To implement the obligations of the United States under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, known as `the Chemical Weapons Convention' and opened for signature and signed by the United States on January 13, 1993. Big Changes in Stay Exemptions Brewing
Written by:
Bruce A. Markell
Professor of Law
Indiana University School of Law—Bloomington
[email protected]
Web posted and Copyright © June 25, 1997, American Bankruptcy Institute.

Editor's Note: Other Commentary on Section 603 of S. 610:

• Big Changes in Stay Exemptions Brewing: The Chemical Weapons Convention Implementation Act of 1997, a criticism of the proposal by Prof. Bruce A. Markell, June 25, 1997
• Brewing a Tempest in a Teapot: A Response to Professor Markell, in support of the proposal by Karen Cordry, July 1, 1997
• Memorandum to Sen. Grassley in support of the proposal prepared by Heidi Heitkamp, June 23, 1997
• A response to Karen Cordry by Prof. Markell Includes proposed section addressing automatic stay concerns of S. 610, July 1997
• A response to Prof. Markell by Karen Cordry, July 18, 1997
• Memorandum prepared by the ABI, June 1997

The Changes

here are some potentially large changes to the automatic stay brewing in Congress. The Chemical Weapons Convention Implementation Act of 1997", S. 610, which passed the Senate on May 23, and which was introduced in the House on June 10, has changes to the exemptions to the automatic stay which go way beyond Chemical Weapons treaties.

The full text of Section 603 of the bill, which would make the changes, is reproduced below. In essence, the changes increase the current exemptions from the stay for governmental entities seeking to enforce any police or regulatory power (it is not limited to actions under the Chemical Weapons Treaty).

Section 603 accomplishes this sweeping change by first eliminating the current exemptions for police and regulatory activity (§§362(b)(4) and 362(b)(5)). It then replaces them with an omnibus exemption for any actions stay by §362(a)(1) (the commencement or continuation of an action on a pre-petition claim), §362(a)(2) (the enforcement of a pre-petition judgment), §362(a)(3) (any act to take possession or control of property of the estate or of the debtor) and §362(a)(6) (any act to collect, assess or recover a pre-petition claim). The exemption will apply if the actions are "the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit'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 . . . police or regulatory power."

Similar changes do not appear in the House companion bill, HR 1590, sponsored by Lee Hamilton of Indiana.

Current Law

Under current law, a governmental entity is not restricted in enforcing its police or regulatory powers so long as it does not try to take possession or exercise control over property of the estate. For example, the government can continue or initiate a criminal prosecution and can initiate an injunctive proceeding to stop pollution, even if such activities relate back to a period before the petition.

What the government cannot do, however, is take control of estate property, in part because it is within the exclusive jurisdiction of the bankruptcy court under §1334(e) of the Judicial Code (title 28, U.S.C.). For example, the government cannot take control of transferrable liquor licenses, or exercise its regulatory powers for private gain. If there is any question, the government can always seek relief from the stay, in many cases on an ex parte basis (depending on the emergency), and if there is a problem with any legitimate action, the stay can always be retroatively annulled. (Technically, §§362(b)(4) and (5) currently contain no exemptions for actions stayed under §362(a)(3)).

Effect of the Changes

Under the change contained in Section 603 of the Chemical Weapons bill, governmental entities need not worry about the stay if they determine that their action fits within police or regulatory power. This is because it adds, for the first time, exemptions to §362(a)(3) and §362(a)(6) for any exercise of police or regulatory powers by governmental entities. If adopted, §362(b) would exempt, for example, the seizure and destruction of T-shirts in the debtor's warehouse if they violate copyright law. It could also conceivably be used to justify the seizure and sale of a $1000 care containing $100 of contraband drugs, with the legitimate $900 profit going to tax coffers instead of creditors. [Note: at least one circuit has held that civil forfeitures relating to pre-petition exemptions are already exempt from the stay. In re James, 940 F.2d 46 (3d Cir. 1991). There are, however, cases that go the other way: See In re Goff, 159 BR 33 (Bankr. N.D. Okla. 1993); In re Thomas, 179 BR 523 (Bankr. E.D. Tenn. 1995) (post petition seizure); In re Ryan, 15 BR 514 (Bankr. D. Md. 1981).]

Exceptions for Collection Activity?

The bill also permits, by including an exemption to §362(a)(6), governmental action pursuant to the police or regulatory power in order to collect a debt. (§362(a)(6) stays "any act to collect, assess or recover a [pre-petition] claim.") I can't figure that one out, but I guess some court will have to.

Double Whammy:
Seminole and the Exemption from §362(a)(3)

This legislation is particularly troubling in light of the uncertainty caused by the Supreme Court's decision in Seminole Tribe of Florida v. Florida, 116 S.Ct. 1114 (1996). Under some readings of Seminole, the states (but not municipalities) are immune, under the Eleventh Amendment, from jurisdiction in bankruptcy court. If so, whether they may be sued in state court then turns on the status of sovereign immunity under state law.

This leads to the specter of a state making a unilateral determination that a seizure is permitted by its interpretation of its police and regulatory powers, and then never having that issue reviewed in any court, federal or state. To put it in context, if a state determines that products manufactured by a debtor violate state unfair trade law, and if state law permits civil seizure and forfeiture in such circumstances, the whole business may be confiscated without ever having to seek bankruptcy court relief.

After confiscation, the identity of who may challenge the state's determination, and how it will be challenged, will solely be a function of state law. This can be troubling, especially in light of recent Supreme Court determination that co-owners and lienors need not be given any opportunity to contest a civil forfeiture. Bennis v. Michigan, 116 S. Ct. 994 (1996) (upholding Michigan statute allowing car to be forfeited as abatable nuisance after man engaged service of prostitute in car, notwithstanding state's failure to reimburse man's wife's part ownership interest).

Lack of Public Input

As far as I know, there were no hearings or any testimony on the issue. Press releases from Sen. Grassley's office indicate that the changes were suggested by the National Association of Attorneys General. There is nothing in the public record to explain why the changes go beyond changes necessary to implement the Chemical Weapons convention.

One irony behind these changes is that one of the reasons that Congress created the National Bankruptcy Review Commission was to stop piecemeal riders such as that found in the Chemical Weapons bill. The Commission initially rejected the type of amendments set forth in the Chemical Weapons bill last fall, but decided early this year to discuss them again. When it finally was able to fit the discussion onto its agenda, at the Friday, June 20 meeting of the Commission in Detroit, the Commission was reduced to a roundtable discussion on the effect of pending legislation, rather than an investigation of what ought to be the law.

The Text of the Bill

Here are the changes, found in Section 603 of S. 610:

Section 362(b) of title 11, United States Code, is amended— (1) by striking paragraphs (4) and (5); and (2) by inserting after paragraph (3) the following:

"(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; "

Thursday, April 17, 1997