In Re Mohawk Greenfield Motel Corp.
MEMORANDUM OF DECISION
This mаtter is before the Court' pursuant to a motion by Stetson Management Company, Inc. (“Stetson”) seeking relief from the automatic stay under § 362(a) and this Court’s order of February 4, 1999 that the Massachusetts Commission Against Discrimination (“MCAD”) and its Hearing Officer Judith Kaplan (“Kaplan”) show cause why they did not violate
I. Facts
The relevant facts are not in dispute.
Mohawk is a Massachusetts corporation operating a motor lodge and restaurant in Greenfield, Massachusetts under a franchise agreement with Howard Johnson®. On June 2, 1998, Mohawk filed a petition for relief in this court under Chapter 11 of the Bankruptcy Code. To date, Mohawk has continued to operate and manage its business as a debtor-in-possession, pursuant to
Prior to March 8, 1998, Stetson, a Massachusetts corporation and wholly owned subsidiary of Franchise Associates, Inc. (“Franchise”), served as the management company responsible for operating the Debtor’s business. 1 Stetson’s now еxpired management contract contained language pursuant to which the Debtor was obligated to indemnify Stetson from certain claims and the defense costs associated therewith. 2
Hearings were conducted in Grybko’s and Mayhew’s cases by MCAD Commissioner Douglas Schwarz and Kaplan, respectively, prior to the Debtor’s bankruptcy filing. The MCAD decision in each case was still under advisement when the Debtor filed its petition on June 2, 1998. Suggestions of Bankruptcy were filed on or about June 9, 1998 in both of the cases.
On January 6, 1999, Stetson sought relief from the automatic stay (the “Stay Motion”), in order to allow the MCAD to proceed to judgment in both cases. Stetson argued that because its management contract with the Debtor indemnified Stetson for all judgmеnts and attorneys fees incurred in defending any actions brought against the Debtor, the MCAD judgments, if any, would liquidate Stetson’s indemnification claim in the Debtor’s bankruptcy case. Further, the issuance of those judgments would promote judicial economy since the matters had already been tried before the MCAD and were just waiting final decision.
The Debtor objected to Stetson’s Stay Motion, but appeared to take greater issue with Stetson’s claimed right of indemnification than with Stetson’s request for relief from the automatic stay. Acсording to counsel for the Debtor, Franchise undertook the defense of both the Grybko and Mayhew complaints without advising the Debtor of the existence of either of those proceedings. 3 Having now been advised of the pending MCAD actions, the Debtor argued that Stetson’s claims of indemnification were groundless, in that the alleged acts committed by the general managers in each case, -even if true, constituted willful and grossly negligent torts outside the scope of their employment with Franchise and Stetson and therefore outside of the scope of Debtor’s indemnification obligation.
A hearing on the Stay Motion was scheduled for February 4, 1999. However, prior thereto, on January 19, 1999, Kaplan issued her decision in the Mayhew case. Kaplan found that Mayhew had been the victim of sexual harassment and ordered the Respondents to cease and desist such discriminatory acts. Kaplan further ordered the Respondents to pay to Mayhew damages in the sum of $50,000 (plus interest) on account of her emotional injuries and $7,521.76 (plus interest) on account of her lost wages. Immediately thereafter, Stetson filed the instant amended motion requesting that relief from the automatic stay be granted
nunc pro tunc
to June 2,
At the February 4, 1999 hearing, counsel for Stetson requested that this Court grant relief from the stay nunc pro tunc to validate the MCAD judgment. Stetson asserted that the granting of such relief was mandated by equitable considerations; namely that thе Mayhew case had been fully tried and taken under advisement prepetition, the MCAD was the appropriate administrative agency to hear discrimination cases, and retrying the case would force the Debtor to incur additional fees and expenses.
This Court, however, was hesitant, in light of
Soares v. Brockton Credit Union (In re Soares),
On February 10, 1999, Jerrold Lavinsky (“Lavinsky”), Deputy General Counsel for the MCAD appeared at the continued hearing.
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According to Lavinsky, Kaplan had not intended to violate the automatic stay. In fact, he explained that it was the understanding of both Kaplan and the MCAD generally that the actions of the MCAD were excepted from the stay. According to Lavinsky, the MCAD had acted as a governmental unit enforcing its police and regulatory power under state law, and its actions fell squarely within the automatic stay еxceptions of
The Court expressed its concern that part of the judgment entered by Kaplan appeared to have been rendered solely for the pecuniary benefit of Ms. Mayhew and therefore might not be excepted from the stay. The precise issue was whether MCAD monetary awards to victims of discrimination are excepted from the automatic stay by
II. Position of the Parties
The MCAD argues that its proceedings and judgment on Mayhew’s behalf were excepted from the automatic stay, pursuant to
In contrast, the Debtor asserts that the MCAD violated the automatic stay when it entered a postpetition judgment against the Debtor with knowledge of the pending bankruptcy case. The Dеbtor maintains that the MCAD action was not excepted from the automatic stay under
III. Discussion
A.
Notwithstanding the breadth of the automatic stay, enforcement of a governmental unit’s police or regulatory power is excepted.
Because the Bankruptcy Code does not define the term “police or regulatory power,” courts have looked to the legislative history of
paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud; environmental protection, consumer protection, safety or similar police or regulatory laws or attempting to fix damages for violation of such law, the action or proceeding is not stayed under the automatic stay.
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 343 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 51-52, reprinted in 1978 U.S.C.C.A.N. 5787, 5838, 5963, 6299. But Statements of Representative Edwards and Senator DeConcini make clear that
Courts have fashioned two tests to determine whether a state agency’s administrative actions fall within the scope of
The MCAD argues that its actions clearly meets both tests. First, the MCAD argues that state and federal civil rights enforcement agencies labor to prevent and eliminate unlawful discrimination, rather than to promote the pecuniary interest of the government or the complaining parties.
See EEOC v. McLean Trucking Co.,
This Court finds merit in the arguments set forth by the MCAD. In Massachusetts, a strongly felt public policy against discrimination — based on race, col- or, religious creed, national origin, ancestry, age, sex, sexual orientation, veteran or military status, handicap, children, or receipt of public assistance — is protected by a legislative scheme which provides for administrative remedies effectuated by the MCAD.
See generally
Mass.Gen.Laws Ann. Ch. 151B § 3. The MCAD is empowered to receive, initiate, and investigate complaints, conduct public hearings, issue orders to eliminatе discrimination where it is found to exist, and mitigate the effects of such discrimination.
Id.
Given the purpose of the MCAD and the enforcement powers it has been granted by the Commonwealth, it is clear that the MCAD is a governmental unit
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enforcing police and regulatory powers within the meaning of
However, that is not the end of this Court’s review. “
A number of courts agree that a governmental unit, as a legitimate aid to its police power, may move to obtain the issuance of an injunction and recovery of civil penalties against a debtor to punish past and prevent future wrongs.
In re Charter First Mortgage, Inc.,
Other courts disagree, ruling that the ability to grant back pay awards and restitution is simply a means to enforce a governmental unit’s police and regulatory power. In
EEOC v. McLean Trucking, Co.,
Other courts of appeals have similarly held that suits commenced by the EEOC or the National Labor Relations Board (“NLRB”) seeking restitution and/or back pay orders are excepted from the automatic stay under
The Court of Appeals for the First Circuit has not specifically determined whether an MCAD monetary award is excepted from the automatic stay under
The case at bar is an excellent case in point. The MCAD ordered the Debtor to cease and desist acts of sexual discrimination and awarded the complainant, Ms. Mayhew, back wages and compensation for her emotional injuries. Clearly, the MCAD cease and desist order enjoining the Debtor from violation of state law had a legitimate public purpose. But the order enjoining future discriminatory acts would have been largely toothless, without the imposition of an appropriate remedy to ensure future compliance. True, the entry of the award on Ms. Mayhew^s behalf was of benefit to her. But that was not the only benefit. The award ensured that the Debtor, as well as others who might contemplate similar odious behavior, would be dissuaded from its future practice.
The message that discriminatory behavior will be identified and remediation determined without excessive delay is the most effective tool of a governmental unit charged with the obligation to ensure private rights for the public good. Regardless of whether this Court applies the pecuniary purpose test or the public policy test, the result is the same. The preservation of MCAD’s authority to determine damages on account of discriminatory acts is сonsistent with public policy and the protection of public safety and welfare; and the benefit to the public arising from the continuing capability of MCAD to identify and sanction discriminatory behavior overshadows any associated pecuniary benefit to the victim of that discrimination.
In view of the foregoing, this Court will follow what it discerns to be the trend among the courts of appeal, both in this circuit and others, to the effect that the entry of awards by administrative agencies like the MCAD fall within the police and regulatоry power of these governmental units, pursuant to
Inasmuch as the automatic stay is inapplicable, the Amended Stay Motion will be denied as moot. And this Court will take no further action on its Show Cause Order.
Notes
. Stetson was appointed as manager of the Debtor’s operations pursuant to the Third Joint Chapter 11 Plan of Reorganization confirmed in Debtor's prior bankruptcy case, 9.1-40772-JFQ, on February 19, 1992.
. That language provides in relevant part:
In taking any action pursuant to this Agreement, [Stetson] will be acting solely as agent for [Debtor], and all debts and liabilities incurred by [Stetson] in the course of its operation hereunder shall be the debts and liabilities of the [Debtor] only. [Stetson] shall not be liable for such debts or liabilities^]
[Debtor] agrees to reimburse [Stetson], upon demand for any money which [Stetson] is required to pay out for any reason whatsoever, whether the payment is for operating or maintenance expenses or expenses in defense of any claim, civil orcriminal action, proceeding, chаrge, or prosecution made, instituted or maintained against [Stetson] [.]
[Debtor] agrees to defend promptly and diligently, at [Debtor’s] expense, any claim, action or proceeding brought against [Stetson] ... arising out of or connected with any of the foregoing and to hold harmless and fully indemnify [Stetson] from any judgment, award, fine, penalty, loss or settlement on account thereof.
It is expressly understood and agreed that the foregoing provisions of this paragraph shall survive the termination of this Agreement.
Management Contract at ¶ 14.
. The Debtor also asserts that the only party named as respondent in the Grybko case is Franchise.
. At Kaplan's written request, the Court excused her appearance at the hearing.
. Neither counsel for the Debtor nor counsel for Stetson appeared at the hearing on February 10, 1999. It was later learned that both parties understood the hearing to be continued to another date. To preserve their respective rights to comment on the issue at hand, the Court provided each party an opportunity to filе a post-hearing brief. Only the Debtor did so.
. As part of the Chemical Weapons Convention Implementation Act of 1998 which was part of the Omnibus Consolidated Emergency Supplemental Appropriation Act, 1999, former Code
[from] paragraph (1), (2), (3), or (6) of [§ 362(a) ] ... the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and their Destruction, openеd for signature on January 13, 1993, 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.
Because this case was filed prior to the effective date of the amendment, the former
. A governmental unit is defined under the Bankruptcy Code as “United States; State; Commonwealth; District, Territory; municipality; foreign state; department, agency, or instrumentality of the United States ... a state, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government[.]”
. In its papers, the MCAD concedes that the automatic stay would apply to any effort to enforce an award by seeking to reach property of the estate. Therefore, this Court's holding that the MCAD proceedings are excepted from the automatic stay extends to proceedings up to and including the entry of the MCAD judgment, but no further. Also, as is discussed in the Carib-Inn of San Juan Corporations case, the First Circuit has distinguished the applicability of the “automatic” stay from a court’s power to issue a “discretionary” stay in appropriate circumstances. Carib-Inn at 562. But no party herein has asked this Court to issue a discretionary stay, nor would any such request likely have merit here in light of the history and stage of the MCAD proceedings with respect to Ms. Mayhew’s complaint.