DEBTOR CASE NO. 94-10360






VS. ADV. NO. 94-1012






This matter is before the Court on the plaintiff's Motion for Summary Judgment filed herein on October 12, 1995. The plaintiff contends that it is entitled to judgment as a matter of law that the defendants, the Kentucky Racing Commission ("the Commission") and its individual members, violated the automatic stay, that they should be held in contempt for that violation, and that the plaintiff should be awarded attorney fees. The defendants filed an Objection to Plaintiff's Motion for Summary Judgment on October 23, 1995, and a Supplemental Memorandum in Opposition to Plaintiff's Motion for Summary Judgment on October 31, 1995. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); the plaintiff has alleged that it is a core proceeding pursuant to 28 U.S.C. '157(b)(2).

The plaintiff initiated this matter by the filing of its Complaint on December 14, 1994. On the same date the plaintiff filed a Motion for Preliminary Injunction and Emergency Hearing, asking the Court to enjoin the Commission from revoking the plaintiff's racing license, as well as an Emergency Motion to Show Cause and Hold Defendants in Contempt of Court for violating 11 U.S.C. '362. On December 15, 1994, the plaintiff filed a Motion for Ex Parte Restraining Order, asking the Court to enjoin the Commission from enforcing its order revoking the plaintiff's license and requiring it to allow the plaintiff to continue intertrack wagering. A hearing was conducted on these matters on December 15, 1994.

The Court entered a Preliminary Injunction on December 27, 1994, enjoining the Commission from revoking the plaintiff's license, and from taking any further action to interfere with, prohibit or restrict in any way the operation of the race track. The Commission was further ordered to take affirmative action to permit the plaintiff to operate the track. The Preliminary Injunction set out that the Motion for Ex Parte Restraining Order was moot, and that the Motion to Show Cause and to Hold Defendants in Contempt was not of an emergency nature and would be heard later.

The Defendants filed their Answer to the plaintiff's Complaint on January 17, 1995. A pretrial conference was conducted on February 8, 1995, and an Order for Trial was entered on February 10, 1995, setting the matter for trial on July 10, 1995. On March 27, 1995, the plaintiff filed a Motion to Compel the members of the Commission to appear for deposition. On the same date the defendants filed a Motion for Protective Order, asking the Court to disallow the members' depositions. The defendants further filed an Objection to Motion to Compel and a Motion to Dissolve Preliminary Injunction; or Alternatively, Motion to Modify Preliminary Injunction, on March 31, 1995. The Court conducted a hearing on these motions on April 5, 1995.

The Court entered an Order on April 10, 1995, overruling the Motion to Dissolve Temporary Injunction. The parties filed a Joint Motion to Reschedule Trial on May 31, 1995, citing changes in circumstances surrounding this matter, including the fact that the debtor had decided to temporarily close the wagering facility known as "Mountain Meadows." An Order Rescheduling Trial was entered on June 13, 1995, setting the matter for trial on October 23, 1995. Counsel for the debtor filed a Motion to Withdraw and Compel Payment of Administrative Expenses on June 22, 1995. The Motion was overruled by Order entered on July 3, 1995. The plaintiff then filed its Motion for Summary Judgment as set out above. The trial of this matter was remanded from the Court's docket on October 23, 1995, and the matter was submitted for decision by Order entered on November 22, 1995.

The parties entered into Joint Stipulations of October 19, 1995, which set out the following:

1. This is an adversary proceeding brought pursuant to Bankruptcy Rule 7001 of Title 11 United States Code ("U.S.C.").

2. This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. '1334.

3. This is a core proceeding under 28 U.S.C. 157 (sic).

4. This bankruptcy case was commenced by the filing of an involuntary petition on October 24, 1994, and the case was converted from an involuntary Chapter 7 to a voluntary Chapter 11 of the United States Bankruptcy Code by order of this Court dated November 18, 1994. Mountain Meadows is the Debtor in Possession in that case, which is pending before this Court and styled: In Re: Tri-City Turf Club, Inc., d/b/a Mountain Meadows, f/d/b/a Riverside Downs, Case No. 94-1-0360.

5. The Commission is a state agency created under KRS 230.010 et seq., and has state authority to regulate any horse race meeting for any stake, purse or reward within the Commonwealth of Kentucky and has exclusive authority to grant a license required to hold or conduct any horse race meeting.

6. The individual defendants are all residents of the state of Kentucky and members of the Commission.

7. On August 1, 1993, the Commission granted Tri-City d/b/a Mountain Meadows a license to conduct harness racing and granted the track racing dates in 1994.

8. On November 1, 1993, the Commission also granted to Mountain Meadows simulcasting and intertrack wagering dates as a receiving track for 1994.

9. The license for conducting live horse race meetings and intertrack wagering was conditioned upon the completion of the track facilities by the beginning of its scheduled live meeting in October of 1994.

10. Mountain Meadows contracted with Philip Jarvis, d/b/a Jarvis Construction, ("hereinafter "Jarvis") to construct the race track facilities. Jarvis did begin construction on the race track facilities, but due primarily to contractor and subcontractor problems and delays, the race track has not been completed as scheduled.

11. The debtor also had financial difficulties which contributed to the track not being completed.

12. Despite the fact that no live race meetings occurred at Mountain Meadows, the race track conducted simulcast and intertrack wagering in 1994 and was granted its live racing dates for 1995.

13. At the Commission's meeting on September 30, 1994, the Commission issued a show cause order to Mountain Meadows and M.L. Vaughan, president of Mountain Meadows, requiring them to appear before the Commission on October 13, 1994, to state why disciplinary action should not be taken against Mountain Meadows' license as a racing association for various alleged violations of the Commission' (sic) statutes and regulations.

14. On October 6, 1994, Bernie Hettel, Executive Director of the Commission, issued an Amended Order, Citation and Notice of Hearing which set forth the specific charges at issue in the hearing.

15. On October 13, 1994, the Commission held a hearing on the alleged violation in which the Honorable Elijah M. Hogge presided as the Hearing Officer for the Commission.

16. On October 20, 1994, the Commission granted Mountain Meadows simulcasting and inter-track wagering dates for 1995.

17. On December 6, 1994, Judge Hogge submitted his Proposed Findings of Fact and Conclusions of Law which were presented to the Commission on December 13, 1994.

18. Judge Hogge's Proposed Findings of Fact and Conclusions of Law found various violations by Mountain Meadows which would justify the suspension or revocation of Mountain Meadows (sic) license.

19. Judge Hogge recommended that no disciplinary action, which would constitute an act to exercise control over property of Tri-City, be taken.

20. On December 13, 1994, the Commission voted to revoke Mountain Meadows' license and directed Judge Hogge to amend his Findings, Conclusions and Recommendations and an order was so entered on December 14, 1994.

21. The Debtor's Counsel filed a Request for Stay with the Commission on December 14, 1994, which was denied by the Commission.

22. The Commission sent a copy of its Order revoking Tri-City's racing license to Turfway Park and NYRA, who, in response, refused to send the simulcast signal to Mountain Meadows.

23. The debtor filed an adversary complaint and a motion for preliminary injunction against the Commission and its members on December 14, 1994.

24. This Court heard the Debtor's motion on December 14, 1994, and after a hearing, determined that there was a substantial likelihood the Plaintiff would prevail on the merits, enjoined the Commission from revoking the license and reserved the issue of contempt for future determination.

25. Tri-City was not operating profitably for the months of October, November and December of 1994, and has not operated profitably for all of 1995.

The specific issues raised by the plaintiff's Motion for Summary Judgment and the responses thereto are whether the Commission's action constituted a violation of the automatic stay, and, if so, whether the plaintiff may recover attorney's fees under the theory that the Commission was in contempt of court by its action. The plaintiff maintains that the Commission's action was a violation of the automatic stay, irrespective of the exception in 11 U.S.C. '362(b)(4), which provides that the filing of a bankruptcy petition does not operate as a stay of the commencement or continuation of an action by a governmental unit to enforce such governmental unit's police or regulatory power. The defendants contend that this exception is applicable herein and that there was no violation.

Efforts to resolve this question have led courts to apply one of two tests

to determine whether a particular government action was excepted from the automatic stay: the pecuniary purpose test or the public policy test. See In re Herr, 28 B.R. 465, 468-69 (Bankr.D.Me. 1983). Under the pecuniary purpose test, the court asks whether the governmental proceeding relates primarily '"to the protection of the[government's] pecuniary interest in the debtors' property and not to matters of public safety and health."' 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). The former purpose would subject the proceeding to the stay provision of '362; the latter would not. In contrast, the public policy test '"distinguishes between proceedings that effectuate public policy and those that adjudicate private rights: only the former are excepted from the automatic stay."' In re Herr, 28 B.R. at 468.

N.L.R.B. v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir. 1986), at page 942. In order to determine which government interest is being protected, the Court must first decide whether the debtor's racing license was property which then became property of the estate when the bankruptcy petition was filed.

In a case that mirrors the within matter in many ways, the court in In re National Cattle Congress, Inc., 179 B.R. 588 (Bkrtcy.N.D.Iowa 1995), considered these issues in a comprehensive, well-reasoned opinion. The debtor in that case had its pari-mutuel dog racing license revoked by the Iowa Racing and Gaming Commission. The court, after considering various authorities including the Supreme Court's decision in United States v. Whiting Pools, Inc., 103 S.Ct. 2309, 2314 (1983), concluded that the debtor's racing license was property of the estate. The court stated:

It is a property interest in which Debtor has, at a minimum, a proprietary interest to be administered by the Bankruptcy Court balanced against the State's legitimate interest in regulation of the subject matter of the license. Within those parameters, the Bankruptcy Code's broad definition of property of the estate, which has been expansively embraced by this Court, ultimately encompasses Debtor's interest in this racing license. See 11 U.S.C. '541(a)(1).

At page 593.

The court then went on to consider the so-called "governmental exception" to the automatic stay contained in 11 U.S.C. '362(b)(4):

Section 362(b)(4) was intended to be given a narrow construction to permit governmental units to pursue actions to protect the public health and safety. The 8th Circuit has defined this relationship as follows:

'In light of the legislative history in court decisions under the earlier bankruptcy act, we believe that the term '"police or regulatory power"' refers to the enforcement of state laws affecting health, welfare, morals and safety, but not regulatory laws that directly conflict with the control of the res or property by the bankruptcy court.'

Missouri, 647 F.2d at 776. The ultimate issue for this Court's determination, therefore, is whether the conduct involved in this case constitutes control of the property of the estate, and if so, the point at which such control occurs.

At page 594.

While this Court is unaware of any Sixth Circuit decision which specifically identifies the kinds of laws to which the term "police or regulatory power" refers, cases which have found the '362(b)(4) exception applicable have all involved obvious public health, safety and welfare issues. These cases include In re Commerce Oil Co., 847 F.2d 291 (6th Cir. 1988)--water pollution; In re Kovacs, 717 F.2d 984 (6th Cir. 1983), aff'd sub nom Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985)--water pollution; U.S. v. Jones & Laughlin Steel Corp., 804 F.2d 348 (6th Cir. 1986)--air and water pollution; and N.L.R.B. v. Edward Cooper Painting, Inc., supra--unfair labor practices.

This Court therefore believes that the issue facing it is the same as that enunciated above, i.e., whether the conduct of the Kentucky Racing Commission constituted control of property of the estate. In this regard, the National Cattle Congress court held that

the act to revoke the license constituted control over property of the estate which violated the automatic stay provisions of '362 (a)(1) and '362(a)(3). Revocation constitutes maximum control over Debtor's racing license as the act destroys any value which this property has to the estate. .... Thus, the Commission could not revoke Debtor's license without first seeking relief from the automatic stay. As the attempted revocation resulted in the Commission's control over property of the estate, the automatic stay renders the actual revocation void ab initio.

At page 598. This Court agrees with the court's reasoning and its decision, and finds that the Commission violated the automatic stay by revoking the plaintiff's racing license--an act in contravention, it might be added, of its own hearing officer's recommendation.

Having found that the Commission violated the automatic stay, the Court must now decide if the plaintiff may recover attorney fees. As all parties have observed, this Court has already held in In re Manlon, Inc., 168 B.R. 594 (Bkrtcy.E.D.Ky. 1994), that a corporation may not recover damages pursuant to 11 U.S.C. '362(h) because the term "individual" does not include a corporate entity. If the plaintiff is to recover attorney fees, it must prevail under a theory of civil contempt. In In re Chateaugay Corp., 920 F.2d 183 (2nd Cir. 1990), the court held that

a bankruptcy court may impose sanctions pursuant to '362(h) under the standard set out in Crysen/Montenay [In re Crysen/Montenay Energy Co., 902 F.2d 1098 (2nd Cir. 1990)], only for violating a stay as to debtors who are natural persons. For other debtors, contempt proceedings are the proper means of compensation and punishment for willful violations of the automatic stay. See id. at 1104 (contempt involves maliciousness or lack of a good faith argument that the party's actions were not in violation of a bankruptcy stay); Fidelity Mortg. Investors v. Camelia Builders, Inc., 550 F.2d 47, 51, 57 (2nd Cir. 1976) (allowing imposition of costs, including reasonable attorney's fees under civil contempt powers for acts which bankruptcy judge found were done with '"knowledge"' of automatic stay and '"deliberate[ ]"' disregard of rules regarding requirements for relief), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977); Drywall Tapers, Local 1974 v. Local 530, 889 F.2d 389, 394-95 (2nd Cir. 1989) (knowledge of violation and terms of injunction required to hold party in civil contempt), cert. denied, ____U.S.____, 110 S.Ct. 1478, 108 L.Ed.2d 615 (1990); see also In re First RepublicBank Corp., 113 B.R. at 279 (recognizing power of bankruptcy court under '105 of the code and Bankruptcy Rule 9020 to impose contempt sanctions for violations of the automatic stay); ....

At page 187. The power of the bankruptcy court to impose contempt sanctions for violations of the automatic stay has been recognized by many courts. See In re Skinner, 917 F.2d 444, 447 (10th Cir. 1990); In re Ogden Modulars, Inc., 184 B.R. 575, 578 (Bkrtcy.E.D.Mo. 1995); In re Xavier's of Beville, Inc., 172 B.R. 667, 671-672 (Bkrtcy.M.D.Fla. 1994); Matter of U.S. Abatement Corp., 150 B.R. 381, 388 (Bkrtcy.E.D.La. 1993).

The defendants herein knew that the automatic stay was in effect in this case. The Commission's hearing officer, a respected state jurist, advised that revoking the plaintiff's racing license without seeking relief would constitute a violation. They had "....fair warning that the acts in issue are forbidden, ...." In re Geiger, 137 B.R. 586 (Bkrtcy.E.D.Pa. 1992), at 592. The defendants chose to ignore this advice and violated the stay. Such action warrants contempt sanctions under '105. Any argument that the plaintiff may not recover a money judgment against the state is made moot by the amendment of 11 U.S.C. '106 in its entirety by the Bankruptcy Reform Act of 1994. Section 106(a) provides in pertinent part that sovereign immunity is abrogated as to a governmental unit with respect to ''105 and 362.

In addition, there is no doubt that individual members of a group in this situation may be found jointly and severally liable. In In re General Homes Corp., 181 B.R. 870 (Bkrtcy.S.D.Tex. 1994), Judge Clark provides a well-reasoned discussion of the liability of individual members of the unsecured creditors' committee for sanctions imposed by the court for contempt, wilful stay violations, and violations of Rule 9011. The court found that:

[t]he Committee members were made aware by both [counsel] that the course of action that they chose was a likely violation of the standards articulated in Louisiana World [Exposition v. Federal Insurance Co., 858 F.2d 233 (5th Cir. 1988)], supra, and [counsel] specifically advised against filing the suit without prior authorization by the court. The Committee's purposeful decision to continue with the action .... resulted in a purposeful, informed and intentional violation of the stay, under which contempt is an appropriate remedy.

At page 879. The General Homes court noted that the unsecured creditors' committee members had voted unanimously (except for one abstention) to take the action they did, and found them jointly and severally liable for their share of the sanctions imposed by the court. Id., at page 882.

The record herein indicates that the Commission members voted unanimously to revoke the plaintiff's racing license. See Transcript of Deposition of Bernard J. Hettel, April 4, 1995, Exhibit L. This Court finds that the members of the Kentucky Racing Commission are jointly and severally liable for the sanctions imposed herein.

The plaintiff has asked for attorney fees and costs in the amount of $13,990.97 and $713.11, respectively. Attorney fees and costs are appropriate remedies for recovery based on contempt. In re General Homes, Inc., supra, 181 B.R. at 883. See also In re McNeil, 128 B.R. 603, 615 (Bkrtcy.E.D.Pa. 1991). However , the request by the plaintiff's counsel for attorney fees does not contain sufficient detail for the Court to evaluate what services he has rendered which relate directly to this proceeding. Further proceedings are necessary to determine the amount of attorney fees which the plaintiff is entitled to recover herein.

In consideration of all of the foregoing, it is the opinion of this Court that the plaintiff's Motion for Summary Judgment should be sustained as to the imposition of sanctions but that further proceedings are necessary to determine the amount of such sanctions. An order in conformity with this opinion will be entered separately.


By the Court -





Copies to:


John O. Morgan, Jr., Esq.

David M. Cantor, Esq.

U.S. Trustee