The bankruptcy court properly declined to modify the automatic stay and permit plaintiffs to proceed with a civil rights action to enjoin a bankrupt city from conducting allegedly illegal searches, according to a Sept. 19 opinion by a district judge in Los Angeles.
The appeal arose in the municipal debt adjustment proceeding initiated by San Bernardino, Calif., in 2012. Plaintiffs filed suit in federal district court alleging that the city conducted an unlawful search during the chapter 9 case that violated the Fourth Amendment. The suit sought damages and an injunction barring the city from using inspection warrants rather than criminal search warrants to combat crime.
Although the bankruptcy judge held that the suit violated the automatic stay, she enjoined the city from using inspection warrants to conduct any search of property occupied by the named plaintiffs. In substance, the bankruptcy judge barred the plaintiffs from seeking attorneys’ fees and a city-wide injunction precluding the use of inspection warrants. The injunction would dissolve on confirmation of the city’s plan.
The plaintiffs appealed and lost in an opinion by District Judge Otis D. Wright, II.
Judge Wright held that the suit violated the automatic stay under Section 922(a)(1), which invokes the Section 362 automatic stay in municipal bankruptcies and enjoins actions against “an officer” of the debtor.
With regard to the request for an injunction to prevent illegal searches, Judge Wright said that the suit would violate the automatic stay because it could enjoin city workers from carrying out their duties, thus effectively exercising control over the city’s money by forcing the city to spend its money using other methods to reduce crime.
Judge Wright therefore held that the suit was an attempt to exercise control over city property and thus violated Section 362, even if the plaintiffs sought only an injunction.
With regard to damages and an injunction, Judge Wright held that there is no exception from the automatic stay for constitutional claims. He said the plaintiffs could file an administrative claim for their damages.
He also said that the plaintiffs could have filed an adversary proceeding in bankruptcy court seeking an injunction and declaratory judgment barring use of inspection warrants. Thus, he reasoned that the automatic stay did not preclude the plaintiffs’ pursuit of their constitutional rights because the bankruptcy forum was available.
The opinion, however, has no discussion of Section 904(1), which prevents the bankruptcy court from interfering with any “governmental powers of the debtor.” It is therefore questionable whether the bankruptcy court indeed had power to enjoin the use of inspection warrants even against the named plaintiffs. It is likewise questionable whether, as Judge Wright said, the bankruptcy court could enjoin the use of inspection warrants generally.
Even if the bankruptcy court lacked power to issue injunctions against the general or specific uses of inspection warrants, there may still be a violation of the automatic stay. The possible inability of the bankruptcy court to grant all forms of relief would just be another issue in deciding whether to modify the stay and allow the plaintiffs to proceed in district court.
On the other hand, Judge Wright held that the bankruptcy court did not abuse its discretion in refusing to modify the automatic stay because the plaintiffs “did not seek any relief that the bankruptcy court could not provide.” Although that basis for upholding the stay might not be altogether correct, Judge Wright identified other possibly valid grounds for enjoining an injunction action until the city emerges from chapter 9.