In Re: Mystic Tank

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit

10-16-2008

In Re: Mystic Tank
Precedential or Non-Precedential: Precedential

Docket No. 06-4033

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 06-4033

IN RE: MYSTIC TANK LINES CORPORATION,
Appellant

On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 05-cv-04783)
District Judge: Honorable Anne E. Thompson

Submitted Under Third Circuit LAR 34.1(a)
October 7, 2008

Before: SLOVITER and AMBRO, Circuit Judges, and
POLLAK,* District Judge

(Filed: October 16, 2008 )
_______

Albert A. Ciardi, III
Nicole M. Nigrelli
Ciardi Ciardi & Astin
Philadelphia, PA l9l03

Attorneys for Appellant

*
Hon. Louis H. Pollak, Senior Judge, United States District
Court for the Eastern District of Pennsylvania, sitting by
designation.
Oren L. Zeve
Office of Attorney General of the
State of New York
New York, NY 10271

Attorney for Appellee
_____

OPINION OF THE COURT
_______

SLOVITER, Circuit Judge.

In this appeal we revisit the police power exception to the
automatic stay in bankruptcy and consider the extent to which a
bankruptcy court has exclusive subject matter jurisdiction.

I.

Factual Background and Procedural History

R.J. Guerrera, Inc., the predecessor in interest of appellant
Mystic Tank Lines Corporation (hereafter “Mystic”), was one of
a number of companies that delivered gasoline to a New York
gas station. In 1997, the State of New York (hereafter “New
York”) learned that a leak at the station had contaminated the
local soil and groundwater with petroleum products. As the
New York court held in rendering the default judgment against
Mystic, New York state law allows the state to recover damages
from any shipper for discharged petroleum if the leak can be
traced to the delivery of the gasoline and the shipper had control
over delivery. N.Y. Nav. Law § 181 (McKinney 2004). In May
2004, New York brought suit in the Supreme Court of New York
(a trial court) against “all potential dischargers on the site,”
naming Guerrera as a defendant. App. at 295. Neither Guerrera
nor its successor Mystic ever answered the New York complaint.

On June 1, 2004, Mystic filed for bankruptcy in the
United States District Court for the District of New Jersey. In

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September 2004, Mystic informed New York both that it had
filed for bankruptcy and that it had acquired Guerrera, one of the
defendants in New York’s action. On October 18, 2004, New
York filed a proof of claim against Mystic in the Bankruptcy
Court (Claim Number 161) based on the damages for the clean-
up of the contamination. Thereafter, matters proceeded in both
the New York state court and the New Jersey Bankruptcy Court.

In June 2005, New York obtained a default judgment
against Guerrera in its state court action in light of Guerrera’s
failure to file an answer to its complaint. In the same month,
June 2005, Mystic filed objections to New York’s bankruptcy
claim. Mystic alleged that the “claim was based on pre-petition
litigation wherein the Debtor disputed all such liability.” App. at
50. The next month Mystic filed another motion to expunge the
claim, arguing that the claim had been filed late and that even if
the claim were allowed, it would be covered by the insurance
Guerrera had in place when delivering the fuel.

The Bankruptcy Court held a hearing on the claim.
During this hearing the lawyer representing New York State
argued that the claim had been filed on time and that the claim
should be allowed regardless of whether the insurance
companies were willing to pay. New York also countered
Mystic’s argument that liability was still disputed by pointing out
that a judgment had been entered in the New York state court
action. When Mystic attempted to argue that it had never been
served with the complaint in the New York action, the
Bankruptcy Judge responded:

[B]ut they attached the judgment to their response, so I
can’t set aside the judgment in New York State. I don’t
have the right to do that. We have the Full Faith and
Credit Statute. Federal Courts have to recognize State
judgments. All right? So if you want to attack that
judgment you’ve got to go to New York State . . . .

App. at 23. Thus, the Bankruptcy Court allowed New York’s
Claim Number 161 based on the state court judgment. However,
New York’s additional claim for other cleanup costs (designated

3
Claim Number 207) was expunged after New York conceded it
filed that claim late.

Mystic appealed the allowance of Claim Number 161 to
the District Court, which affirmed the decision of the
Bankruptcy Court. The District Court rejected Mystic’s
argument that New York violated the automatic stay by
obtaining the default judgment after it filed the claim in the
Bankruptcy Court. The District Court held New York’s claim
fell within the police power exception to the automatic stay.
Mystic’s timely appeal of that decision is before us now.

While the case was on appeal, there was a relevant
development in the New York state action. Because New York
had failed to include affidavits establishing the connection
between the gasoline deliveries and the gasoline leak, the New
York Supreme Court, Appellate Division, reversed the state trial
court’s default judgment without prejudice to New York
renewing its application. The parties notified this court and we
held the appeal c.a.v.1 pending further action in the state court.
New York renewed its motion for default judgment in the state
court action, this time including affidavits establishing the
necessary connection. The New York court again granted the
default judgment over the objection of Mystic. Both parties then
asked that this court reinstate the appeal to the calendar.

II.

Jurisdiction and Standard of Review

This court has jurisdiction to review the decision of the
District Court upholding the decision of the Bankruptcy Court
under 28 U.S.C. § 158(d)(1). The appeal is from a final order
and was timely filed.

1
As defined in Black’s Law Dictionary, c.a.v. is an
abbreviation for curia advisari vult, meaning “the court will be
advised, will consider, will deliberate.”

4
 Mystic raises only legal issues. The legal conclusions of
the District Court and Bankruptcy Court are subject to de novo
review. In re Indian Palms Assocs., Ltd., 61 F.3d 197, 203 (3d
Cir. 1995).

III.

Discussion

Mystic makes only two arguments in its opening brief. It
contends: “(1) The Filing Of The Default Judgment Against The
Debtor Constituted An Attempt to Enforce A Money Judgment
And Therefore Violated The Automatic Stay Arising Under 11
U.S.C. § 362(a),” Appellant’s Br. at 12; and “(2) The Judgment
Is Void Ab Inito [sic] Because New York Violated The
Automatic Stay Arising under 11 U.S.C. § 362(a) And Once
New York Filed A Proof Of Claim New York Submitted To The
Jurisdiction Of The Bankruptcy Court,” Appellant’s Br. at 16.
As New York points out in its brief, both arguments are soundly
foreclosed by our precedents and by the statutory text.

A. The Automatic Stay

Under the Bankruptcy Code, the filing of a bankruptcy
petition generally “operates as a stay . . . of the commencement
or continuation . . . of a judicial . . . action or proceeding against
the debtor that was or could have been commenced before the
commencement” of the bankruptcy case. 11 U.S.C. § 362(a)(1).
There are exceptions to this rule, however. One of the principal
exceptions to the automatic stay is for the exercise of police
power, as the Code provides that the 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 . . . .

5
11 U.S.C. § 362(b)(4).

Although on its face the default judgment New York
obtained against Guerrera in state court appears to fall within the
police power exception to the automatic stay, Mystic argues that
New York is attempting to enforce a money judgment, which is
expressly excluded from the police power exception (sometimes
referred to as “the exception to the exception”). Mystic views
the New York state default judgment as an attempt to enforce a
money judgment because New York sought the judgment for
money already expended in cleanup. Mystic relies on our
decisions in Penn Terra Ltd. v. Dep’t of Envlt. Res., 733 F.2d
267 (3d Cir. 1984), and United States v. Nicolet, Inc., 857 F.2d
202 (3d Cir. 1988). It misreads those cases. Although both
cases examine the intersection of environmental cleanup costs
and bankruptcy claims, they do not support the proposition for
which Mystic cites them.

In Penn Terra, we considered whether the debtor’s
obligation, pursuant to a pre-petition consent decree to remedy
some of its environmental protection violations incorporated into
a state court injunction order, fell within the exception to the
automatic stay. This court held that an order compelling the
debtor to clean up an environmental hazard was not enforcement
of a money judgment. 733 F.2d at 278. We explained that it is
the enforcement of a money judgment by a seizure or an attempt
to seize a debtor’s property that is proscribed by the automatic
stay.

Penn Terra was followed by Nicolet, which presented
facts nearly identical to those in the present case. The United
States sought to bring to trial its claim to recover the costs it
expended in the cleanup of a hazardous waste site that Nicolet
owned at the time the site was contaminated. 857 F.2d at 202.
Nicolet contended that because the government sought to secure
a judgment for pre-petition expenditures, it was simply
attempting to collect money, and thus was outside the scope of
the police power. The District Court rejected that argument, and
we agreed. We examined the legislative history of the automatic
stay provision, and noted that both the Senate and House

6
Committee Reports stated that an action by a governmental unit
attempting to fix damages for violation of, inter alia, an
environmental law is not stayed under the automatic stay. We
stated that the police power exception permits “the entry of a
money judgment, but does not extend to permit enforcement of a
money judgment.” Id. at 208 (emphasis omitted) (citing S. Rep.
No. 989, at 52, as reprinted in 1978 U.S.C.C.A.N. at 5838; H.R.
Rep. No. 595, at 343, as reprinted in 1978 U.S.C.C.A.N. at
6299).

In Nicolet, as in this case, the government merely sought
to reduce to judgment its claim for the costs it expended for the
pre-petition site clean-up, an action we held was not one
enforcing a money judgment because the debtor’s property had
not been seized. Nicolet, 857 F.2d at 208. There is no
meaningful distinction between Nicolet and this case. As in
Nicolet, New York’s state court action sought only the entry of a
judgment. New York’s action in obtaining the default judgment
was therefore within the police power exception and was not a
violation of the automatic stay.

This conclusion also requires rejection of Mystic’s
argument that the default judgment is void ab initio because it
was obtained in violation of the automatic stay. As the judgment
was not obtained in violation of the automatic stay, it cannot be
held void ab initio. We therefore hold that the District Court did
not err in rejecting Mystic’s reliance on the automatic stay.

B. Whether the Bankruptcy Court Jurisdiction was Exclusive

In its second argument, Mystic contends that the New
York state court did not have subject matter jurisdiction to issue
the default judgment. Mystic argues that because New York had
submitted its claim to the New Jersey Bankruptcy Court before
New York sought default judgment in the New York state court,
its claim fell within the sole jurisdiction of the Bankruptcy
Court. This argument fails as well.

Before we consider whether the New York state court had
jurisdiction to issue the default judgment, we must first inquire

7
whether we should entertain this argument in light of Mystic’s
apparent failure to raise the issue in the District Court. “This
court has consistently held that it will not consider issues that are
raised for the first time on appeal.” Harris v. City of
Philadelphia, 35 F.3d 840, 845 (3d Cir. 1994). We depart from
this rule, which is one of waiver, only in exceptional
circumstances. Delaware Nation v. Pennsylvania, 446 F.3d 410,
416 (3d Cir. 2006). Although Mystic did argue in the District
Court that the New York state court judgment was void ab initio,
it based its argument entirely on whether the New York court’s
issuance of the default judgment was a violation of the automatic
stay. It did not argue that the Bankruptcy Court had exclusive
jurisdiction over the validity of the claim. Although we could
view this argument as waived, it does trench upon the
jurisdiction of the Bankruptcy Court, which Mystic contends is
exclusive, and we will exercise our discretion to consider
Mystic’s argument. Under the statutory scheme for bankruptcy
matters, established following the decision in N. Pipeline Constr.
Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the district
courts have original jurisdiction in all cases arising under title 11
of the United State Code. 28 U.S.C. § 1334(a). They generally
refer such matters to bankruptcy judges. 28 U.S.C. § 157(a).
District courts have original, but not exclusive, jurisdiction over
all civil suits related to the bankruptcy filing. 28 U.S.C. §
1334(b). Of note, this section also specifically states,

nothing in this section prevents a district court in the
interest of justice, or in the interest of comity with State
courts or respect for State law, from abstaining from
hearing a particular proceeding arising under title 11 or
arising in or related to a case under title 11.

28 U.S.C. § 1334(c)(1).

It is without a doubt, as Mystic argues, that when New
York filed its proof of claim in the Bankruptcy Court, it
submitted to the jurisdiction of the Bankruptcy Court. It does
not follow that the Bankruptcy Court had exclusive jurisdiction
over all aspects of the claim. No provision of the Bankruptcy
Code requires the Bankruptcy Court to hear all “related to”

8
claims.

New York has not disputed the authority of the
Bankruptcy Court to allow or disallow claims. Indeed, the
Bankruptcy Court in this case allowed Mystic’s Claim Number
161, while disallowing its Claim Number 207. It disallowed
Claim Number 207 without inquiring into the validity of the
claim under state law because it was filed late. As is evident
from the language of 28 U.S.C. § 1334(c)(1), the district courts
may, but are not required to, proceed concurrently with a state
court on some aspects of a bankruptcy claim. Thus, in Penn
Terra, we acknowledged the right of the Pennsylvania state court
to issue its order compelling the debtor to proceed with
remediation of the contaminated site, notwithstanding that the
claim for recovery of the costs was pending in the Bankruptcy
Court. This would not have been possible had the jurisdiction of
the Bankruptcy Court been exclusive.

The issue was succinctly discussed in Sanders v. City of
Brady (In re Brady Mun. Gas Corp.), 936 F.2d 212, 218 (5th Cir.
1991), where the court held that

the only aspect of the bankruptcy proceeding over which
the district courts and their bankruptcy units have
exclusive jurisdiction is “the bankruptcy petition itself.”
See In re Wood, 825 F.2d 90, 92 (5th Cir.1987). In other
matters arising in or related to title 11 cases, unless the
Code provides otherwise, state courts have concurrent
jurisdiction . . . .

As the New York state court had jurisdiction to enter the
default judgment, the Bankruptcy Court properly allowed the
claim.

IV.

Conclusion

For the foregoing reasons, we will affirm the judgment of
the District Court that the Bankruptcy Court properly allowed

9
Claim Number 161.

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