Does a mortgage banker or broker's bankruptcy filing pause a New York State Banking Department proceeding to suspend or revoke its license for consumer fraud or undercapitalization?

Plain-English summary

The Superintendent of the New York State Banking Department asked whether a mortgage banker or broker's bankruptcy filing would automatically stay an NYSBD enforcement proceeding under Banking Law § 595 to suspend or revoke a license on the grounds of fraudulent consumer practices or failure to maintain adequate capital. The AG concluded the proceeding falls within the police or regulatory power exception in 11 U.S.C. § 362(b)(4), so the automatic stay does not apply.

The default rule is that 11 U.S.C. § 362(a)(1) stays the commencement or continuation of an administrative proceeding against a debtor on bankruptcy filing. § 362(b)(4) carves out actions by a governmental unit to enforce its police and regulatory power. Two judicial tests sit beneath the exception: the "pecuniary purpose" test asks whether the action serves the government's pecuniary interest in the debtor's property or the public interest; the "public policy" test distinguishes proceedings aimed at effectuating public policy from those adjudicating private rights. Both tests support exception here. An NYSBD § 595 proceeding for consumer fraud or undercapitalization protects the mortgage-borrowing public, not the State's claim against the debtor's estate.

The AG cataloged authority supporting the conclusion: MCorp Financial (Fed Reserve administrative actions); Universal Life Church (IRS revocation of tax-exempt status); Yellow Cab (Public Utilities Commission certificate restriction); SEC v. Brennan and SEC v. Towers Financial (federal securities enforcement); In re Wade (state bar disciplinary proceeding); In re Fitch (state insurance agent license revocation); In re Edwards Mobile Home Sales (state mobile home dealer license revocation). Banking Law Article 12-D, particularly § 589's statement of purpose, explicitly identifies consumer protection as the regulatory goal.

The AG addressed a complication from § 362(a)(3), which stays acts to "exercise control over" estate property. Pre-1998, some courts had held that even though an agency could commence a § 362(b)(4) regulatory proceeding, it could not actually revoke a license without first seeking relief from the § 362(a)(3) stay. Congress amended § 362(b)(4) in 1998 (Pub. L. No. 105-277) to extend the police-power exception to stays under § 362(a)(2), (a)(3), and (a)(6). The result: even assuming a mortgage banker's license is "property" of the estate under § 541, the § 362(b)(4) exception now permits NYSBD to suspend or revoke it without first lifting the automatic stay.

The AG then turned to 11 U.S.C. § 525(a). That section bars governmental units from revoking a license "solely because" the licensee has filed for bankruptcy or has a discharged debt. But the prohibition does not reach action based on other factors, including financial responsibility examined under non-discriminatory standards. The legislative history (S.R. Rep. No. 95-989 and H.R. Rep. No. 95-595) explicitly endorses net-capital requirements as a permissible factor. NYSBD's grounds (fraudulent consumer practices, failure to maintain adequate capital) thus do not implicate § 525 as long as the agency's action is not based solely on the bankruptcy filing itself.

Finally, the AG addressed a tangential question: invocation of remedies under the New York Debtor and Creditor Law would not affect NYSBD's authority, since that law has no analog to the federal automatic stay.

Currency note

This opinion was issued in 2000. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Does this apply only to consumer-fraud-based revocations?

The AG's logic extends to any NYSBD enforcement under Banking Law § 595 where the grounds are public-protective rather than pecuniary. Consumer fraud is the paradigm case. Undercapitalization is the more contested ground, since insolvency is intimately connected to bankruptcy. The AG addressed that by relying on the non-discrimination distinction: applying a capital requirement uniformly to all licensees (not only to those in bankruptcy) is permissible under § 525.

What if the NYSBD action is really about collecting fines?

The pecuniary-purpose test would defeat the § 362(b)(4) exception in that scenario. If the proceeding's predominant purpose is to obtain payment of a monetary claim from the debtor's estate, the action looks more like creditor collection. The opinion's analysis assumes the predominant purpose is regulatory.

Can NYSBD enforce a money judgment without lifting the stay?

The § 362(b)(4) exception specifically excludes enforcement of money judgments. Even after a § 595 proceeding concludes, if NYSBD obtained a monetary penalty, enforcing that judgment against estate assets generally requires either the bankruptcy court's relief from stay or compliance with claim-allowance procedures.

What about a § 525 challenge by the licensee?

The AG's analysis is a roadmap: the licensee would have to show NYSBD acted "solely" because of the bankruptcy filing, the insolvency that led to it, or a discharged debt. Showing that bankruptcy was one factor among multiple is insufficient, as is showing that financial-responsibility standards apply to all licensees.

How does Brennan affect the analysis?

SEC v. Brennan (2d Cir. 2000) is the Second Circuit's discussion of the 1998 § 362(b)(4) amendments. The AG cited it as confirming the expanded scope. For a New York agency operating within the Second Circuit, Brennan is the controlling reading.

Background and statutory framework

Banking Law Article 12-D contains New York's mortgage banker and mortgage broker licensing and registration regime. § 589 states the regulatory purpose: protecting consumers and ensuring a "fair, honest, and efficient" mortgage lending industry. § 595 is the enforcement provision; suspension, revocation, and roll-deletion authorities all live there.

11 U.S.C. § 362(a)(1) is the automatic stay's general prohibition on actions against the debtor. § 362(a)(2) covers enforcement of pre-bankruptcy judgments. § 362(a)(3) covers acts to obtain or exercise control over estate property. § 362(a)(6) covers acts to collect, assess, or recover pre-bankruptcy claims.

§ 362(b)(4) is the police-or-regulatory-power exception. As amended by Pub. L. No. 105-277, 112 Stat. 2681-886 (1998), it now expressly excepts the listed governmental actions from each of § 362(a)(1), (a)(2), (a)(3), and (a)(6).

11 U.S.C. § 525(a) is the anti-discrimination provision. It bars licensing actions taken "solely because" of bankruptcy filing, insolvency, or unpaid discharged debts.

11 U.S.C. § 541 defines property of the estate broadly. 11 U.S.C. § 101(27) defines "governmental unit." 28 U.S.C. § 959(b) requires trustees and debtors-in-possession to manage estate property "according to the requirements of the valid laws of the State in which such property is situated."

Citations

• Banking Law Article 12-D (mortgage banker / mortgage broker licensing).
• Banking Law § 589 (statement of consumer protection purpose).
• Banking Law § 595 (NYSBD enforcement authority over mortgage bankers and brokers).
• 11 U.S.C. § 362(a)(1) (automatic stay; administrative proceedings).
• 11 U.S.C. § 362(a)(2), (a)(3), (a)(6) (other stayed activities).
• 11 U.S.C. § 362(b)(4) (police and regulatory power exception).
• 11 U.S.C. § 525(a) (no-discrimination-based-solely-on-bankruptcy).
• 11 U.S.C. § 541 (property of the estate).
• 11 U.S.C. § 101(27) (governmental unit).
• 28 U.S.C. § 959(b) (trustee/DIP must comply with State law).
• Pub. L. No. 105-277, 112 Stat. 2681-886 (1998 amendments extending § 362(b)(4) exception to § 362(a)(2), (a)(3), (a)(6)).
• Board of Governors of Fed. Reserve Sys. v. MCorp Financial, Inc., 502 U.S. 32 (1991) (police-power exception applies; no legitimacy threshold).
• Securities and Exchange Comm'n v. Brennan, 230 F.3d 65 (2d Cir. 2000) (1998 amendments).
• In re Wade, 948 F.2d 1122 (9th Cir. 1991) (state bar disciplinary proceeding within exception).
• In re Fitch, 123 B.R. 61 (Bankr. D. Idaho 1991) (insurance agent license revocation within exception).
• In re Edwards Mobile Home Sales, Inc., 119 B.R. 857 (Bankr. M.D. Fla. 1991) (mobile home dealer license revocation within exception).
• In re Synergy Dev. Corp., 140 B.R. 958 (Bankr. S.D.N.Y. 1992) (State enforcement of bond requirement within exception).
• City of N.Y. v. Exxon Corp., 932 F.2d 1020 (2d Cir. 1991) (CERCLA action within exception).
• In re Christmas, 102 B.R. 447 (Bankr. D. Md. 1989) (Section 525 does not require favorable treatment in financial-responsibility analysis).
• In re National Cattle Congress, 179 B.R. 588 (Bankr. N.D. Iowa 1995) (§ 525 not violated by license-action based on factors other than the bankruptcy itself).

Source

• Landing page: https://ag.ny.gov/libraries-documents/opinions/opinions-year
• Original PDF: https://ag.ny.gov/sites/default/files/opinions/2000-F6_pw.pdf

Original opinion text

Opn. No. 2000-F6
BANKING LAW, ART. 12-D, § 595; 11 U.S.C. §§ 362(a)(1), (b)(4), 525.
A proceeding by the New York State Banking Department pursuant to Banking Law § 595 to suspend or
revoke a license of a mortgage banker or to suspend or delete the name of a mortgage broker from the
mortgage broker roll on the grounds of fraudulent consumer practices or failure to maintain adequate
capital, whether commenced prior or subsequent to the mortgage banker's or mortgage broker's filing for
bankruptcy under the Federal Bankruptcy Code, would fall within the police or regulatory power
exception to the automatic stay in 11 U.S.C. § 362(b)(4) and thus would not be stayed by a bankruptcy
filing. So long as there is sufficient evidence that NYSBD's action was not taken solely because of the
bankruptcy filing itself, a proceeding on these grounds would not be prohibited by 11 U.S.C. § 525.
December 28, 2000
Hon. Elizabeth McCaul
Superintendent
Banking Department
Two Rector Street
New York, NY 10006

Formal Opinion
No. 2000-F6

Dear Superintendent McCaul:
Your counsel has requested an opinion regarding whether a mortgage banker's or mortgage
broker's filing for bankruptcy under the Federal Bankruptcy Code ("Code") stays a proceeding, or the
subsequent commencement thereof, by the New York State Banking Department ("NYSBD") pursuant
to Banking Law § 595 to suspend or revoke a license of a mortgage banker, or to suspend or delete the
name of a mortgage broker from the mortgage broker roll on the grounds of fraudulent consumer
practices or failure to maintain adequate capital. Counsel further inquires as to the effect on NYSBD's
regulatory, supervisory and enforcement powers of a mortgage banker's or mortgage broker's invocation
of remedies under the New York State Debtor and Creditor Law.
11 U.S.C § 362(a)(1) provides for an automatic stay, upon the filing of a bankruptcy petition
under any chapter of the Code, of "the commencement or continuation, including the issuance or
employment of process, of a[n] . . . administrative . . . action or proceeding against the debtor that was or
could have been commenced before the commencement of the case under this title." Thus, "[a]s a
general rule, the filing of a . . . bankruptcy petition operates as an automatic stay of administrative
proceedings against the debtor." In re Wade, 948 F.2d 1122, 1123 (9th Cir. 1991).
However, "Congress did not intend for bankruptcy laws to abrogate the States' police powers," In
re Berry Estates, Inc., 812 F.2d 67, 71 (2d Cir.), cert. denied, 484 U.S. 819 (1987), and recognized "that
the stay provision was particularly vulnerable to abuse by debtors improperly seeking refuge under the
stay in an effort to frustrate necessary governmental functions." United States v. Nocolet, Inc., 857 F.2d
202, 207 (3d Cir. 1988). Accordingly, section 362(b)(4) provides for an exception from the automatic
stay for "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." See Securities and Exchange Comm'n v.
Brennan, 230 F.3d 65, 71 (2d Cir. 2000) (quoting City of N.Y. v. Exxon Corp., 932 F.2d 1020, 1024 (2d
Cir. 1991)) ("the purpose of this exception is to prevent a debtor from 'frustrating necessary
governmental functions by seeking refuge in bankruptcy court'").

As the legislative history of this particular exception explains:
Paragraph (4) excepts commencement or continuation of actions and
proceedings by governmental units to enforce police or regulatory powers.
Thus, where a governmental unit is suing a debtor to prevent or stop violation
of fraud, environmental protection, consumer protection, safety, or similar
police or regulatory laws, or attempting to fix damages for violation of such a
law, the action or proceeding is not stayed under the automatic stay.
S.R. Rep. No. 95-989, at 52 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5838 (footnotes omitted).
Moreover,
[u]nder present law, there has been some overuse of the stay in the area of
governmental regulation. For example, in one Texas bankruptcy court, the stay
was applied to prevent the State of Maine from closing down one of the
debtor's plants that was polluting a Maine river in violation of Maine's
environmental protection laws. In a Montana case, the stay was applied to
prevent Nevada from obtaining an injunction against a principal in a
corporation who was acting in violation of Nevada's anti-fraud consumer
protection laws. The bill excepts these kinds of actions from the automatic stay.
The States will be able to enforce their police and regulatory powers free from
the automatic stay.
H.R. Rep. No. 95-595, at 174-175 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6135.
Thus, "Congress clearly intended for the police power exception to allow governmental agencies
to remain unfettered by the bankruptcy code in the exercise of their regulatory powers." In re Commerce
Oil Co., 847 F.2d 291, 295 (6th Cir. 1988); see generally Collier Bankruptcy Manual § 362.05[4]
(1999). In addition, the Supreme Court has rejected the contention that "in order for § 362(b)(4) to
obtain, a court must first determine whether the proposed exercise of police or regulatory power is
legitimate." Board of Governors of Fed. Reserve Sys. v. MCorp Financial, Inc., 502 U.S. 32, 40 (1991).
There are two tests commonly applied by the federal courts to determine whether an action by a
governmental unit falls within the automatic stay or is exempted therefrom under the police or
regulatory power exception of section 362(b)(4). Under the "pecuniary purpose" test, "the court
determines whether the government action relates primarily to the protection of the government's
pecuniary interest in the debtor's property or to matters of public safety and welfare [and] [i]f the
government action is pursued solely to advance a pecuniary interest of the governmental unit, the stay
will be imposed." In re Universal Life Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997), cert. denied,
524 U.S. 952 (1998); see also In re Commonwealth Cos., 913 F.2d 518, 523 (8th Cir. 1990) ("as a
general matter, § 362(b)(4) does not include governmental actions that would result in a pecuniary
advantage to the government vis a vis other creditors of the debtor's estate"). The "public policy" test
"distinguishes between government proceedings aimed at effectuating public policy and those aimed at
adjudicating private rights [and] [u]nder this second test, actions taken for the purpose of advancing
private rights are not excepted from the stay." Eddleman v. United States Dept. of Labor, 923 F.2d 782,
791 (10th Cir. 1991); see also National Labor Rel. Bd. v. Edward Cooper Painting, Inc., 804 F.2d 934,
942 (6th Cir. 1986) (same).
Pursuant to the foregoing principles, the police or regulatory power exception has been held to
exempt from the automatic stay a myriad of governmental actions and proceedings commenced to
protect the public welfare and not designed merely to protect a pecuniary interest of the governmental
unit in the debtor's estate. See, e.g., Board of Governors of Fed. Reserve Sys. v. MCorp Financial, Inc.,
502 U.S. 32 (1991) (administrative proceedings by Board of Governors of Federal Reserve System for
violations of Board's regulation and Federal Reserve Act); In re Yellow Cab Coop. Ass'n, 132 F.3d 591
(9th Cir. 1997) (Colorado Public Utilities Commission's restriction of the scope of a certificate issued to
the debtor); In re Universal Life Church, Inc., 128 F.3d 1294 (9th Cir. 1997), cert. denied, 524 U.S. 952
(1998) (Internal Revenue Service revocation of tax-exempt status of religious corporation); In re Javens,
107 F.3d 359 (6th Cir. 1997) (municipality's demolition of debtor's condemned buildings); National
Labor Relations Bd. v. 15th Ave. Iron Works, Inc., 964 F.2d 1336 (2d Cir. 1992) (National Labor
Relations Board enforcement proceeding); In re Wade, 948 F.2d 1122 (9th Cir. 1991) (attorney
disciplinary proceeding brought by Arizona State Bar); City of N.Y. v. Exxon Corp., 932 F.2d 1020 (2d
Cir. 1991) (action by City under Comprehensive Environmental Response Compensation and Liability
Act); Eddleman v. United States Dept. of Labor, 923 F.2d 782 (10th Cir. 1991) (Department of Labor
proceeding for violation of Service Contract Act); In re Commonwealth Cos., 913 F.2d 518 (8th Cir.
1990) (civil fraud action by United States under False Claims Act); United States v. Nicolet, Inc., 857
F.2d 202 (3d Cir. 1988) (action by United States under Comprehensive Environmental Response,
Compensation, and Liability Act); Equal Opportunity Employment Comm'n v. McLean Trucking Co.,
834 F.2d 398 (4th Cir. 1987) (actions by Equal Opportunity Employment Commission under Age
Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964); Commodity Futures
Trading Comm'n v. Avco Financial Corp., 979 F. Supp. 232 (S.D.N.Y. 1997) (civil enforcement action
by Commodity Futures Trading Commission); Securities and Exchange Comm'n v. Towers Financial
Corp., 205 B.R. 27 (S.D.N.Y. 1997) (action by Securities and Exchange Commission for violation of
federal securities laws); In re Ngan Gung Restaurant, Inc., 183 B.R. 689 (S.D.N.Y. 1995) (action by
State Attorney General for violation of Labor Law).
Article 12-D of the Banking Law, including the licensure and registration requirements for
mortgage bankers and mortgage brokers, was plainly enacted pursuant to the State's police and
regulatory power to protect the welfare of its citizenry in the context of residential mortgage lending. As
Banking Law § 589 states,
[c]onsistent with the purposes of promoting mortgage lending for the benefit of
our citizens by responsible providers of mortgage loans and services and
avoiding requirements inconsistent with legitimate and responsible business
practices in the mortgage lending industry, the purpose of this article is to
protect New York consumers seeking a residential mortgage loan and to ensure
that the mortgage lending industry is operating fairly, honestly and efficiently,
free from deceptive and anti-competitive practices.
Thus, an administrative proceeding by the NYSBD pursuant to Banking Law § 595 to suspend or
revoke a license of a mortgage banker or to suspend or delete the name of a mortgage broker from the
mortgage broker roll on the grounds of fraudulent consumer practices or failure to maintain adequate
capital would qualify as "an action or proceeding by a governmental unit . . . to enforce such
governmental unit's . . . police and regulatory power" within the contemplation of 11 U.S.C. § 362(b)(4).
A proceeding premised upon these grounds would not relate to the protection of any pecuniary interest
of the NYSBD in the debtor's property and, insofar as the proceeding is aimed at effectuating public
policy and not adjudicating private rights, we believe that it would be exempt from the automatic stay
under this police or regulatory powers exception. See In re Synergy Dev. Corp., 140 B.R. 958 (Bankr.
S.D.N.Y. 1992) (State's action against debtor for failure to satisfy bond requirement for health clubs falls
within section 362(b)(4) exception); In re Fitch, 123 B.R. 61 (Bankr. D. Idaho 1991) (State Department
of Insurance proceeding to revoke debtor's insurance agent license falls within the exception); In re
Edwards Mobile Home Sales, Inc., 119 B.R. 857 (Bankr. M.D. Fla. 1991) (revocation of mobile home
sales dealer's license by State Department of Highway Safety and Motor Vehicles falls within the
exception). In addition, because section 362(b)(4) excepts both the "commencement or continuation" of
actions or proceedings within its terms, such a proceeding would be exempted from the automatic stay
regardless of whether it is pending at the time of the bankruptcy filing or is subsequently commenced.
See also 28 U.S.C. § 959(b) ("a trustee, receiver or manager appointed in any cause pending in any court
of the United States, including a debtor in possession, shall manage and operate the property in his
possession as such trustee, receiver or manager according to the requirements of the valid laws of the
State in which such property is situated, in the same manner that the owner or possessor thereof would
be bound to do if in possession thereof").
Indeed, Congress has recently expanded the scope of the police or regulatory powers exception. A
prior version of section 362(b)(4) exempted an action or proceeding pursuant to a governmental unit's
police or regulatory power only from the automatic stay set forth in section 362(a)(1), encompassing the
commencement or continuation of an administrative proceeding against the debtor, and not from the stay
set forth in section 362(a)(3), encompassing "any act to obtain possession of property of the estate or of
property from the estate or to exercise control over property of the estate." As a result, one court
concluded that, although an agency was entitled to commence or continue an administrative proceeding
notwithstanding the automatic stay, it could not actually proceed to revoke a license possessed by the
debtor without seeking relief from the automatic stay, because the revocation constituted an exercise of
control over property of the estate. See In re National Cattle Congress, 179 B.R. 588 (Bankr. N.D. Iowa
1995), remanded on other grounds, 91 F.3d 1113 (8th Cir. 1996) (pari-mutuel license); see also Hillis
Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 591 (9th Cir. 1992) ("There is no
governmental powers exception to section 362(a)(3), the provision at issue here"); but see In re Javens,
107 F.3d 359, 369 (6th Cir. 1997) ("the universe of actions that trigger an automatic stay under § 362(a)
(3) does not include those governmental actions entitled, under § 362(b)(4), to an exception from the
automatic stay").
In 1998, Congress amended section 362(b)(4) (Pub. L. No. 105-277, 112 Stat. 2681-886) to make
the police or regulatory power exception explicitly applicable to stays arising under section 362(a)(3), as
well as under sections 362(a)(2) and (a)(6) (encompassing, respectively, "the enforcement of, against the
debtor or against property of the estate, of a judgment obtained before the commencement of the case
under this title" and "any act to collect, assess, or recover a claim against the debtor that arose before
the commencement of the case under this title"). See Securities and Exchange Comm'n v. Brennan, 230
F.3d 65, 73-75 (2d Cir. 2000) (discussing 1998 amendments). Accordingly, where the governmental
unit's action or proceeding falls within the parameters of the 362(b)(4) exemption, it is now clear that
acts to obtain possession or exercise control over the property of the debtor's estate, not involving the
enforcement of a money judgment, would not be stayed. See In re PMI-DVW Real Estate Holdings,
L.L.P., 240 B.R. 24, 30 (Bankr. D. Ariz. 1999) ("because the amended statute also includes an exception
to section 362(a)(3), the police and regulatory power exception applies to acts by the government to
obtain possession of property of the Bankruptcy estate or to exercise control over Bankruptcy estate
property"); see also Collier Bankruptcy Manual § 362.05[4][a] (1999). Thus, even assuming that a
mortgage banker's license or a mortgage broker's registration qualifies as "property" of the debtor's
estate as that term is expansively defined by the Code, see 11 U.S.C. § 541 (estate includes "all legal or
equitable interests of the debtor in property as of the commencement of the case"), the suspension or
revocation of a mortgage banker's license or a mortgage broker's registration would not be barred under
the automatic stay pursuant to a NYSBD proceeding within the section 362(b)(4) exception.
11 U.S.C. § 525 must also be considered. Section 525(a) provides that "a governmental unit may
not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant
to, condition such a grant to, discriminate with respect to such a grant against" any person who has been
a debtor or bankrupt, "solely because" such person has been a debtor or bankrupt or has been insolvent
or has not paid a dischargeable debt. The statute "is designed to prevent governmental units from
frustrating the fresh start policy of the Code by discriminating against persons who have been debtors
under the Code or bankrupts or debtors under the prior Act." Collier Bankruptcy Manual § 525.02
(1999). However, "this prohibition is not violated where the denial of a license is based on other factors
such as the debtor's lack of financial responsibility" and "does not prohibit a state agency's examination
of financial responsibility pursuant to state regulations in determining whether to suspend a debtor's
license." In re National Cattle Congress, Inc., 179 B.R. 588, 598 (Bankr. N.D. Iowa 1996), remanded on
other grounds, 91 F.3d 1113 (8th Cir. 1996). As the legislative history of the statute explains:
The prohibition extends only to discrimination or other action based solely on
the basis of the bankruptcy, on the basis of insolvency before or during
bankruptcy prior to a determination of discharge, or on the basis of nonpayment
of a debt discharged in the bankruptcy case . . . . It does not prohibit
consideration of other factors, such as future financial responsibility or ability,
and does not prohibit imposition of requirements such as net capital rules, if
applied nondiscriminatorily.
S.R. Rep. No. 95-989, at 81 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5867 (emphasis added).
Similarly,
[t]he prohibition does not extend so far as to prohibit examination of the factors
surrounding the bankruptcy, the imposition of financial responsibility rules if
they are not imposed only on former bankrupts, or the examination of
prospective financial condition or managerial ability. The purpose of the
section is to prevent an automatic reaction against an individual for availing
himself of the protection of the bankruptcy laws. Most bankruptcies are caused
by circumstances beyond the debtor's control. To penalize a debtor by
discriminatory treatment as a result is unfair and undoes the beneficial effects
of the bankruptcy laws. However, in those cases where the causes of a
bankruptcy are intimately connected with the license, grant, or employment in
question, an examination into the circumstances surrounding the bankruptcy
will permit governmental units to pursue appropriate regulatory policies and
take appropriate action without running afoul of bankruptcy policy.
H.R. Rep. No. 95-595, at 165 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6126 (footnotes omitted);
see Collier Bankruptcy Manual § 525.02 (1999) ("if there is a bona fide nondiscriminatory examination
of future financial responsibility in a particular licensing process, applicable to all persons regardless of
the existence of prior debts or any bankruptcy filings, section 525 is not applicable"); see also In re
Christmas, 102 B.R. 447, 461 (Bankr. D. Md. 1989) ("the prohibitions in the Bankruptcy Code against
discrimination do not require that debtors receive favorable treatment by being excused from a state
requirement of financial responsibility from which nondebtors are not excused").
Applying these principles, we do not think that a suspension or revocation proceeding premised
upon fraudulent consumer practices or failure to maintain adequate capital would violate the antidiscrimination provision of section 525(a). A proceeding on the grounds of fraudulent consumer
practices would clearly not be based solely upon the debtor's bankruptcy filing. While a mortgage
banker's or broker's ability to maintain minimum capital requirements may well be connected to the
circumstances necessitating a bankruptcy filing, it does not necessarily follow that the NYSBD's
suspension of a license or registration for this reason would be solely on the basis of the bankruptcy
within the meaning of section 525. As set forth above, the statute as interpreted does not proscribe a
bona fide, nondiscriminatory examination of future financial responsibility in a licensing process and the
legislative history explicitly cites net capital requirements as an example of a factor which may lawfully
be considered. Accordingly, it is our opinion that, so long as action against a mortgage banker or broker
is not taken for the sole reason that it has filed for bankruptcy, the NYSBD would not be prohibited
under section 525 from enforcing nondiscriminatory capital requirements against a mortgage banker or
broker in an administrative proceeding falling within 11 U.S.C. § 362(b)(4)'s police or regulatory power
exception to the automatic stay.
Finally, we find no authority for the proposition that a mortgage banker's or broker's invocation of
remedies under the New York Debtor and Creditor Law would affect this regulatory authority of the
NYSBD. The New York Debtor and Creditor Law does not contain a provision analogous to the
automatic stay of the Federal Bankruptcy Code.
We conclude that a proceeding by the NYSBD pursuant to Banking Law § 595 to suspend or
revoke a license of a mortgage banker or to suspend or delete the name of a mortgage broker from the
mortgage broker roll on the grounds of fraudulent consumer practices or failure to maintain adequate
capital, whether commenced prior or subsequent to the mortgage banker's or mortgage broker's filing for
bankruptcy under the Code, would fall within the police or regulatory power exception to the automatic
stay in 11 U.S.C. § 362(b)(4) and thus would not be stayed by the bankruptcy filing. So long as there is
sufficient evidence that NYSBD's action was not taken solely because of the bankruptcy filing itself, a
proceeding on these grounds would not be prohibited by 11 U.S.C. § 525. A mortgage banker's or
broker's invocation of remedies under the New York Debtor and Creditor Law would not affect this
regulatory authority of the NYSBD.
Very truly yours,
ELIOT SPITZER
Attorney General

1 "Governmental unit" is defined by the Code to include an "agency . . . of . . . a State." 11 U.S.C. § 101(27).
2 Stays arising under 362(a)(2), except to the extent that the governmental unit was seeking to enforce a money judgment,
were already excepted under prior section 362(b)(5), which subsection was deleted by the 1998 amendments and
incorporated into subsection 362(b)(4).

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