Opinion
CIVIL ACTION NO. 3:03-CV-2108-G
January 9, 2004
MEMORANDUM ORDER
Before the court is the unopposed motion of the United States, pursuant to FED. R. CIV. P. 60, to set aside the court's October 30, 2003 order staying the United States' claims against EOTL Systems, Inc. ("EOTL"). For the reasons discussed below, the United States' motion is granted.
Federal Rule of Civil Procedure 60(b) provides:
On motion and upon such terms as are just, the court may relieve a party . . . from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; . . . or (6) any other reason justifying relief from the operation of the judgment.
I. BACKGROUND
The United States, on September 17, 2003, filed a complaint seeking equitable relief against EOTL and its principals Daniel Fisher and Brenda Meyers-Fisher (and the multiple entities under which they conduct their business activities). Brief in Support of Rule 60 Motion to Set Aside Order ("Motion Brief") at 2. In its complaint, the United States seeks to enjoin EOTL, pursuant to sections 7402, 7407, and 7408 of the Internal Revenue Code of 1986 ("I.R.C."), from illegally promoting an abusive tax scheme, from preparing federal tax returns that enable their customers to conceal income and assets from the Internal Revenue Service ("I.R.S.") and unlawfully seek refunds of previously paid taxes, and from preparing fraudulent forms W-2 and 1099. See Complaint ¶ 8; Motion Brief at 2.On October 30, 2003, after receiving notification that EOTL filed a petition under Chapter 11 of the Bankruptcy Code, the court granted an automatic stay of the United States' claims against EOTL pursuant to section 362 of the Bankruptcy Code. See Docket Sheet. On November 13, 2003, the United States moved the court to set aside that order, arguing that the automatic stay does not apply to this proceeding. See United States' Rule 60 Motion to Set Aside Order. EOTL has filed no response to this motion.
EOTL filed a voluntary petition under Chapter 11 of the Bankruptcy Code on January 29, 2003. United States Bankruptcy Judge Barbara J. Houser granted the U.S. Trustee's motion to convert the case to a Chapter 7 bankruptcy on October 30, 2003. See In re EOTL Systems, Inc., No. 03-31017 (Bankr. N.D. Tex. 2003).
II. ANALYSIS
The Bankruptcy Code provides that the filing of a petition in bankruptcy operates as an automatic stay 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[.]11 U.S.C. § 362(a)(1). See also Securities and Exchange Commission v. First Financial Group of Texas, 645 F.2d 429, 439 (5th Cir. 1981) ("[T]he automatic stay applies to prevent dismemberment of the [debtor's] estate and insure its orderly distribution."); Penn Terra Ltd. v. Department of Environmental Resources, Commonwealth of Pennsylvania, 733 F.2d 267, 271 (3rd Cir. 1984); Brock v. Rusco Industries, Inc., 842 F.2d 270, 273 (11th Cir.), cert. denied, 488 U.S. 889 (1988). Congress has provided exceptions to this automatic stay provision, however — exceptions that subordinate the policy of the automatic stay to other interests. See 11 U.S.C. § 362(b). The exception relevant to this case is the exception for enforcing a "governmental unit's or organization's police and regulatory power." Id. § 362(b)(4).
The regulatory and police powers exception to the automatic stay provision of the Bankruptcy Code is as follows:
(b) The filing of a petition [in bankruptcy] . . . does not operate as a stay . . .
* * *
(4) under . . . subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit . . . 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[.]11 U.S.C. § 362(b)(4) (emphasis added).
A continuing civil enforcement proceeding brought by a governmental unit and the enforcement of injunctive relief against a debtor in bankruptcy are exempted from the automatic stay under the regulatory and police power exception of § 362(b)(4). First Financial, 645 F.2d at 438 (finding that the enforcement of a preliminary injunction against First Financial, which enjoined the purchase and sale of securities by First Financial because of certain alleged violations of the federal securities laws, was not stayed under § 362(a)). See also, e.g., Board of Governors of Federal Reserve System v. MCorp Financial, Inc., 502 U.S. 32, 39-40 (1991) (upholding the Board's ability to proceed with administrative hearings against a corporation in bankruptcy; finding that the Board's proposed actions against MCorp fell "squarely within § 362(b)(4)"); Ohio v. Kovacs, 469 U.S. 274, 283 n. 11 (1985) (citing with approval the Third Circuit's conclusion, in Penn Terra, 733 F.2d at 271-274, that an injunction against a bankrupt corporation requiring compliance with state environmental laws was not subject to the automatic stay provision of § 362); In re Universal Life Church, Inc., 128 F.3d 1294, 1297-99 (9th Cir. 1997) (holding that the automatic stay provision of § 362 is not violated by the I.R.S.'s revocation of a debtor's tax exempt status), cert. denied, 524 U.S. 952 (1998). Explaining Congress' purpose in providing the regulatory and police power exception, the Fifth Circuit noted: "[A] government unit's suit against debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws is not stayed [under the automatic stay]; nor is enforcement of an injunction in such cases stayed." First Financial, 645 F.2d at 438 (citing S.R. No. 95-989, 95th Cong., 2d Sess. 50, H.R. No. 95-595, 95th Cong., 2d Sess. 341, reprinted in (1978) U.S. Code Cong. Ad. News 5787, 5836 and 6298). Certainly, enjoining a debtor in bankruptcy from committing or promoting tax fraud is congruent with the purposes of § 362(b)(4) and furthers the public welfare by protecting taxpayers as well as the United States Treasury.
In the case sub judice, the United States is not seeking to advance any pecuniary interest in EOTL's property, nor is it seeking a money judgement from EOTL. Instead, the United States is exercising its police or regulatory power to enjoin EOTL from promoting allegedly illegal tax schemes. See Motion Brief at 1. The court concludes, therefore, that the United States' injunction action, brought under sections 7402, 7407, and 7408 of the I.R.C., is not subject to the automatic stay provision of 11 U.S.C. § 362. This conclusion is consistent with the Fifth Circuit's observation that the police or regulatory power exception in § 362(b)(4) "permit[s] the pursuit of actions to protect the public health and safety, and thereby avoid[s] making the bankruptcy court a haven for wrongdoers." First Financial, 645 F.2d at 439 n. 16.
III. CONCLUSION
Accordingly, the United States' motion to set aside the court's order of October 30, 2003 is GRANTED, pursuant to FED. R. CIV. P. 60(b), and the claims filed by the United States against EOTL Systems, Inc. are hereby REOPENED.