United States Court of Appeals For the First Circuit
No. 22-1761
IN RE: LUIS MANUEL RUIZ RUIZ,
Debtor,
MILK INDUSTRY REGULATORY OFFICE OF THE COMMONWEALTH OF PUERTO RICO,
Appellant,
v.
LUIS MANUEL RUIZ RUIZ,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]
Before
Rikelman, Hamilton,* and Thompson, Circuit Judges.
Edward W. Hill-Tollinche, for appellant.
Homel A. Mercado-Justiniano, for appellee.
* Of the Seventh Circuit, sitting by designation. November 21, 2024
- 2 - HAMILTON, Circuit Judge. In this appeal, we consider
the "police power" exception to the Bankruptcy Code's automatic
stay provision, 11 U.S.C. § 362. The police power exception in
§ 362(b)(4) provides that the automatic stay does not apply to
"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, 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 power."
In this case, the Puerto Rico agency that regulates milk
production and distribution revoked a bankruptcy debtor's dairy
license and ordered him to sell his milk production quota rights.
When the debtor failed to do so, the agency announced plans to
auction those rights under the governing regulations. The
bankruptcy and district courts found that planning the auction
violated the bankruptcy stay under § 362. We find, however, that
the agency's plan to auction the debtor's milk quota falls squarely
within the police power exception in § 362(b)(4). We reverse the
judgments of the bankruptcy and district courts and direct judgment
in favor of the agency.
I. Factual and Procedural Background
The appellant in this case is the Milk Industry
Regulatory Office of Puerto Rico, known as "ORIL" using the
- 3 - initials from its Spanish name, Oficina para la Reglamentación de
la Industria Lechera. ORIL regulates the production and
distribution of milk under Puerto Rico law. See 5 L.P.R.A.
§§ 1092–1139. ORIL grants dairy farmers licenses to operate,
determines the amount of milk produced in the market through the
allocation of milk quotas to licensed farmers, and polices the
standards and quality of milk throughout the supply chain from
farmers to consumers. Only licensed dairy farmers may produce
milk for public consumption. 5 L.P.R.A. § 1101(a) & (e).
ORIL allocates milk quotas to licensed farmers. The
quotas specify the amount of milk that the ORIL administrator
assigns to milk producers, to be produced every fourteen days, "in
accordance with the market's needs." 5 L.P.R.A. § 1126(c). Milk
quotas may be sold, leased, or used as collateral by licensed dairy
farmers. 5 L.P.R.A. §§ 1135–37. ORIL maintains and manages a
national registry of quota transactions to track these
transactions. 5 L.P.R.A. § 1127. ORIL also has broad
investigative and enforcement powers to ensure that raw milk meets
quality standards set by state and federal regulations.
Appellee Luis Manuel Ruiz Ruiz has been a dairy farmer
in Puerto Rico. He filed for Chapter 12 bankruptcy in 2015, and
as best we can tell, that bankruptcy is still open. After Ruiz
filed for bankruptcy, ORIL began investigating his milk production
practices. ORIL found evidence of milk trafficking, where a dairy
- 4 - farmer either sells raw milk he or she did not physically produce
or lies about the amount of milk produced. One punishment for
milk trafficking can be the revocation of a farmer's dairy license.
On August 18, 2018, Ruiz received a notice of complaint from ORIL
threatening to revoke his license for milk trafficking.
ORIL issued its final administrative decision revoking
Ruiz's license on October 22, 2018. As part of that decision,
ORIL also ordered Ruiz to dispose of his milk quota through a
public sale within 60 days. After some initial proceedings in the
bankruptcy court, ORIL agreed to reinstate Ruiz's dairy license
conditionally while he appealed his license revocation. Ruiz's
appeal ended without success on May 1, 2020 when the Puerto Rico
Supreme Court issued its final decision denying reconsideration of
Ruiz's challenge to his license revocation.
Even after that loss, Ruiz did not sell his milk quota
within 60 days, as ordered as part of the license revocation. As
authorized by applicable regulations, ORIL then began taking steps
to sell the quota through a public auction. On December 3, 2020,
ORIL issued a notice for the public auction of Ruiz's quota. The
auction was scheduled to take place on December 22, 2020. Before
the auction could take place, Ruiz filed a new adversary proceeding
against ORIL in the bankruptcy court. This appeal arises from
that adversary proceeding.
- 5 - Ruiz alleged that ORIL and its administrator knowingly
violated the automatic stay in 11 U.S.C. § 362 by taking steps to
auction his milk quota without permission of the bankruptcy court.
Ruiz requested (1) a declaratory judgment saying that defendants
violated the automatic stay and that the ORIL administrator acted
in bad faith; (2) actual and punitive damages for violation of the
automatic stay; and (3) a temporary restraining order to stop the
public auction of his milk quota.
The bankruptcy court enjoined ORIL from auctioning
Ruiz's milk quota without first seeking permission from the
bankruptcy court. ORIL has complied with the bankruptcy court's
order. The bankruptcy court later addressed Ruiz's requests for
declaratory and monetary relief. On cross-motions for summary
judgment, the bankruptcy court issued a split decision. It granted
summary judgment in favor of ORIL's administrator, who had been
sued for damages in his individual capacity. The court denied
summary judgment for ORIL itself and granted Ruiz's motion in part,
finding that ORIL violated the bankruptcy stay by taking steps to
auction the milk quota. The bankruptcy court said it would hold
a hearing on potential damages, but to date no hearing has
occurred.
ORIL appealed the grant of summary judgment for Ruiz to
the United States District Court for the District of Puerto Rico.
The district court agreed with the bankruptcy court that ORIL
- 6 - violated the § 362 stay when it took steps to auction Ruiz's milk
quota outside the bankruptcy proceedings, holding that the police
power exception in § 362(b)(4) did not apply. Milk Industry
Regulatory Office v. Ruiz-Ruiz, 629 F. Supp. 3d 11, 18 (D.P.R.
2022). ORIL has appealed.
II. Appellate Jurisdiction
Before addressing the merits, we first address our
appellate jurisdiction. That question is complicated a bit because
the parties have shifted the jurisdictional bases they have relied
upon between the appeal to the district court and the appeal to
this court.
The bankruptcy court order granted Ruiz's motion for
summary judgment in part, as to liability, but it did not decide
on damages, leaving that question for further proceedings. In
ordinary civil litigation, such a partial resolution of a claim
would not amount to an appealable final judgment. E.g., Liberty
Mut. Ins. Co. v. Wetzel, 424 U.S. 737, 742–44 (1976). In
bankruptcy proceedings, as well, such partial adjudications are
ordinarily not final judgments. See In re Vázquez Laboy, 647 F.3d
367, 372 (1st Cir. 2011) (concluding that bankruptcy court order
granting summary judgment to debtors in adversary proceeding
alleging violation of automatic stay by private creditor and its
attorneys was not final judgment where issue of damages was left
unresolved).
- 7 - Accordingly, ORIL sought permission to pursue an
interlocutory appeal to the district court under 28 U.S.C.
§ 158(a)(3) and Federal Rule of Bankruptcy Procedure 8004. ORIL
told the district court that the court had "discretionary appellate
jurisdiction to hear and decide this interlocutory appeal pursuant
to [section] 158(a)(3)." Appellee Ruiz agreed with ORIL's
jurisdictional statement before the district court.
Under § 158(a)(3), district courts have discretion to
grant leave for an interlocutory appeal from a bankruptcy court
decision and may exercise appellate jurisdiction over such
appeals. The statutes and rules do not establish standards for a
district court's exercise of this discretionary power. See In re
American Colonial Broadcast Corp., 758 F.2d 794, 801 n.7 (1st Cir.
1985). Most courts applying § 158(a)(3) have sensibly borrowed
the standard in 28 U.S.C. § 1292(b) for interlocutory appeals from
district courts to the courts of appeals. See Rodriguez-Borges v.
Lugo-Mender, 938 F. Supp. 2d 202, 212 (D.P.R. 2013) (applying
§ 1292(b) standard in denying interlocutory appeal); Monahan v.
Massachusetts Dep't of Revenue, 215 B.R. 287, 289 (D. Mass. 1997)
(same); In re Delta Petroleum (P.R.), Ltd., 193 B.R. 99, 106 n.15
(D.P.R. 1996) (applying § 1292(b) standard in alternative holding
granting leave to appeal); In re Caribbean Tubular Corp., 44 B.R.
283, 284–85 (D.P.R. 1984) (applying § 1292(b) standard in denying
interlocutory appeal); see also 10 Collier on Bankruptcy ¶ 8004.08
- 8 - (16th ed. 2024) (explaining that "courts have generally adopted
[the § 1292(b)] standard when considering whether to grant leave
to appeal from an order or decree of the bankruptcy court").
ORIL argued that the bankruptcy court's partial grant of
summary judgment to Ruiz regarding ORIL's liability for violating
the bankruptcy stay was appropriate for interlocutory appeal
because (1) it involved a controlling question of law (the scope
of the police power exception to bankruptcy stays), (2) as to which
there was substantial ground for differences of opinion, and
(3) that an immediate appeal of the bankruptcy court's order would
materially advance the ultimate termination of the litigation.
See 28 U.S.C. § 1292(b); Plixer Int'l, Inc. v. Scrutinizer GmbH,
905 F.3d 1, 6 n.6 (1st Cir. 2018) (explaining standard for granting
appeal under § 1292(b)). While the district court never expressly
addressed these § 1292(b) arguments made by ORIL, the court clearly
chose to exercise its jurisdiction pursuant to § 158(a)(3). See
Ruiz-Ruiz, 629 F. Supp. 3d at 15. The better course is to make
the findings explicit, but we are satisfied that the conditions
for interlocutory appeal were met in the district court. As noted,
the district court affirmed the interlocutory order of the
bankruptcy judge. Id. at 18.
So far, so good. But a problem arose in the appeal from
the district court to this circuit court. We have appellate
jurisdiction over final decisions of the district courts.
- 9 - 28 U.S.C. § 1291. We also have appellate jurisdiction over a final
decision by a district court acting as an appellate bankruptcy
court under § 158(a). 28 U.S.C. § 158(d)(1); see also Connecticut
National Bank v. Germain, 503 U.S. 249, 253 (1992) ("Because giving
effect to both §§ 1291 and 158(d) would not render one or the other
wholly superfluous, we do not have to read § 158(d) as precluding
courts of appeals, by negative implication, from exercising
jurisdiction under § 1291 over district courts sitting in
bankruptcy."). The question here, however, is how to evaluate the
appealability of a district court decision affirming an
interlocutory order from a bankruptcy court.
Complicating the matter, the parties' initial
jurisdictional statements to our court were not consistent with
what happened in the district court. Both parties told us that
the bankruptcy court decision was a final order and that we have
jurisdiction over the appeal under § 158(d)(1), which requires a
final decision, judgment, order, or decree under § 158(a) or (b).
Since the district court's affirmance of the bankruptcy court's
order returned the adversary proceeding to the bankruptcy court to
decide on damages, we questioned whether we could exercise
appellate jurisdiction under § 158(d)(1). As we have explained
before, "a district court order in an adversary proceeding is not
appealable as of right under § 158(d) unless it ends the entire
adversary proceeding on the merits and leaves nothing for the court
- 10 - to do but enter the judgment." In re Financial Oversight &
Management Bd. for Puerto Rico, 52 F.4th 465, 483 (1st Cir. 2022)
(quoting In re Casal, 998 F.2d 28, 31 (1st Cir. 1993)).
After oral argument, we ordered the parties either to
show cause why we should not dismiss for lack of appellate
jurisdiction or to seek certification for an interlocutory appeal
to our court under § 158(d)(2). Ruiz responded by arguing we lack
appellate jurisdiction. ORIL pointed us to the Tenth Circuit's
decision in Eddleman v. United States Dep't of Labor, 923 F.2d 782
(10th Cir. 1991). In Eddleman, the Tenth Circuit held that it had
jurisdiction in a similar dispute over the police power exception
to the bankruptcy stay. Id. at 784. Eddleman persuades us that
we have appellate jurisdiction for narrow reasons specific to the
police power exception, distinguishing this case from the rule we
applied in In re Vázquez Laboy, 647 F.3d at 372.1
To explain, after the Eddleman debtors had petitioned
for bankruptcy protection, the federal Department of Labor filed
an administrative action alleging that they had violated federal
law by underpaying employees working on government contracts. The
Department sought, among other forms of relief, to debar the
Eddleman was overruled on other grounds, as noted in Temex 1
Energy, Inc. v. Underwood, Wilson, Berry, Stein & Johnson, 968 F.2d 1003, 1005 n.3 (10th Cir. 1992) (citing Connecticut Nat'l Bank v. Germain, 503 U.S. 249 (1992)).
- 11 - debtors from contracting with the government for three years. The
debtors responded by asking the bankruptcy court for an injunction
shutting down the administrative action and for an award of
damages. The Department relied on the police power exception in
§ 362(b)(4), but the bankruptcy court issued the injunction. The
district court affirmed that injunction and remanded the case to
the bankruptcy court for further proceedings on the issue of
damages for violation of the automatic stay. 923 F.2d at 783.
The Tenth Circuit held that the practical effect of the
bankruptcy and district courts' decisions was to deny the
Department relief from the stay, which in that circuit would
ordinarily be appealable as a final decision. Id. at 784–85.
Turning to the issue we face here, the Tenth Circuit then held
that the open issue of damages did not defeat finality. The court
compared the situation to a district court's rejection of a defense
of absolute or qualified immunity, which is appealable as a final
decision to the extent that the decision turns on a question of
law. Id. at 788–90 (citing Mitchell v. Forsyth, 472 U.S. 511, 530
(1985) (holding that an order denying a claim of qualified immunity
falls under the collateral order exception to the finality rule
established in Cohen v. Beneficial Industrial Loan Corp., 337 U.S.
541 (1949))).
The Tenth Circuit took pains in Eddleman to distinguish
similar cases involving actions by private creditors, and the court
- 12 - emphasized its reliance on the important governmental interests
protected by the police power exception. Id. at 787–90. Without
belaboring the point, we agree with Eddleman and its reasoning.
The bankruptcy and district courts' denials of ORIL's motion for
summary judgment based on the police power exception are final
decisions appealable under the collateral order doctrine — at least
to the extent the denials turned on issues of law, just as a
similar denial of summary judgment based on absolute or qualified
immunity is appealable in a case, for example, under 42 U.S.C.
§ 1983. The special considerations underlying the police power
exception distinguish this case from appeals like In re Vázquez
Laboy, where private creditors were accused of violating the
automatic stay and the police power exception was not available.
647 F.3d at 372. The order to show cause is hereby discharged.
We have jurisdiction and proceed to the merits.
III. Standard of Review
In bankruptcy appeals, we afford no particular deference
to decisions of the first-tier appellate tribunal (whether the
district court or the bankruptcy appellate panel), and we focus on
the bankruptcy court's decision. In re Shove, 83 F.4th 102, 108
(1st Cir. 2023). We review de novo the grant or denial of summary
judgment, considering the parties' cross-motions for summary
judgment separately in the light most favorable to the respective
non-moving party and drawing all reasonable inferences in that
- 13 - party's favor. In re Financial Oversight & Mgmt. Bd. for Puerto
Rico, 948 F.3d 457, 466 (1st Cir. 2020); see In re Varrasso, 37
F.3d 760, 762–63 (1st Cir. 1994).
IV. The Police Power Exception
Section 362 of the Bankruptcy Code provides that the filing
of a bankruptcy petition automatically stays "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), and also stays "any act
to obtain possession of property of the estate or of property from
the estate or to exercise control over property of the estate,"
§ 362(a)(3). The automatic stay in § 362 is "one of the
fundamental protections that the Bankruptcy Code affords to
debtors." In re Jamo, 283 F.3d 392, 398 (1st Cir. 2002). It
"ensures that the assets remain within the exclusive jurisdiction
of the bankruptcy court pending their orderly and equitable
distribution among the creditors, better enabling the debtor's
'fresh start.'" In re McMullen, 386 F.3d 320, 324 (1st Cir. 2004).
At the same time, the automatic stay can interfere with competing
policy goals, so Congress has adopted important limits and
exceptions to the stay, including the police power exception.
- 14 - A. Property of the Estate
As a threshold question, the automatic stay under
§ 362(a)(3) applies only to "property of the estate," so we explain
briefly why Ruiz's milk quota is property of his bankruptcy estate.
Section 541(a) defines "property of the estate" broadly to include
"all legal or equitable interests of the debtor in property as of
the commencement of the case." 11 U.S.C. § 541(a)(1). State law
ordinarily creates and defines the underlying property interests,
but federal bankruptcy law determines whether those interests are
"property of the estate." In re TelexFree, LLC, 941 F.3d 576, 584
(1st Cir. 2019).
Under Puerto Rico law, milk quotas can be sold, leased,
or used as collateral. See Rosa Dairy Farm, Inc., 622 B.R. 806,
808 (B.A.P. 1st Cir. 2020) (first citing 5 L.P.R.A. § 1135 and
then citing P.R. Reg. No. 8660, Art. 7). At the same time, milk
quotas are highly regulated. Puerto Rico Dairy Farmers Ass'n v.
Pagan, 748 F.3d 13, 15 (1st Cir. 2014). "ORIL licenses dairy
farmers to produce milk according to assigned quotas, and
designates the milk from each farm to a specific processing plant."
United States v. Gonzalez-Alvarez, 277 F.3d 73, 75–76 (1st Cir.
2002). Only a farmer to whom ORIL has issued a dairy license may
own milk quotas. See P.R. Reg. No. 8660, Art. 5 ("Quotas may be
purchased and sold, but only by farmers with a current license
issued by [ORIL]."), as translated in Appellant App'x at 146.
- 15 - Although milk quotas are heavily regulated, they still
qualify as property of the estate under § 541. We find guidance
from our decision dealing with a similar form of heavily regulated
property, In re Gull Air, Inc., 890 F.2d 1255 (1st Cir. 1989). In
Gull Air, we held that the Federal Aviation Administration did not
violate the § 362 automatic stay when it revoked and reallocated
the debtor airline's takeoff and landing time slots at a major
airport. 890 F.2d at 1262. Regulations required an air carrier
to use its time slots 65 percent of the time over a two-month
period. If an air carrier failed to comply with this provision,
the FAA was required to reallocate them to other carriers. Debtor
Gull Air failed to comply with this provision, so the FAA
reallocated its slots. Id. at 1261.
We concluded first that the slots qualified as at least
a limited form of property: "[B]y granting carriers the right to
buy and sell slots with the intent of maximizing reliance on market
forces and minimizing government involvement regarding slot
distribution, the FAA grants to carriers a limited proprietary
interest in slots." Id. at 1260. That "limited proprietary
interest" was "encumbered by conditions that the FAA imposed in
its regulations," namely the "use or lose" provision. Id.
Likewise, by permitting milk quotas to be sold, leased,
or used as collateral, ORIL has granted licensees a proprietary
interest in their milk quotas. The regulations governing milk
- 16 - quotas limit, but do not eliminate, a licensee's proprietary
interest. We assume that this proprietary interest amounts to a
kind of intangible personal property. Therefore, the milk quota
became property of the bankruptcy estate when Ruiz filed for
bankruptcy in 2015.2
Once the revocation of Ruiz's dairy license became final
in 2020, however, Ruiz was no longer legally qualified to own milk
quota. See Reg. No. 8660, Art. 5. The same order that revoked
his dairy license ordered him to dispose of his milk quota within
60 days and warned that if he did not, ORIL would conduct a public
auction of the quota, as regulations also provide. Either way,
the revocation of Ruiz's dairy license meant the transfer of his
milk quota became inevitable.
Still, the milk quota qualified as property of Ruiz’s
bankruptcy estate even after the license revocation became final.
It is the sale of the milk quota, not the revocation of the dairy
license, that extinguishes a former licensee’s interest in milk
quota. In this respect, Gull Air is distinguishable in a subtle
but critical way. In Gull Air, we concluded that the debtor’s
2 We note that, in Gull Air, we declined to decide "whether a carrier's proprietary interest in an arrival or departure slot constitutes 'property of the estate' within the meaning of the Bankruptcy Code." 890 F.2d at 1261 n.8 (emphasis added). For present purposes, we are convinced that milk quotas qualify as property of Ruiz's bankruptcy estate under § 541.
- 17 - "interest in the time slots . . . terminated by force of regulation
with no need for affirmative action by the FAA." 890 F.2d at 1261.
After the debtor "failed to satisfy a necessary condition to its
continued possession of the slots," the slots automatically
reverted to the FAA for reallocation. Id.
Unlike the FAA with the takeoff and landing slots in
Gull Air, ORIL could not wait passively for the operation of law
to divest Ruiz of his milk quota. Although ORIL does not have any
discretion to allow a dairy farmer whose license is revoked to
continue holding milk quota, see P.R. Reg. No. 8660, Art. 7, it
needed to take legal action to enforce the part of the license
revocation decision compelling the sale of Ruiz's quota. Until
the sale, the milk quota remained in Ruiz's possession, despite
the fact that he was no longer legally qualified to own it or use
it. Because Ruiz retains a proprietary interest in his milk quota
until it is sold, we treat his unsold milk quota as property of
the bankruptcy estate.
B. The Scope of the Police Power Exception
The automatic stay under § 362 is broad, but the police
power exception in § 362(b)(4) exempts 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, including the
enforcement of a judgment other than a money judgment, obtained in
- 18 - 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).
This exception ensures that government agencies can
still enforce laws "affecting health, welfare, morals and safety"
and that debtors are not automatically protected in bankruptcy
court from such regulatory laws. In re Universal Life Church,
Inc., 128 F.3d 1294, 1297 (9th Cir. 1997). "When a governmental
unit decides to undertake an enforcement action and believes its
action falls within the police power exception, it need not
petition the bankruptcy court for permission to proceed in the
ordinary course . . . ." Chao v. Hospital Staffing Servs., Inc.,
270 F.3d 374, 385 (6th Cir. 2001). By doing so, however, "the
agency runs the risk that a court will later find its action
outside the exception's ambit" and thus in violation of the
bankruptcy stay. Id. We first apply the statutory text to the
facts of this case. We then apply two tests that courts have
devised for applying the police power exception.
1. Statutory Text of the Police Power Exception
In approaching this question of statutory
interpretation, we start with the statutory text. E.g., City of
Providence v. Barr, 954 F.3d 23, 31 (1st Cir. 2020). ORIL's
planned auction of Ruiz's milk quota after the revocation of his
license fits comfortably within the statutory text of § 362(b)(4).
- 19 - The revocation of Ruiz's dairy license was certainly a proceeding
by ORIL, a governmental unit, to enforce its police or regulatory
power over milk safety and marketing. The police power exception
applies by its terms to the commencement or continuation of such
an action, but also extends to "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)
(emphasis added).
The planned auction was a step in the enforcement of the
judgment revoking Ruiz's dairy license. On its face, that judgment
ordered the disposition of his milk quota. In statutory terms,
the revocation of Ruiz's milk license did not produce "a money
judgment," the enforcement of which is carved out as an exception
to the police power exception. See 11 U.S.C. § 362(b)(4); see
also Cournoyer v. Town of Lincoln, 790 F.2d 971, 974–76 (1st Cir.
1986) (police power exception applied to zoning enforcement action
seeking removal of junk from property; action did not involve money
judgment even if compliance would require debtor to incur some
expenses); Penn Terra Ltd. v. Dep't of Environmental Resources,
733 F.2d 267 (3d Cir. 1984) (same for state agency action seeking
injunction to restore the environment and prevent future harm to
it). The statutory text of the police power exception to the
- 20 - automatic stay thus applies to ORIL's planned auction of Ruiz's
milk quota.
2. The Public Policy and Pecuniary Purpose Tests
Our conclusion directly from the statutory text also
fits comfortably with case law applying the police power exception.
While the statutory language is our touchstone, we have recognized
that, in applying the police power exception, "courts have devised
two interrelated, fact-dominated inquiries — the so-called 'public
policy' and 'pecuniary purpose' tests . . . ." In re McMullen,
386 F.3d at 325.
The Sixth Circuit has explained these tests:
Under the pecuniary purpose test, reviewing courts focus on whether the governmental proceeding relates primarily to the protection of the government's pecuniary interest in the debtor's property, and not to matters of public safety. Those proceedings which relate primarily to matters of public safety are excepted from the stay. Under the public policy test, reviewing courts must distinguish between proceedings that adjudicate private rights and those that effectuate public policy. Those proceedings that effectuate a public policy are excepted from the stay.
Hospital Staffing Servs., 270 F.3d at 385–86 (quoting In re
Commerce Oil Co., 847 F.2d 291, 295 (6th Cir. 1988)); see also In
re Nortel Networks, Inc., 669 F.3d 128, 140 (3d Cir. 2011) ("If
the purpose of the law is to promote public safety and welfare or
to effectuate public policy, then the exception to the automatic
stay applies. If, on the other hand, the purpose of the law is to
- 21 - protect the government's pecuniary interest in the debtor's
property or primarily to adjudicate private rights, then the
exception is inapplicable."). The undisputed facts show here that
the revocation of Ruiz's dairy license and resulting auction of
his milk quota qualify for the police power exception under either
test.3
First, under the public policy test, we have already
noted the heavily regulated nature of the milk industry in Puerto
Rico. Dairy licenses and milk quotas are the bailiwick of ORIL,
which oversees dairy license qualifications, milk quality, the
market for milk and milk quotas, and enforcement actions for
breaches of its various regulations. ORIL has an important
interest in ensuring that those who hold dairy licenses do not
place unsafe milk in the market. The health and safety dimensions
of the regulatory requirements are evident. ORIL also has an
interest in ensuring that the milk being produced can meet the
demands of the consumer market by preventing milk quota from
3 Cases are divided as to whether a government enforcement action must satisfy one or both of these tests to qualify for the police power exception. Compare Lockyer v. Mirant Corp., 398 F.3d 1098, 1108 (9th Cir. 2005) (satisfying one test is sufficient), with Hospital Staffing Services, 270 F.3d at 388–89 (enforcement action must satisfy both to qualify for police power exception); see also In re Nortel Networks, 669 F.3d at 139 n.12 (noting issue but not deciding it because enforcement action did not qualify under either test). Because the agency's action here satisfies both tests, we need not decide whether it must satisfy both or just one.
- 22 - sitting idly in the hands of someone legally barred from using it.
The revocation of Ruiz's dairy license and the public auction of
his milk quota serve to promote public policy rather than to
adjudicate private rights.
Also, to be clear, the police powers protected under
§ 362(b)(4) are not limited to matters directly involving public
health and safety. They extend more broadly to regulatory efforts
to protect public welfare. E.g., In re McMullen, 386 F.3d at 324–
25 (police power exception applied to state agency proceeding to
revoke license of real estate broker; police power 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 to
enjoin or deter ongoing debtor conduct which would seriously
threaten the public safety and welfare (e.g., environmental and/or
consumer protection regulations)").
The application of the police power exception to the
automatic stay is also clear under the pecuniary purpose test.
ORIL has no pecuniary interest in Ruiz's dairy license or milk
quota. The agency will not receive any proceeds of the auction of
Ruiz's milk quota. In this case, the bankruptcy court concluded
that ORIL would not profit from this sale. See In re Ruiz Ruiz,
No. 15-04548, 2021 WL 6102147, at *5 (Bankr. D.P.R. Dec. 23, 2021).
The agency represented, however, that if there had been a profit
- 23 - from the auction after paying the lienholder and auction expenses,
the surplus would have been given to the debtor.
3. The Role of the Lienholder
There is no doubt that the ORIL proceeding to revoke
Ruiz's dairy license was protected from the automatic stay by the
police power exception. Ruiz argues, however, and the bankruptcy
and district courts were persuaded, that the further step of
auctioning Ruiz's milk quota is not protected. We have just
explained that the planned auction also fits the exception because
it is part of the enforcement of the license revocation order.
In opposing this conclusion, Ruiz highlights ORIL's
efforts to protect the interests of the lender that holds a
security interest in Ruiz's milk quota. As Ruiz sees things, the
planned auction was not protected by the police power exception
because it amounted to an effort to protect the financial interests
of a private entity. We are not persuaded that such efforts to
protect the interests of a lienholder have any effect on the
application of the police power exception.
The bankruptcy court, district court, and Ruiz all
quoted language from our opinion in In re Spookyworld, Inc., 346
F.3d 1 (1st Cir. 2003), to argue that if the government's
enforcement action serves the pecuniary interest of a private party
(such as the lienholder here), the police power exception does not
apply. They seize on the parenthetical "perhaps" comment in the
- 24 - following passage: "the exception does not apply if the government
takes legal action to advance its own 'pecuniary' interest (or
perhaps the pecuniary interest of others)." Id. at 9. These
arguments overread that opinion and the tentative comment.
The parenthetical "perhaps" comment was obvious obiter
dictum. It cannot be stretched to require advance bankruptcy court
permission for the planned auction of milk quota here. ORIL is
required by law to force Ruiz to dispose of his milk quota, and
ORIL is also required by law, in the course of doing so, to protect
the interests of lienholders. That does not mean that ORIL was
taking action against Ruiz for the pecuniary benefit of the
lienholder.
Moreover, the cited support for the quoted statement in
Spookyworld would not support the broader application sought by
Ruiz here. We cited In re Universal Life Church, Inc., 128 F.3d
1294 (9th Cir. 1997), and Chao v. Hospital Staffing Services, Inc.,
270 F.3d 374 (6th Cir. 2001). Neither opinion endorsed an atextual
rule to the effect that any time a government action serves any
private pecuniary interest to any degree, the police power
exception cannot apply. Rather, both opinions teach more narrowly
that a pecuniary interest of the government itself cannot be the
primary purpose of the government's action. See Universal Life
Church, 128 F.3d at 1299 ("[M]ost government actions which fall
under this exemption have some pecuniary component, particularly
- 25 - those associated with fraud detection. This does not abrogate
their police power function. Only if the action is pursued solely
to advance a pecuniary interest of the governmental unit will the
automatic stay bar it." (emphasis added) (internal quotation marks
omitted)); Hospital Staffing Servs., 270 F.3d at 389 ("[T]he
Secretary's action would not result in a pecuniary advantage to
the government, so her suit passes the pecuniary interest test
. . . ." (emphasis added)).
In Hospital Staffing Services, the Sixth Circuit
recognized that the government's suit would "result in a pecuniary
advantage to certain private parties vis-a-vis other creditors'
interests in the debtor's estate, a situation addressed by this
court's public policy test." 270 F.3d at 389 (emphasis in
original) (footnote omitted). But the court also explained that
if a government action "furthers both public and private interests
and the private interests do not significantly outweigh the public
benefit from enforcement, courts should defer to the legislature's
decision to vest enforcement authority in the executive and
recognize such actions as within 'such governmental unit's police
and regulatory power,' as that term is used in § 362(b)(4)." Id.
at 390.4
4 In Hospital Staffing Services, the majority found that the circumstances of that particular "hot goods" case under the Fair
- 26 - Here, the undisputed facts show that the purpose of
ORIL's action was to protect the public safety and welfare (a) by
ensuring that those who adulterate the milk supply are no longer
legally qualified to produce and sell milk and (b) by enforcing
the milk quota system in Puerto Rico. Because ownership of milk
quota depends on holding a dairy license, and because the license
revocation judgment ordered Ruiz to dispose of his milk quota, the
planned auction would, in terms of § 362(b)(4), be part of 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).
From ORIL's perspective, the existence of a lien on
Ruiz's milk quota was purely coincidental and does not affect the
agency's regulatory interests or powers. The fact that Ruiz chose
Labor Standards Act did not satisfy the public policy test because barring use of the hospital records in question would not prevent unfair competition but would "promote a significant property interest — a property interest held by the affected employees." 270 F.3d at 392–93. Judge Moore dissented, citing several cases holding that similar FLSA enforcement actions were protected by the police power exception. Id. at 395–97. The Hospital Staffing Services majority acknowledged that, given the fact-specific nature of the public policy test, applying the test is a "difficult undertaking" and there will be close cases. Id. at 389. In this case, however, applying the public policy test is much easier because the effect of the auction on the holder of the lien on Ruiz's quota is only a coincidental side-effect of Ruiz's choice to use his milk quota as collateral.
- 27 - to use his milk quota as collateral for a loan did not weaken
ORIL's regulatory power to protect public health and welfare. The
fact that an auction would let the lienholder enforce its lien
against Ruiz's quota is an incidental side effect of the regulatory
action, one that results only from Ruiz's choice of collateral.
That situation does not change the nature of the proceeding or
overshadow or outweigh ORIL's public interest in regulating the
milk market. Cf. E.E.O.C. v. Rath Packing Co., 787 F.2d 318, 325
(8th Cir. 1986) (holding that EEOC sex-discrimination suit against
debtor-employer fell within police power exception: "When the EEOC
acts, albeit at the behest of and for the benefit of specific
individuals, it acts also to vindicate the public interest in
preventing employment discrimination." (internal quotation marks
and alteration omitted; quoting General Tel. Co. of the Northwest,
Inc. v. E.E.O.C., 446 U.S. 318, 326 (1980))).
V. Conclusion
While this appeal was pending, several successful and
attempted sales of portions of Ruiz's milk quota have taken place
through the bankruptcy proceeding. We register here no objection
to the bankruptcy court's supervision of those sales. But ORIL's
attempted public auction of Ruiz's milk quota was part of the
enforcement of a judgment obtained in an action to enforce ORIL's
police and regulatory power. The attempted auction therefore did
- 28 - not violate the automatic stay under § 362. ORIL is entitled to
summary judgment in its favor in the adversary proceeding.
REVERSED.
- 29 -