Opinion
No. 01 Civ. 4658 (KMW)(KNF)
July 22, 2002
MEMORANDUM and ORDER
I. INTRODUCTION
Before the Court is plaintiff Securities Exchange Commission's ("SEC") motion, made pursuant to 11 U.S.C. § 362(b)(4), for an exemption from the automatic stay of litigation in the instant action. The stay is based upon the filing of a bankruptcy petition by defendant Burton G. Friedlander ("Friedlander"); 11 U.S.C. § 362 provides for a stay of certain litigation when such a petition is filed with the bankruptcy court.
II. BACKGROUND
On May 31, 2001, the SEC filed a complaint alleging violations of the securities laws by Friedlander, Friedlander International Limited, Friedlander Management Limited, Friedlander Capital Management Corporation, and Friedlander Limited Partnership (collectively "defendants"). Thereafter, the SEC submitted a motion seeking the appointment of a receiver and the entry of a preliminary injunction against the defendants. Following a hearing, the assigned district judge found that the SEC had established a prima facie case of securities fraud against the defendants, but declined to appoint a receiver or enter a preliminary injunction. Instead, the assigned district judge directed Friedlander to cooperate with the SEC in its ongoing investigation of past activity by the defendants. However, after Friedlander failed to cooperate with the SEC, and engaged in other misconduct, the assigned district judge granted the SEC's renewed motions for a preliminary injunction and the appointment of a receiver.
On June 20, 2002, Friedlander filed a petition for a "Chapter 7" bankruptcy in the United States Bankruptcy Court for the Southern District of Florida. A "Suggestion of Bankruptcy" pleading was filed the same day in the instant action, asserting that the filing of the bankruptcy petition "automatically stayed" the instant action "pursuant to Bankruptcy Code Section 362."
III. DISCUSSION
Section 362 of the Bankruptcy Code provides an automatic stay of litigation against a debtor. See 11 U.S.C. § 362(a). The Bankruptcy Code exempts from automatic stay, however, actions "by a governmental unit . . . to enforce such governmental unit's . . . police or regulatory power. . . ." 11 U.S.C. § 362(b)(4). The purpose of the governmental unit exception "is to prevent a debtor from frustrating necessary government functions by seeking refuge in bankruptcy court." SEC v. Brennan, 230 F.3d 65, 71 (2d Cir. 2000) (citing City of New York v. Exxon, 932 F.2d 1020, 1024 [2d Cir. 1991]). Thus, "where a governmental unit is suing a debtor to prevent or stop violation of fraud . . . or . . . police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay." Id.
11 U.S.C. § 362 provides, in pertinent part:
§ 362. Automatic stay
(a) Except as provided in subsection (b) of this section, a petition filed . . . operates as a stay, applicable to all entities, of —
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title. . . .11 U.S.C. § 362(a)(1).
The governmental unit exception permits the entry of a money judgment against a debtor provided that the proceeding in which such a judgment is entered is one to enforce the governmental unit's police or regulatory power. See id.; SEC v. Thrasher, No. 92 Civ. 6987, 2002 WL 523279, at *1-2 (S.D.N.Y. April 8, 2002). A proceeding that seeks to curb certain behavior, such as defrauding investors, by imposing financial liability or seeking an injunction, is one that enforces the government's police or regulatory power and serves to protect public health and safety. See Brennan, 230 F.3d at 72-73; SEC v. Towers Financial Corp., 205 B.R. 27, 30 (S.D.N.Y. 1997) (noting that actions seeking to effectuate public policy fall within the police power exception and are exempted from the stay).
Here, the SEC's prosecution of a civil fraud action against the defendants, and its attempt to fix damages for violations by the defendants of the securities laws, which are laws with police or regulatory purposes, fall within the Bankruptcy Code's governmental unit exception and are exempted from the automatic stay of litigation in the instant action.
The governmental unit exception permits the entry of a money judgment against a debtor, but anything beyond the entry of a money judgment is prohibited by the automatic stay. See Thrasher, 2002 WL 523279, at *2. In this case, the SEC seeks, inter alia an order fixing the appropriate amount of disgorgement, civil penalties and interest, but does not seek an order directing payment of these amounts. Accordingly, the SEC's action may proceed.
IV. CONCLUSION
For the reasons set forth above, under 11 U.S.C. § 362(b)(4), the SEC's action against the defendants is exempted from the automatic bankruptcy stay of 11 U.S.C. § 362(a)(1). The action may proceed.