Monday, August 13, 2012

Fifth Circuit Holds State Agency Proceedings Exempt from Automatic Stay Pursuant to Section 362(b)(4) of the Bankruptcy Code

On June 18, 2012, the Fifth Circuit issued its opinion in Halo Wireless, Inc. v. Alenco Communications, Inc., et al., unanimously affirming an order by the Eastern District of Texas Bankruptcy Court that various state public utility commission proceedings initiated against Halo could proceed despite Halo’s subsequent Chapter 11 bankruptcy under the exception to the automatic stay provided by section 362(b)(4) of the Bankruptcy Code.  See Case No. 12-40122, 2012 WL 2212429 (5th Cir. June 18, 2012). Section 362(b)(4) is commonly known as the “police power exemption” and excepts from the automatic stay “the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s or organization’s police and regulatory power . . . .” 11 U.S.C. § 362(b)(4).

The state public utility commission proceedings at issue were initiated by telephone companies. The proceedings involved allegations that Halo was involved in an arbitrage scheme to avoid paying fees under applicable laws and regulations to the telephone companies. Halo sought refuge from the state commission proceedings by filing Chapter 11 bankruptcy. The telephone companies moved for a determination from the Bankruptcy Court that the agency proceedings were excepted from the automatic stay under the Section 362(b)(4) police power exemption  as proceedings “continued” though not “commenced” by governmental units.

The Bankruptcy Court agreed Section 362(b)(4) excepted the proceedings from the automatic stay and clarified in its order that while the state public utility commission proceedings could proceed, those commissions could not liquidate any claim against Halo or take any other action that would affect the debtor/creditor relationship. Noting the absence of direct authority on the issue, Halo requested, and the Bankruptcy Court certified, its order for appeal.

The main issue before the Fifth Circuit was one of statutory interpretation. First, were the state public utility commission proceedings “continued by” a governmental unit? Second, were those proceedings in furtherance of the states’ police and regulatory powers?

Halo contended Section 362(b)(4) did not apply to the state public utility commission proceedings because those proceedings were initiated by appellees and were not brought by a governmental unit. The Fifth Circuit disagreed, concluding that “[i]t neither ignores nor twists the words of the statute to interpret this phrase as excepting suits continued by a governmental unit, without regard to who initially filed the complaint.” Halo Wireless, Inc. v. Alenco Communications, Inc., 12-40122, 2012 WL 2212429, at *8 (5th Cir. June 18, 2012).

The Fifth Circuit further concluded that the state public utility commission proceedings were not solely to protect the telephone companies’ monetary interests but were in furtherance of the states’ police and regulatory powers. Id. at 10. The Court analyzed the issue using the public policy and pecuniary purpose tests utilized by courts in determining the applicability of Section 362(b)(4) and determined that the state public utility commission proceedings met both tests and that their function in regulating telecommunications carriers serves the public interest. Id. at 10.

In affirming the Bankruptcy Court order, the Fifth Circuit notes its interpretation of the exemption prevents a Debtor from using bankruptcy “to frustrate governmental functions and avoid the states’ regulatory powers.” Id. at 17. Also, the Court notes the Bankruptcy Court order, in limiting the effect of any monetary judgment issued by the agency, “ensures that the actions at issue pass the pecuniary purpose test.” Id. at 22.

Michael Kabat
mkabat@mcginnislaw.com
McGinnis, Lochridge & Kilgore, L.L.P.
Austin, Texas

Brook Brown
bbrown@mcginnislaw.com
McGinnis, Lochridge & Kilgore, L.L.P.
Austin, Texas

Richard D. Milvenan
rmilvenan@mcginnislaw.com
McGinnis, Lochridge & Kilgore, L.L.P.
Austin, Texas

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