Opinion
Civil No. 22-1005 (FAB)
2022-09-20
MILK INDUSTRY REGULATORY OFFICE of the Commonwealth of Puerto Rico, Appellant, v. Luis M. RUIZ-RUIZ, Appellee.
Edward W. Hill-Tollinche, Hill & Gonzalez, PSC, San Juan, PR, for Appellant. Homel A. Mercado-Justiniano, Mayaguez, PR, for Appellee.
Edward W. Hill-Tollinche, Hill & Gonzalez, PSC, San Juan, PR, for Appellant. Homel A. Mercado-Justiniano, Mayaguez, PR, for Appellee.
OPINION AND ORDER
BESOSA, District Judge.
The United States Bankruptcy Court for the District of Puerto Rico ("bankruptcy court") granted appellee Luis Ruiz-Ruiz ("Ruiz")'s motion for summary judgment. Ruiz v. Commonwealth, Adv. Proc. No. 20-137, 2021 WL 6102147, 2021 Bankr. LEXIS 3504 (Bankr. D.P.R. Dec. 23, 2021) (Cabán-Flores, Bank. J.). Subsequently, appellant Milk Industry Regulatory Office of the Commonwealth of Puerto Rico ("ORIL") filed an appeal. (Docket No. 4.) For the reasons set forth below, the Court AFFIRMS the bankruptcy court's summary judgment decision.
Known as the "Oficina para la Reglamentación de la Industria Lechera" in Spanish.
I. Background
The "milk industry is heavily regulated in Puerto Rico." Puerto Rico Dairy Ass'n v. Pagán, 748 F.3d 13, 15 (1st Cir. 2014). Dairy farmers are allotted quotas, the amount of milk "to be produced every fourteen (14) days, in accordance with the market's needs." Laws P.R. Ann. tit. 5, § 1126(c). Milk quotas "are an asset which can be sold, leased, or used as collateral for credit." In re Rosa Dairy Farm, Inc., 622 B.R. 806, 808 (B.A.P. 1st Cir. 2020) (citation omitted); see Laws P.R. Ann. tit. 5, § 1135. ORIL is responsible for regulating the production and distribution of milk. See Laws P.R. Ann. tit. 5, § 1092 et seq. Only licensed dairy farmers are permitted to produce milk for public consumption. Id. § 1192(c), § 1101 ("No producer, processor, or sterilizer of milk or its byproducts may operate without a license issued therefor by the [ORIL] Administrator.").
On June 16, 2015, Ruiz filed a Chapter 12 voluntary petition in the bankruptcy court. Ruiz, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *2. In the "Schedule B Personal Property" section of his petition, Ruiz identified the following: "56,321 liters of bi-weekly milk quota recognized by ORIL . . . which was sold to Suiza Dairy Inc. on a bi-weekly basis. Value is based on a $15.00 per liter value." In re Ruiz, Pet. No. 15-4548, Docket No. 1 at p. 10. Ruiz's share of milk quota is worth $844,815.00. Id. This property served as collateral for a loan from Oriental Bank. Id. at p. 12.
Oriental Bank then sold Ruiz's loan to ACM CCSC OB VII Cayman Asset Company ("Cayman Asset Company"). (Docket No. 8 at p. 11.)
ORIL revoked Ruiz's dairy license on October 22, 2018 for violating safety regulations. (Docket No. 4 at pp. 9-10.) He purportedly engaged in "milk trafficking," a "kind of fraud whereby a farmer 'passes' milk into the system that his farm did not produce." Id. at pp. 12 and 24. Subsequently, ORIL announced a public auction to sell Ruiz's milk quota for a minimum bidding price of $7.00 a liter. (Docket No. 8 at p. 10.) The bankruptcy court granted Ruiz's motion for a temporary restraining order, however, thwarting ORIL's attempt to dispose of his milk quota at public auction. Ruiz, Adv. Proc. No. 20-137, Docket No. 27.
Ruiz moved for summary judgment, averring that ORIL violated the automatic stay by endeavoring to sell property of the bankruptcy estate (i.e. the milk quota). Id., Docket No. 49. He prevailed. Ruiz, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *8. The bankruptcy court held that "ORIL established a parallel distribution scheme of property of the estate out-side of bankruptcy" in violation of 11 U.S.C. § 362 ("section 362"). Id. ORIL appealed, contending that the police power exception set forth in 11 U.S.C. § 362(b)(4) is applicable. Id.
II. Standard of Review
Federal courts are courts of limited jurisdiction. Destek Grp. v. State of N.H. Pub. Utils. Comm'n, 318 F.3d 32, 38 (1st Cir. 2003); Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) ("The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute."). Jurisdiction to adjudicate this action derives from 28 U.S.C. § 158(a). On appeal, this Court may affirm, modify, or reverse a bankruptcy court's judgment, or remand with instructions for further proceedings. Fed. R. Bankr. P. 8013.
Section 362 stays "the commencement or continuation . . . of a judicial, administrative, or other action against the debtor that was or could have been commenced before" the bankruptcy petition. 11 U.S.C. § 362(a). The "automatic stay provision is one of the fundamental debtor protections in the Bankruptcy Code. It gives the debtor a 'breathing spell' from creditors and stops all collection efforts, all harassment, and all foreclosure actions." González v. Puerto Rico Treasury Dep't., 532 B.R. 1, 5 (Bankr. D.P.R. 2015) (Lamoutte, J.) (citation omitted). Exceptions to the automatic stay, however, permit the continuation of litigation despite the filing of a bankruptcy petition.
Whether ORIL violated the automatic stay is a question of law, subject to a de novo standard of review. Heghmann v. Indorf, 316 B.R. 395, 400 (B.A.P. 1st Cir. 2004) (citation omitted); see A & J Auto Sales, Inc. v. United States, 223 B.R. 839, 841 (D.N.H. 1998) ("In considering a bankruptcy appeal, the district court applies a de novo standard when reviewing the bankruptcy court's conclusions of law, but accepts the bankruptcy court's findings of fact unless clearly erroneous.") (citing In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir. 1991); see In re Kupperstein, Adv. Pro. 18-11772, 2020 WL 1939719, at *—, 2020 U.S. Dist. LEXIS 70883, at *11 (D. Mass. Apr. 22, 2020) ("To the extent the Bankruptcy Court determined that the relevant state proceedings were within the police or regulatory power exception and, thus, beyond the reach of the automatic stay, this Court applies a de novo review in construing the statutory exception.").
A. The Police Power Exception
Because Ruiz filed a bankruptcy petition, the automatic stay is applicable subject to enumerated exceptions in section 362(b). See Montalvo v. Autoridad de Acueductos y Alcantarillados, 537 B.R. 128, 140 (Bankr. D.P.R. 2015) (Lamoutte, J.) (holding that the automatic stay becomes operative upon the filing of a bankruptcy petition, and "is extremely broad in scope," applying "to almost any type of formal or informal action taken against the debtor") (citation omitted).
Pursuant to 11 U.S.C. § 362(b)(4), the automatic stay does not preclude the commencement or continuation of a proceeding:
by a government unit . . . to enforce such government 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 power11 U.S.C. § 362(b)(4); see Alan R. Resnick & Harry J. Sommer, 3 Collier on Bankr. ¶ 362.05 (16th ed. 2015) ("The governmental unit may prosecute an action and obtain a judgment or order, but may not take or perfect a lien on property of the estate, setoff claims, or take other action that would violate the provisions of subsection 362(a)(4), (a)(5), (a)(7) or (a)(8)."). Courts construe the police power exception narrowly. In re Laskaratos, 605 B.R. 282 (Bankr. E.D.N.Y. 2019).
The police power exception is intended "to prevent a debtor from frustrating necessary governmental functions by seeking refuge in bankruptcy court." Montalvo v. Autoridad de Acueductos, 537 B.R. 128, 142 (B.A.P. 1st Cir. 2015) (quotation omitted) (citing McMullen v. Sevigny, 386 F.3d 320, 324-25 (1st Cir. 2004) ("This exception discourages debtors from submitting bankruptcy petitions either primarily or solely for the purpose of evading impending governmental efforts to invoke the governmental police powers and/or consumer protection regulations.")). Ultimately, courts consider the "purposes of the law that the government seeks to enforce to distinguish between situations in which a state acts pursuant to its police and regulatory power, and where the state acts merely to protect its status as a creditor." Id. at 143 (citation and quotation omitted). Not every enforcement of the police power falls "within section 362(b)(4); such a construction would render section 362(a)(1) meaningless." In re Herr, 28 B.R. 465 (Bankr. D. Me. 1983); In re Hoffman, 65 B.R. 985, 988 (D.R.I. 1986) ("In short, state and local government units cannot, merely by invoking the nominal exercise of their police power or regulatory powers, circumvent the prophylaxis afforded to debtors and creditors alike by federal bankruptcy law.").
III. The Police Power Exception is Inapplicable
In determining whether the police power exception is applicable, courts employ the pecuniary and public policy tests. Ruiz, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *10 (citing Montalvo, 537 B.R. at 143). Pursuant to the first test, this exception "does not apply if the government takes legal action to advance its own 'pecuniary' interest (or perhaps the pecuniary interest of others); but does apply if the government acts in the interest of 'public safety and welfare." Spookyworld, Inc. v. Town of Berlin, 346 F.3d 1, 9 (1st Cir. 2003). Courts analyze whether the government proceedings "seek to enforce a matter of public safety and welfare, which favors the stay exception, or its pecuniary interest, which does not." Montalvo, 537 B.R. at 143. The pecuniary advantage test is an alternative iteration, examining whether the "specific acts that the government wishes to carry out would create a pecuniary advantage for the government vis-à-vis other creditors." Id. (citations omitted). The public policy test is a related standard of review, focusing on whether the government is "primarily trying to effectuate public policy or to adjudicate private rights." Id. (citation and quotation omitted). The government unit need only satisfy one test to defeat the automatic stay. Id.
ORIL cannot escape liability pursuant to the public policy test. The relevant public policy seeks "to ensure the general wellbeing and health of all [milk] consumers." Ruiz, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *8 (citing the ORIL report and recommendation to revoke Ruiz's milk license). As a preliminary matter, a farmer's dairy license and milk quota are distinct. See Laws P.R. Ann. tit. 5, § 1126. Revoking Ruiz's milk license ensured that he no longer engaged in milk trafficking. Indeed, "[once this] license was revoked, [Ruiz] was unable to sell milk and there was no further risk to the public." Ruiz, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *12. The record is devoid of any allegation that Ruiz surreptitiously sold milk after the revocation, or that he poses a threat to the general well-being of Puerto Rico. Accordingly, ORIL fulfilled public policy objectives by revoking Ruiz's license. See Cournoyer v. Lincoln, 790 F.2d 971, 975 (1st Cir. 1986) (holding that a town's attempt to enforce a zoning ordinance by clearing a residential truck yard did not violate the automatic stay, noting that the debtor "has not been disposed from his property").
Ruiz is not attempting to evade the milk license revocation; he merely moves to preserve property of the bankruptcy estate. Other than deterring prospective milk traffickers, selling Ruiz's milk quota at public auction has a de minimis effect on public policy. In fact, Ruiz filed successive motions in bankruptcy court to sell his milk quota for $10.00 a liter. See Pet. No. 15-4548, Docket Nos. 202 and 209. Consequently, the public policy test cannot suspend the automatic stay.
ORIL also failed to satisfy the pecuniary test. Ruiz's creditor possessed an interest in the proceeds of the milk quota auction. (Docket No. 8 at p. 11.) The auction announcement stated explicitly that "[Cayman Asset Company] has to demand from LUIS M. RUIZ-RUIZ the portion of the creditor's claim that may not be satisfied by the sale of the quota." Id. The bankruptcy court astutely observed that: "While ORIL was not set to profit from this sale, it advanced [Cayman Asset's] pecuniary interest, by putting in motion a mechanism that would quickly satisfy this creditor's debt outside of the bankruptcy court." Ruiz v. Commonwealth, 2021 WL 6102147, at *—, 2021 Bankr. LEXIS 3504, at *7. Accordingly, this auction allowed Cayman Asset Company to evade the bankruptcy plan and to supersede the claims of competing creditors. See In re Herr, 28 B.R. at 468 (noting that "cases in which governmental units have exercised their police power in a way that interferes with property of the estate or prefers or injures creditors [are stayed]") (citing Missouri v. U.S. Bankr. Ct., 647 F.2d 768 (8th Cir. 1981) (holding that "Missouri's laws, by governing the operation and liquidation of grain warehouses, directly conflict with the control of property by the bankruptcy court and, therefore, do not fall within the [police power] exception").
ORIL cites In Re Gull Air, 890 F.2d 1255 (1st Cir. 1989), to support the proposition that the police power exception preempts the automatic stay. (Docket No. 4 at pp. 21-22.) In that decision, the Federal Aviation Agency ("FAA") revoked the debtor's arrival and departure "slots," "the operational authority to conduct one landing or takeoff operation each day during a specific hour or thirty-minute period." 890 F.2d at 1256. Like milk quotas, the slots constituted property of the bankruptcy estate. Id. at 1261. The In Re Gull Air court held, however, that the debtor lost the slots pursuant to a "use it or lose it" provision in FAA regulations. Id. It did not address the police power exception, "[leaving] that issue for later determination in an appropriate case." Id. at 1263 n.10. Other courts have applied the police power exception for strong policy reasons not present in this case. See, e.g., In re Mohawk Greenfield Motel Corp., 239 B.R. 1 (Bankr. D. Mass. 1999) (holding that an order from the Massachusetts Commission Against Discrimination fell within the police power exception because the "benefit to the public arising from [this agency's] continuing capability . . . to identify and sanction discriminatory behavior overshadows any associated pecuniary benefit to the victim of that discrimination").
Because the bankruptcy court's disposition pertaining to the police power exception is legally sound and sustained by the facts in this case, the summary judgment decision is AFFIRMED.
IV. Conclusion
For the reasons set forth above, the bankruptcy court's order granting Ruiz's motion for summary judgment is AFFIRMED.
Judgment shall be entered accordingly.
IT IS SO ORDERED.