In re Energy Guard Midwest LLC

595 B.R. 588

IN RE: ENERGY GUARD MIDWEST LLC, Debtor.

Case No. 18-11070

United States Bankruptcy Court, D. Kansas.

Signed December 11, 2018

Justin T. Balbierz, Mark J Lazzo PA, Mark J. Lazzo, Landmark Office Park, Wichita, KS, for Debtor.

Order Denying Debtor's Motion for Order Enforcing Automatic Stay

Dale L. Somers, United States Chief Bankruptcy Judge

Debtor Energy Guard Midwest LLC is in a precarious position. Prior to Debtor filing its Chapter 11 bankruptcy petition, the State of Kansas filed a state court petition against Debtor under the Kansas Roofing Registration Act and the Kansas Consumer Protection Act, alleging various untoward practices by Debtor. The State of Kansas seeks the permanent injunction of all Debtor's roofing and construction related work in Kansas. If the state court action continues, Debtor claims it will not be able to reorganize in bankruptcy court, and Kansas consumers' best chance for having their work completed by Debtor will be lost. Debtor seeks an order from this Court enforcing the Bankruptcy Code's automatic stay, effectively putting an end to the State of Kansas's enforcement action. But the State of Kansas argues it is exempt from the automatic stay under 11 U.S.C. § 362(b)(4),¹ because it is a governmental unit enforcing its police and regulatory power. The State of Kansas opposes Debtor's motion, and the state court has already found that the State of Kansas is exempt from the stay under § 362(b)(4).

Because the Court concurs that the State of Kansas's enforcement action meets both the "pecuniary purpose" test and the "public policy" test for showing an action is exempt from the automatic stay under § 362(b)(4), the Court must deny Debtor's motion to enforce the automatic stay.² It will be up to the state court to determine how much—or how little—of Debtor's business operations are enjoined.³

I. Findings of Fact

Debtor is engaged in roofing and home improvement services throughout Kansas and neighboring states.⁴ On March 16, 2018, the Kansas Attorney General filed a state court petition against Debtor, alleging claims under the Kansas Roofing Registration Act⁵ and the Kansas Consumer Protection Act.⁶ The purpose of the Kansas Roofing Registration Act, an attachment to the Kansas Consumer Protection Act,⁷ is the protection of consumers—there is no private right of action under the Act.⁸

The state court petition's claims are based on Debtor's conduct with a client referred to as "T.D." The allegations are that on September 1, 2017, Debtor contracted to perform roofing and home improvement services for T.D. in exchange for payment of $ 55,830. Despite repeated contacts from T.D., Debtor never actually ordered materials for the project and did not carry out the scope of work. T.D. requested a refund. Despite agreeing to discontinue the contract prior to the state court petition ever being filed, Debtor has provided a refund of only about half the amount owed. The State of Kansas requested the following relief: 1) a permanent injunction prohibiting Debtor from operating as a roofing contractor or providing roofing-related, home improvement, or other construction services; 2) reasonable investigative fees and expenses; 3) restitution of $ 43,371.05; 4) civil penalties of $ 40,000 under the Kansas Roofing Registration Act and $ 10,000 under the Kansas Consumer Protection Act; and 5) costs.

The parties to the state court action agreed to a stipulated temporary restraining order. The stipulated order forbade Debtor from advertising, soliciting, or accepting new business. Debtor was specifically prohibited from acting as a roofing contractor or general contractor in Kansas, except for any jobs that were currently under contract. Debtor agreed to provide the State with a list of all projects then under contract so that the State could monitor the completion of Debtor's existing contracts in Kansas.

Debtor did eventually provide a list of its jobs in Kansas to the State. Monicka Richmeyer, director of the Roofing Registration Unit of the Kansas Consumer Protection Division, contacted all of the individuals on the list provided by Debtor to get an update of the status of each contract.

After the state court petition was filed against Debtor, Ms. Richmeyer's office received 9 additional complaints, prompting an amended petition to be filed on May 10, 2018. The amended petition adds facts related to some of the additional complaints, although the relief sought is similar: 1) a permanent injunction prohibiting Debtor from operating as a roofing contractor or providing roofing-related, home improvement, or other construction services; 2) reasonable investigative fees and expenses; 3) restitution of $ 51,371.05; 4) civil penalties of $ 80,000 under the Kansas Roofing Registration Act and $ 150,000 under the Kansas Consumer Protection Act; 5) costs; and 6) permanent revocation of Debtor's roofing registration certificate. In other words, the State of Kansas seeks, through its state court activity, the permanent cessation of all Debtor's work in Kansas, plus higher amounts in restitution and penalties.

On June 4, 2018, Debtor filed a Chapter 11 bankruptcy petition, and shortly thereafter filed the motion to enforce the automatic stay that is the subject of this Order. Debtor seeks an order from this Court declaring that the Bankruptcy Code's automatic stay prohibits the further prosecution of the state court action. An evidentiary hearing was held on October 3, 2018. Post filing, the state court judge entered an order modifying the prior stipulated temporary restraining order. The state court added both Tim Henry (Debtor's general manager) and Elizabeth Henry to the prior order and concluded that the matter was excepted from the Bankruptcy Code's automatic stay under § 362(b)(4).

On April 11, 2018, when the stipulated order was entered, Debtor had 85 jobs that were under contract. Of those, at hearing on this matter on October 3, 2018, Debtor identified 31 jobs that have been completed, 11 jobs that are requesting refunds from Debtor, 4 jobs that are in progress, and 8 jobs that have materials purchased and ready to ship. There are 31 jobs that have not yet been addressed. Mr. Henry testified that Debtor is paying for the work on these jobs in Kansas with profits from the jobs Debtor had in other states. Mr. Henry is also injecting his personal funds into Debtor, from the sale of personal property and a loan from a pawn shop. The State of Kansas recently sent a list to Debtor of 25 consumer complaints that it had received about Debtor and its business practices. Mr. Henry testified that he was unaware of the specific complaints, but that his intent was to finish all jobs under contract.

Mr. Henry admitted that Debtor was in over its head in Kansas, and could not have completed its backlog of jobs without new jobs injecting funds into the company.⁹ Debtor also owes a substantial sum to the Internal Revenue Service for withholding taxes. Mr. Henry testified that Debtor had not had a good program in place to prevent the IRS debt, but that Debtor has since changed programs to prevent future tax errors.

II. Conclusions of Law

A. Status of the Law

Under the Bankruptcy Code, the filing of a bankruptcy petition "operates as a stay, applicable to all entities, of– – (1) the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement" of the bankruptcy case. The purpose of the Bankruptcy Code's automatic stay is "to protect the debtor and his creditors by allowing the debtor to organize his affairs" and to ensure "that the bankruptcy procedure may operate to provide an orderly resolution of all claims."¹⁰ There is an exception, however, to this automatic stay. Section 362(b)(4) states that the filing of a voluntary petition:

does not operate as a stay-- -- (4) ... of 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[.]

There is no debate that the State of Kansas is a governmental unit. The debate centers on whether the State of Kansas is enforcing a "police and regulatory power."

In Eddleman v. U.S. Dep't of Labor ,¹¹ the Tenth Circuit noted two tests could be used to determine whether an action enforces a governmental unit's "police and regulatory power." The Eddleman court stated:

Of course, not every agency action against a debtor can be characterized as one that enforces "police or regulatory power." Consequently, courts have developed two tests for determining whether agency actions fit within the exception. Under the "pecuniary purpose" test, the court asks whether the government's proceeding relates primarily to the protection of the government's pecuniary interest in the debtor's property and not to matters of public policy. If it is evident that a governmental action is primarily for the purpose of protecting a pecuniary interest, then the action should not be excepted from the stay. In contrast, the "public policy" test distinguishes between government proceedings aimed at effectuating public policy and those aimed at adjudicating private rights. Under this second test, actions taken for the purpose of advancing private rights are not excepted from the stay.¹²

The Circuit Court in Eddleman found that a Department of Labor enforcement proceeding seeking to liquidate back-pay claims was exempt from stay under either test. The Tenth Circuit again applied § 362(b)(4) in Yellow Cab Cooperative Ass'n v. Metro Taxi, Inc. (In re Yellow Cab Cooperative Ass'n) ,¹³ and held that the exemption applied to an enforcement action by the Public Utilities Commission to restrict the...