Police or Regulatory Power Exception to Automatic Stay

(Excerpt) Under § 362(b)(4) of the Bankruptcy Code, a party may bring a claim against a debtor despite the automatic stay provision of § 362(a) if the claimant acts within a governmental unit or agency’s police or regulatory powers. In some cases, however, it is unclear whether the claimant is in fact enforcing police or regulatory powers, or whether the claimant is attempting to adjudicate private rights. In making this determination, courts have advocated narrowing the scope of the § 362(b)(4) exception to the automatic stay, with the result that a claimant that appears at first blush to act within its police or regulatory powers may ultimately be held in violation of the stay. Two cases illustrate how similar facts can result in divergent holdings once the court examines the connection between the claimant and the governmental unit. In both In re Reyes and McMullen v. Sevigny (In re McMullen), a real estate client filed a complaint against a debtor real estate agent with the state real estate commission. The Bankruptcy Court for the Western District of Texas held in Reyes that because the state agency was compelled to bring an action against the agent after the client filed the complaint, that client—and not the state agency—was the true claimant. Thus, the Reyes court held that the action did not come within the police or regulatory power exception to the automatic stay. In contrast, the First District in McMullen held that the proceeding brought against the debtor was excepted from the automatic stay because the state agency’s power to revoke or suspend a debtor agent’s license “plainly implement[ed]” state policy, and the agency lacked the power to make the debtor agent pay damages to the client. Accordingly, the McMullen court held that the proceeding “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 client].” Part I of this memorandum describes the police or regulatory power exception under § 362(b)(4) and the exception’s general application. Part IIA explores situations in which courts have held that the police or regulatory exception to the stay applied and highlights three factors the courts consider when making that determination: the purpose behind the government agency’s formation; the agency’s choice in bringing the action; and the agency’s inability to award monetary damages to specific claimants. Part IIB examines situations in which courts have held that the exception to the stay did not apply, and explains three factors those courts consider: the agency’s lack of choice in bringing the action; the agency’s ability to award monetary damages to individual claimants; and the agency’s decision not to intervene in the proceeding against the debtor. The memorandum concludes that the jurisprudence in this area demonstrates a consistently narrow interpretation of § 362(b)(4) because the courts have recognized the expansive nature of the automatic stay