According to the district court, in determining whether an action constitutes a “police and regulatory action,” a court must look to the underlying purpose of the government’s monetary enforcement efforts. If those efforts serve a nonpecuniary purpose and are intended to effectuate public policy and promote public safety and welfare, then they will fall within the police and regulatory power exception and not violate the stay.
In the case of In re Black Diamond Energy of Delaware, 676 B.R. 323 (W.D. Penn. 2025), the U.S. District Court for the Western District of Pennsylvania provided insight regarding the “police and regulatory power” exception to the automatic stay set forth in 11 U.S.C. Section 362(b)(4). In this decision, the district court clarified that under the U.S. Court of Appeals for the Third Circuit’s “pecuniary purpose” and “public policy” tests, a governmental unit does not violate the automatic stay merely because it attempts to enforce a prepetition order requiring a debtor to post a bond and pay a fine. According to the district court, in determining whether an action constitutes a “police and regulatory action,” a court must look to the underlying purpose of the government’s monetary enforcement efforts. If those efforts serve a nonpecuniary purpose and are intended to effectuate public policy and promote public safety and welfare, then they will fall within the police and regulatory power exception and not violate the stay.
Background
On July 26, 2022 (petition date), Black Diamond Energy of Delaware, Inc. (debtor) filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Western District of Pennsylvania (Bankruptcy Court). As of the petition date, the debtor owned and operated 13 federal oil wells in the state of Wyoming. Prepetition, the debtor had “extensive and extended disputes for a period of 10 years” with the Wyoming Oil and Gas Conservation Commission (commission), the entity that carries out Wyoming’s Oil and Gas Conservation Act through its regulation of oil and gas in Wyoming. According to the district court, the commission’s rules and regulations are intended to promote public health and environmental protection by, among other things, avoiding soil, groundwater and surface water contamination at drilling and production locations.
Prior to the commencement of the bankruptcy case, the commission initiated several enforcement proceedings against the debtor that resulted in the commission assessing various penalties against the debtor. These included revoking the debtor’s right to operate nonfederal wells in Wyoming and directing that some of the debtor’s wells be plugged and abandoned. Following a 2021 hearing addressing the debtor’s violations of several commission rules, the commission entered an order requiring the debtor to post a $25,000 surety bond to ensure its future compliance with commission rules and pay a $5,000 fine for its violations of commission rules. In July 2022, the commission issued a further order authorizing the sealing of the debtor’s wells due to its failure to comply with the commission’s prior enforcement order.
On the petition date, the commission sealed the debtor’s wells. The debtor removed several seals and restarted production in violation of the prior enforcement orders. The commission then resealed the debtor’s wells and, in connection with its post-petition inspections, discovered two different oil spills at these wells.
In June 2023, the debtor filed a motion in the Bankruptcy Court seeking, among other things, to enforce the automatic stay and impose sanctions on the commission. In its motion, the debtor contended that the commission violated the automatic stay through its post-petition enforcement efforts, which included sending a June 2023 letter demanding compliance with the commission’s prepetition enforcement orders. The Bankruptcy Court denied the motion.
On appeal to the district court, the debtor argued that the Bankruptcy Court erred in determining that the commission did not violate the automatic stay by resealing the wells and, by way of the June 2023 letter, ordering the debtor to post the $25,000 bond and pay the $5,000 fine. The commission, in turn, contended that its actions were exempted from the automatic stay under the police and regulatory power exception set forth in section 362(b)(4).
District Court’s Analysis
The district court first noted that the automatic stay of Section 362(a) bars the commencement or continuation of a judicial, administrative or other action or proceeding against a debtor in connection with a prepetition claim, as well as any act to obtain possession of, or to exercise control over, estate property, or to collect or recover a prepetition claim against a debtor. Moreover, the stay applies to “all entities,” including “governmental units” such as the commission.
There is, however, an exemption from the automatic stay set forth in Section 362(b)(4) for government actions “to enforce a governmental unit’s … police and regulatory power, including the enforcement of a judgment other than a money judgment.” Within the U.S. Court of Appeals for the Third Circuit, courts evaluate the applicability of this exception using two related and somewhat overlapping tests: the “pecuniary purpose test” and the “public policy test.”
As the district court explained, these two tests are designed to identify and bar actions in which the government files suit to further either “its own or certain private parties’ interest in obtaining a pecuniary advantage over other creditors.” To that end, the pecuniary purpose test evaluates whether the government primarily seeks to protect a pecuniary interest of the government in the debtor’s property as opposed to protecting public health and safety. The public policy test, in turn, evaluates whether the government is “effectuating public policy rather than adjudicating private rights.”
Ultimately, if the purpose of the law being enforced is to either promote public safety and welfare or effectuate public policy, then the police and regulatory power exception applies.
Here, the district court found that the commission’s efforts to compel the debtor to post a $25,000 bond satisfied both tests and therefore did not violate the stay. The bond requirement satisfied the pecuniary purpose test because the debtor had a well-documented history of pre- and post-petition rule violations, which, among other things, included failing to conduct required testing and failing to report oil spills. The commission’s bond requirement provided financial assurance that the debtor would follow the commission’s rules going forward. As such, the bond served to protect public health and safety given the environmental dangers associated with oil spills and was therefore in line with the non-pecuniary purposes of the commission.
Enforcement of the bond requirement likewise satisfied the public policy test, as there was “no question” that the commission’s rules address important public policy concerns by ensuring that oil and gas are produced safely and without environmental damage. The commission’s bond requirement—as well as its related decision to keep the wells sealed until the bond is posted—was designed to bring the debtor into compliance with the commission’s rules and thereby promote public safety and welfare.
The district court found that the commission’s efforts to enforce the $5,000 prepetition fine also fell within the police and regulatory power exception. Notably, efforts to enforce a prepetition money judgment are expressly excluded from Section 362(b)(4)’s police power exception. However, the district court agreed with the commission that the primary purpose of the commission’s order imposing the fine, including the commission’s post-petition efforts to enforce the order, was non-pecuniary in nature and therefore fell within the exception.
In reaching its decision, the district court distinguished between collecting the fine as a money judgment and “enforcement of the regulatory order as a whole, including its nonmonetary, future-looking compliance components.” Based upon the record, it was clear that the commission did not take any of its post-petition actions with a primary purpose of collecting the $5,000 fine. Rather, the commission’s efforts to enforce the fine were intended to compel compliance with the commission’s rules and regulations going forward. As such, the commission’s enforcement efforts vis-à-vis the fine satisfied both the pecuniary purpose and public policy tests.
Conclusion
As the Black Diamond decision illustrates, evaluating whether the police and regulatory power exception to the automatic stay applies in a particular situation may not be a simple matter of whether the government sought to enforce a monetary penalty or fine against a debtor post-petition. Rather, the analysis is incredibly fact-driven and may turn on the entire history or “big picture” of the government’s enforcement efforts. In other words, the reason behind the government’s enforcement efforts may be the deciding factor and not the mere fact that the government attempted to collect a prepetition debt from the debtor.
Lawrence J. Kotler is a partner and co-chair of the bankruptcy and fiduciary representations division of the business reorganization and financial restructuring practice group at Duane Morris.
Geoffrey A. Heaton, special counsel at the firm, practices in the area of business reorganization and financial restructuring, concentrating on representation of secured creditors, Chapter 11 and Chapter 7 trustees, creditors' committees and unsecured creditors.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.
