Thе State of New York (the “State”) has presented the debtor, Synergy Development Corporation (“Synergy”), with a Hob-son’s Choice. The State has moved to have this court declarе that the automatic stay does not apply pursuant to 11 U.S.C. § 362(b)(4) or, in the alternative, for relief from the automatic stay to enforce in a state court the terms of a prepetition stipulation into which the debtor entered with the State. The stipulation allows the State to enter an order enjoining the debtor from selling or renewing memberships in its health club unless it рosts a $50,000.00 bond with the Secretary of State. The debtor claims that it cannot post such a bond and cannot proceed with its Chapter 11 reorganization if it cannot sell and renew memberships.
BACKGROUND
On December 18, 1991, the debtor filed with this court a petition for reorganiza-tional relief under Chapter 11 of the Bankruptcy Code and was continued in management and possession of its property and business in accordance with 11 U.S.C. §§ 1107 and 1108. The debtor owns and operates a health and fitness spa.
On October 21, 1991, pursuant Executive Law § 63(12), the State of New Yоrk instituted a special proceeding in New York State Supreme Court, Dutchess County, against the debtor for an order enjoining the debtor from engaging in repeated fraudulent or illegаl acts in New York and directing the debtor to pay restitution and damages to those injured by such activities. The State alleged, among other things, that the debtor failed to post a $50,000.00 bond аs security, which is required of health clubs pursuant to New York General Business Law § 622-a.
By stipulation dated November 7, 1991, the debtor and its principals agreed to settle the State’s procеeding by paying restitution to consumers victimized by the debt- or’s actions and to pay the State a civil penalty of $2,500.00 and costs of $2,000.00. The payments to consumers were to commence immediately and were to be paid in installments concluding May 1, 1992. The stipulation also provides that if the debtor defaults on its obligations, an order will be entered on consent which shall require the debtor to post a bond or other security with the Secretary of State of New York in the sum of $50,000.00 to continue selling or renewing existing memberships at the health club.
The stipulation further provides that if the debtor defaults on its obligations, the debtor has ten days to cure such default before the State may submit a proposed order. In a letter dated February 21, 1992, the State notified the debtor that it was in default of the stipulation. The debtor did not cure its default within the ten day period, nor has it cured it to date.
DISCUSSION
Bankruptcy does not grant a debtor greater rights than those it would receive outside of bankruptcy.
Butner v. United States,
New York General Business Law § 622-a provides:
1. Every health club, except as provided in subdivision ten of this section, before it enters into any сontract for services for use by a buyer of a health club, shall file and at all times maintain with the secretary ...
*960 (a) A bond with a corporate surety, from a company authorized tо do business in this State.
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2. The principal sum of the bond ... shall be;
(a) Fifty thousand dollars if the health club sells contracts for services for a term not greater than twelve months.
N.Y.Gen. Bus.Law § 622-a 1(a) & 2(a) (McKinney 1992 Supp.).
The State argues that pursuant to 11 U.S.C. § 362(b)(4), the automatic stay shоuld not preclude it from proceeding to enter an order in the state court proceeding imposing the injunction consented to by the debtor. Section 362(b)(4) states:
(b) The filing of a petition under section 301, 302, or 303 of this title, ... does not operate as a stay—
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(4) under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit’s police or regulatory power.
11 U.S.C. § 362(b)(4). The debtor argues that it cannot post the $60,000.00 bond and that precluding it from selling or renewing memberships will effectively destroy its Chapter 11 reorganization.
To determine whether a particular government action is within the “police power” exception, courts apply two tests, thе pecuniary purpose test and the'public policy test.
N.L.R.B. v. Continental Hagen Corp.,
This is not a case where a governmental unit seeks to exercise its police power in an effort to help a creditor collect a prepetition debt. Such enforcement of police power is not excepted from the automatic stay.
See, e.g., In re Massenzio,
In
In re Edwards Mobile Home Sales, Inc.,
[i]t is clear from the record the license requirement is for the benefit and protection of potential mobile home purchasers. Consumer protection is included in the ambit of the government’s police and regulatory powers. Actions taken by the State of Florida as regard the license clearly go to the State’s interest in public protection.
Id. at 860.
The legislative history of section 362(b)(4) also indicates that Congress intended to except from the automatic stay, governmental аctions to protect consumers.
*961 Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar policе 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. 595, 95th Cong., 1st Sess. 343 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6299; S.Rep. No. 989, 95th Cong., 2d Sess. 52, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5838 (emphasis added).
In the instant case, the State brought a prepetition action against the debtor because the debtor failed to satisfy the $50,-000.00 bond requirement for health clubs operating in the New York State. This requirement is to protect consumers who purchase health club memberships only to be defrauded should the health club close. This court cannot imagine a purer exercise of a State’s regulatory or police powers. The State is not attempting to withhold the debtor’s right to operate its health club by not issuing a certificate to operate or similar license, which might violate sections 362(a)(3) and 541(a).
See Draughon Training Institute, Inc.,
CONCLUSIONS OF LAW
1.This court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 28 U.S.C. § 157(a). This is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(G).
2. The automatic stay does not apply to the State’s action brought to enforce section 622-a of the New York General Business Law, which requires health clubs post a $50,000.00 bond in order to sell memberships of a certain duration. The State’s action was brought to protect future consumers and is within the State’s police or regulatory powers pursuant to 11 U.S.C. § 362(b)(4).
3. The State may proceed to enter the prepetition stipulation into which it entered with the State.