Matter of Commonwealth Cos., Inc.
| Decision Date | 02 December 1987 |
| Docket Number | Bankruptcy No. BK87-2456,BK87-2457. |
| Citation | 80 BR 162 |
| Parties | In the Matter of COMMONWEALTH COS., INC., Commonwealth Electric Co., Inc., Debtors. |
| Court | U.S. Bankruptcy Court — District of Nebraska |
Joseph Badami, Lincoln, Neb., for Commonwealth Companies.
Robert Craig, Omaha, Neb., Steven Russell, Lincoln, Neb., for Creditors' Committee.
Robert Okun, Washington, D.C., for the U.S.
This matter was heard on September 29, 1987. Joseph Badami appeared for Commonwealth Companies, Robert Craig appeared for the Creditors' Committee and Steven Russell and Robert Okun appeared for the United States. At the hearing the Court requested the parties to submit written legal arguments.
The United States requests either an exception from the automatic stay under Section 362(b)(4) or relief from the stay for cause under Section 362(d) in order to join debtors, Commonwealth Companies, Inc., and Commonwealth Electric Co., Inc., in the United States pending civil fraud action against Fischbach & Moore, Inc., S. Lofgren, P.T. Mahoney, P.B. Murphy and P.C. Schorr, III. In its civil fraud action, the United States alleges unjust enrichment and payment by mistake as well as that Fischbach, et al., violated the False Claims Act, 31 U.S.C. Sections 3729-33, which Act provides for treble money damages. The gravamen of the complaint is that debtors and Fischbach, et al., submitted false and inflated claims on a Tennessee electrical construction project, 75 percent funded by the United States. Because the debtors had filed for Chapter 11 relief prior to the United States filing its claim against Fischbach, et al., the debtors were not named in the United States complaint.
The United States contends that an action under the False Claims Act qualifies for the exception from the stay provided in Section 362(b)(4) and points to case law supporting this position. Alternately, the United States asserts that the promotion of judicial economy and the fixing of the amount of debtors' liability are sufficient cause under Section 362(d) to lift the stay. In its pending civil fraud action, the United States seeks damages, imposition of a constructive trust and/or an equitable lien upon the fraud proceeds. However, if the United States is permitted to proceed with its civil action against debtors, the United States agrees to not seek the enforcement of a constructive trust and/or equitable lien against debtors, but will request judgment for the damages and penalties claimed in its complaint.
The debtors and Creditors' Committee ("debtors") contend that legislative history and case law direct a narrow interpretation of Section 362(b)(4). The debtors claim that an exception to the stay should be permitted only when the public health and safety is threatened or when the governmental unit is preventing or stopping ongoing violations of police or regulatory laws. The debtors argue that there is no ongoing fraud in the instant case and thus no public health or safety threat. The debtors contend that the sole purpose of the United States request is a pecuniary one—to improve its status from an unsecured creditor with a contingent, unliquidated claim to that of a judgment creditor. Further, the debtors argue that relief for cause under Section 362(d) is not appropriate because: 1) The United States is not showing irreparable harm; 2) the debtors should be provided a "breathing spell" to plan their case administration; 3) the stay would be pointless if every creditor were allowed a lifting of the stay to affix damages; and 4) the added cost to debtors in defending additional lawsuits would be a burden.
I. Whether prosecution under the False Claims Act satisfies the exception from the automatic stay provided in Section 362(b)(4)?
II. Whether the public policy of promoting judicial economy and the liquidation of a claim against debtor are cause sufficient to allow relief from the automatic stay under Section 362(d)?
I. Section 362(b)(4) provides that the filing of a petition does not operate as a stay "of 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) (1987). Thus, Section 362(b)(4) "excepts" certain actions from the automatic stay activated upon the filing of a petition for relief. Both the United States and debtors look to the legislative history of Section 362(b) to interpret the section's intent. The relevant passages are:
1. This section 362(b)(4) is intended to be given a narrow construction in order to permit governmental units to pursue actions to protect the public health and safety and not to apply to actions by a governmental unit to protect a pecuniary interest in property of the debtor or property of the estate.
Debtors' reply brief at 1 ().
2. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud . . . laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.
United States Memorandum in Support of Motion at 4-5 ().
An additional passage from the legislative history not mentioned in the briefs but which the Court believes relevant reads: H.Rep. 95-595 at 342, 1978 U.S.Code Cong. & Admin.News 6298 (emphasis added). Additionally, in its general discussion of the automatic stay, the House Report explains the purpose of the exception:
Under present law, there has been some overuse of the stay in the area of governmental regulation. For example, in one Texas bankruptcy court, the stay was applied to prevent the State of Maine from closing down one of the debtor\'s plants that was polluting a Maine River in violation of Maine\'s environmental protection laws. In a Montana case, the stay was applied to prevent Nevada from obtaining an injunction against a principal in a corporation who was acting in violation of Nevada\'s anti-fraud consumer protection laws. The bill excepts these kinds of actions from the automatic stay. The States will be able to enforce their police and regulatory powers free from the automatic stay. The bankruptcy court has ample additional power to prevent damage to the bankrupt estate by such actions on a case-by-case basis. By exempting these State actions from the scope of the automatic stay, the court will be required to examine the State actions more carefully, and with a view to protecting the legitimate interests of the State as well as of the estate, before it may enjoin actions against the debtor or the estate.
H.Rep. at 175, 1978 Code Cong. & Admin. News 6135 (footnotes omitted).
The United States argues that the legislative language, supra p. 2, stating that the exception from the stay should not be applied to "actions by a governmental unit to protect a pecuniary interest in property of the debtor or property of the estate" is broadened by the language in the second passage, supra p. 3, stating that the exception does apply when a governmental unit is "attempting to fix damages for violation of such a law." However, the Court finds the United States argument unpersuasive. The specific Congressional statement that "the effect of an exception is not to make the action immune from injunction" and the more general language discussing the purpose of the automatic stay, supra p. 3, set forth the parameters intended by Congress for the Section 362(b)(4) exception. In other words, the type of governmental action Congress anticipated to be excepted from the stay is a circumstance which requires injunctive relief, and the type of damages intended to be permitted are those accompanying or following an injunctive action.1
In Cournoyer v. Town of Lincoln, 53 B.R. 478 (D.R.I.1985), the District Court of Rhode Island listed several examples of damage actions excepted under Section 362(b)(4).
In Re Cousins Restaurant, 11 B.R. 521 (Bankr.W.D.N.Y.1981) (); In Re Porter, 42 B.R. 61, 64-67 (Bankr.Tex.1984) (); In Re Thomassen, 15 B.R. 907 (9th Cir.1981) (); In Re Colonial Tavern, Inc., 420 F.Supp. 44 (D.Mass.1976) ().
Id. at 483. In each case the penalties or damages assessed were non-monetary.
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