In Re Burgess
234 B.R. 793, 1999 WL 360295 (1999)
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Rule of Law:
A governmental unit's revocation of a debtor's business license during bankruptcy proceedings, which is essential to the debtor's business, constitutes an act to exercise control over property of the estate under 11 U.S.C. § 362(a)(3) and is thus subject to the automatic stay, for which the police or regulatory power exception under § 362(b)(4) does not apply.
Facts:
- Since 1983, David Burgess has operated a legal brothel in Storey County, Nevada.
- On July 30, 1997, David Burgess filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code.
- On June 2, 1998, the Storey County Commission and the Sheriff of Storey County held a hearing to express displeasure with Burgess's association with the Hell’s Angels motorcycle club.
- At this hearing, the Storey County Commissioners revoked David Burgess’s brothel license.
- Following the revocation, David Burgess ceased operating his brothel business.
Procedural Posture:
- On July 30, 1997, David Burgess (debtor) filed a voluntary petition for bankruptcy under Chapter 11 in the U.S. Bankruptcy Court.
- On June 2, 1998, the Storey County Commission and Sheriff revoked Burgess's brothel license during a hearing.
- Burgess immediately sought relief in the U.S. Bankruptcy Court, arguing the County's action violated the automatic stay or, alternatively, sought an injunction under 11 U.S.C. § 105.
- Burgess also sought relief in the U.S. District Court (before Judge David W. Hagen), arguing the County's action violated his First Amendment and Due Process rights.
- On June 17, 1998, the U.S. Bankruptcy Court denied Burgess's requested relief, holding that the brothel license was not "property" but a "personal privilege."
- On July 7, 1998, U.S. District Court Judge Hagen granted a preliminary injunction in Burgess's separate civil rights case, enjoining the County from enforcing the license revocation.
- David Burgess (appellant) appealed the U.S. Bankruptcy Court's order dated June 17, 1998, to the U.S. District Court.
- Storey County (real party in interest/appellee) argued for dismissal of the appeal as moot due to Judge Hagen's injunction.
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Issue:
Does a governmental unit's revocation of a debtor's business license during bankruptcy, which is essential for the business's operation, violate the automatic stay under 11 U.S.C. § 362(a)(3) when the governmental unit asserts a police or regulatory power exception under § 362(b)(4)?
Opinions:
Majority - Reed, District Judge
Yes, a governmental unit's revocation of a debtor's business license during bankruptcy, which is essential for the business's operation, violates the automatic stay under 11 U.S.C. § 362(a)(3), and the governmental unit's assertion of a police or regulatory power exception under § 362(b)(4) does not apply to this specific subsection. The court first determined that the appeal was not moot, as the debtor could still pursue damages for the period his business was closed. The court affirmed the broad interpretation of "property" in bankruptcy, noting that a bankruptcy estate includes all of a debtor's legal and equitable interests, interpreted liberally to encourage reorganizations. The automatic stay, 11 U.S.C. § 362(a), is designed to freeze the status quo by precluding post-petition actions affecting property of the estate, specifically applying § 362(a)(3) to acts to exercise control over estate property. While Storey County argued its action fell under the § 362(b)(4) "police or regulatory power" exception, the court emphasized that this exception, by its plain terms and established Ninth Circuit precedent (Hillis Motors, Inc. v. Hawaii Auto. Dealers’ Ass’n), applies only to § 362(a)(1) (actions against the debtor) and not to § 362(a)(3) (actions affecting property of the estate). Therefore, the central inquiry became whether the brothel license was "property" of the estate and if its revocation was an "act to exercise control over" that property under § 362(a)(3). The court rejected the bankruptcy court's finding that the license was a mere "personal privilege" under state law, asserting that while state law defines the nature of a right, federal law determines whether it constitutes "property" for bankruptcy purposes. Citing numerous examples of similar commercial licenses (liquor, racetrack, casino, FCC) held to be property in bankruptcy, and noting a separate district court ruling by Judge Hagen holding the same license as property for due process purposes, the court concluded that the brothel license was indeed "property" due to its enormous value and essential nature to the debtor's reorganization efforts. Finally, the court held that revoking the license was an "act to exercise control over" property, as it would essentially "destroy the estate" by eliminating the business's value, falling squarely within the purpose of § 362(a)(3) to prevent dismemberment of the estate. Since the County's action violated § 362(a)(3) and the police power exception did not apply, the County's revocation without seeking relief from the automatic stay was unlawful.
Analysis:
This case significantly clarifies the scope of "property of the estate" under 11 U.S.C. § 541(a) and the automatic stay under § 362(a)(3), particularly concerning governmental actions. It reinforces that federal bankruptcy law defines what constitutes "property" for estate purposes, overriding state law characterizations that might deem valuable licenses as mere "privileges." The ruling strictly interprets exceptions to the automatic stay, establishing a clear boundary that the governmental police power exception (§ 362(b)(4)) does not permit actions that exercise control over or destroy property of the estate under § 362(a)(3) without first obtaining relief from the stay. This decision prevents governmental units from unilaterally undermining a debtor's reorganization efforts by revoking essential business licenses, ensuring that such actions must be approved by the bankruptcy court.
