Three to Five Years
(catch up on missed mortgage payments)
Vehicles in Chapter 13
Memorandum on Receivership
Prior to filing for bankruptcy relief, the Debtors entered into a Consent Order filed in the District Court for Baltimore City related to the Debtors’ real property known as Oak Avenue, Baltimore, Maryland (hereinafter the “Property”). The Consent Order has been admitted into evidence as Exhibit 1. Pursuant to the Consent Order, the District Court for Baltimore City appointed a receiver, One House at a Time, Incorporated (hereinafter known as the “Receiver”), a private, non-profit corporation. Paragraph two of the Consent Order provided that the Receiver’s actions were stayed until August 31, 2013. Paragraph nine of the Consent Order stated that “upon the appointment of a Receiver to rehabilitate, demolish, or sell the property, and after the deadline for the stay in Paragraph 2 has passed, all Parties are divested of any authority to act in furtherance of those goals, and any Party who takes any steps to rehabilitate, demolish or sell the Property is subject to sanctions and penalties, including but not limited to contempt.” After August 31, 2013, no governmental unit had the authority to sell the Property – the only entity allowed to sell under the Consent Order was the Receiver.
On December 5, 2013, the Debtors filed for Chapter 13 bankruptcy relief. At the time of the filing of the case, the Debtors owned the Property.
All parties were on notice of the bankruptcy filing and were listed in mailing matrix in the above captioned case. See Exhibit 4. On December 10, 2013, the Receiver sold the Property at public auction for $5,000. A suggestion of bankruptcy was filed on December 11, 2013 with the Baltimore City District Court Clerk’s Office. See Exhibit 3. The Consent Order requires that “within 30 days of the sale of the Property, the Receiver shall file with this Court a Report of Sale.” Furthermore, the Consent Order states that, “Exceptions to the sale may be filed within 30 days after the date of the mailing or posting of the notice, whichever is later.”
The Receiver never mailed a copy of the Report of Sale to the Debtors’ bankruptcy counsel. At the evidentiary hearing, Counsel for the Receiver testified that the U.S. Postal Service did not deliver a copy of the Report of Sale by the required certified mailing. However, Counsel for the Receiver testified that a copy of the Report of Sale was mailed first-class, regular mail to the Debtors. The Debtors testified that they never received a copy of the Report of Sale.
On January 10, 2014, the Receiver filed a Report of Sale with the Clerk of the District Court for Baltimore City. See Exhibit 7. On February 24, 2014, an Order Ratifying Sale was issued. See Exhibit 9. Title to the Property is now in the hands of BP Inc. See Exhibit 11.
The Property was not sold by Baltimore City. The Receiver, as a corporation, is not a government unit, and it did not act on behalf of a government unit. The Receiver was appointed by the state court, not hired by Baltimore City. The Receiver did not act on behalf of, nor was it controlled by a governmental unit. To the contrary, once the Receiver was appointed, the Consent Order made clear that Baltimore City was divested of any authority to rehabilitate, demolish, or sell the property. Because the sale of the Property was made by a private entity, the sale does not fall within the exception of the Automatic Stay found at 11 USC §362(b)4. Therefore, the Receiver was prevented by 11 USC §362(a) from selling the Property. As such, the sale is void.
The bankruptcy code defines a “governmental unit” as “the United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.11 USC§101(27).
Further, in United States ex. rel. Goldstein v. P & M Draperies, Inc., 303 B.R. 601, 603 (D.Md.2004), Judge Derby held that definition of a governmental until was limited to actual government entities. United States ex. rel. Goldstein v. P & M Draperies, Inc., 303 B.R. 601, 603 (D.Md.2004). The Court cites legislative history:
“A portion of the House Report expressly stated that “[e]ntities that operate through state action such as through the grant of a charter or license, and have no further connection with the state or federal government are not within the contemplation of the definition.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 311 (1977); S.Rep. No. 989, 95th Cong.2d Sess. 24 (1978), U.S. Code Cong. &Admin.News, pp. 5787, 5810, 6268, cited in In re Revere Copper and Brass, Inc., 32 B.R. 725, 727 (S.D.N.Y.1983).
United States ex. rel. Goldstein v. P & M Draperies, Inc. decided the nature of a private individual bringing a qui tam action. As such, the Court said, “although a qui tam action can certainly be said to be an action “on behalf” of a “governmental unit” or “for” a “governmental unti,” it is not an action “by a governmental unit.” Id. at 605. In conclusion, the Court stated that, “the conclusion I have reached is consistent with the decisions of several courts that the “governmental unit” exception does not extend to various actions brought by private individuals or organizations to enforce governmental regulations.”Id. at 605.
In contrast to the Receiver’s action in this case, In re Javens, 107 F.3d 359, 361 (6th Cir. 1997), is a condemnation case where buildings were condemned by a “governmental unit” (Hazel Park).Hazel Park had condemned the debtor’s property before debtor filed for bankruptcy relief. Hazel Park was exercising a police power. Hazel Park demolished three condemned buildings owned by Harry and Joyce Javens after they filed for bankruptcy. In re Javens, 107 F.3d 359, 361 (6th Cir. 1997). Findings were made that the buildings were an actual dangerto the public and the buildings were demolished by a governmental unit.
In this case, no actual findings of immediate danger were made. In addition, a governmental unit did not correct defects on the property by demolishing the property. Moreover, demolishing the house in this case would have left the bankruptcy estate with valuable land which could have been sold to a developer. At the hearing, the Debtor testified that the Property was large enough to build multiple row-house units on the Property.
The Receiver is not performing a police or regulatory function. Specifically, 11 USC §362(b)4 states that the automatic stay does not operate as a stay for “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.”
In the case of In re Royal, the Court of Appeals for the Fourth Circuit held that the taking by eminent-domain of groundwater rights at debtors’ mobile home park was not enforcement of county’s police and regulatory power. In re Royal, 137 Fed.Appx.537 (4th Cir.2005).The government was attempting to exercise its authority under the exception to the automatic stay. The Fourth Circuit cited the legislative history behind the exception to the automatic stay and concluded that the exception must be construed narrowly because the bankruptcy court can quickly and easily correct issues resulting from a problematic stay, but has no power to correct issues caused by a problematic exception to a stay.Id. at 541.
Other courts have held that Section 362(b)(4) should only be used for “actions which represent a direct application of the unit’s police or regulatory powers.” In re Iezzi, 504 B.R. 777 (E.D.Pa., 2014). The collection of unpaid recycling fees was not regulatory in nature. Id. at 790. The Court reasoned that if recycling fees were regulatory in nature “any litigation relating to virtually any government monetary claim that has any relationship to a government regulatory program, no matter how attenuated that relationship might be, would be excepted from the automatic stay.” Id. at 791. (See also“[T]he cases and the legislative history of the Code indicate that the exception relating to governmental police and regulatory power is to be construed narrowly. In re Cash Currency Exchange, Inc., 37 B.R. 628 (N.D.Ill.1984).
The Mayor memorandum glosses over the narrowness of the police and regulatory exception to the automatic stay by citing Safety-Kleen, Inc. v. Wyche, 274 F.3d. 846 (4th Cir. 2001). In Safety-Kleen, the government took taken. In the case at hand, a private non-profit (the Receiver) took action. In Safety-Kleen, the Debtor ran a hazardous waste landfill. In order to operate, Safety-Kleen was required to post bonds to secure the costs associated with the maintenance of the facility. The U.S. Treasury removed Safety-Kleen’s surety (Frontier Insurance Company) from its list of approved sureties. Subsequently, Safety-Kleen was ordered by the South Carolina Department of Health and Environmental Control (DHEC) to acquire substitute bonds. However, Safety-Kleen could not afford to acquire new bonds which caused DHEC to shut the facility down. Ultimately, the Court found that DHEC’s order to acquire new bonds fell within the 362(b)(4) exception because the government was exercising a regulatory power to promote the public safety and welfare. Id. at 864. The Court held that, “The financial assurance regulations are within the regulatory exception because they serve the primary purpose of deterring environmental misconduct. Stated more positively, the regulations serve to promote environmental safety in the design and operation of hazardous waste facilities.” Id. at 866.
There are two tests for determining whether ‘governmental unit” action fits within the section 362(b)(4) exception, the “pecuniary purpose” test and the “public policy” test. In re Universal Life Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997).Each test has narrow parameters which have been refined by case law.
Under the pecuniary purpose test, the court determines whether the government action relates primarily to the protection of the government’s pecuniary interest in the debtor’s property or to matters of public safety and welfare. If the government action is pursued solely to advance a pecuniary interest of the governmental unit, the stay will be imposed. In re Universal Life Church, Inc., 128 F.3d 1294 (9th Cir. 1997) (internal citations omitted).
A state-appointed receiver’s actions were pecuniary in nature and therefore not entitled to the 362(b)(4) exception in the case of In re Cash Currency Exchange, Inc., 37 B.R. 617, 621 (N.D.Ill.1984). A week prior to the filing for bankruptcy relief, Illinois currency exchanges had been placed under administrative receiverships. The state-appointed receiver was directed to turn over property of Illinois currency exchanges to the bankruptcy trustee. The Court reasoned that regulatory laws cannot conflict with the “res or property” of the estate. Id. at 628. Because the purpose of the Community Currency Exchanges Act focused on the payment of creditors, the state-appointed receiver’s actions were to “protect the pecuniary interests of creditors of the exchanges.” Id. The statute did not authorize liquidation proceedings against currency exchanges to stop fraud or for consumer protection. Therefore, the state’s administrative receivership did not fall within the § 362(b)(4) exception from the automatic stay. Id. at 629.
The public policy test “distinguishes between government actions that effectuate public policy and those that adjudicate private rights.” In re Universal Life Church, Inc.at 1297. (internal citations omitted). The Ninth Circuit held that IRS administrative actions were permissible under the police and regulatory power exception to the automatic stay. In re Universal Life Church, Inc., 128 F.3d 1294 (9th Cir. 1997). Specifically, “a tax exempt status revocation letter had a public policy purpose and, by itself has no pecuniary effect.” Id. at 1299. The Court held that “the IRS’s action protects a public trust in the 501(c)(3) certification.” Id. at 1299.(Clearly, the IRS is a governmental unit.) The Court went on to state that police or regulatory power refers to “the enforcement of laws affecting health, welfare, morals and safety, but not regulatory laws that directly conflict with the control of the res or property by the bankruptcy court.” Id. at 1297.
Selling the Property in this case did not make the property safe – therefore, the Receiver’s action was not a “direct” police or safety action. The goal of selling the Property was to pay someone else to fix the Property. The purchaser must fix the Property and make it safe. The Purchaser fixes the Property because he/she will receive valuable payment in the form of a deed. In other words, the Receiver offers “payment” to the purchaser in exchange for bringing the Property up to Code. To come full circle, the Receiver makes a bargain with the purchaser. The purchaser agrees to fix the property. As payment, the Purchaser gets the valuable land. What is this transaction? A promise to repair the Property and a debt collection by the Receiver − collecting the land from the Debtor and paying for the repairs made by the Purchaser. It is Pecuniary.
Another analogy, a debtor owns a grassy-green football field in the heart of the nicest area in Baltimore City. The field is worth $100,000. On the edge of the field is a rotten tree which will cost the owner or the City $5,000 to cut down in order to make it safe. The City cuts the tree down and puts a lien against the property for $5,000. Next, the field owner files for bankruptcy. Clearly, the City cannot auction off the field for $5000 to satisfy the debt without lifting the automatic stay because the City is collecting a debt. The case at hand is the same transaction. It’s debt collection made to sound like police and regulatory powers.
The Mayor argues that there was government action. In the case at hand, the government took the Debtors’ real property and sold it post-petition. However, eminent domain actions are subject to the automatic stay. In the case of In re Quality Supplier General Partnership, 176 B.R. 135 (Bkrtcy.D.Md.,1994), Judge Derby held that “the automatic stay of 11 U.S.C. § 362(a) is applicable to enjoin the State’s exercise of its power of eminent domain as to property of the debtors.” The Court reasoned that “the federal interest in protecting a debtor’s right to reorganize should prevail, if it can be accommodated without doing substantial harm to the state’s interests in pursuing condemnation of a debtor’s property.” The automatic stay does not permanently stop the State government’s action. “When a bankruptcy estate’s property is revested in a debtor after confirmation of a reorganization plan [in a Chapter 11], the debtor’s property interests stand in the same relationship to the State’s sovereign powers of eminent domain as they did before bankruptcy, and in the same relationship as the ownership rights of other property owners. In re Quality Supplier General Partnership, 176 B.R. 135 (Bkrtcy.D.Md.,1994).
The Receiver sold the Property without lifting the automatic stay imposed by §362(a). The Receiver is not a “governmental unit” pursuant to the definition of §101(27) “governmental unit.” The Receiver is not an actual governmental unit but instead a non-profit entity appointed by the terms of a Consent Order. Pursuant to the Consent Order, the government was divested of all authority to act – only the Receiver could act. Legislative history notes that non-governmental action on behalf of the government cannot use the exception to the stay found at §364(b)(4). The Receiver’s action was not “police or regulatory” in nature. The Receiver’s actions were pecuniary. They were a complicated debt collection action. The use of the “police or regulatory” exception is a narrow exception. It excludes certain governmental functions even when the government action ultimately relates to a police or regulatory action. The police or regulatory power must have a direct nexus. In addition, regulatory actions cannot conflict with property of the bankruptcy estate. Furthermore, government action which adjudicates private rights does not fall with the exception to the automatic stay. Moreover, eminent domain actions are stopped by §362(a). Therefore, the sale in this case was void for all of the above reasons.