Commonwealth Companies, Inc., In re

• Decision Date: 06 September 1990
• Docket Number: No. 89-1797NE,89-1797NE
• Citation: 913 F.2d 518
• Parties: , 20 Bankr.Ct.Dec. 1519, Bankr. L. Rep. P 73,610 In re COMMONWEALTH COMPANIES, INC. and Commonwealth Electric Co., Inc., Debtors. UNITED STATES of America, Appellant, v. COMMONWEALTH COMPANIES, INC. and Commonwealth Electric Co., Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 518

913 F.2d 518

59 USLW 2212, 20 Bankr.Ct.Dec. 1519,

Bankr. L. Rep. P 73,610

In re COMMONWEALTH COMPANIES, INC. and Commonwealth Electric

Co., Inc., Debtors.

UNITED STATES of America, Appellant, v. COMMONWEALTH COMPANIES, INC. and Commonwealth Electric Co., Inc., Appellees.

No. 89-1797NE.

United States Court of Appeals,

Eighth Circuit.

Submitted Feb. 16, 1990.

Decided Sept. 6, 1990.

Richard A. Olderman, Washington, D.C., for appellant.

Robert F. Craig, Omaha, Neb., for appellees.

Before WOLLMAN and MAGILL, Circuit Judges, and WATERS, ^* District Judge.

MAGILL, Circuit Judge.

The United States (the government) appeals from the district court's judgment affirming the bankruptcy court's denial of the government's motion for exception from the Bankruptcy Code's automatic stay under 11 U.S.C. Sec. 362(b)(4), or, in the alternative, relief from the stay for cause under Sec. 362(d)(1). The government's motion sought a ruling that it could join the debtors, Commonwealth Companies, Inc. and its subsidiary, Commonwealth Electric Company, Inc., in a pending civil fraud action brought against officers of the debtor corporations and others under the False Claims Act (FCA), 31 U.S.C. Secs. 3729-3733. We hold that Sec. 362(b)(4) excepts the government's proposed FCA action against the debtors from the automatic stay up to and including the entry of a money judgment. ¹ Accordingly, we reverse the judgment of the district court.

I.

On August 10, 1987, the debtors filed a Chapter 11 bankruptcy petition in the District of Nebraska. Four days later, the government brought a civil fraud action under the FCA in federal court in Tennessee, alleging that the debtor corporations, three of their officers, and other parties had conspired to rig bids on an electrical construction subcontract for a waste water treatment plant in Tennessee. The government had paid seventy-five percent of the costs of the project through a grant awarded by the United States Environmental Protection Agency. The complaint stated that the bid-rigging conspiracy had caused the submission of false and inflated claims, resulting in actual damages to the government totaling approximately $778,000. For the alleged violations of the FCA, the government requested treble damages, a $10,000 penalty for each false or inflated claim, and interests and costs.

Because the debtors had filed a bankruptcy petition four days earlier, the government's complaint did not name them as defendants. On August 25, 1987, the government filed a proof of claim in the bankruptcy court, asserting that it held an unsecured claim against the debtors for approximately $2,723,961. In seeking leave from the bankruptcy court to join the debtors in the Tennessee lawsuit, the government agreed that if it were permitted to join the debtors, it would not seek enforcement of the requested money judgment but only entry of judgment, which would fix the amount of the debtors' liability for violation of the FCA. ²

The bankruptcy court held that Sec. 362(b)(4) does not except the government's proposed FCA action against the debtors because the action is one solely for the pecuniary advantage of the government, rather than to protect public health or safety. In re Commonwealth Cos., Inc., 80 B.R. 162, 165 (Bankr.D.Neb.1987). In support of its holding, the bankruptcy court concluded that Congress intended Sec. 362(b)(4) to permit an action for money damages only if the damages are sought in conjunction with some sort of injunctive relief. Id. at 164. The district court affirmed, finding that the "pecuniary purpose" test used by the bankruptcy court was the correct legal standard and that the bankruptcy court's factual determinations in applying this test were not clearly erroneous.

II.

Our standard of review is the same as that used by the district court. We review the bankruptcy court's legal conclusions de novo and its factual findings under the clearly erroneous standard. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987).

It is undisputed that if not excepted by Sec. 362(b)(4), the government's proposed FCA action against the debtors is subject to the automatic stay of Sec. 362(a), which states that the filing of a bankruptcy petition

operates as a stay, applicable to all entities, of--

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.

Section 362(b)(4) provides that the filing of a petition does not operate as a stay "under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." ³

A.

At the outset, we must reject the bankruptcy court's view that Sec. 362(b)(4) applies only to actions to protect public health or safety. ⁴ The statutory language does not contain or suggest such a limitation of purpose. See Midatlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 503, 106 S.Ct. 755, 760, 88 L.Ed.2d 859 (1986) ("one of the purposes of [the police or regulatory power] exception is to protect public health and safety") (emphasis added). Moreover, there are numerous decisions holding Sec. 362(b)(4) applicable to governmental actions or proceedings that did not concern public health or safety. See, e.g., EEOC v. Rath Packing Co., 787 F.2d 318, 323-25 (8th Cir.) (Title VII employment discrimination suit), cert. denied, 479 U.S. 910, 107 S.Ct. 307, 93 L.Ed.2d 282 (1986); Brock v. Rusco Indus. Inc., 842 F.2d 270, 273 (11th Cir.) (action to prevent sale of goods in violation of Fair Labor Standards Act), cert. denied, 488 U.S. 889, 109 S.Ct. 221, 102 L.Ed.2d 212 (1988); SEC v. First Fin. Group, 645 F.2d 429, 437-38 (5th Cir. Unit A May 1981) (civil enforcement action to enjoin purchase and sale of securities); NLRB v. Evans Plumbing Co., 639 F.2d 291, 293 (5th Cir. Unit B Mar.1981) (per curiam) (enforcement proceeding for reinstatement of employees with back pay).

Since the filing of their Chapter 11 petition, the debtor corporations have not engaged in any business activity. They argue that this fact renders Sec. 362(b)(4) inapplicable in the instant case because the exception encompasses only governmental actions to prevent or stop an imminent or ongoing harm to the public. The Fifth Circuit flatly rejected this argument in In re Commonwealth Oil Refining Co., Inc., 805 F.2d 1175, 1184-86 (5th Cir.1986), cert. denied, 483 U.S. 1005, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987). We agree with the Fifth Circuit that the language of Sec. 362(b)(4) "is unambiguous--it does not limit the exercise of police or regulatory powers to instances where there can be shown imminent and identifiable harm or urgent public necessity." Id. at 1184. We also find that the relevant legislative history is not to the contrary. See id. & n. 7.

The debtors contend the bankruptcy court was correct in concluding that the legislative history of Sec. 362(b)(4) reveals a congressional intent to exclude any action for money damages from the exception unless the damages accompany or follow some type of injunctive remedy. We disagree. For an explanation of the meaning of Sec. 362(b)(4), the circuit courts have consistently looked to the Senate and House Committee Reports on the Bankruptcy Reform Act of 1978. See, e.g., EEOC v. Rath, 787 F.2d at 324; Brock v. Morysville Body Works, Inc., 829 F.2d 383, 388-89 (3d Cir.1987); Commonwealth Oil, 805 F.2d at 1182-83. In regard to Sec. 362(b)(4), (b)(5), the reports state:

Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer 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.

S.Rep. No. 989, 95th Cong., 2d Sess. 52, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5838; H.R.Rep. No. 595, 95th Cong., 2d Sess. 343 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6299 (emphasis added). This legislative history makes it plain that Sec. 362(b)(4) permits the government to seek the entry of a money judgment as its sole remedy for the violation of a fraud or other police or regulatory law. ⁵ In accordance with the clearly expressed congressional intent, those circuits addressing the question have concluded that Sec. 362(b)(4) does not exclude a governmental action to obtain the entry of a money judgment for a past violation of the law simply because money damages are the only relief sought in the action. See United States v. Nicolet, Inc., 857 F.2d 202, 207-09 (3d Cir.1988); EEOC v. McLean Trucking Co., 834 F.2d 398, 400-02 (4th Cir.1987).

B.

In determining that Sec. 362(b)(4) does not apply in this case, the bankruptcy court purported to apply the so-called "pecuniary purpose" or "pecuniary interest" test. ⁶ The relevant inquiry under this test is whether the "specific acts the government wishes to carry out ... would result in an economic advantage to the government or its citizens over third parties in relation to the debtor's estate." ⁷ In re Charter First Mortgage, Inc., 42 B.R. 380, 382 (Bankr.D.Or.1984). We agree that as a general matter, Sec. 362(b)(4) does not include governmental actions that would result in a pecuniary advantage to the...