In re Gandy
| Decision Date | 18 July 2005 |
| Docket Number | Bankruptcy No. 05-32244-H2-13.,Bankruptcy No. 05-30651-H1-13.,Adversary No. 05-3253. |
| Citation | 327 B.R. 796 |
| Parties | In re Ricky Lynn GANDY, Debtor. In re Elvia Diaz, Debtor. Elvia Diaz, Plaintiff, v. State of Texas, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Reese W. Baker, Baker & Associates LLP, Houston, TX, for Debtor Ricky Lynn Gandy.
Richard W. Aurich, Jr., Attorney at Law, Houston, TX, for Elvia Diaz.
JOINT MEMORANDUM OPINION
On April 22, 2005, this Court issued an order in In re Gandy,1 finding that the automatic stay did not apply to a prepetition state court lawsuit brought by governmental units against Mr. Gandy. On April 29, 2005, this Court denied an Application for a Temporary Restraining Order in Diaz v. State of Texas,2 finding that the automatic stay did not apply to a prepetition state court suit brought by the State of Texas against Ms. Diaz. The two decisions involve substantially similar questions of law. This Joint Memorandum Opinion provides the findings and conclusions on which the decisions were based.
On March 24, 2004, Harris County filed a lawsuit in state court against Mr. Gandy for violations of various state environmental laws, including the Texas Solid Waste Disposal Act and the Texas Clean Air Act. In the state court suit, the County requested injunctive relief, fees and costs. On June 25, 2004, the Texas Commission on Environmental Quality intervened in the suit. The principal allegation in the lawsuit is that Mr. Gandy used his property to store debris from site clearing and construction projects. The bulk of the debris was comprised of wood products (such as tree stumps) and used building materials. The governmental units allege that Mr. Gandy's present use of the property violates Texas law. On August 4, 2004, the state court issued a temporary restraining order concerning Mr. Gandy's alleged violations of state environmental laws.
On January 11, 2005, Mr. Gandy filed a petition for relief under chapter 13 of the Bankruptcy Code. Mr. Gandy then filed a suggestion of bankruptcy with the state court requesting "the observance of the Stay Order under § 362." Pursuant to Mr. Gandy's suggestion — and in spite of the governmental units' arguments that the suit was not subject to the automatic stay — the state court stayed all proceedings.
On March 17, 2005, Harris County and the Texas Commission on Environmental Quality filed their Amended Motion to Determine the Non-Applicability of Stay Pursuant to 11 U.S.C. § 362(b)(4). Mr. Gandy filed a response on April 14, 2005. The Court conducted a hearing on this matter on April 22, 2005. At the conclusion of the hearing, the Court issued an order determining that the stay did not apply to the state court suit.
On February 3, 2005, the State of Texas filed a lawsuit against Ms. Diaz in the 113th Judicial District Court of Harris County. The lawsuit alleges that Ms. Diaz committed consumer fraud under the Deceptive Trade Practices Act related to her work as a notary public. In general, the lawsuit alleges that Ms. Diaz misrepresented her services as a "notario" with the effect of misleading Houston's large Mexican immigrant population into believing that she could serve as an attorney. The State alleges that the term "notario" is a term used by licensed attorneys in Mexico and that Ms. Diaz is intending to mislead the public in violation of Texas law.3
On February 13, 2005, Ms. Diaz filed a petition for relief under chapter 13. Apparently, Ms. Diaz's state court counsel signed an agreed order stipulating to the non-applicability of automatic stay to the proceeding. Despite this agreed order, Ms. Diaz filed an application for a temporary restraining order to prevent the state court from proceeding with the lawsuit and to seek damages for violations of the automatic stay. This Court denied the application and Ms. Diaz's request for damages based on the non-applicability of the automatic stay.
This Court is frequently called upon to determine whether the automatic stay applies to state court lawsuits involving a governmental unit's enforcement of police and regulatory powers. Sometimes — as occurred in Mr. Gandy's case — despite the plain application of the police and regulatory power exception, a debtor will file a suggestion of bankruptcy or affirmatively represent to the state court that the automatic stay precludes a state court from continuing with its adjudication. In other instances, as evidenced by Ms. Diaz's case, debtors seek injunctive relief from the bankruptcy court to stop the state court litigation based on the application of the automatic stay. Regardless of form, the debtors' actions sometimes lead state courts to stay the proceedings while awaiting an order from the bankruptcy court before continuing with their cases. Such actions delay state court proceedings and waste the resources of the parties and the courts. The Court appreciates the comity shown by state courts when they decline to proceed in the face of a pending bankruptcy case. Nevertheless, the Court finds that its duty of reciprocal comity requires the issuance of this opinion. Accordingly, this Court issues this Joint Memorandum Opinion clarifying that the state courts in the present cases had the authority to determine that the automatic stay did not apply to the governmental units' actions to enforce their police and regulatory power.
This Court has previously examined the issue of whether state courts possess jurisdiction and authority to determine whether the automatic stay applies. In re Edwin A. Epstein, Jr. Operating Co., Inc., 314 B.R. 591, 598-99 (Bankr.S.D.Tex.2004). In determining that state courts are vested with jurisdiction, the Court's analysis began with the jurisdictional grant provided by Congress:
The U.S. Constitution gives Congress plenary power over bankruptcy thus allowing Congress to limit the jurisdiction that courts can exercise over the person and property of a debtor who duly invokes the bankruptcy law. U.S. CONST., art. I, § 8; Kalb v. Feuerstein, 308 U.S. 433, 439, 60 S.Ct. 343, 84 L.Ed. 370 (1940). The current bankruptcy jurisdictional statute, 28 U.S.C. § 1334, defines the role of the federal district courts in bankruptcy. Section 1334(a) provides, "[e]xcept as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11." 28 U.S.C. § 1334(a). Section 1334(b) then provides: "[n]otwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."
Id. (emphasis added). In Edwin A. Epstein, Jr. Operating Co., Inc., an arbitration panel4 erroneously ruled that the automatic stay did not apply to various claims against the debtor's interests in various oil and gas properties. Id. The effect of this decision was to impermissibly annul or terminate the automatic stay. Id.5 Thus, while the Court found that state courts possess concurrent jurisdiction — pursuant to § 1334(b) — to determine whether the stay applies, state courts lack authority to terminate the stay when it in fact does apply. Id. The bankruptcy court alone has authority to modify the automatic stay. Id. For the reasons set forth in Edwin A. Epstein, Jr. Operating Co., Inc., an erroneous determination of the inapplicability of the automatic stay would be voidable. Of course, the automatic stay does not arise when the police and regulatory exception applies. 11 U.S.C. § 362(b)(4). In a police and regulatory exception case — where the automatic stay has never arisen — the state court has concurrent jurisdiction to so determine.
Section 362(a)6 provides for an automatic stay of certain acts upon the filing of a bankruptcy petition under any chapter of the Bankruptcy Code. 11 U.S.C. § 362(a); In re Pierce, 272 B.R. 198, 209 (Bankr.S.D.Tex.2001); 2 COLLIER ON BANKRUPTCY ¶ 303.12 (15th ed.2004). "The purpose of the automatic stay is to give the debtor a `breathing spell' from his creditors, and also, to protect creditors by preventing a race for the debtor's assets." Browning v. Navarro, 743 F.2d 1069, 1083 (5th Cir.1984) (citations omitted). The stay prohibits lien enforcement and other actions, judicial or otherwise, that are attempts to enforce or collect prepetition claims. 11 U.S.C. § 362. It also stays a wide range of actions that would affect or interfere with property of the estate, property of the debtor, or property in the custody of the estate. Id.
Although the reach of the automatic stay is broad, it is not unlimited. Some actions that would otherwise fall within the scope of the stay are excepted from the stay. The exceptions are typically based on particular policy objectives. One important exception to the automatic stay is the police and regulatory power exception. The police and regulatory power exception is based on the compelling need for the government to continue to protect the public when a debtor files for bankruptcy and to "prevent a debtor from `frustrating necessary governmental functions by seeking refuge in bankruptcy court.'" SEC v. Brennan, 230 F.3d 65, 71 (2nd Cir.2000) (citing City of New York v. Exxon Corp., 932 F.2d 1020, 1024 (2nd Cir.1991)) (internal quotation marks omitted); In re Commonwealth Cos., Inc., 913 F.2d 518, 527 (8th Cir. BAP 1990) () The...
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