Bankruptcy Code’s Automatic Stay ‘Excepted’ in Houston Robocall Case: States

The automatic stay “triggered” by robocalling defendant Michael Smith’s voluntary bankruptcy filing (see 2301200027) doesn't prevent the U.S. District Court for Southern Texas in Houston “from hearing the instant police and regulatory suit before it,” said the seven plaintiff states in a memorandum of law Monday (docket 4:20-cv-02021) contesting the applicability of the automatic stay to the case. The court “has the power to determine whether the stay applies to this suit,” said Arkansas, Indiana, Michigan, North Carolina, North Dakota, Ohio and Texas.

The bankruptcy code “contains an explicit exception to the automatic stay” permitting the plaintiff states “to proceed with police power proceedings, such as this suit,” they said. The court has the authority, “concurrent” with the bankruptcy court, “to determine whether the police power exception to the automatic stay applies,” they said. The parties “need not seek relief” from the bankruptcy court before proceeding with this suit, they said.

The legislative history of the exception “expressly provides” that where a governmental unit is suing a debtor to prevent or stop a violation of fraud, environmental protection, consumer protection, safety or “other similar police or regulatory laws,” or attempting to fix damages for violation of such a law, “the action or proceeding is not stayed,” said the states. The filing of a bankruptcy and the imposition of the automatic stay don't divest all other courts of jurisdiction to hear every claim that's in any way related to the bankruptcy proceeding, they said. Whether the stay applies to litigation otherwise within the jurisdiction of a district court is an issue of law within the competence of both the court where the litigation is pending and the bankruptcy court, they said.

A “two-pronged test” for the court to administer will “determine whether an action falls under the police and regulatory power exception,” said the states. The court must first determine whether the plaintiff in the non-bankruptcy-court action is a “governmental unit” as defined by the bankruptcy code, they said: “Then the court must next determine whether the governmental unit’s action is an exercise of its police and regulatory power.”

The plaintiff states in the robocalling action are clearly a governmental unit as defined by the bankruptcy code, they said, and they clearly qualify for the police and regulatory power exception under the bankruptcy code.

The plaintiff states “are not only free to commence or continue an action to enforce its police and regulatory power,” but they may also “enforce a judgment for injunctive relief,” they said. “A continuing civil enforcement proceeding brought by a governmental unit and the enforcement of injunctive relief obtained therein are exempted from the automatic stay provision,” they said.

The policy behind the police power exception to the automatic stay is clear, said the states. The plaintiff states are free to continue to exercise their police and regulatory power “so that defendants will not use bankruptcy as a way to exempt themselves from complying with state laws,” they said.

Because of this important exception to the automatic stay, the government can pursue actions to protect consumers “and thereby avoid making the bankruptcy court a haven for wrongdoers,” said the states. The bankruptcy code, and the cases interpreting it, all “strongly support” the plaintiff states’ request that the court “exercise its jurisdiction to determine that the instant case is excepted from the bankruptcy automatic stay and to proceed with the pending case,” they said.