Matter of Bell

• Citation: 215 BR 266
• Decision Date: 13 November 1997
• Docket Number: Bankruptcy No. N97-11673-WHD.
• Parties: In the Matter of Otis C. BELL, Irene W. Bell, Debtors. STATE OF GEORGIA, Movant, v. Otis C. BELL, Irene W. Bell, Respondents.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia

215 B.R. 266 (1997)

In the Matter of Otis C. BELL, Irene W. Bell, Debtors.

STATE OF GEORGIA, Movant, v. Otis C. BELL, Irene W. Bell, Respondents.

Bankruptcy No. N97-11673-WHD.

United States Bankruptcy Court, N.D. Georgia, Newnan Division.

November 13, 1997.

COPYRIGHT MATERIAL OMITTED

Alan W. Jackson, Glover & Davis, P.A., Newnan, GA, for State of Ga.

Edward R. Downs, Jr., Riverdale, GA, for Debtors.

ORDER

W. HOMER DRAKE, Jr., Bankruptcy Judge.

Now before the Court in this proceeding is a Motion for Relief from the Automatic Stay by the State of Georgia (hereinafter "the State") and an objection thereto by Otis C. and Irene W. Bell (hereinafter collectively "the Debtors"). Having found this matter to constitute a core proceeding, see 28 U.S.C. § 157(b)(2)(G), having conducted a hearing, and having taken the matter under advisement to consider the post-trial briefs of each party, the Court now shall dispose of the aforementioned Motion in accordance with the following reasoning.

FACTUAL BACKGROUND

On or about February 21, 1997, agents of the Coweta County Sheriff's Department allegedly purchased fifty dollars ($50.00) worth of powder cocaine from the Debtors at the location of their residence, 2011 Smokey Road, Newnan, Coweta County, Georgia.¹ In view of that purported episode, officers then placed the Debtors under arrest, charging each with violation of the Georgia Controlled Substances Act, O.C.G.A. § 16-13-1, et seq.² The State also filed a statutorily-proscribed notice of a forfeiture lien upon the Debtors' residence, and on March 19, 1997, commenced an in rem action for forfeiture of the subject property in the Superior Court of Coweta County. This forfeiture process soon was interrupted, however, by the Debtors' filing a petition under Chapter 13 of the Bankruptcy Code on May 28, 1997.

In the wake of the above-styled case's commencement, the State now has filed a Motion for Relief from Stay, arguing first that its continued pursuit of forfeiture in the Superior Court should enjoy exemption from bankruptcy's automatic stay by virtue of the police and regulatory power exception codified at 11 U.S.C. §§ 362(b)(4) and (5). Assuming that such an exception does not apply to forfeiture measures, however, the State nonetheless contends that the equities of this case dictate that the Debtors should not be allowed to forestall a pending forfeiture action merely by filing for bankruptcy protection. Thus, reasons the State, cause must be found to warrant lifting the automatic stay on its behalf. See 11 U.S.C. § 362(d)(1) (licensing the termination or modification of bankruptcy's automatic stay for cause shown).

Seeking to pierce the veil of civil forfeiture under Georgia law and recast its terms as but a means for revenue collection, the Debtors firmly challenge the applicability of the stay exceptions found in Code section 362(b)(4) and (5), exceptions which they contend do not apply in the forfeiture context. Likewise, the Debtors assert that equity requires that the stay upon forfeiture remain intact, so that the State may not circumvent bankruptcy's preordained rules of distribution. So framed by the respective contentions of each party, these questions relating to the automatic stay's governance and the appropriateness of relief therefrom shall each be disposed of in turn.

DISCUSSION

I. Forfeiture Provisions in Overview.

The process of forfeiture, i.e., the uncompensated divestiture of ownership in specific property when it has been used in a manner contrary to sovereign directive, can take either a criminal or a civil form. In the former instance, forfeiture proceeds as an in personam action geared to penalize the criminal conduct of a property's owner.³ By definition, therefore, criminal forfeiture only may be imposed upon an individual subject to criminal conviction.⁴

In civil forfeiture, by contrast, an in rem action is said to arise against guilty property rather than some guilty person.⁵ Thus, forfeiture depends in such instances, not upon an owner's culpability, but instead upon the property's being connected to some criminal act.⁶ Likewise, civil forfeiture is said to be proper when the subject property somehow facilitated criminal enterprises.⁷

Given the ever-increasing threat of crime in modern society, law enforcement authorities have come to rely upon each of these forfeiture vehicles as an additional means for stemming the tide of crime.⁸ At the same time, forfeiture also has proven itself to be a lucrative means of secondary revenue, permitting law enforcement agencies to finance their costs of operation and obtain additional resources by using the assets of criminal wrongdoers.⁹ Thus, in addition to deterring crime, forfeiture generates sizable financial dividends for the involved agencies, leading provisions of civil and criminal forfeiture to become an integral part of the criminal justice process at both the state and federal levels.¹⁰

With its increased use, however, the process of forfeiture has generated substantial questions, not only as to the constitutional limits thereon,¹¹ but also with respect to the inequity which forfeiture may work upon the rights of third parties.¹² Such is particularly the case in civil forfeiture, wherein innocent owners and secured lenders may defend their rights in the subject property,¹³ but unsecured lenders have no standing to contest forfeiture of perhaps all of a given debtor's assets.¹⁴ Notwithstanding this lack of full representation in its development, however, a judgment of civil forfeiture may restructure the rights of any and all parties who might otherwise look to the debtor's assets for payment, since it arises from a proceeding in rem.¹⁵

Noting this fact, and the remedy's increasingly revenue-producing function, commentators have divided sharply on the proper intersection of civil forfeiture and debtor-creditor law.¹⁶ As the instant case demonstrates, that developing tension between the expanding process of civil forfeiture and creditors' rights becomes most pronounced when a debtor elects to file for bankruptcy during the pendency of a civil forfeiture of his or her property. In such cases, a crucial application of federal law shall determine whether civil forfeiture, albeit possibly a veiled revenue collection device, shall be excepted from bankruptcy's otherwise governing policy staying the collection efforts of creditors.¹⁷ Alternatively, the court must determine whether bankruptcy's automatic stay shall be lifted, so as to prevent any debtor's escaping the forfeiture component of the criminal justice system.¹⁸ As they pertain to the instant controversy, each of these questions shall be addressed in turn.

II. Applicability of the Automatic Stay in the Civil Forfeiture Context.

Regarding the continuation of efforts at collection after filing, the Bankruptcy Code provides, in relevant part:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, 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 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;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

* * * * * *

11 U.S.C. § 362(a)(1), (2) & (3). The legislative history of the Code explains the goal of these several protections:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

H.R. Rep. 95-595, at 340 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 6296. Thus, for reasons of bankruptcy policy, section 362(a)'s interdicts action by any and all "entities," including governmental units. See Penn Terra Ltd. v. Dept. of Envtl. Resources, 733 F.2d 267, 271 (3d Cir.1984) ("the legislative history is clear that, in general, this section was intended to extend to governmental entities as well as private ones"); see also In re Del Mission Ltd., 98 F.3d 1147 (9th Cir.1996) (State violated automatic stay by knowingly retaining taxes which it had been ordered to repay); In re Pearson, 917 F.2d 1215 (9th Cir.1990), cert denied, 503 U.S. 918, 112 S.Ct. 1291, 117 L.Ed.2d 514 (Bankruptcy Code's automatic stay provision binds all governmental units, including United States); Small Business Admin. v. Rinehart, 887 F.2d 165 (8th Cir.1989) (governmental agency violates automatic stay when it holds or freezes payments that debtor is otherwise entitled to receive).

Certain governmental actions, however, do not fall subject to the mandatory freeze of bankruptcy's automatic stay. Specifically, as Code section 362(b) reveals, the filing of a petition does not operate as a stay:

(4) under subsection (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;

(5) under subsection (a)(2) of this section, of the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit\'s police or regulatory power;

11 U.S.C. §...