S. 610 Chemical Weapons Convention Implementation Act of 1997
A Response to Professor Markell
NAAG Bankruptcy Counsel
National Association of Attorneys General
Web posted and Copyright © July 1, 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
rof. Markell has written an analysis of the language in S.610 that revises §362 of the Bankruptcy Code. As NAAG has been publicly accorded responsibility for the inclusion of the language in the bill, I would like to present a counterpoint to some of the more alarmist portions of the Professor's discussion. I have also included a letter that was sent to the House and Senate subcommittee by the Chair of NAAG's Bankruptcy and Taxation Working Group, Attorney General Heidi Heitkamp of North Dakota, which further discusses these issues.
Just a note on process first. I do take responsibility for suggesting that the Justice Department's December 1996 memorandum to the National Bankruptcy Review Commission include the language that is now part of S. 610, but that is as far as I go. The Senate acted independently, and without consultation with NAAG, when it decided to include that language in the Chemical Weapons bill. It is my understanding that they were initially concerned with whether the non-governmental inspection teams that enforce the Chemical Weapons Treaty would qualify for inclusion under the police and regulatory exemptions from the stay. Although that concern could be easily addressed, the subcommittee was then forced to consider whether a party could file bankruptcy and assert the automatic stay as a bar to the regulatory actions of such teams. In deciding to add language to address those concerns, the Senate subcommittee concluded that the revisions were equally appropriate with respect to governmental police and regulatory actions generally. (Some have suggested that they should have only made the change with respect to the chemical weapons teams, but this could have resulted in unwarranted negative implications about the scope of the police and regulatory exception in other areas.) S. 610 then passed the Senate unanimously—a result with which NAAG is well pleased, although not directly responsible.
On the merits, then, the bill simplifies the existing structure by combining present §§362(b)(4) and (5) into a single section which also exempts police and regulatory actions from §§362(a)(3) and (6). This change is not necessarily an expansion of the Code's present provisions; a substantial number of courts already consider that either or both of §§362(a)(3) and (6) cannot reasonably be deemed to apply to actions which are explicitly exempted by §§362(b)(4) and (5). See, e.g. Javens v. City of Hazel Park, 107 F.3d 359 (§362(a)(3)) and In re Mateer, 205 B.R. 915, 921-922 (C.D. Ill. 1997) (§362(a)(6)). But, to the extent that the case law is split, and the proposal does propose a change, I submit it is reasonable, necessary, and, indeed, inevitable.
In so stating, I refer, of course, only to the changes that the proposal actually makes, not to
the imaginative list of horribles that have been conjured up about it. To clarify the situation:
- The proposal only exempts police and regulatory actions. Collection of taxes, student loans, SBA loans, and the like have never been viewed as police and regulatory actions and would not be affected by this change.
- A monetary judgment may be entered in a police and regulatory action but, as is the case now, cannot be enforced through collection from the estate's or the debtor's assets. (Thus, Prof. Markell's assertion that the exemption from §362(a)(6) will allow the government to "collect a debt" is simply incorrect. The exemption from §362(a)(6) is included, not to allow for collection of money judgments, but rather to clarify that the extremely broad language in that section should not be used to bar legitimate governmental actions which are explicitly exempted from the more specific sections of the Code.)
- The provisions of §§362(a)(4) and (5), which bar actions to create, perfect, or enforce a lien remain effective against governmental entities.
- Exempting an action from the automatic stay does not exempt the government or the debtor from other restrictions in the Code; thus, the government would still not be able to discriminate against a debtor for failure to pay a dischargeable debt, nor would the debtor be free to make post-petition payments on governmental claims except in accordance with the Code's provisions.
- Section 105 remains available to restrict actions by the government which could be enjoined under nonbankruptcy law, such as where the government is acting in bad faith or could be subject to equitable estoppel.
To the extent, though, that true police and regulatory actions do require the exercise of control over property of the estate, the bill clarifies that generally applicable law continues to control, even with respect to entities that file for bankruptcy. I make no apology for that proposition—a civilized society cannot function if its laws can be set aside whenever they impinge on business' profit-making opportunities. The choices as to whether the benefits of a law outweigh its impact on marginal enterprises is one that must be faced by the legislature when it enacts the statute; once that choice is made, there is nothing in the Code that authorizes a bankruptcy judge to override the legislative judgment, based on his own ad hoc weighing of the equities of the situation. This does not mean that the government can "exercise its regulatory powers for private gain." It does mean that the government can continue to protect the public interest in health, safety, consumer protection, environmental protection, labor laws, and the like even when a debtor is involved.
At times, those protective actions inevitably will impact on property of the estate. Under current law, the government is plainly allowed to complete all necessary proceedings to determine that the particular actions should be taken, but arguably must come to the bankruptcy court for a "Mother, may I?" type of hearing before it is allowed to actually take the actions. But requiring a motion to lift the stay makes sense only if the bankruptcy court has any meaningful discretion to grant or deny the request. But, on what basis may it do so? There really are only two options: it can refuse to grant full faith and credit to a judgment of another court and redetermine the merits of that judgment, or it can admit the validity of the order but conclude that it may allow the debtor to violate the law in order to assist the reorganization effort or to provide more money to creditors. I invite Prof. Markell or anyone else to find the language in the Code that authorizes either of those results. (Contrast, for instance, the language in §505 that allows tax liabilities to be redetermined, with the language in 28 U.S.C. 959(b) which explicitly requires the debtor to obey applicable state police and regulatory statutes.)
This is not to say that a state court judgment, for instance, is always right, but full faith and credit does not depend on the merits of the other court's actions. Rather, our federal system requires each branch of government to respect the actions of other branches and nothing in the Code overrules that fundamental principle of federalism. (See In the Matter of Pope (Pope v. Wagner), 1997 WL 341702, fn. 9 (Bankr. N.D. Ga. 6/16/97), which discusses the Rooker-Feldman abstention doctrine, which provides that even if a state court decision is wrong, only the Supreme Court has appellate jurisdiction to modify that decision). In short, the bankruptcy courts do not exercise appellate authority over every other state and federal court in the land. And, if the bankruptcy court must accept the validity of those judgments, then requiring a pro forma motion will be, at best, a waste of time and money for all concerned and, at worst, will allow serious harm while time is wasting. Professor Markell's suggestion that the government should simply either routinely make ex parte motions to lift the stay or seek retroactive annulment of the stay is, I submit, no way to run a railroad. Government should not have to function by emergency motion or court contempt sanctions with the hope that its good intentions will save it from being punished.
Prof. Markell then goes on to cite some examples of government actions that would be allowed under this section, but which he believes should not be allowed to take place. I suggest, however, that there is no alternative to allowing those actions to proceed. For instance, he states that the amendment would allow the government to seize and destroy T-shirts that violate copyright law. That is probably true, but does he seriously suggest that creditors have a right to demand that the government must sell the shirts for their benefit, thus becoming an accomplice to the debtor's illegal actions? If so, how does one balance the benefit to those creditors with the harm to the debtor's competitors who must stand by and watch the federal government take sales away from them by marketing goods when the debtor is not allowed to sell? By the same token, if current forfeiture laws allow for the seizure and sale of a car that is used as an instrumentality in the sale of drugs, does he mean to say that a bankruptcy judge may refuse to lift the stay if the judge believes that the law is unfair and should not be applied in that fashion? That conclusion is a prescription for judicial anarchism. I suggest, instead, that if one disagrees with the current forfeiture laws (and there may be much to disagree with), the proper solution is to go to Congress and have them changed, not to allow debtors to use bankruptcy courts as an end run around the law to gain additional rights that do not now exist.
Finally, Prof. Markell argues at length that the problem is heightened with respect to state actions because of the Supreme Court's decision in the Seminole Tribe case. To be sure, that decision did give the states a measure of immunity from federal court jurisdiction over challenges to their actions. That is a far cry from "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." Seminole did not repeal either the Due Process or the Supremacy Clauses of the Constitution. Thus, I would be more impressed by this "specter" if the article provided examples of where a governmental agency could seize property without satisfying due process requirements, including appropriate notice, a hearing, and rights to object. It is one thing to say that review of a civil seizure or forfeiture decision may not be available in the bankruptcy court; it is quite another to imply that this means there is no independent review of the action or remedies for an improper action. I assume, Prof. Markell did not intend to suggest that state courts are incapable or unwilling to apply state and federal law competently and evenhandedly. If bankruptcy courts believe themselves competent to administer state law, they should be equally willing to extend the same collegial respect to state court judges.
Moreover, it is not at all clear that the bankruptcy courts are totally barred from adjudicating challenges to state property seizures. The Supreme Court's recent decision in Idaho v. Couer D'Alene Tribe, No. 94-1474 (June 23, 1997) discusses the scope of the Ex Parte Young exception, as it pertains to declaratory judgments against state officials with respect to control of property. While the unusual facts of that case resulted in a determination that the exception did not apply, I think there is room for debtors to argue that they may normally sue state officials in bankruptcy court to determine rights of possession, if not final ownership, in goods seized from them during the case. If so, then there is a federal avenue to regain these assets for the estate's use during the case even if a final decision on ownership may need to be made in state court. I do not concede this point, I merely note that the issue is by no means settled or hopeless for debtors. Nor, of course, in any event, do I believe that going to state court is a fate worse than death, as some commentators seem to assume. Most state courts are well aware of their obligations to obey federal law, are reasonably competent at reading and applying a statute, and may even be capable of deciding a case correctly without assistance from the federal judiciary. Seminole probably does mean that other parties will need to visit state courts more often—and we welcome their arrival.