In re First Federal Corp., Bankruptcy No. 5-83-00482

• Decision Date: 09 July 1984
• Docket Number: Misc. No. 84-M-6(H).,Bankruptcy No. 5-83-00482
• Citation: 42 BR 682
• Parties: In re FIRST FEDERAL CORPORATION, Debtor. COMMONWEALTH OF VIRGINIA and Commonwealth of Virginia ex rel. Virginia Real Estate Commission, Plaintiffs/Appellants, v. FIRST FEDERAL CORPORATION, Defendant/Appellee.
• Court: U.S. District Court — Western District of Virginia

42 B.R. 682 (1984)

In re FIRST FEDERAL CORPORATION, Debtor COMMONWEALTH OF VIRGINIA and Commonwealth of Virginia ex rel. Virginia Real Estate Commission, Plaintiffs/Appellants, v. FIRST FEDERAL CORPORATION, Defendant/Appellee.

Bankruptcy No. 5-83-00482, Misc. No. 84-M-6(H).

United States District Court, W.D. Virginia, Harrisonburg Division.

July 9, 1984.

Edward P. Nolde, Asst. Atty. Gen., for the Com. of Va., Richmond, Va., for plaintiffs/appellants.

Mark Feldmann, Roanoke, Va., for defendant/appellee.

MEMORANDUM OPINION

MICHAEL, District Judge.

This matter is before the court on an appeal from an Order entered by the United States Bankruptcy Court for the Western District of Virginia hereinafter "Bankruptcy Court" on January 23, 1984. The Bankruptcy Court, in its order, refused to exempt the Commonwealth of Virginia and the Virginia Real Estate Commission hereinafter "the appellants" from the automatic stay of all proceedings which went into effect under 11 U.S.C. § 362(a) when First Federal Corporation hereinafter "the debtor" filed a Chapter 11 petition in the Bankruptcy Court. The appellants argue that the Bankruptcy Court erred in refusing to recognize that the Bankruptcy Code specifically exempts from the automatic stay "the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." 11 U.S.C. § 362(b)(4). The appellants ask this court to reverse or modify the Bankruptcy Court's Order of January 23, 1984, to permit them to proceed with law enforcement and regulatory actions in state court.

The Bankruptcy Court, in its Order of January 23, 1984, while refusing to exempt the appellants from the automatic stay, nevertheless sought to protect the interests which the appellants argued were jeopardized by the automatic stay by prohibiting the debtor from engaging in any further marketing or offering of any time share units without prior approval of the Bankruptcy Court. In its Memorandum Opinion, the Bankruptcy Court stated that its doors were wide open to hear whatever claims the appellants wish to advance for injunctive or declaratory relief under the laws of Virginia and therefore recourse to Virginia's state court system would not be necessary. Despite these safeguards, the appellants insist that under the Bankruptcy Code they are exempt from the automatic stay in any proceedings commenced to prevent violations of anti-fraud laws, consumer protection laws, or similar regulatory enactments.

In its posture as a court reviewing decisions made by the Bankruptcy Court, this court is bound to uphold the decisions of the lower court unless that court has made findings of fact which are clearly erroneous, or has committed an error of law. A finding of fact is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948). The limitation which the clearly erroneous standard imposes on an appellate court does not apply to its review of conclusions of law. Such conclusions, if objected to by a party, are afforded a de novo review. See In Re Bubble Up Delaware, Inc., 684 F.2d 1259, 1262 (9th Cir.1982); Bankruptcy Rules 7052(a), 8013.

11 U.S.C. § 362(a)(1) provides that:

Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title 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 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;

. . . . .

However, this provision is supplemented by section 362(b)(4) which provides that:

the filing of a petition under section 301, 302, or 303 of this title does not operate as a stay—

. . . . .

(4) under section (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, . . .

As the Third Circuit Court of Appeals has recently stated, section 362(b)(4) "returns to the states with one hand some of what was taken away by the other," i.e., by the automatic stay. Penn Terra Ltd. v. Pennsylvania Department of Environmental Resources, 733 F.2d 267, 272 (3d Cir.1984). The Congressional Reports which accompanied the passage of these sections 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.

House Report No. 95-595, 95th Cong. 1st Session (1977) 342-3, Senate Report No. 95-989, 95th Cong. 2d Session (1978) 51-2, reprinted in 1978 U.S.Code Cong. and Adm.News 5787, 5963, 6299. In addition, Congressman Don Edwards, Chairman of a subcommittee of the Judiciary Committee considering the Bankruptcy code, noted:

This section 362(b)(4) is intended to be given a narrow construction 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. Record H 11089, reprinted in 1978 U.S.Code Cong. and Adm.News 6436, 6444-6445.

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