June 23, 1997

As chair of the Bankruptcy and Taxation Working Group of the National Association of Attorneys General, I write to support the bankruptcy provisions contained in S. 610, the implementing legislation for the Chemical Weapons Treaty. We believe these provisions represent a balanced approach that recognizes the needs of the debtor and creditors, while ensuring that the government may continue to exercise its vital and fundamental police and regulatory powers to protect the citizenry as a whole. The new language does not expand the scope of those police powers, rather it only serves to clarify existing Congressional intent about the extent to which the exercise of such powers should be exempt from the automatic stay. Its inclusion will remove the ambiguities in current law, thereby eliminating unnecessary litigation, delay, and expense for all parties involved in such matters.

The provisions in S. 610 will allow the government to continue to adjudicate liability issues and liquidate damages in cases involving police and regulatory matters, including areas such as environmental protection, consumer protection, and labor laws. In addition, as under current law, the government will be free to force compliance with injunctive obligations that are not claims and to enforce non-monetary judgments. The proposal, however, specifically excludes the enforcement of monetary judgments from the police and regulatory power exception. Thus, as is currently the case, the stay will continue to bar the actual collection of money judgments even where they are entered in true police and regulatory actions. Moreover, it does nothing to change the existing scope of police and regulatory powers which do not include matters such as collection of taxes, student loans, small business loans, or other similar purely monetary issues. Finally, it does not except governmental actions from the provisions of the automatic stay (§§362(a)(4) and (5)) which bar the creation or enforcement of liens against property of the estate and/or the debtor. Thus, the interests of secured creditors will not be affected by these provisions.

The provisions ensure that the government’s authority to carry out bona fide police and regulatory actions will not be impeded by the automatic stay where no attempt to collect a monetary judgment is at issue. Under the current language, the provisions of §§362(a)(3) and/or (6) have sometimes been held to bar implementation of decisions in police and regulatory actions where they would, unavoidably, impact on property of the estate. The situations dealt with in the Chemical Weapons bill are an obvious example of where the application of §§362(a)(3) and (6) to governmental actions could cause serious danger. Clearly, even if a maker of such weapons files bankruptcy, the government must retain the ability to control the weapons and the chemicals used to make them, to seize them if authorized to do so by the bill, and, in general, to exercise the full authority provided for in S. 610 without being required to defer critical actions while it files a motion with the bankruptcy court to lift the stay. Indeed, financial difficulties facing a debtor may be the very reason that it tries to circumvent the law to find an easy source of funds to escape those problems. It is in those situations that the ability of the government to act quickly is more important, not less.

Chemical weapons, however, are only one of a myriad of areas in which the government must be free to act in order to protect its citizenry, even if those actions may, unavoidably, make it more difficult for an individual entity to reorganize. When a law is passed, it is often clear that some portion of the regulated businesses may not be able to survive if they must comply with its terms, but the decision to accept that risk is a choice that has been made by the legislature, and should not be subject to revision on an ad hoc basis by the bankruptcy courts. There are many instances where the government must be free to act directly and expeditiously to control estate property: the destruction of unsafe and condemned buildings, [ FN: In re Javens, 107 F.3d (6th Cir. 1997).] seizure of diseased or contaminated meat or confiscation of produce infested with Mediterranean fruit flies can hardly be held hostage to the need to obtain a lifting of the stay. The government must also be able to act on licensing issues where public health and safety or consumer protection issues are at stake, even if this means an unsafe or crooked facility is put out of business. [ FN: In re Wilner Wood Products Co. v. State of Maine, 128 B.R. 1 (D. Me. 1992);In re Professional Sales Corp., 56 B.R. 753 (N.D. Ill. 1985).] Finally, the legislature may determine that some estate property must be treated as contraband and removed from the stream of commerce, regardless of its sales value. This may involve the destruction of counterfeit goods or those made in violation of applicable labor laws, [ FN: In re Brock v. Rusco Industries Inc., 842 F.2d 270 (11th Cir. 1988); Donovan v. TMC Industries Inc., 20 B.R. 997 (N.D. Ga. 1982).] or the forfeiture of items which are the proceeds and instrumentalities of a crime. [ FN: In re James, 940 F.2d 46 (3rd Cir. 1991)] Regardless of the intrinsic "value" of the goods, the government must be allowed to seize and/or destroy such items in order to protect against the harm that they do to the debtor’s employees and competitors by their very existence; to do otherwise would be to make the government an accomplice in the debtor’s unlawful actions. Moreover, forfeiture of assets, whether on a civil or criminal basis, has been made an integral part of this country’s war on crime, particularly in the drug area. Again, bankruptcy cannot and should not be seen as an avenue of escape from those legislative policy choices.

This provision ensures that those choices will be respected. The courts retain power to restrain bad faith conduct by the government in the limited circumstances where this would also be allowed outside of bankruptcy courts. [ FN: Younger v. Harris, 401 U.S. 37 (1971).] That exception, though, cannot be equated to a general power in the bankruptcy courts to authorize a debtor to violate the law that all others must obey whenever the court thinks the law is unwise, unnecessary, or unduly burdensome. Those policy judgments are for the legislature, not the courts and this proposal clarifies that fundamental position.

Heidi Heitkamp, Chair
Bankruptcy and Taxation Working Group
National Association of Attorneys General

Note: The above was forwarded to Sen. Charles Grassley and Sen. Patrick Leahy, Ranking Member of the Subcommittee on Administrative Oversight and the Courts and its members.

Thursday, April 17, 1997