Automatic Stay Is Not Absolute: You Can Still Go To Jail

In re D’Mello, 473 B.R. 207 (Bankr. E.D. Mich. 2011)

Although the stay that automatically arises under Section 362 of the Bankruptcy Code when a bankruptcy petition is filed is very broad, there are exceptions, including actions to enforce a governmental entity’s police and regulatory power.  In D’Mello Ypsilanti Township obtained a mandatory injunction prior to bankruptcy requiring Cormello, LLC and Dominic D’Mello (apparently its member) to abate what was characterized as “a serious public nuisance” at a property known as the Ypsilanti Mobile Village.

After finding D’Mello in contempt of its abatement order, the state court gave him an opportunity to come into compliance and scheduled a hearing to review the status with the intent of remanding him to jail if he remained in contempt at that time.  The morning of the hearing D’Mello filed a chapter 7 bankruptcy case.  At the hearing, the state court required the Township to go to the bankruptcy court for further instruction regarding the effect of the automatic stay on enforcement of the abatement judgment.

The abatement action ordered by the state court included:

  • removal of all of the abandoned and condemned mobile homes;
  • removal of three abandoned and condemned buildings/structures and sheds;
  • removal of all mailboxes, signs, dish satellites, street lampposts and landscape edging;
  • removal of all blight, garbage, rubbish, tires, furniture, appliances, toys, etc.; and
  • removal of all abandoned tie-downs for mobile homes, concrete pads and utility infrastructure located above ground and removal or capping of all sewer lines.

The state court took under advisement a further request that roadways be removed, grade be restored to fill in gullies created by erosion and utilities, and soil contaminated by sewage backup and treatment with lime be removed.

Under Section 362(b)(4) of the Bankruptcy Code, there is an exception from the automatic stay imposed on actions described in subsections (a)(1) [proceedings against a debtor], (a)(2) [enforcement of pre-bankruptcy judgment], (a)(3) [taking possession or control of property of the bankruptcy estate] and (a)(6) [action to collect, assess or recover pre-petition claims] for actions by governmental authorities exercising their “police and regulatory powers,” including enforcement other than through a money judgment.

During the bankruptcy court hearing on the Township’s motion for a determination that the stay did not apply to the abatement order, the Township elected to narrow and clarify its request to seek relief only to the extent that D’Mello could “personally, physically do without spending any money to rent or buy equipment or to hire somebody else to do the work.”  In ruling on the Township’s more limited request, the bankruptcy court went out of its way to note that it was not expressing any view on whether the automatic stay would apply to actions that required D’Mello to spend money.

In reviewing the specific items proposed by the Township, the court agreed that the stay did not apply to  (1) removal of all mailboxes, signs, dish satellites, and landscape edging (but not street lampposts), or (2) removal of all blight, garbage, rubbish, tires, furniture, appliances, toys, etc., but did not agree that D’Mello could remove tie-downs from former mobile homes, concrete pads or utility infrastructure without spending money (i.e. was outside of the Township’s self-limited request).

The bankruptcy court also specifically held that D’Mello’s failure to implement these abatement measures could result in a finding of contempt that could result in jail.

D’Mello also argued that to the extent that the state court judgment applied to him personally, it failed to respect the distinction between a limited liability company and its members under Michigan law, and further that the order was in some way a violation of his due process rights.  The bankruptcy court declined to address these issues, advising that the state court was the proper forum in which D’Mello “can and should” make these arguments.

The lesson to be learned from this case is that the automatic stay generally does not provide relief from a governmental entity’s exercise of police and regulatory powers.  However, the “police and regulatory” exception from the stay does not give a governmental entity carte blanche to do whatever it wishes.  It appears that the Township was very conservative in this case, and probably could have gone further in enforcement of the abatement judgment.  However, the stay exception is not without limits – including the exclusion of enforcement of a money judgment.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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