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Bankr. E.D.N.C.: In re Taylor- Private Citizens Enforcing Federal Statutes Not Exempt from the Automatic Stay as Governmental Units

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By Ed Boltz, 25 August, 2017
Summary: In a case involving a hog farm and related claims of environmental pollution, Sound Rivers, Inc.’s and Waterkeeper Alliance, Inc. sought an order confirming that the automatic stay does not apply or, in the alternative, for relief from the automatic stay in order to continue their lawsuit filed in the federal district Court. The Movants contended that the automatic stay does not apply with respect to the district court lawsuit under the governmental regulatory exclusion to the stay at § 362(b)(4), which provides that the automatic stay does not preclude the continuation of an action “by a governmental unit…to enforce such governmental unit’s … police and regulatory power….” While admittedly not “governmental units in the most narrow and traditional definition,” the Movants argue that private citizens bringing compliance suits pursuant to a government unit’s “police power” may constitute “governmental units” for purposes of §362(b)(4) if the law giving rise to the action are for the “public safety and welfare,” See Universal Life Church, Inc. v. United States (In re Universal Life Church, Inc.), 128 F.3d 1294, 1297 (9th Cir. 1997), or to “effectuate public policy,” NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 942 (6th Cir. 1986). The bankruptcy court instead held that reliance on the plain language of the Bankruptcy Code, which specifically defines “governmental unit” at 11 U.S.C. § 101(27), and the legislative history, which is devoid of any reference to private citizens acting on behalf of the government. See United States ex rel. Kolbeck v. Point Blank Solutions, Inc., 444 B.R. 336, 339 (Bankr. E.D. Va. 2011), to be “the better-reasoned view”. This was “buttressed by a generally accepted policy in favor of upholding the stay, and reading any exclusions narrowly. See, e.g., In re McMullen, 386 F.3d 320, 325 (1st Cir. 2004). In deciding whether to grant relief from the stay to allow the district court lawsuit to proceed, the bankruptcy court, following In re Robbins, 964 F.2d 342, 345 (4th Cir. 1992), looked to the following factors: (1) only issues of state law are involved; (2) judicial economy will be protected; (3) the litigation will not interfere with the bankruptcy case; and, (4) the estate can be protected by requiring that any judgment be enforced only through the bankruptcy court. In evaluating these, the bankruptcy court found it “particularly telling, and not surprising” neither state nor federal authorities have intervened in either the district court or bankruptcy cases. Further, allowing the lawsuit to proceed would preclude confirmation of the plan, resulting in a likely liquidation of the estate, which is not in the interests of the Taylors, the bankruptcy estate, or their creditors. Accordingly, the court held that the “prejudice to the debtors if the stay is modified and the movants are allowed to continue the district court lawsuit far outweighs that which would be experienced by the movants if the stay remains in effect” and denied the requested relief from the automatic stay. Commentary: It is impossible not to comment that this is a case that runs contrary to the bankruptcy dictum “porcelli pinguescunt, sues trucidantur”, as here the hog farmer did not get slaughtered. As the FDCPA and most other state and federal consumer protection statutes are built of the premise that private citizens are, at least in part, acting as “private attorney generals”, this is a holding that could divide bankruptcy attorneys, for whom the automatic stay is sacrosanct, and consumer rights lawyers, seeking to continue actions against bankrupt debtors, which often include mortgage servicers, debt collectors, etc. For a copy of the opinion, please see: Taylor- Private Citizens Enforcing Federal Statutes Not Exempt from the Automatic Stay as Governmental Units  

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