advantage the state sought to gain in the debtor's estate or what pecuniary purpose would be served by assessing civil liability against Commerce. 28 We find nothing in the state's review of the Commissioner's assessments which would convert the state's proceedings into an action primarily designed to protect a pecuniary interest. The state proceeding concerned here was an adjudicatory review of the damages and penalties assessed against Commerce by the Commissioner under TENN.CODE ANN. Secs. 69-3-107 and 69-3-115. The primary purpose of the hearing was to determine whether and to what extent the Tennessee Water Quality Control Act was violated and to review the damages and penalties assessed by the Commissioner in light of those violations. See TENN.CODE ANN. Secs. 69-3-105(f); 69-3-109(a)(3). This was a regulatory action in the purest sense. We conclude therefore that both the state's initial assessment and the state's review of the assessment were actions to enforce Tennessee law within the meaning of Sec. 362(b)(4). 29 Finally, Commerce warns us that if we hold assessment proceedings within the police power exception to the automatic stay, we will cause needless and unintended expenditure of estate resources because debtors will have the burden of petitioning the bankruptcy court for a stay of the proceedings under 11 U.S.C. Sec. 105(a) to protect the estate. We do not agree with Commerce that requiring the debtor to use Sec. 105 to protect the bankrupt estate from state administrative proceedings imposes any unintended or undue burden on the estate. See S.REP. NO. 95-987, 95th Cong., 2d Sess. 51 (1978), reprinted in [1978] U.S. CODE CONG. & AD.NEWS 5787, 5837; H.R.REP. NO. 95-595, 95th Cong., 1st Sess. 342 (1977), reprinted in [1978] U.S.CODE CONG. & AD.NEWS 5963, 6298 (By excepting an act or action from the automatic stay, the bill simply requires that the trustee move the court into action, rather than requiring the stayed party to request relief from the stay.). Moreover, we decline to adopt Commerce's premise that preservation of the debtor's estate is of greater priority in the statutory scheme set forth by Congress in Title 11 than is the enforcement of environmental protection laws explicitly intended to be excepted from the automatic stay. The plain meaning, the structure and the policy behind Sec. 362(b) all indicate otherwise. See Commodity Futures Trading Comm. v. Co Petro Marketing, 700 F.2d 1279, 1283 (9th Cir.1983) (The policy behind this 'police or regulatory exception' to the automatic stay is to prevent the bankruptcy court from becoming a haven for wrongdoers.). 30 For the foregoing reasons, we hold that the Tennessee Water Quality Control Board's proceedings to fix civil liability under the Tennessee Water Quality Control Act of 1977 are within the Sec. 362(b)(4) exception to the automatic stay in bankruptcy. We hereby reverse and vacate the lower courts' rulings.