An array of policy considerations are embodied in the Bankruptcy Code and its treatment of "governmental units." For example, §362(b)(4) provides that the automatic stay does not apply to the exercise of the "police and regulatory power of a governmental unit." Section 106 provides that "sovereign immunity is abrogated as to a governmental unit" as set forth in that section. Section 523(a)(7) provides an exception to the discharge of individual debtors for certain debts payable to "governmental units." Section 525(a) provides that a "governmental unit" may not discriminate against persons solely because of a bankruptcy or pre-bankruptcy insolvency.

In order to effectuate these and other provisions of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, it is necessary to determine whether the acting organization is a "governmental unit." Governmental unit is defined in §101(27) of the Bankruptcy Code as the

United States, state, commonwealth, district, territory, municipality, foreign state, department, agency or instrumentality of the United States (but not a U.S. Trustee while serving as a trustee in case under this title), a state, a commonwealth, a district, a territory, a municipality or a foreign state; or other foreign or domestic government.

The Bankruptcy Code also provides that a "governmental unit" is an "entity," but in most cases, is not a "person."¹ The legislative history states an intention to define

"governmental unit" in the broadest sense... "Department, agency or instrumentality" does not include entities that owe their existence to state action, such as the granting of a charter or license, but that have no other connection with a state or local government or the federal government. The relationship must be an active one in which the department, agency or instrumentality is actually carrying out some government function.²

"United States," "state," "district" and "territory" are relatively unambiguous manifestations of the government. At the level of "department," "agency" and "instrumentality," however, the definitional line begins to blur, and additional analysis is necessary. Courts have held that utility commissions,³ transit authorities,⁴ liquor authorities⁵ and state universities⁶ are "governmental units." Private organizations that are wholly or in part funded by public funds have been found not to be "governmental units."⁷

Some case law intimates that an organization may be a "governmental unit" for some purposes and not others.⁸ In Wade v. State Bar of Arizona (In re Wade), 948 F.2d 1122, 1123-24 (9th Cir. 1991), the appeals court for the Ninth Circuit affirmed Bankruptcy Appellate Panel (BAP) and bankruptcy court decisions that found that the State Bar of Arizona was not stayed, as a "governmental unit" under §362(d)(4), from instituting post-petition disciplinary proceedings against a debtor attorney. The state bar acknowledged that it was not a "governmental unit" in every instance, but persuasively argued that the prosecution of disciplinary proceedings made the bar an "instrumentality" of the Arizona Supreme Court, and thus, a "governmental unit." Id. at 1123.

In support of its decision, the Wade appeals court noted that the U.S. Supreme Court had held that the State Bar of Arizona engaged in "state action" in the conduct of disciplinary proceedings in Bates v. State Bar of Arizona, 433 U.S. 350, 359, 97 S. Ct. 2691, 2696, 53 L.Ed.2d 810 (1977).⁹ Although the Supreme Court's "state action" analysis in Bates arose in a non-bankruptcy context, courts routinely look to non-bankruptcy case law, policy and legislation to determine "governmental unit" status for purposes of §101(27) of the Bankruptcy Code.

The "Important Government Function" Test

In TI Federal Credit Union v. DelBonis, 72 F.3d 921 (1st Cir. 1995), the First Circuit Court of Appeals examined the question of whether a federal credit union was an "instrumentality" and a "governmental unit" for the purpose of determining the dischargeability of student loans pursuant to §523(a)(8) of the Bankruptcy Code.¹⁰ Finding no "settled process" for its analysis, the appeals court undertook an approach based on a "combination of statutory interpretation, case law and consideration of the factors relevant to federal instrumentality determination." Id. at 931.

The paramount consideration articulated by the DelBonis court was whether the entity in question "performs an important governmental function."¹¹ The appeals court, drawing from a variety of sources, reviewed in detail the history of the Federal Credit Union Act, and the multifarious salutary purposes served by federal credit unions, including the provision of credit to the working class and as "fiscal agents of the United States and depositories of public monies." Id. at 931-32. The court noted that for decades, federal court decisions had recognized the importance of the functions served by credit unions in a variety of contexts. Id. at 931-35. Tax exemption, and extensive federal regulation, also weighed in favor of federal credit union status as a federal "instrumentality."¹² The appeals court acknowledged the similarities between modern credit unions and private banks, but rejected the debtor's argument that such similarities precluded a finding that federal credit unions "perform a predominantly governmental purpose." Id. at 933.

Interestingly, the DelBonis court did not conclude its analysis upon finding that federal credit unions are government "instrumentalities." The court went on, in some detail, to determine whether "treating federal credit unions as...governmental units is consistent with purposes of 11 U.S.C. §523(a)(8)." Id. at 935-36. The court opined at length on the merits of the exception to dischargeability set forth at §523(a)(8) of the Code, and the importance of maintaining the viability of federal student loan programs, and found that its conclusions were consistent with the purposes of the Code as indicated by Congress. Id. at 935-38.

Like Wade, the DelBonis analysis embraces the concept that an organization may be a governmental unit for some purposes, but not others. The DelBonis court went further, however, and was willing to examine the validity of the governmental unit designation when the "purpose" in question was the effectuation of a provision of the Bankruptcy Code.

The Question of "State Action"

As noted above, the Wade court made a brief reference to "state action" jurisprudence. Other courts have apparently been less willing to engage the substantial and complex body of "state action" law arising in the federal constitutional context to resolve "governmental unit" questions under the Bankruptcy Code. Indeed, "state action" opinions have been criticized for having the appearance of being "outcome determinative."¹³

In 2001, the U.S. Supreme Court decided Brentwood Academy v. Tennessee Secondary School Athletic Association.¹⁴ In Brentwood, the Supreme Court attempted to clarify the analytical framework for deciding "state action" questions. Justice Souter, writing for the majority, noted that "state action" has been traditionally found under three scenarios: first, when the actor is beholden to the "coercive power" of the state; second, when the actor has been tasked with a "public function" of the state; and third, when the actor is "entwined with governmental policies...management or control."¹⁵ Following Brentwood, at least one bankruptcy court has taken up the challenge of directly relating traditional "state action" principals to the question of "governmental unit" status.

In In re Marcano, 288 B.R. 324 (Bankr. S.D.N.Y. 2003), the U.S. Bankruptcy Court for the Southern District of New York consolidated, for purposes of a memorandum opinion, a pair of cases with similar issues. Both individual debtors treated in the opinion argued that their separate landlords were "governmental units," and thus the landlords' eviction attempts based on failure to pay pre-petition dischargeable rent were in violation of §525(a) of the Code.

Both cases implicated In re Stoltz, 315 F.3d 80, 90 (2d Cir. 2002), in which the Second Circuit Court of Appeals, applying §525(a), held that a governmental unit may not evict a tenant from public housing solely for failure to pay dischargeable pre-petition rent. The question in both Marcano cases was whether the landlord was a "governmental unit" for purposes of §525(a).

The Marcanos were an elderly couple with a social security income renting a residence in a building owned by the city. Marcano, 288 B.R. at 326. Under a city-sponsored renewal program, the building's residents had formed a private tenant's association (TA) to lease the building from the city, and to take on the responsibility for its maintenance and management. Id. at 326-27. Thus, the TA acted as landlord for the property. Pursuant to the city's renewal program, the TA had the option of purchasing the building from the city, but had not done so. Id. at 327.

The TA obtained a warrant for eviction against the Marcanos for failure to pay rent. Id. Execution of the warrant, however, was stayed pursuant to a stipulation between the parties that required the Marcanos to make payments. Id. At that point, Mr. Marcano filed a petition for relief under chapter 7. Id. Marcano argued that the TA was a governmental unit by virtue of the city's "control and influence" over the TA under the city's renewal program, and thus, following Stoltz, his eviction for non-payment of pre-petition dischargeable rent was improper under §525(a) of the Code. Id.

The Marcano court, citing Brentwood, characterized Marcano's argument as falling under the concept of "entwinement." Id. at 334. The court noted that although the landlord TA was ostensibly a private entity, the city's renewal program provided a highly regulated framework for the TA's activities. Id. at 334-35. These activities were intricately supervised by the city or a city agency at several levels, including the setting of rents, access to tenant bank accounts, rights of physical access and an approval requirement for any sale of the property. Id.

Moreover, the Marcano court noted that other courts had found that private tenant associations organized under the city's renewal program were subject to constitutional restraints as "state actors," entitling tenants to due-process protections in the non-bankruptcy context. Id. at 335. The Marcano court found that "[u]nder these cases, where the state is so clearly 'entwined' with the tenant association that the tenant has a right to due process before being evicted, it would be anomalous to conclude that the TA is not a 'governmental unit' for purposes of the anti-discrimination provisions of §525(a)." Id.

In the second matter decided in the Marcano opinion, another elderly tenant with a social security income, Gayle, was faced with eviction and filed a petition for chapter 7 relief. Id. at 328-29. Gayle lived in a dormitory-style residence designed primarily to "alleviate the problem of homelessness" in New York City. Id. at 328. The residence was owned and operated by landlord Volunteers of America Inc. (VOA), a private faith-based organization. Id. VOA's activities were overwhelmingly funded from government sources. Id.

Gayle argued that the VOA, as the largest provider of homeless services in New York City, performed a "public function," and thus was a governmental unit subject to the restrictions set forth under §525(a) of the Bankruptcy Code. Id. at 334. The Marcano court found that Gayle's position predominantly fell within Brentwood's "public function" test for determining "state action." Id.

The Marcano court, citing Rendell-Baker v. Kohn, 457 U.S. 830, 102 S. Ct. 2764, 73 L.Ed.2d 418 (1982), first noted that the mere performance of a "public function" by an organization did not support a finding of "state action" unless the function in question has been "traditionally the exclusive prerogative of the state."¹⁶ Thus, the VOA's receipt of public funds was not determinative, nor was its tax-exempt status. Marcano, 288 B.R. at 336-37. The Marcano court acknowledged that shelter was of "critical importance to life and health," but also stated that "housing is not a function essentially reserved for the state."¹⁷ Concluding that VOA's important public services were nonetheless not "exclusive" state functions, the court held that VOA was not a governmental unit, and Gayle's eviction could proceed notwithstanding §525(a) of the Bankruptcy Code. Id. at 337-38.

The Marcano decisions highlight some of the challenges associated with the application of traditional "state action" analysis. While Brentwood has some appeal as a relatively coherent articulation of "state action" jurisprudence, the application of unique facts into a single categorization—classification as a "public function" or "entwinement" argument—appears somewhat arbitrary. It is difficult to imagine an organization meeting the "public function" test if the function at issue must be shown to be otherwise the "exclusive prerogative of the state." Under that strict standard, even DelBonis may have been decided differently.

Conclusion

As the case law demonstrates, the determination of "governmental unit" status can be critical to the outcome of a case. Beyond the obvious incarnations of "the government," no universal test exists for the determination, and the courts have adopted a variety of approaches. On either side of the issue, a savvy practitioner should be familiar with the line of reasoning favored by the jurisdiction, or the judge called upon to decide whether an organization is a "governmental unit."

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Footnotes

¹ See 11 U.S.C. §101(15) ("entity"); 11 U.S.C. §101(27) ("person"). Return to article

² H.Rep. No. 95-595, 95th Cong., 1st Session 311 (1977), U.S. Code Cong. & Admin. News 1978, p. 5787 (1977), reprinted in App. C Collier on Bankruptcy, Pt. 4(d)(i), 4-1437. Return to article

³ See In re Begley, 46 B.R. 707 (E.D. Pa. 1984). Return to article

⁴ See In re Marine Electric Railway Products Division Inc., 17 B.R. 845 (Bankr. E.D.N.Y. 1982). Return to article

⁵ See In re Maley, 9 B.R. 832 (Bankr. W.D.N.Y. 1981). Return to article

⁶ See In re Howen, 10 B.R. 303 (Bankr. D. Kan. 1980). Return to article

⁷ See, e.g., In re Joliet-Will County Community Action Agency, 847 F.2d 430 (7th Cir. 1988). Return to article

⁸ See, e.g., In re Reliance Holdings Inc., 273 B.R. 374, 387 & n. 19 (Bankr. E.D. Pa. 2002) ("A court may consider whether an entity is a 'governmental unit' when performing a particular activity."). Return to article

⁹ Wade, 948 F.2d at 1124. Return to article

¹⁰ The appeals court in DelBonis dealt with a prior version of §523(a)(8) of the Bankruptcy Code. The result reached in the case, however, would presumably not be affected by the changes to §523(a)(8) effected by the Higher Education Amendments of 1998. Due to an erroneous stipulation between the parties at the bankruptcy court level, the bankruptcy court and district court rulings in DelBonis were decided upon the status of the credit union as a "nonprofit" under §523(a)(8), and the status of the credit union as a "governmental entity" was not addressed by the lower courts. DelBonis, 72 F.3d at 927. Return to article

¹¹ DelBonis, 72 F.3d at 931 (quoting United States v. Michigan, 851 F.2d 803, 806 (5th Cir. 1988)). Return to article

¹² Id. at 933-34. The DelBonis court took care to note that tax-exempt status alone does not indicate the existence of a federal instrumentality. Return to article

¹³ See, e.g., Drew, Josaih N., "Note: The Sixth Circuit Dropped the Ball: An Analysis of Brentwood Academy v. Tennessee Secondary School Athletic Ass'n. in the Light of the Supreme Court's Recent Trends in State Action Jurisprudence," 2001 B.Y.U. L. Rev. 1313, 1343 (2001). Return to article

¹⁴ 531 U.S. 288, 121 S. Ct. 924, 148 L.Ed.2d 807. Return to article

¹⁵ Brentwood Academy, 531 U.S. at 296. Return to article

¹⁶ Marcano, 288 B.R. at 336-37 (quoting from Rendell-Baker, 457 U.S. at 842). Return to article

¹⁷ Id. at 337 (quoting from Young v. Halle Housing Assoc., 152 F.Supp.2d 355, 365 (S.D.N.Y. 2001)). Return to article