Opinion
92 Civ. 6987 (JFK)
April 5, 2002
OPINION AND ORDER
The issue before the Court is whether the Securities and Exchange Commission ("SEC") action against defendant Jonathan Hirsh ("Hirsh") is automatically stayed under bankruptcy law. Hirsh filed a bankruptcy petition on January 28, 2002, in the United States Bankruptcy Court, Central District of California. Hirsh contends that the automatic stay provision of the Bankruptcy Code prevents the SEC action from going forward while the stay is in effect. For the reasons set forth below, the Court holds that the SEC's action is exempted by 11 U.S.C. § 362 (b) (4) from the automatic stay provided by Section 362(a)(1) of the Bankruptcy Code.
Discussion
Hirsh argues that this Court does not have jurisdiction to determine the scope of the automatic stay. Hirsh argues that because the bankruptcy is pending in the Ninth Circuit, the Ninth Circuit rule should apply. In the Ninth Circuit, the bankruptcy court has "the ultimate authority" to determine the scope of the automatic stay. In re Gruntz, 202 F.3d 1074, 1087 (9th Cir. 2000).
In the Second Circuit, concurrent jurisdiction exists between the district court and the bankruptcy court. See In re Baldwin-United Corp. Litig., 765 F.2d 343, 347 (2d Cir. 1985). The district court has jurisdiction to determine its own jurisdiction, as well as whether the proceeding pending before it is subject to the automatic stay. Id. The Court finds that it has jurisdiction to determine whether the SEC action is exempt from the automatic stay.
Section 362 of the Bankruptcy Code provides an automatic stay of litigation against the debtor. See 11 U.S.C. § 362 (a)(1). The Bankruptcy Code exempts from that automatic stay actions "by a governmental unit to enforce such governmental unit's police or regulatory power." Id. § 362(b)(4). The SEC's prosecution of a civil fraud action is excepted from the automatic stay under the regulatory exception. See SEC v. Towers Fin. Corp., 205 B.R. 27, 30 (S.D.N.Y. 1997) (holding that the SEC action arising from an investment fraud scheme was exempted by 11 U.S.C. § 362 (b)(4) from the automatic stay and that disgorgement is a remedy sought by the SEC in furtherance of its police powers); see also Bilzerian v. SEC, 146 B.R. 871, 873 (Bankr. M.D. Fla. 1992) (finding an exception to the automatic stay for an SEC action seeking injunctive relief and disgorgement).
Hirsh argues that the police and regulatory exception is inapplicable here as it permits governmental units to pursue actions to protect public health and safety, and the SEC action seeks only a money judgment. The SEC does not seek only a money judgment. The amended complaint seeks an injunction against Hirsh from future violations of the securities laws and to fix damages in furtherance of the SEC's police powers to deter Hirsh from violating securities laws in the future and to protect the public from fraud. When the government seeks to impose financial liability on a party, it is acting in its police or regulatory capacity in that it is attempting to curb such behavior by making the behavior more expensive. SEC v. Brennan, 230 F.3d 65, 72 (2d Cir. 2000). Until liability is fixed by entry of judgment, the government is acting in its police or regulatory capacity by "burdening certain conduct so as to deter it." Id. at 73. The SEC action here falls within the exception.
The SEC may prosecute an action through and including the entry of judgment on the merits. The governmental unit exception of 362(b)(4) permits the entry of a money judgment against a debtor. Brennan, 230 F.3d at 71 (emphasis in original). Anything beyond the mere entry of a money judgment against a debtor is prohibited by the automatic stay. Id. (citations omitted). Here the SEC seeks an order fixing the appropriate amount of disgorgement, civil penalties, and interest. The SEC does not seek an order directing payment of disgorgement or civil penalties and interest. Accordingly, the action may proceed.
Additionally, Hirsh relies on the statements made by SEC counsel Ms. Schrage at a Chapter 11 case status conference in the bankruptcy court for the Central District of California on March 7, 2002. Ms. Schrage stated that the SEC sought a money judgment against Hirsh and did not discuss the injunctive relief sought. The record of proceedings in bankruptcy court does not change the relief sought in the amended complaint. The amended complaint controls. The SEC action may proceed.
CONCLUSION
For the reasons set forth above, under 11 U.S.C. § 362 (b)(4), the SEC's action against Hirsh is exempt from the automatic bankruptcy stay of Section 362(a)(1). The action may proceed.
SO ORDERED.