In re Ryan

• Decision Date: 20 November 1981
• Docket Number: Adv. No. 80-0448.,Bankruptcy No. 80-2-0347-L
• Citation: 15 BR 514
• Parties: In re Robert Kenneth RYAN, Debtor. Stephen H. SACHS, Attorney General of Maryland, to the use of the State of Maryland, Plaintiff, v. Robert Kenneth RYAN, Debtor, and Neal S. Melnick, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

15 B.R. 514 (1981)

In re Robert Kenneth RYAN, Debtor Stephen H. SACHS, Attorney General of Maryland, to the use of the State of Maryland, Plaintiff, v. Robert Kenneth RYAN, Debtor and Neal S. Melnick, Trustee, Defendants.

Bankruptcy No. 80-2-0347-L, Adv. No. 80-0448.

United States Bankruptcy Court, D. Maryland.

November 20, 1981.

Charles A. Castle, Elliot, Nicklas & Castle, Frederick, Md., for debtor.

James J. Doyle, III, Asst. Atty. Gen., Pikesville, Md., for plaintiff.

Neal S. Melnick, Weinberger & Weinstock, Baltimore, Md., Trustee.

MEMORANDUM OPINION AND ORDER

HARVEY M. LEBOWITZ, Bankruptcy Judge.

This case calls upon the Court to consider whether action by the State of Maryland seeking to establish a forfeiture pursuant to Md.Ann.Code art. 27, § 297 (Supp.1981) in the Circuit Court for Frederick County is stayed with respect to individuals who seek relief in a Bankruptcy Court under the Bankruptcy Reform Act of 1978, Pub.L.No. 95-508, 92 Stat. 2549 (1978) (now codified at 11 U.S.C. §§ 101-1330 (Supp. IV 1980)) (the "Code"). After consideration of the memoranda of law submitted by the parties and the argument of counsel in open court, this Court concludes that any action by the State to enforce a forfeiture in another forum against either the Debtor and his property or the property of the estate is stayed until such time as a Bankruptcy Court permits the action to proceed.

On October 3, 1980, the Attorney General of Maryland acting on behalf of the State of Maryland filed a "Complaint for Declaratory Judgment" seeking a judgment pursuant to 28 U.S.C. § 2201 (1976) that his pending action for forfeiture is not stayed by § 362(a) of the Code.¹ The Attorney General urged in the alternative that the Court declare that if a forfeiture action is stayed, it is nonetheless excepted from such stay by sections 362(b)(1) or 362(b)(4) of the Code.² At trial, the parties entered into a stipulation of fact, which has been summarized below and upon which this Court has based its opinion.³

I.

On June 11, 1979, a Maryland State Policeman entered a hotel room in Frederick, Maryland, where he observed a water pipe and a bag of what he suspected to be marijuana. As a result of these observations, the three occupants of the room were arrested, one of whom was the Debtor, Robert Kenneth Ryan. Subsequently, the officer obtained a search warrant, and returned to search thoroughly the hotel room. Ultimately the State Police seized from the hotel room or its occupants a quantity of controlled dangerous substances and several items characterized as "drug paraphernalia." In the course of the arrest, the State Police came into possession of $5,562.00 in United States coin and currency. The Attorney General and the Debtor differ as to how the State Police came into possession of the money.⁴ The State Police contend that the officer seized the money from the hotel room at the time of the Debtor's arrest. Ryan, on the other hand, testified at a bond hearing in the District Court for Frederick County that the money had been voluntarily surrendered by him to the property officer at the Frederick State Police Barracks on the date of his arrest pursuant to a request by that officer. Ryan further contends that testimony in the District Court demonstrated that the money was the proceeds of a sale of a residential dwelling which had been built by the Debtor's construction company.

Thereafter, Ryan was indicted and found guilty on various criminal charges among which were several involving possession of controlled dangerous substances with the intent to distribute. On March 7, 1980, the Debtor received a suspended sentence and was placed on two-year probation. On March 13, 1980, Ryan filed a bankruptcy petition in this Court seeking relief under Chapter 7 of the Code.⁵ The Attorney General then brought an action in the Circuit Court for Frederick County on June 3, 1980, seeking to have the money declared forfeited to the State. The Circuit Court action names both the Debtor and the coin and currency as parties defendant. Ryan filed an answer in the Circuit Court and suggested that any action in that court was stayed by the filing of the bankruptcy petition. Subsequently the Attorney General turned to this court for a declaration of the State's rights.

II.

The first contention by the Attorney General is that the state court forfeiture action is not stayed by § 362(a) of the Code. This contention is derived from the provision of the state statute that "all rights, title and interest in and to the money or currency shall immediately vest in . . . the State" upon the seizure of money that is found within "close proximity to contraband controlled dangerous substances or controlled paraphernalia, or which otherwise has been used or intended for use in connection with the illegal manufacture, distribution, dispensing or possession of controlled dangerous substances or controlled paraphernalia." Md.Ann.Code art. 27, § 297(a)(6) (Supp. 1981). The Attorney General argues that because the State's interest vested upon the arrest, the Debtor had no interest in the funds in question at the time he later filed his petition for relief under the Bankruptcy Code. Based upon this premise, the Attorney General concludes that no interest in the money passed into the bankruptcy estate pursuant to § 541(a) of the Code, and that therefore the State is not stayed by § 362(a) from prosecuting its forfeiture action in the state courts.

The Court disagrees with the conclusion that immediately prior to the filing of the bankruptcy petition the Debtor did not have an interest that became property of the estate by force of § 541(a). It is axiomatic bankruptcy law that the scope of § 541(a) is broad and all-embracing. In re Ford, 3 B.R. 559, 568-70 (Bkrtcy., D.Md. 1980), aff'd per curiam sub nom. Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981). By its express terms, § 541(a)(1) brings into the estate "all legal or equitable interests of the debtor in property as of the commencement of the case." Once the Debtor's interest in property becomes property of the estate, subsections 2, 3, and 4 of § 362(a) effectively stay any interference with the property without prior relief from the stay in the Bankruptcy Court under § 362(d). Cf. In re Moore, 5 B.R. 449 (Bkrtcy., D.Md.1980).

It is manifest upon the face of the state forfeiture statute in question here that the Debtor retained some legal or equitable interest in the funds at the time the bankruptcy petition was filed. The statute establishes a procedure whereby a petition for forfeiture must be filed in the state courts and a show cause order served in accordance with the usual provisions for service of process in a civil proceeding. Md. Ann.Code art. 27, § 297(b) (Supp.1981). This was in fact the procedure adopted by the Attorney General in this instance. Inasmuch as arbitrary deprivations of property are proscribed by the United States Constitution, Fuentes v. Shevin, 407 U.S. 67, 80-82, 92 S.Ct. 1983, 1994-1995, 32 L.Ed.2d 556 (1972), the Debtor undoubtedly has the right to establish in the forfeiture proceeding that the money in question falls outside the scope of the state statute.⁶ Although the actual recovery of the money by the Debtor may be contingent and dependant upon his future success at a hearing on the merits of the forfeiture action, the right to claim the money after seizure, recognized by the provisions of the state statute, is an interest in property that becomes part of the bankruptcy estate.⁷ Were the claim not an asset of the estate, and were the Debtor to prevail in the forfeiture action, the Debtor would achieve a windfall at the expense of his creditors predicated upon the fortuity of a pre-bankruptcy arrest. Section 362(a), therefore, stays any attempt by the State to foreclose the estate's interest in the funds in question.

Furthermore, the forfeiture action is also stayed in part by § 362(a)(1). The Debtor is a named party defendant in the forfeiture proceeding. The "commencement or continuation . . . of a judicial . . . proceeding against the debtor that was or could have been commenced" prior to the bankruptcy petition is stayed by the express terms of § 362(a)(1). The prosecution of an action in which the debtor is a named party defendant is perhaps the simplest example of a judicial proceeding stayed by the intervention of bankruptcy proceedings.

The Court concludes therefore, that any action by the State to enforce a forfeiture is stayed by the force of § 362(a). This conclusion is consistent with the overall scheme of the Bankruptcy Code that makes the Bankruptcy Court the forum of first resort with respect to action against the Debtor, his property, or property of the estate.

III.

The Court is also unpersuaded by the Attorney General's alternative contention that a forfeiture proceeding is excepted from the § 362(a) stay. For the reasons that appear below, the Court concludes that a forfeiture proceeding is neither a criminal action or proceeding within the meaning of § 362(b)(1), nor an action by a governmental unit seeking enforcement of its police or regulatory powers within the meaning of § 362(b)(2).

Section 362(b)(1) provides for a broad exception to all the provisions of § 362(a) for the "commencement or continuation of a criminal action or proceeding against the debtor." 11 U.S.C. § 362(b)(1) (Supp. IV 1980) (emphasis added). This exception is a manifestation of Congressional intent that the "bankruptcy laws are not to become a haven for criminal offenders." H.R.Rep. No.95-595, 95th Cong., 1st Sess. 342 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787, 6299. Nonetheless, it is clear that it is the substance of the proceeding rather than its form that governs the applicability of the § 362(b)(1) exception. The equitable powers of Bankruptcy Courts have long been "invoked to the end that fraud will not prevail, that substance will not give way to form, and...