By: Linda C. Attreed
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Adopting a narrow view of the section 362(b)(4)[1] “police and regulatory power” exception to the automatic stay, the Bankruptcy Court for the Western District of Texas, in In re Reyes,[2] held that Josie Jones (“Jones”) and her attorney Robert Wilson (“Wilson”) violated the automatic stay provision by reporting the debtors to the Texas Real Estate Commission (“the TREC”).[3] The court determined that Jones and Wilson had intentionally prosecuted the TREC complaint “to punish the debtor for filing, and to exert pressure on the debtor in order to collect on the judgment.”[4] The court noted that Jones and Wilson filed the TREC action against the debtors approximately two months after seeking to lift the stay, and held that this was sufficient to support a finding of civil contempt.[5]
The Reyes court distinguished the instant matter from McMullen v. Sevigny (In re McMullen),[6] where the First Circuit had held that a complaint filed by homeowners against their realtor after the realtor filed for bankruptcy[7] fell within the police or regulatory power exception to the automatic stay.[8] The McMullen court discussed the two inquiries courts have devised to assess whether a particular governmental proceeding fell within the exception: “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.”[9] In its discussion of McMullen, the Reyes court reasoned that because Massachusetts law “did not compel the agency to commence an action without first satisfying itself that the pursuit [of] such an action was warranted,”[10] the state agency was the actual party initiating the proceeding against the debtors.[11] In contrast, under Texas law, the TREC is compelled to investigate the actions and records of the real estate agent once a complaint is filed, if the complaint and evidence provide reasonable cause for an investigation.[12] The Reyes court observed that Wilson was familiar with the TREC’s process and “knew what the consequences of initiating that process would be.”[13] The court further found that the motivation behind the complaint was helpful in determining whether to view the complainant as the state agency itself, or as an entity entirely separate from the state agency. In McMullen, the real estate commission lacked the power to compel the debtor to repay the plaintiffs; thus, the filing of the complaint was viewed not as an attempt to collect a pre-petition debt, but rather as an attempt to vindicate the public interest by petitioning the agency to suspend, revoke, or refuse to renew the real estate broker’s license.[14] In contrast, the TREC did have the authority to compel payment, thanks to its maintenance of a Real Estate Recovery Trust Account.[15] In order for a complainant to recover from this account, the complainant “must first file a claim with the TREC that is independent from any license revocation complaint.”[16] Accordingly, the court treated Wilson and Jones—not the TREC—as the parties initiating the proceeding against the debtors.[17]
In reaching its holding, the Reyes court agreed with the McMullen court that the police or regulatory power exception should be narrowly construed, and should be applied only when the action against the debtor is brought by the government.[18] Reyes is consistent with prior jurisprudence in this area. Its significance lies in its endorsement of a fact-sensitive inquiry to tease out who actually brought the proceeding against the debtor: a government entity, or a party that does not “fall within the governmental police powers exception to the automatic stay.”[19] Other courts conduct a similar inquiry, examining the relationship between the action and the stated public policy in order to determine whether the action primarily serves the public interests or adjudicates private rights.[20] By not allowing an action that falls in the latter category to come within the exception, the courts prevent individual complainants from gaining a pecuniary advantage over other creditors of the debtor—a significant policy of the Bankruptcy Code.[21]
[1] 11 U.S.C. § 362(b)(4) (2006).
[2] No. 10-52366-C, 2011 WL 1522337 (Bankr. W.D. Tex. Apr. 20, 2011).
[3] Jones alleged Liza Reyes’s conduct relating to the handling of a real estate transaction caused Jones damages. Id. at *1.
[4] Id. at *10.
[5] Id. at *9–10 (awarding attorneys’ fees and costs and punitive damages). The court discussed damages under section 362(k)(1), which provides that individuals who are injured by a willful violation of the automatic stay “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(1) (2006).
[6] 386 F.3d 320 (1st Cir. 2004).
[7] Id. at 323.
[8] 11 U.S.C. § 362(b)(4) (2006).
[9] McMullen, 386 F.3d at 325. Courts refer to this inquiry as the “public policy” and “pecuniary purpose” tests. See id. See also Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 374, 385 (6th Cir. 2001); Universal Life Church, Inc. v. United States (In re Universal Life Church, Inc.), 128 F.3d 1294, 1297 (9th Cir. 1997).
[10] Reyes, 2011 WL 1522337, at *4.
[11] Id. at *5 (“The institution of an action that necessarily required further prosecution was not the mere discharge of a public duty, as it was found to be in McMullen.”).
[12] Tex. Occ. Code Ann. § 1101.204(b) (West 2010).
[13] Reyes, 2011 WL 1522337, at *4.
[14] McMullen, 386 F.3d at 326.
[15] Reyes, 2011 WL 1522337, at *6.
[16] Id.
[17] Id. at *5 (“Jones’[s] initiation of this complaint, carefully crafted by Wilson, is better understood as the commencement or continuation of a proceeding against [the debtors] to collect on a pre-petition debt, in violation of section 362(a)(1).”).
[18] Id. at *7.
[19] United States ex rel. Kolbeck v. Point Blank Solutions, Inc., 444 B.R. 336, 337 (E.D. Va. 2011) (holding that the exception to the stay did not apply because the United States government had expressly declined to intervene in the matter).
[20] See, e.g., Chao, supra note 9; Massachusetts v. First Alliance Mortg. Co. (In re First Alliance Mortg. Co.), 263 B.R. 99 (B.A.P. 9th Cir. 2001); Safety-Kleen, Inc. (Pinewood) v. Wyche, 274 F.3d 846 (4th Cir. 2001).
[21] See Chao, supra note 9, at 390.
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