A New Jersey Bankruptcy Court recently held that a government environmental agency violated the automatic stay by seeking to compel a debtor to remediate an environmental violation in lieu of enforcing a claim for monetary damages.[1]
Stephen Samost (the “Debtor”) held an indirect ownership interest via an LLC and its subsidiary in a lake and adjacent dam. In 2010, the Superior Court of New Jersey entered a summary judgment order in favor of the New Jersey Department of Environmental Protection (the “NJDEP”) holding that repairs to the dam were required and the Debtor was liable under New Jersey’s Safe Dam Act[2] for costs to repair to the dam. The Superior Court entered an order holding the Debtor liable for 45% of the costs necessary to repair the dam. The Superior Court appointed a Receiver to collect the costs of repairing the dam from all responsible parties. The Superior Court made the Receiver directly responsible for making repairs to the dam after necessary funds were collected from the responsible parties. The Superior Court entered three subsequent orders directing the Debtor and other responsible parties to deposit funds with the Receiver to be used for repair and reconstruction costs, but the Debtor failed to perform. On May 9, 2022, the Superior Court entered an order granting a motion by the NJDEP to enforce litigant’s rights which required the Debtor to deposit $1,078,578.45 with the Receiver for the Dam’s repair and to pay a $700,000.00 penalty, plus interest. The Debtor failed to comply.
On October 18, 2023, the Debtor filed for bankruptcy under Subchapter V of Chapter 11. In December of 2023, the Receiver filed in application in the state court action to be discharged from his duties because he was retiring from the practice of law. The NJDEP filed a cross-motion to rescind the order appointing the Receiver, and portions of other orders relating to the Receiver and the Debtor’s obligation to pay the Receiver for the costs of the repairing the dam. The effect of the rescindments requested by the NJDEP was to transfer direct responsibility for repairing the dam from the Receiver to the Debtor and the other responsible parties. The NJDEP also issued an administrative order which states “[t]he responsible parties [including the Debtor] are reminded that they are still responsible for repairing the Dam themselves under the [2010 Order]. If one or more of the responsible parties do not step forward and agree to repair the Dam, appropriate enforcement action will be taken in the N.J. Superior Court.”[3] The NJDEP did not seek relief from the stay before issuing the administrative order or filing its cross-motion to rescind the orders imposing direct responsibility on the Receiver for repairing the dam.
The Debtor filed a motion in the bankruptcy court for an order determining that the NJDEP violated the stay by filing the cross-motion and issuing the administrative order.
11 U.S.C. § 362(b)(4) provides an exception to the automatic stay for governmental units acting to enforce police and regulatory powers, but also provides an exception to that exception by prohibiting governmental units from acting to enforce a money judgment. Thus, the subsection is designed “to permit an injunction and enforcement of an injunction, and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment.”[4] The Debtor argued that the NJDEP was acting to enforce its money judgment by seeking to (i) eliminate the Receivership, (ii) eliminate portions of orders that required the Debtor to pay funds to the Receiver, and (iii) require the Debtor to be directly responsible for repair of the dam. The NJDEP argued that its actions were permissible under the police and regulatory exception to the automatic stay set forth in 11 U.S.C. § 362(b)(4), and did not fall under the exception to the exception because the NJDEP did not seek any monetary relief in its state court cross-motion.
The court began its analysis by finding that the NJDEP’s action, which sought to enforce rights under the Safe Dam Act, “indisputably” fell within the police and regulatory exception under 11 U.S.C. § 362(b)(4).[5]
The court next considered whether the NJDEP’s action constituted an attempt to enforce a money judgment and consequently fell within the exception to the exception under 11 U.S.C. § 362(b)(4). The court found that, “as the court reads the facts, the NJDEP is not seeking to enforce its monetary judgment. In fact, the NJDEP is attempting to abandon its monetary judgment.”[6]
Notwithstanding the finding that the NJDEP was not seeking to enforce a monetary judgment, the court held that the NJDEP violated the automatic stay. The court ruled that the NJDEP, by abandoning efforts to collect money to fund the dam repair and seeking instead to compel the debtor to perform the dam repair, was “attempting to circumvent the money judgment exception to the police and regulatory power exception to the automatic stay in order to frustrate any perceived benefits or advantages the Debtor may acquire under the Bankruptcy Code.”[7] The court also emphasized that the Debtor had proposed a plan which “provides the funding needed to satisfy the monetary obligation to repair the Dam within a specified period of time” and expressed concern that the injunctive relief requested by the NJDEP would thwart the plan and delay repair of the dam.[8]
The court’s decision is interesting because a plausible interpretation of the NJDEP’s actions is that the NJDEP was attempting to comply with the Bankruptcy Code by giving up its attempts to enforce monetary remedies and pursuing the alternative of injunctive relief which is expressly approved in the legislative history to 11 U.S.C. § 362(b)(4). Environmental and other governmental agencies should take note of the risk of seeking injunctive relief against a debtor without first obtaining a ruling from the bankruptcy court applying 11 U.S.C. § 362(b)(4)’s exception to the exception to the particular facts of a debtor’s case.
For debtors, the court’s decision provides a path to argue that the automatic stay prohibits an environmental agency or other governmental unit from obtaining injunctive relief if the government has already obtained a money judgment against the debtor, particularly in circumstances where the debtor is able to propose a plan that provides funding to fully satisfy the monetary obligation.
[1] In re Samost, 2024 Bankr. LEXIS 829 (Bankr. D.N.J. April 2, 2024).
[2] N.J.S.A. 58:4-1, et seq.
[3] Samost, supra, at *12-13.
[4] Penn Terra, Ltd. v. Dep’t of Envtl. Res., 733 F.2d 267, 272 (3d Cir. 1984) (quoting S. Rep. No. 95-989 at 52, 1978 U.S. Code Cong. & Ad. News at 5787; H. Rep. No. 95-595 at 343, 1978 U.S. Code Cong. & Ad. News at 6299.)
[5] Samost, supra, at *23.
[6] Id. at *31.
[7] Id. at *31-32.
[8] Id. at *37.
