Can Bankruptcy Be A Tool To Combat Eminent Domain? Probably Not

by McNees Wallace & Nurick LLC

There are times when governments, attempting to revitalize a downtown area or conduct other operations, need to take private lands to further their purpose. To do so, they may invoke their eminent domain powers.


Conversely, property owners may attempt to protect their lands from government takings by filing for bankruptcy. Although the federal bankruptcy law provides many protections for those that utilize the law, one of the greatest assets is what is known as the automatic stay. The automatic stay, in essence, is a mandatory prohibition against creditors taking adverse actions against the debtor.


But how does a condemning entity’s right to exercise eminent domain interact with a debtor’s right to the automatic stay? Is bankruptcy a potential shield for debtors to protect themselves from eminent domain takings?


This issue presents a clash of federal protections granted to private debtors by Congress against the constitutional right of state governments (and certain private entities) to function effectively as independent units. Although there is no precedent in the Third Circuit, this question has been confronted in other federal jurisdictions.


Once debtors declare bankruptcy, all proceedings against them are stayed to allow time to reorganize assets and, in some instances, repay creditors. Bankruptcy courts across the country, however, have held that there are certain situations where actions against a debtor’s property will not be stayed, including those initiated by the government. Under §362(b)(4) of the United States Code, the automatic stay can be lifted if the government is working to enforce its “police or regulatory power.”


When will the government’s eminent domain powers overcome the automatic stay of bankruptcy? Most federal courts follow the United States Supreme Court’s precedent in holding that the government’s eminent domain powers and police powers are coterminous and that either may be used to effectuate a taking. The minority position is that eminent domain and police powers are not the same, and thus government takings of a property owner in bankruptcy may only occur when the government entity is acting pursuant to “police and regulatory powers.” Most courts, however, agree that if a government taking is framed within the scope of being a “police or regulatory power,” it can overcome a private debtor’s stay of actions against property.


Courts have devised two tests to determine whether the government is acting within its “police or regulatory powers:” the pecuniary interest test and the public policy test.


The pecuniary interest test analyzes whether the government is acting for a pecuniary, or financial, interest, rather than in the interest of public health, safety, and welfare. If the government is acting purely in its financial interest, the stay will not be lifted. If it is acting for the public benefit, the stay will be lifted and the debtor’s lands will be subject to condemnation. If the debtor can show that the government is not acting to advance the general welfare, health, or safety of the public, the presumption is that there is a pecuniary interest and the stay will not be lifted, thereby protecting the debtor’s property.


The public policy test determines whether the government is acting to protect public or private rights. If the government is acting pursuant to its quasi-legislative or quasi-executive powers to enforce a public interest, the stay will be lifted. But if the government entity is acting in a quasi-judicious manner to resolve a private dispute, the stay will not be lifted.


So how are these tests applicable to eminent domain actions against private debtors? Debtors declaring bankruptcy will want to argue against having the automatic stay lifted by claiming that the government is acting with a pecuniary interest. If the reasons listed by the government for the taking do not cite public health, welfare, or safety, the taking is not likely to succeed and the stay will remain in effect, effectively thwarting the condemning entity’s eminent domain power.


In practice, though, the umbrella of public health, safety, or welfare covers many broad government purposes. Historically, it has not been difficult for the government broadly to state its purposes in taking private property as an effort to protect the public health, safety, or welfare. Because the government has the ability to state its purpose broadly within these terms, seeking shelter from government action against private property under the shield of bankruptcy is not likely to be a successful strategy.


For example, in the recent Bankruptcy Court decision from Alabama In re Bevelle, a debtor owned property that the local county government sought to condemn for purposes of constructing a new courthouse. The landowner argued that because he declared bankruptcy, he was protected by the automatic stay and the county could not use its eminent domain powers to take the property. The court conducted a two step analysis. First, following United States Supreme Court precedent, it held that eminent domain fell under the “police and regulatory powers” exception. Second, the court found that the new facility would advance the public health, safety, and welfare because the old courthouse was unable to conform to modern safety standards. The stay was therefore lifted.


Erik B. Derr also contributed to this article.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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