In Go West Entertainment, Inc. v. New York Liquor Authority (In re Go West Entertainment, Inc.),1 the United States Bankruptcy Court for the Southern District of New York refused to extend the automatic stay or to utilize its other injunctive powers to prevent state regulatory authorities from revoking a debtor’s liquor license. Even though the debtor could not operate without its liquor license, the Bankruptcy Court reinforced the rule that a court should not interfere with regulatory measures of a state authority so long as the government’s actions are not meant to protect the government’s pecuniary interests.

Factual Background

Several months prior to its chapter 11 filing, Go West Entertainment, Inc., the operator of a “gentleman’s nightclub” (the “Debtor”) was the subject of a sting operation that resulted in the suspension of its liquor license by the New York State Liquor Authority (the “Authority”). The Debtor contested the suspension and the case was reviewed by an administrative law judge, who found in the Authority’s favor on all the charges, noting that the Debtor “had permitted women to solicit for prostitution on the premises and . . . had failed to exercise adequate supervision over the business.”2 The Debtor appealed the ruling in state court, which refused to grant a stay of the revocation of the license pending appeal.

Several days after the state court’s denial of a stay, the Debtor filed for chapter 11. The Debtor initiated an adversary proceeding against the Authority, asserting that the revocation of the liquor license, pending the Debtor’s appeal in the state courts, violated the automatic stay of section 362(a) of the Bankruptcy Code. The Debtor also asserted that, in the alternative, the Court should use its authority under section 105 of the Bankruptcy Code to stay the effectiveness of the revocation, because maintenance of the liquor license was essential to the reorganization of the debtor’s business. In response, the Authority argued that the exception to the stay provisions permitted its action and that the Court should not otherwise enjoin it from exercising its powers under state law.

Court’s Analysis

The Bankruptcy Court denied the Debtor’s request for injunctive relief. The Bankruptcy Court first found that the Authority’s refusal to suspend the effectiveness of the revocation order did not violate the automatic stay of section 362(a) of the Bankruptcy Code. Section 362(a) broadly prohibits all entities from taking action to affect property of the debtor’s estate.3 Pursuant to section 362(b)(4), however, actions by government entities are exempted from the provisions the automatic stay to the extent the entities are acting to enforce their “police or regulatory power” and are not seeking a “money judgment.”4

In Go West, the Bankruptcy Court held that, although the liquor license clearly constituted property of the estate that was affected by the revocation order, the actions of the Authority were nevertheless permissible under section 362(b)(4). The Bankruptcy Court explained that courts have developed two tests to determine whether governmental actions fall within the language of section 362(b)(4), “the pecuniary interest test” and “the public policy test.”5 In finding that the Authority’s actions passed both tests, the Court explained:

the [Authority] has made no effort to collect the minor fine also imposed on the Debtor and has represented that it will make no effort to do so during this case. The reasons for the revocation of the license involve issues that are clearly within the purview of the public health, safety and welfare laws and do not advance private rights.6

The Bankruptcy Court therefore held that the Authority’s actions were properly exempt from the operation of the automatic stay.

The Bankruptcy Court also rejected the Debtor’s alternative argument to enjoin revocation of the liquor license under section 105 of the Bankruptcy Code. Section 105 authorizes a court to issue any order, necessary or appropriate to carry out the provisions of the Bankruptcy Code. Although the Bankruptcy Court acknowledged that there was significant authority that supported using section 105 to enjoin a government action that was otherwise exempt from the automatic stay,7 the Court declined to use its section 105 power in this case. The Court explained that, in order to obtain an injunctive order, the requesting party must show that it will be irreparably harmed if the order is not issued, and that it is likely to succeed on the merits of its suit.

In determining whether a section 105 injunction was appropriate, the Court recognized that, in the absence of a stay, the Debtor would be irreparably harmed because it could not feasibly operate its business without a liquor license. The Court did not, however, find that the Debtor was likely to succeed on the merits of the underlying action. Instead, the Court determined that there was insufficient proof to show that the Debtor was likely to prevail on the merits, and thus, the Court would not issue an injunction against the Authority. The Court noted that it was not enough to show that a reversal could be achieved, but rather the Debtor had to demonstrate that it would ultimately prevail in obtaining a judgment in favor of maintaining the license. Referencing several federal abstention doctrines,8 the Court also explained that it should not interfere with a state court proceeding where there is no evidence of bad faith or lack of due process.9 Quoting the Supreme Court decision in Pennzoil Co. v. Texaco, Inc., the Court stated, “[t]his Court repeatedly has recognized that the States have important interests in administering certain aspects of their judicial systems.”10 The Court thus refused to impose a stay to reverse a result that already had been upheld on appeal by the state court.

Conclusion

The standard for determining whether government action is exempt from the automatic stay under section 362(b)(4) of the Bankruptcy Code requires that the court scrutinize the actions of the government to ascertain whether its monetary interests are implicated. If the governmental unit’s motives are pure and they intended to promote public safety, its actions will not be stayed by section 362(a).

Enjoining actions of a governmental unit under section 105, however, remains a more unsettled area. Although the Court referenced the federal abstention doctrines as counseling against interference in state court proceedings, the fundamental basis for its decision appears to be its belief that the Debtor failed to meet the requirements for a preliminary injunction. Indeed, beyond the concession that a court has no authority under section 105 to enjoin an administrative proceeding that has not culminated in a final order,11 the Go West decision seems to indicate that a court is otherwise free to invent its own standard for determining whether injunctive relief under section 105 is appropriate in each particular case.