In re Ellis
| Citation | 66 BR 821 |
| Decision Date | 04 August 1986 |
| Docket Number | No. 85 C 5742.,85 C 5742. |
| Parties | In re Zenobia ELLIS, Debtor. ILLINOIS DEPARTMENT OF PUBLIC AID, Appellant, v. Zenobia ELLIS, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Richard Grossman, James C. O'Connell, Sp. Asst. Attys. Gen., Chicago, Ill., for appellant.
Linda Spak, Spak & Associates, Chicago, Ill., for appellee.
Currently before the court is the appeal of the Illinois Department of Public Aid (the "Department") from the order of the bankruptcy court enjoining it from pursuing state court proceedings against appellee-debtor Zenobia Ellis ("Ellis") and imposing attorneys' fees and costs against the Department for violating the automatic stay provisions of the Bankruptcy Code. For the reasons stated below, we affirm.
Ellis received public assistance benefits from the Department from December 8, 1978, through November 24, 1980. Brief for Appellant, Appendix A at 1. She filed a petition in bankruptcy under 11 U.S.C. §§ 1301 et seq., ("Chapter 13") on November 3, 1983. Pursuant to that petition, she filed with the bankruptcy court a "wage earner" plan (the "plan") to repay her creditors. The bankruptcy court held a hearing to confirm that plan on November 3, 1983. A meeting of creditors to confirm the plan was held on December 6, 1984. The Department apparently appeared at that meeting and objected to confirmation of the plan. According to the bankruptcy case record, on that day the Department also filed a memorandum with the bankruptcy court objecting to confirmation of the plan. (A copy of that memorandum and the basis of the Department's objections are not in the record on appeal.) The bankruptcy court confirmed the plan over the Department's objections on January 3, 1984.
On February 3, 1984, the Department filed a three-count complaint in the Circuit Court of Cook County, Illinois alleging that Ellis had received $9,662.69 in "overissuances." The complaint alleged that Ellis had breached her statutory duty to report a change in her living conditions and/or willfully concealed and failed to report that change. The complaint alternatively alleged that the Department had made an administrative error. Each count sought recovery of the overpayments.
On April 10, 1985 Ellis filed a motion with the bankruptcy court for a rule to show cause against the Department for violating Section 362(a) the automatic stay provisions of the Bankruptcy Act.1 On April 26, 1985, the bankruptcy court found the Department in contempt and entered an order enjoining it from proceeding further in the state court action and ordering the Department to pay Ellis $26.00 in costs and $1,045.00 in attorneys' fees.2 The order was entered on the bankruptcy docket on May 1, 1985. The Department filed its appeal on May 10, 1985.3
On appeal the Department argues that its state court action did not violate the automatic stay because it constituted an attempt by a governmental unit to enforce its police and regulatory power which is specifically exempted from the stay under Section 362(b)(4).4 Section 362(b)(4) excepts from the stay:
the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit\'s police or regulatory power.
The Department relies on Section 362(b)(4)'s legislative history and subsequent case law to support its interpretation of "police or regulatory power." Alternatively, it argues that, because its state court complaint sought only entry, not enforcement, of a judgment, its actions did not violate the stay. Ellis argues that the bankruptcy court had exclusive jurisdiction over her estate. She contends that because the Department sought to recover money from her, the purpose of the state suit was to obtain an economic advantage over third parties and the state suit therefore violated the automatic stay.
The entry of a contempt order for violation of the automatic stay provisions of section 362(a) is a final appealable order in a core proceeding. 28 U.S.C. § 157(b)(1); 11 U.S.C. § 105; In the matter of Carmen Crum, 55 B.R. 455, 458 (Bkrtcy. M.D.Fla. 1985); In re Indus. Tool Distributors, 55 B.R. 746, 749 (N.D.Ga.1985); Better Homes of Virginia, Inc. v. Budget Services Co., 52 B.R. 426 (E.D.Va.1985). While findings of fact by a bankruptcy judge should not be set aside unless "clearly erroneous," Bankruptcy Rule 8013, the parties on appeal do not dispute the facts. Rather, the question is one of law and we may reach our own conclusions of law. In re Visiting Home Services, Inc., 643 F.2d 1356, 1358-59 (9th Cir.1981); Universal Mineral, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 103 (3d Cir.1981).
Whenever a petition is filed under any chapter of the Bankruptcy Code, "almost all" efforts by creditors to recover on their claims against the debtor or the debtor's estate are automatically stayed pursuant to Section 362(a). R. Ginsberg, Bankruptcy ¶ 3002 at 3011 (1985) (hereinafter "Ginsberg"). By operation of law, the stay voids all actions taken by creditors outside of the bankruptcy court regardless of whether the creditor knew of the bankruptcy petition. Id. If a creditor knows of the bankruptcy proceeding and, without the bankruptcy court's permission, attempts to enforce a claim against the debtor or his estate in a forum other than the bankruptcy court, the creditor may be found in contempt. See In re Smith Corset Shops, Inc., 696 F.2d 971 (1st Cir.1982); In re Carter, 691 F.2d 390 (8th Cir.1982). In effect, the automatic stay forces creditors into the bankruptcy court and makes them rely on the Bankruptcy Code to enforce their claims.
Compared to Chapters 7 and 11, Chapter 13 is more circumscribed in the opportunities it presents creditors to enforce their claims against the debtor or the debtor's estate. For example, Chapter 13 creditors do not have the right to accept or reject confirmation of a plan proposed by the debtor to repay debts. They may, however, attempt to interpose several legal objections to confirmation. For example, if the creditor is secured, it might argue that the plan does not meet the liquidation or surrender requirements of 11 U.S.C. §§ 1325(a)(5)(B), (C). Unsecured creditors who meet the "priority" requirements of 11 U.S.C. § 507 may attempt to argue that the plan fails to provide payment in full over the life of the plan as required by 11 U.S.C. §§ 1322(a)(2), 1325(a)(1). Nonpriority unsecured creditors have little protection; under 11 U.S.C. § 1325(a)(4), a court can confirm a plan even if it fails to provide for repayment to these creditors. See Ginsberg ¶ 1008, at 1019-20 and n. 23 and cases cited therein. Finally, all creditors may argue that the plan has not been proposed in good faith under 11 U.S.C. § 1325(a)(3) or that it is not feasible under 11 U.S.C. § 1325(a)(6).
If a plan is confirmed by the bankruptcy court, the debtor must devote his or her best efforts to making the repayments required by the plan during the life of the plan. 11 U.S.C. § 1325(b). But, when all payments required by a plan are completed, the debtor is automatically discharged from:
having to pay the unpaid balances of all claims against him or her other than long-term debts that the debtor has cured under the plan . . ., claims for alimony, child support and the like, and certain post-petition debts. All other debts provided for in the plan, regardless of whether they would be dischargeable in a Chapter 7 case, are covered by a Chapter 13 discharge. Therefore, the debtor can use Chapter 13 to avoid claims based on fraud, willful and malicious injuries to persons or property, drunk driving injuries, educational loans and the like.
Ginsberg ¶ 1008, at 1020-21 (footnotes omitted). See 11 U.S.C. § 1328(a)(1). Cf. Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984); In re Neavear, 674 F.2d 1201, 1203-04 (7th Cir.1982) ().
Creditors who meet the qualifications of 11 U.S.C. § 362(b) are excepted from the automatic stay, however, and may pursue their claims against the debtor or the debtor's estate using their statutory or common law remedies in a nonbankruptcy forum. The debtor or any other party wishing to stop such proceedings must file an adversary proceeding and seek an injunction from the bankruptcy court. 28 U.S.C. § 157(b)(2)(A); 11 U.S.C. § 105(c); Bankruptcy Rules 7001(7), 7065. The party seeking the injunction "must show that the injunction is not only necessary, or at least appropriate to the administration of the bankruptcy case, but that the estate will suffer irreparable harm if the injunction is denied." Ginsberg ¶ 3101, at 3020. In addition, the hardships to the debtor caused by denial of the injunction must outweigh the hardships to the creditor in granting it. Id.
For purposes of the Bankruptcy Code, a governmental unit such as the Department is considered to be like any other creditor and is subject to the automatic stay. Lee v. Schweiker, supra, 739 F.2d at 875; In re Nashville White Trucks, Inc., 731 F.2d 376 (6th Cir.1984). But, when a governmental unit commences or continues an action or proceeding to enforce its "police or regulatory power," it is excepted from operation of the stay. 11 U.S.C. § 362(b)(4).
When Congress enacted the exception to the automatic stay for governmental units, it intended the exception to be construed narrowly "in order to permit governmental units to pursue actions to protect the public health and safety and not to apply to actions by a governmental unit to protect a pecuniary interest in property of the debtor or property of the estate." 124 Cong.Rec. H11,092 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards). According to the House committee that considered Section 362(b)(4):
Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus where a governmental...
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