In re RGV Smiles by Rocky L. Salinas D.D.S. P.A.
| Decision Date | 06 January 2021 |
| Docket Number | Case No: 20-70209, Case No: 20-70210 |
| Citation | 626 B.R. 278 |
| Parties | IN RE: RGV SMILES BY ROCKY L. SALINAS D.D.S. P.A., et al Rocky Lamar Salinas, D.D.S.; dba RGV Smiles by Rocky L. Salinas D.D.S. P.A.; aka Compassionate Healthcare Services Debtors |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
J. Casey Roy, Noah Reinstein, Assistant Attorneys General, for State of Texas
Joyce Williams Lindauer, Joyce W. Lindauer Attorney, PLLC, Dallas, TX, for Debtors.
This case pits the policies underlying the Bankruptcy Code against one another. The Code is designed to shield debtors from creditors and to protect the public from debtor conduct that impacts public health, safety, and welfare. While those policies are not always in tension, here, the Court must decide how to balance those policies. On December 22, 2020, the Court conducted a final hearing on the State of Texas's expedited motion to determine the non-applicability of the automatic stay. For the reasons set forth below, this Court finds that the motion should be granted in part.
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.18 This court determines that pursuant to 28 U.S.C. § 157(b)(2)(A) and (G), this proceeding contains only core matters.
This Court may only hear a case in which venue is proper.19 28 U.S.C. § 1409(a) provides that "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending." Both RGV Smiles primary place of business and Dr. Salinas's principal residence are in McAllen, Texas. Their jointly administered chapter 11 cases are presently pending in this Court. Therefore, venue of this proceeding is proper.
This Court has an independent duty to evaluate whether it has the constitutional authority to sign a final order.20 In Stern , which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."21 As indicated above, the pending matter before this Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G). The ruling in Stern was limited to the one specific type of core proceeding involved in that dispute, which is not implicated here. Additionally, in Stern , the debtor filed a counterclaim based solely on state law. Here, the State of Texas's Motion is based on 11 U.S.C. § 362(b)(4) of the United States Bankruptcy Code. A similar provision does not exist under state law. Accordingly, the narrow limitation imposed by Stern does not prohibit this Court from entering a final order here.22
In its Motion to Determine, the State of Texas asks this Court to enter an order confirming that: (1) the State Court Action is excepted from the automatic stay pursuant to 11 U.S.C. § 362(b)(4) ; and (2) the State of Texas is authorized to continue the prosecution of the State Court Action in all respects.23 The State of Texas acknowledges that "the provisions of Bankruptcy Code section 362(a) generally operate as a stay of, among other things, the commencement or continuation of an action or proceeding against a debtor to recover a claim that arose prior to bankruptcy."24 However, it argues, "the TMFPA action brought by the State is an enforcement action, and thus the police and regulatory exception found in 11 U.S.C. § 362(b)(4) applies to except the State Court Action from the automatic stay, which allows a state trial court to hear a police or regulatory matter pending before it."25 The Court will consider each argument in turn.
1. Whether the police and regulatory exception of 11 U.S.C. § 362(b)(4) applies.
Upon the filing of a bankruptcy petition, 11 U.S.C. § 362(a) stays all judicial and administrative proceedings and collection efforts against a debtor and the debtor's estate. The automatic stay is intended to "protect debtors and creditors during the pendency of a bankruptcy proceeding to ensure that debtors get appropriate relief and that creditors receive payment in a fair and orderly manner."26 Subsection (b) "establishes certain exceptions to the automatic stay provisions."27 Under those exceptions, § 362 does not operate as a stay.28
Pursuant to § 362(b)(4), the subsection at issue in this case:
the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit's or organization's police or regulatory power[,]
is excepted from the automatic stay.29 This exception helps balance the policy underlying the automatic stay by "ensur[ing] that debtors do not use a declaration of bankruptcy to avoid the consequences of their actions that threaten the public interest."30 For § 362(b)(4) to apply, the Court must determine that the entity invoking the exception is a governmental unit pursuant to § 101(27).31 If it is, then the Court must find that the entity is seeking to enforce its police or regulatory power.32
The Bankruptcy Code defines "governmental unit" as "United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title) ...."33 It is undisputed that the State of Texas falls squarely within that definition. The Court now turns to whether the State Court Action is an act by the State of Texas to enforce its police or regulatory power.
Courts employ two separate, but related tests in determining whether a governmental unit is enforcing its police or regulatory powers: the pecuniary interest test and the public policy test.34 Courts consider the totality of the circumstances when applying both tests.35 If a court finds that the governmental unit's actions are aimed at protecting a pecuniary governmental interest or adjudicating private rights, as opposed to protecting public safety and health or effectuating public policy, then § 362(b)(4) does not apply, and the automatic stay is effective and remains in place.36 If the inverse is true, then the exception applies.37
This Court must decide whether the State of Texas is attempting to recover from Debtors’ property based on its own claim or the nongovernmental debts of private parties38 to gain a pecuniary advantage over other creditors of Debtors.39 Where a governmental unit acts primarily to further its financial interests, and not primarily to protect public health and safety, that action satisfies the pecuniary interest test and the automatic stay applies. Courts generally find that the §...
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Kupperstein v. Schall (In re Kupperstein)
...pursue False Claims Act case to recover improper government payments to debtor); In re RGV Smiles by Rocky L. Salinas D.D.S. P.A., Nos. 20-70209, 20-70210, 626 B.R. 278, 287–88 (Bankr. S.D. Tex. Jan. 6, 2021) (applying police power exception to state Medicaid fraud statute to permit governm......