Opinion
Case No. C2-CV-04-739.
November 2, 2005
OPINION ORDER
The Court's September 27, 2005 Order granted Plaintiff United States Securities and Exchange Commission's ("SEC") motion for summary judgment on all but one of the SEC's fraud claims against the Primary Defendants Bradley T. Smith ("Smith"), Continental Midwest Financial, Inc. ("Continental"), and Scioto National, Inc. ("Scioto"). (Doc. # 81). However, the Court deferred ruling on the SEC's requested remedies — specifically, disgorgement, civil penalties, injunctive relief, and prejudgment interest — until after the primary Defendants and Relief Defendants Bancshareholders of America ("BSA"), and Bancshares Investors Brokerage, Inc. ("BSIB") addressed those issues at the Court's December 6, 2005 trial. Subsequently, the Court granted the SEC's unopposed motion to voluntarily dismiss its remaining claim with prejudice. (Doc. # 85).
On October 4, 2005 Relief Defendant BSA filed a notice of filing for bankruptcy and a corresponding motion to stay. (Doc. # 86). The next day the Court conducted its final pretrial conference. (Doc. # 87). At that conference, a dispute arose as to whether the mandatory bankruptcy stay provision applied to: (1) the action at hand; and (2) BSA. Accordingly, the Court ordered the parties to brief the issue and as a result of those briefs, the Court has determined that an exception to the mandatory stay provision applies to permit the Court to proceed to address the issue of remedies as to BSA. (Docs. # 81, 89, 91).
At the final pretrial conference, the Primary Defendants admitted that the exception to the automatic bankruptcy stay provision applied to them.
I. SECTION 362(a) DOES NOT APPLY TO THIS SECURITIES FRAUD ACTION.
BSA cites 11 U.S.C. § 362(a) as the basis for its motion for a stay. (Docs. # # 86, 91). That section provides:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title [ 11 USCS § 301, 302, or 303], or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 [ 15 USCS § 78eee(a)(3)], 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;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a corporate debtor's tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. In essence, then, § 362(a) stays the continuation of most proceedings against a debtor, including enforcement of judgments, that were or could have been commenced before the debtor filed for bankruptcy. The provision is intended to allow the bankruptcy court to centralize all "disputes concerning property of the debtor's estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in the other arenas." In re United States Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999) (internal quotation marks omitted).
In contrast, the SEC maintains that 11 U.S.C. § 362(b)(4) exempts this governmental enforcement action from § 362(a)'s automatic stay provision. Section 362(b)(4) states:
(b) The filing of a petition under section 301, 302, or 303 of this title [ 11 USCS § 301, 302, or 303], or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970 [ 15 USCS § 78eee(a)(3)], does not operate as a stay —
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit's or organization's police or regulatory power . . .
The purpose of this "police powers" exception is to prevent a debtor from "frustrating necessary governmental functions by seeking refuge in bankruptcy court." City of New York v. Exxon Corp., 932 F.2d 1020, 1024 (2d Cir. 1991) (internal quotations omitted); In re Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988). Accordingly, "where a governmental unit is suing a debtor to prevent or stop violation of fraud, . . . consumer protection, . . . or similar police or regulatory laws, or attempting to fix damages for a violation of such a law, the action or proceeding is not stayed under the automatic stay." H.R. Rep. No. 95-595 at 343, U.S. Code Cong. Admin. News at 6299.
Courts employ two tests when determining whether the police powers exception applies — the pecuniary purpose test and the public policy test. Commerce Oil Co., 847 F.2d at 295. According to the Sixth Circuit, under the pecuniary purpose test, reviewing courts focus on whether the governmental proceeding relates primarily to the protection of the government's pecuniary interest in the debtors property, and not to matters of public safety. Id. (citing NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 942-43 (6th Cir. 1986)). Those proceedings which relate primarily to matters of public safety are excepted from the stay; those that relate primarily to the government's pecuniary interest are not. In re Commerce Oil Co., 847 F.2d at 295. In contrast, under the public policy test, reviewing courts must distinguish between proceedings that adjudicate private rights and those that effectuate public policy. Id. Those proceedings that effectuate a public policy are excepted from the stay; therefore, by implication, those proceedings that effectuate private rights are not. Id.
The Court holds that the exception applies here under both tests. Turning first to the pecuniary purpose test, the Court notes that the governmental proceeding at issue in this case is administrative in nature and targets the Defendants' allegedly fraudulent securities activities. Consequently, the SEC's primary purpose in instituting this action relates to public safety and not to pecuniary interests. Moreover, the SEC is currently seeking to "fix damages for violation of [securities fraud] laws" pursuant to the Court's September 27, 2005 Order. As such, the action is not stayed under the bankruptcy's provision's automatic stay." H.R. Rep. No. 95-595 at 343, U.S. Code Cong. Admin. News at 6299.
Next, the Court determines that the SEC's current action is designed to effectuate public policy against securities fraud. As mentioned above, the SEC's Amended Complaint alleges, and the Court found, that the primary Defendants violated several securities fraud statutes. The SEC now seeks an order to ensure enforcement of the securities fraud laws which would undoubtedly further public policy against securities fraud.
Defendants therefore concede that the Court has jurisdiction over BSA's motion for a stay. (Doc. # 91 at 2).
As a result, the Court concludes that § 362(b)(4) exempts this governmental enforcement action from § 362(a)'s automatic stay provision. See SEC v. Brennan, 230 F.3d 65 (2d Cir. 2000) ; SEC v. First Financial Grp. of Texas, 645 F.2d 429, 437 (5th Cir. 1981); SEC v. Elmas Trading Corp., 620 F. Supp. 231 (D. Nev. 1985) aff'd 805 F.2d 1039 (9th Cir. 1986). Furthermore, because the Court holds that the current proceedings are exempted by § 362(b)(4), the Court is allowed to and will permit the SEC to "fix the amount of the penalties, up to and including a money judgment." Edward Cooper Painting, Inc., 804 F.2d at 942-943.
II. THE POLICE POWER EXCEPTION APPLIES TO THE RELIEF DEFENDANTS
Although BSA's memorandum in support of its motion for a stay does not address the issue of whether the police power exception applies to BSA, the Court will nonetheless discuss and quickly dispose of the issue because BSA did raise that concern at the Court's October 5, 2005 final pre-trial conference.
The United States Bankruptcy Court for the Southern District of Florida authored the lone decision on point in In re Rothschild Reserve International, Inc., Case No. 01-30448 (Bankr. S.D. Fla. May 3, 2001) (slip opinion). In that unpublished decision, the Court held that § 362(a)(4) applies with equal force to relief defendants, and noted that the "fixing" of the award against the relief defendants was "well within the provisions of" that section as well. Id. at 6. This Court will follow Rothschild's lead and therefore holds that § 362(a)(4) applies to BSA and BSIB in the instant matter.
Consequently, the court DENIES BSA's motion for a stay. (Doc. # 86).
IT IS SO ORDERED.