Judicial Code 959(b) and the Stay Part II

Judicial Code 959(b) and the Stay Part II

Journal Issue: 
Column Name: 
Journal Article: 
The first part of this article (September 1997 ABI Journal) discussed the interrelationship between Judicial Code §959(b) and the automatic stay. This article will examine the important and intricate relationships among Bankruptcy Code §§105(a), 362(b)(4) and (b)(5) and Judicial Code §959(b).

§105 Injunction Proper

There may exist extraordinary circumstances that warrant a bankruptcy court to employ its equitable powers to enjoin administrative action that is destructive to a debtor's corporate reorganization case and also harmful to the public interest. An interesting case in which a bankruptcy court employed Bankruptcy Code §105(a) and enjoined an admin-istrative agency is In re Metro Trans. Co.[1] The debtor owned and operated 800 medallion taxi cabs in Philadelphia.

On July 2, 1986, the Public Utility Commission (PUC) received a notification that the debtor's insurance coverage would be canceled effective August 1, 1986. On July 29, 1986, the debtor filed a voluntary chapter 11 case. On or about August 11, 1986, the debtor prepared a settlement agreement concerning a PUC administrative proceeding; the settlement agreement provided that the debtor's proposed self-insurance plan adequately protected the public. An administrative law judge subsequently recommended, however, that the debtor's proposed plan be rejected because it did not adequately protect the public. The PUC accepted the administrative law judge's recommendation, and denied the debtor's self-insurance application. The debtor sought to enjoin the enforcement of the PUC order.

The bankruptcy court issued an injunction against the PUC.[2] The court ruled that the threat to the assets of the estate was the correct standard to determine whether a governmental unit should be enjoined from taking action against a debtor.[3] The facts in this case warranted the granting of an injunction.[4] The debtor would have been ruined unless an injunction was issued, and there was no market to liquidate the debtor's 800 taxi medallions.[5] Not only would the creditors be harmed, but also public transportation in Philadelphia would be disrupted. Equally significant, the PUC's staff came to the conclusion that the debtor's proposed plan adequately protected the public.[6] The court stated:

Our reluctance to reach a conclusion different from that of the PUC is tempered by the consistent responses of the PUC itself to the debtor's self-insurance plan. On August 25, 1986, the PUC's prosecutorial counsel stipulated that the terms of the settlement agreement, which requires numerous changes in the debtor's operations and provides a means to terminate the debtor's operations if it cannot meet the agreement's financial requirements, "provides adequate protection to the public." The settlement agreement certainly appeared to put only the financial capacity of the debtor to meet the terms of the settlement agreement before the Commission.[7]

The only individuals who believed that the settlement agreement would not adequately protect the public were the PUC chairperson and an administrative law judge, contrary to the express findings of the PUC staff.[8] Furthermore, the administrative law judge failed to make any express findings of fact on the issue of adequate protection, even though this was supposedly the only issue before him.[9]

Metro Trans. Co. is an example of a reorganization case where there are compelling circumstances meriting the issuance of an injunction. The evidence adduced at trial reflected that the administrative staff thought that the debtor's proposed self-insurance program would adequately protect the public. Of equal merit, the administrative law judge's ruling could be attacked as arbitrary and capricious because it lacked any factual foundation. Although a bankruptcy court is not supposed to act as an appellate court, it is incumbent upon a bankruptcy court to protect and preserve the assets of the estate. Here, an injunction was warranted to protect an estate from an improper application of the law. The bankruptcy court did not circumvent the application of Judicial Code §959(b) because the administrative staff had stated that the proposed plan complied with state law. Rather, the bankruptcy court sought to ensure that state law would be applied fairly to a financially distressed entity.

§105 Injunction Improper

One court has held that Bankruptcy Code §105(a) cannot be employed to override the express requirements of Judicial Code §959(b).[10] Wilner Wood Products v. State of Maine, Department of Environmental Protection,[11] concerned a Maine law under which the debtor was required to obtain an air emission license from the Department of Environmental Protection (DEP). The debtor lacked the financial resources to comply with the licensing requirements. The bankruptcy court issued a preliminary injunction staying the DEP's denial of the debtor's license pending the state appeal process.

The district court vacated the issuance of the preliminary injunction, and remanded for proceedings consistent with its opinion.[12] Judicial Code §959(b) made it clear that a debtor-in-possession must operate and manage its property in compliance with state law.[13] There is no exception for debtors that are inconvenienced or burdened by state law.[14] The court stated:

Wilner Wood, the debtor-in-possession in this case, must therefore comply with the valid environmental laws of the state of Maine and obtain an air emission license if it wishes to manage and operate its property on an on-going basis. The bankruptcy court cannot issue an injunction against the state that, even on a temporary basis, effectively grants Wilner Wood a license.[15]

Nothing in the express language of Bankruptcy Code §105(a) suggests that Congress intended to override the specific prohibitions contained in Judicial Code §959(b).[16] Section 105(a) does not authorize a bankruptcy court to create substantive rights that are non-existent under applicable law, or constitutes a roving commission to do equity.[17]

Conclusion

Wilner Wood reflects that the prevailing consensus of the lower federal courts that bankruptcy courts should abstain from employing Bankruptcy Code §105(a) to override the requirements of Judicial Code §959(b). The district court's interpretation of Bankruptcy Code §105(a) is sound because a significant number of businesses are subject to public health and safety regulations. Judicial Code §959(b) is intended to ensure that debtors-in-possession comply with applicable public health and safety laws. Under a relaxed standard for obtaining a §105(a) injunction, debtors would be able to circumvent legitimate public health and safety laws, which would imperil public safety. Finally, bankruptcy should not be a device for creating new substantive entitlements, and the granting of an injunction to operate a business is the practical equivalent of granting a license.


Footnotes

[1] 64 B.R. 968 (Bankr. E.D. Pa. 1986).[RETURN TO TEXT]

[2] Id. at 974.[RETURN TO TEXT]

[3] Id.[RETURN TO TEXT]

[4] Id. at 973.[RETURN TO TEXT]

[5] Id.[RETURN TO TEXT]

[6] Id.[RETURN TO TEXT]

[7] Id.[RETURN TO TEXT]

[8] Id.[RETURN TO TEXT]

[9] Id.[RETURN TO TEXT]

[10] Wilner Wood Products Co. v. State of Maine, Department of Environmental Protection, 128 B.R. 1 (D. Me. 1991).[RETURN TO TEXT]

[11] 128 B.R. 1 (D. Me. 1991).[RETURN TO TEXT]

[12] Id. at 4.[RETURN TO TEXT]

[13] Id. at 2.[RETURN TO TEXT]

[14] Id.[RETURN TO TEXT]

[15] Id. at 3.[RETURN TO TEXT]

[16] Id.[RETURN TO TEXT]

[17] Id.[RETURN TO TEXT]

Journal Date: 
Saturday, November 1, 1997