In re Ronald J. Reyes & Liza A. Reyes Debtor

• Decision Date: 20 April 2011
• Docket Number: Bankr. Case No. 10-52366-C
• Parties: In re Ronald J. Reyes & Liza A. Reyes Debtor
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

In re Ronald J. Reyes & Liza A. Reyes Debtor

Bankr. Case No. 10-52366-C

United States Bankruptcy Court Western District of Texas San Antonio Division

Dated : April 20, 2011

SIGNED this 20th day of April, 2011.

leif m. clark

UNITED STATES bankruptcy judge

Memorandum Decision on Motion for Contempt

Came on for hearing the foregoing matter. The debtors filed a motion for contempt against Robert Wilson and Josie Jones for an alleged violation of the automatic stay. The facts are essentially as follows:

The debtors filed for chapter 13 on June 24, 2010. Prior to the filing, one Josie Jones sued Liza Reyes in state court, alleging that her conduct had caused Jones damages, relating to the handling of a real estate transaction. After the verdict was rendered, Jones and her lawyer, Robert Wilson, met with the debtor in a conference room at the courthouse. There, the debtor informed Wilson that they intended to file for bankruptcy. In response, Wilson, in the hearing of not only the debtor but also membersof the debtor's family, told the debtor that he would "run them out of business by filing a complaint with the TREC (Texas Real Estate Commission) and close them down to get the money." After the debtor filed for bankruptcy, Wilson, true to his word, filed a complaint in September 2010, on behalf of his client, with the TREC. The complaint took a number of months to prepare, and Wilson billed his client for the service. The TREC's procedures do not require a pre-investigation as a prerequisite to instituting such a complaint. Instead, the filing of the complaint itself necessitates an investigation by the Commission. If such an investigation results in a determination of wrongdoing on the part of the agent, and if a finding of damages is made, then the the TREC may make a monetary award to the complaining witness, and may subsequently seek reimbursement from the agent in the amount of the award. Wilson is well aware of these rules and procedures, this being one of his areas of practice.

Wilson has also been active in the bankruptcy case. On July 2, 2010, he filed a Motion for Relief from Stay on behalf of his client, which was later withdrawn. Subsequently, on July 6, 2010, he filed an Objection to Exemptions, which was denied by the court on August 9, 2010. The debtors allege that the lift stay motion and objection to exemptions were frivolous, though no formal request for sanctions was ever made (nor is one being made here). The motions are indeed thin (though this court too declines to find that they transgress Rule 9011). On September 16, 2010, Ms. Jones filed the complaint against the debtor with the TREC. The claims held by Ms. Jones in the TREC action are also the subject of the cause of action that was tried to judgment in state court. The judgment stands, of course, but it can now only be enforced in this bankruptcy case as an ordinary unsecured claim.

The debtors have requested that Ms. Jones and Mr. Wilson be held in contempt for violation of section 362. They also request damages, sanctions, attorney's fees and costs. While the debtors' motion is called a motion for contempt it could also be read as an action for violation of the stay pursuant to section 362(k). The motion was reset a number of times to accommodate Ms. Jones, who resides in California. Despite these efforts, when this matter was finally heard, Wilson informed the court (and the debtor) that Ms. Jones was unavoidably unable to be present at the hearing. Wilson did not request a further continuance. As Ms. Wilson resides beyond subpoena range, it was not possible to compel her attendance. No competent evidence to support Mr. Wilson's explanation for Ms. Jones' not appearing was presented.

Legal Analysis-Contempt

The first issue to be addressed is whether the actions of Ms. Jones and her attorney constituted a violation of the automatic stay. The debtors claim that Ms. Jones and Mr. Wilson violated the automatic when they filed their TREC complaint against the debtors alleging claims that were the subject of Ms. Jones' pre-petition lawsuit against the debtors. The complaint was filed post-petition.

Section 362(a)(1) provides that "a petition filed under section 301... 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 action or proceedings against a 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." See 11 U.S.C. § 362(a)(1). The stay also applies to "any act to collect, assess, orrecover a claim against the debtor that arose before the commencement of the case[.]" § 362(a)(6). While section 362(a)(1) generally stays administrative and license revocation proceedings, see, e.g., In re National Cattle Congress, Inc., 179 B.R. 588, 594 (Bankr. N.D. Iowa 1995) (noting that the legislative history of section 362(a)(1) makes clear that the stay applies to "all proceedings... including arbitration, license revocation, administrative, and judicial proceedings"), section 362(b)(4) provides an exception to the stay for certain proceedings.

Section 362(b)(4) says that the automatic stay does not apply to "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). This exception applies "only where (i) the action is brought by the government, and (ii) the action seeks to vindicate the public interest, as opposed to a specific individual's or entity's rights." United States Int'l Trade Comm'n v. Jaffe, 433 B.R. 538, 543 (E.D. Va. 2010) (emphasis added); see also In re Wade, 948 F.2d 1122, 1124 (9th Cir. 1991) (finding state bar disciplinary proceeding exempt from automatic stay and noting that "[t] he purposes of the Bar's disciplinary proceedings are (1) 'to protect the public, the profession, and the administration of justice, ' and (2) 'to deter other lawyers from improper conduct.'"); In re North, 128 B.R. 592, 601 (Bankr. D. Vt. 1991) (listing cases and stating that "state regulatory licensing schemes that meet the § 362(a)(4)'s 'governmental unit' exception include police or regulatory actions motivated to protect public health and safety"). Here, the complaint Ms. Jones filed with TREC alleges fraud, among other things, and seeks the revocation of the debtors' professional licenses. Accordingly, any proceeding initiated by TREC based on Ms. Jones' complaint wouldlikely satisfy this public interest requirement insofar as the TREC's pursuit of the action, even if such action happened to also benefit the complainants. In Chao v. Hosp. Staffing Servs., Inc., the Sixth Circuit recognized that

courts should examine the type of enforcement action brought [by the governmental unit] and the relationship between a particular suit and Congress's (or a state's) declared public policy. When an action furthers both public and private interests and the private interests do not significantly outweigh the public benefit from enforcement, courts should defer to the legislature's decision to vest enforcement authority in the executive and recognize such actions as within 'such governmental unit's police and regulatory power, ' as that terms is used in § 362(b)(4). However, when the action incidentally serves public interests but more substantially adjudicates private rights, courts should regard the suit as outside the police power exception, particularly when a successful suit would result in a pecuniary advantage to certain private parties vis-a-vis other creditors of the estate, contrary to the Bankruptcy Code's priorities.

Id., 270 F.3d 374, 390 (6th Cir. 2001).

TREC's conduct is not at issue here, however. The debtor has not named the TREC as a party against whom it seeks a contempt finding. Rather, the debtors maintain that it is the actions of Ms. Jones and her attorney, in filing the complaint with TREC in the first place that, on the facts of this case, violate the automatic stay. Jones and Wilson, in response, cite McMullen v. Sevigny (In re McMullen), 386 F.3d 320 (1st Cir. 2004) for the proposition that their filing the complaint with TREC also fell under the protections of section 362(b)(4). In McMullen, the debtor contended that plaintiffs who had there filed a complaint against the debtor with the Massachusetts Division of Registration for Real Estate Agents after the debtor had filed for chapter 13 had violated by the automatic stay by doing so. Id. at 324. The complaint alleged that the debtor had illegally retained the plaintiffs' security deposit and sought the revocation of the debtor's real estate license. Id. at 325. The court found that the state agency proceeding againstthe debtor fell squarely within the section 362(b)(4) exception to the stay, stating "the disciplinary proceeding before the Board was designed to serve—and did in fact principally serve—to protect the public in the future, rather than to seek recompense for the alleged financial losses sustained by the [plaintiffs]." Id. at 326-27. The court then addressed whether the actions of the plaintiff in filing the complaint with the Board in the first place violated the stay the same question presented here. The court concluded that the mere filing of a complaint with the state real estate board did not violate the stay. Id. at 328. In reaching that conclusion, the First Circuit rejected the reasoning of the bankruptcy court in In re Byrd to the effect that creditors who approach governmental authorities post-petition to complain about a debtor's unlawful conduct violate the stay by doing so. The Byrd court had stated:

The filing of a bankruptcy action should have no impact on whether a prosecuting entity elects to commence or continue a criminal action against a debtor,

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