The Bankruptcy Code provides immediate and automatic protection to a debtor upon the filing of a bankruptcy petition, staying legal claims and debt collection efforts against a debtor—subject to certain exceptions. See 11 U.S.C. § 362. Because of the importance of this protection to the debtor, and the dramatic effect it can have on other parties, the scope of the automatic stay is often an important question for parties and bankruptcy practitioners, and it is a question we have blogged about before. One exception is for “an action or proceeding by a governmental unit . . . to enforce such governmental unit’s or organization’s police and regulatory power . . . .” Id. § 362(b)(4). A recent decision from the United States Court of Appeals for the First Circuit addresses this exception, holding that a Puerto Rico milk regulator’s sale of a debtor’s milk quota did not violate the automatic stay.
The Milk Industry Regulatory Office of Puerto Rico (known by its Spanish acronym, “ORIL”) regulates milk production and distribution in Puerto Rico. ORIL licenses dairy farmers, allocates milk quotas to licensed farmers, and polices the standards and quality of milk. The debtor, Luis Manuel Ruiz Ruiz (“Ruiz”), was a dairy farmer who filed a chapter 12 petition in 2015. (Chapter 12 is a chapter of the Bankruptcy Code for adjustment of debts of family farmers or fishermen.) That bankruptcy case remains pending. After the bankruptcy petition, ORIL opened an investigation into Ruiz for milk trafficking, and, on October 22, 2018, issued a final administrative decision revoking Ruiz’s license and requiring him to dispose of his milk quota through a public sale within 60 days. Ruiz’s appeal was unsuccessful, but Ruiz failed to sell his milk quota, so ORIL filed a notice for a public auction of Ruiz’s quota. Ruiz filed an adversary proceeding seeking relief for ORIL’s alleged violation of the automatic stay. The bankruptcy court found that ORIL had violated the automatic stay, and the district court agreed. ORIL appealed to the First Circuit.
The court first addressed the issue of appellate jurisdiction. Ordinarily a federal appeals court only has jurisdiction to hear an appeal of a final order from the district court, but the bankruptcy court’s order and the district court’s affirmance of it had not disposed of all the issues in the adversary proceeding. Ultimately, however, the First Circuit concluded that it had appellate jurisdiction. Under the collateral order doctrine, jurisdiction exists over appeals of certain orders that are effectively unappealable after a final judgment, such as a government defendant’s absolute or qualified immunity. The First Circuit held that the decision below fell into that category.
The court then turned to whether ORIL’s actions violated the automatic stay. As an initial matter, the court explained that the automatic stay was applicable to forced sale of the milk quota, in the absence of any exception. The court noted that milk quotas under Puerto Rico law, while highly regulated property, are nonetheless property that can be sold, leased, and used as collateral. As such, the court held that the milk quotas were intangible personal property that had become property of the estate upon Ruiz’s bankruptcy petition. Since the automatic stay applies to “any act . . . to exercise control over property of the estate,” 11 U.S.C. § 362(a)(3), ORIL’s planned auction was subject to the automatic stay if no exception applied.
Here, however, the First Circuit held that the police power exception in section 362(b)(4) applied. The court began with the statutory text. The exception expressly includes “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). Here, the First Circuit reasoned, ORIL had obtained a judgment revoking Ruiz’s license and requiring him to dispose of his milk quota, which (since he was no longer a licensee) he could no longer lawfully own. ORIL’s planned auction was a step in the enforcement of that judgment.
The court held that this conclusion was supported by the two tests courts have used to evaluate the police power exception, the public policy test and the pecuniary purpose test. The public policy test addresses whether the proceeding involves public policy or private rights. The pecuniary purpose test addresses whether the proceeding involves the government’s pecuniary interest in the debtor’s property. Under the public policy test, the court reasoned that the auction implicated Puerto Rico’s public policies in milk regulation, including health and safety and ensuring that a milk quota does not remain with someone who cannot lawfully use it. Under the pecuniary purpose test, ORIL had no pecuniary interest in the dairy license or milk quota, and will not receive any proceeds from the auction.
Ruiz argued that ORIL’s auction was not protected by the exception because it served the financial interests of the lender that holds a security interest in the milk quota, relying on language in a prior First Circuit case (In re Spookyworld, Inc., 346 F.3d 1 (1st Cir. 2003)) that the public policy exception may not apply if the government seeks to advance the pecuniary interests of others. The court rejected this argument. It characterized the Spookyworld language as obiter dictum, and held that here, where the purpose of the auction was regulatory and the presence of the lien was coincidental, ORIL’s auction fit comfortably within the statutory exception to the automatic stay. As such, the court reversed the district court and held that ORIL should be granted summary judgment.
