In re Kadlec

661 B.R. 253

IN RE: Nicholas KADLEC and, Casey Reid-Kadlec, Debtors.

Case no. 23-10753-t7

United States Bankruptcy Court, D. New Mexico

Signed April 26, 2024

Ronald E. Holmes, Davis Miles McGuire Gardner, PLLC, Albuquerque, NM, for Debtors.

Jaime A. Pena, Daniel White, DOJ-Ust, Albuquerque, NM, for U.S. Trustee.

OPINION

David T. Thuma, United States Bankruptcy Judge

Before the Court is the New Mexico Attorney General's motion for a declaration that the automatic stay imposed by § 362(a)¹ does not apply to a prepetition state court action he brought against Debtor Nicholas Kadlec and others, or alternatively for relief from the stay. At issue is whether the action comes within § 362(b)(4), the "police power" exception to the automatic stay. The Court concludes that some of the counts asserted in the action are within the police power exception, while others are not. For the counts subject to the automatic stay, cause has not been shown to grant stay relief.

A. Facts.²

Debtors and the Attorney General have asked the Court to rule on the motion based on the facts that can be gleaned from the current record. The Court therefore finds:³

Debtors are shareholders of NM Solar Group, Inc. ("NM Solar"), which was in the business of selling and installing residential and commercial solar panel electricity generating systems. Mr. Kadlec is the former president of NM Solar. NM Solar abruptly shut down on August 11, 2023. At the time, it had many outstanding contractual and other obligations and had taken deposits or payments for work that had not been started and/or completed. Warranties paid for by customers likely will not be honored. The shutdown caught most people off guard because recent public statements allegedly made by Mr. Kadlec indicated that the future was promising for Debtor's business.

The Attorney General brought an action against Mr. Kadlec, NM Solar, and others on August 21, 2023, styled State of New Mexico ex rel. Raul Torrez v. NM Solar Group Inc., et al., case no. D-101-CV-202302015, in the First Judicial District Court, State of New Mexico (the "State Court Action"). The State Court Action includes two counts under the New Mexico Unfair Practices Act, N.M.S.A. § 57-12-1 et seq. ("UPA") (for violation of the UPA and for injunctive relief), and three counts under New Mexico common law (unjust enrichment, fraud, and negligence). The alleged wrongdoings included not only misrepresentations about NM Solar's financial condition but also about how long it takes to install the solar systems, expected electricity savings, and available tax credits and rebates. The prayer for relief asks for compensatory and punitive damages, treble damages, attorney fees, civil penalties, interest, disgorgement, restitution, and declaratory and injunctive relief.

Debtors filed this chapter 7 case on September 1, 2023.⁴ It is a "no asset" case. Debtors are eligible for a chapter 7 discharge, although no discharge order has yet been entered. The Attorney General did not file a nondischargeability proceeding. Thus, any monetary claims asserted against Mr. Kadlec in the State Court Action will be discharged upon entry of the discharge order, except, possibly, for the civil penalties claim.⁵ It is not clear from the complaint whether the Attorney General is seeking to penalize Mr. Kadlec and the other individual defendants, or only NM Solar.

The Attorney General filed the subject motion on December 13, 2023. On January 3, 2024, the Attorney General served a notice of deadline to object to the motion. Debtor timely objected. The contested matter has been fully briefed. The Court held a preliminary hearing on the motion on March 7, 2024. At the hearing, the parties declined the opportunity to provide evidence at a final hearing, instead asking the Court to rule on the briefs and the facts available from the record.

The motion alleges that 140 of NM Solar's customers lodged complaints about NM Solar with the Attorney General's office. The identities of the customers were not disclosed. About 250 customers filed proofs of claim in NM Solar's bankruptcy case.

Although the motion is titled "Motion for Relief from Automatic Stay" and the Attorney General asked for stay relief in the opening paragraph as an alternative, the rest of the motion is devoted entirely to arguing that the automatic stay does not apply. The Attorney General did not argue for stay relief or attempt to show that "cause" exists to modify the stay. Nevertheless, the Court will address the alternative request.

B. The New Mexico Unfair Practices Act.

The UPA makes unlawful certain unfair, deceptive, and unconscionable trade practices. The statute includes a non-exhaustive list of 19 unfair or deceptive trade practices, N.M.S.A. § 57-12-2(D), as well as a general definition of unconscionable trade practices N.M.S.A. § 57-12-2(E). The UPA grants standing to the Attorney General to bring claims for violation of the statute:

A. Whenever the attorney general has reasonable belief that any person is using, has used or is about to use any method, act or practice which is declared by the Unfair Practices Act to be unlawful, and that proceedings would be in the public interest, he may bring an action in the name of the state alleging violations of the Unfair Practices Act. The action may be brought in the district court of the county in which the person resides or has his principal place of business or in the district court in any county in which the person is using, has used or is about to use the practice which has been alleged to be unlawful under the Unfair Practices Act.

B. In any action filed pursuant to the Unfair Practices Act, including an action with respect to unimproved real property, the attorney general may petition the district court for temporary or permanent injunctive relief and restitution.

N.M.S.A. § 57-12-8 (italics added). The restitution remedy is discussed in N.M.S.A. § 57-12-9:

A. In lieu of beginning or continuing an action pursuant to the Unfair Practices Act, the attorney general may accept a written assurance of discontinuance of any practice in violation of the Unfair Practices Act from the person who has engaged in the unlawful practice. The attorney general may require an agreement by the person engaged in the unlawful practice that, by a date set by the attorney general and stated in the assurance, he will make restitution to all persons of money, property or other things received from them in any transaction related to the unlawful practice . . . .

(italics added). Finally, the UPA allows the Attorney General to recover civil penalties:

In any action brought under Section 57-12-8 N.M.S.A. 1978, if the court finds that a person is willfully using or has willfully used a method, act or practice declared unlawful by the Unfair Practices Act, the attorney general, upon petition to the court, may recover, on behalf of the state of New Mexico, a civil penalty of not exceeding five thousand dollars ($5,000) per violation.

N.M.S.A. § 57-12-11.

In addition to the Attorney General's right to enforce the UPA, "persons" damaged by unfair or unconscionable practices are given the private remedies of injunctive relief, § 57-12-10(A), actual damages, § 57-12-10(B), treble damages if the practice was willful, § 57-12-10(B), and attorney fees. § 57-12-10(C). The Attorney General is not a "person" within the definition. N.M.S.A. § 57-12-2(a).

C. The Automatic Stay and the Police Power Exception.

Section 362(a) provides in part:

[A] petition filed under section 301 . . . operates as a stay, applicable to all entities, of . . . the continuation . . . of a judicial . . . action or proceeding . . . against the debtor that was . . . commenced before the commencement of the case under this title . . . .

§ 362(a)(1). However, 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 . . . 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 . . . police or regulatory power . . . .

§ 362(b)(4). The Tenth Circuit discussed this "police power" exception in Eddleman v. U.S. Dept. of Labor, 923 F.2d 782 (10th Cir. 1991), overruled in part on other grounds by Temex Energy, Inc. v. Underwood, Wilson, Berry, Stein & Johnson, 968 F.2d 1003, 1005 n.3 (10th Cir. 1992). Mr. Eddleman, a mail hauler for the U.S. Postal Service, filed a chapter 11 bankruptcy case in August 1986. Nine months later the U.S. Department of Labor brought an administrative action against him, alleging that he underpaid workers and failed to keep adequate pay records, in violation of the Service Contract Act, 41 U.S.C. §§ 351-358 (the "SCA"). The Department sought to liquidate claims for back pay due to employees and to add Mr. Eddleman to a list of SCA violators.

In response to the administrative action, Mr. Eddleman filed an adversary proceeding to enforce the automatic stay. At issue was the scope of the police power exception. Discussing whether the Department's action came within the exception, the Tenth Circuit held:

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. See [N.L.R.B. v.] Edward Cooper Painting, 804 F.2d [934] at 942 [(6th Cir. 1986)]; In re State of Missouri, 647 F.2d 768, 776 (8th Cir.1981), cert. denied, 454 U.S. 1162, 102 S. Ct. 1035, 71 L.Ed. 2d 318 (1982). If it is evident that a governmental action is primarily for the purpose of protecting a

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