Bankruptcy Code Definition: Governmental Unit

What is a “governmental unit” under the Bankruptcy Code?

The Bankruptcy Code defines “governmental unit” as follows:

The term “governmental unit” means United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.

11 U.S.C. § 101(27)

So what are examples of governmental units? A foreign country is a governmental unit subject to a bankruptcy court’s jurisdiction despite the Foreign Sovereign Immunity Act.  In re Tuli, 172 F.3d 707, 711-12 (9th Cir. 1999). A state bar association bringing disciplinary proceedings has been found to be a governmental unit. In re Wade, 115 B.R. 222, 228 (B.A.P. 9th Cir. 1990), aff'd, 948 F.2d 1122 (9th Cir. 1991). A “governmental unit” also has been held to include federal credit unions, TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 924 (1st Cir. 1995); Indian tribes, Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1060 (9th Cir. 2004); utility commissions, In re Begley, 46 B.R. 707 (E.D.Pa.1984) (the Pennsylvania Public Utility Commission); transit authorities, In re Marine Electric Railway Products Division, Inc., 17 B.R. 845 (Bankr.E.D.N.Y.1982) (New York City Transit Authority); liquor authorities, In re Maley, 9 B.R. 832 (Bankr.W.D.N.Y.1981); and state universities, In re Howren, 10 B.R. 303 (Bankr.D.Kan.1980). These examples are not exclusive. The legislative history to section 101(27) indicates that this subsection defines “governmental unit” in the broadest sense.  In re Wade, 115 B.R. 222, 226 (B.A.P. 9th Cir. 1990), aff'd, 948 F.2d 1122 (9th Cir. 1991). Courts apply a functional approach by examining whether the entity at issue is carrying out a governmental function. Id. The limited case law suggests that courts should also look to the closeness of the relationship between the government and the entity at issue. Id.

In contrast, what entities are not considered governmental units? A private party, acting as a “private attorney general” bringing a citizen action under the Clean Water Act is not a governmental unit. In re Revere Copper & Brass, Inc., 32 B.R. 725, 727 (S.D.N.Y. 1983).  Other examples of entities that were not “governmental units” include a nonprofit human service organization that provided housing for homeless even though it received funding from the government, In re Marcano, 288 B.R. 324 (Bankr. S.D.N.Y. 2003); a private landlord that received a subsidy under the “Section 8” program from the Federal Department of Housing and Urban Development, In re Lutz, 82 B.R. 699 (Bankr.M.D.Pa.1988); a private mortgage company approved under the Housing and Urban Development  federal mortgage insurance program, In re Merriweather, 185 B.R. 235 (Bankr.S.D.Tex.1995); or a private nongovernmental association of members that accredits schools, In re Draughon Training Institute, Inc., 119 B.R. 927 (Bankr.W.D.La.1990). In contrast to Krystal Energy Co. v. Navajo Nation, another court has held Indian tribes are not governmental units. In re Whitaker, 474 B.R. 687, 695 (B.A.P. 8th Cir. 2012).

What is the significance of being a “governmental unit” under the Bankruptcy Code?

Section 106 of the Bankruptcy Code abrogates the sovereign immunity for a governmental unit except to the extent as other Bankruptcy Code provisions may provide. The section contains a long list of other sections where section 106 applies.¹   11 U.S.C. § 106(a)(1).

However, some other provisions of the Bankruptcy Code contain preferential treatment for governmental units.  For example, section 362 provides that the automatic stay does not apply to the enforcement of a governmental unit’s police or regulatory powers. 11 U.S.C. § 362(b)(4). In evaluating whether an action is part of the police or regulatory powers, courts use two tests. First courts use the "pecuniary purpose" test, which focuses on whether governmental proceeding relates primarily to protection of the government's pecuniary interest in debtor's property and not to matters of public safety or public policy. In re Sori, 513 B.R. 728 (Bankr. N.D. Ill. 2014). In the alternative, courts may use the "public policy" test, which distinguishes between proceedings that adjudicate private rights and those that effectuate public policy. Id.

The police or regulatory power exception to the automatic stay has been held applicable to an NLRB enforcement proceeding concerning the back pay of employees discriminatorily discharged, an assessment of penalties for child labor violations by the Secretary of Labor, and the denial of an application for a license to race horses by a state racing board. Lewis J. Heisman, Annotation, What are proceedings by governmental units to enforce police or regulatory powers which are excepted from operation of automatic stay provisions of Bankruptcy Code of 1978 (11 U.S.C.A. § 362(b)(4), (5)), 58 A.L.R. Fed. 282 (1982). It has been held inapplicable to the termination by the Government National Mortgage Association of a guaranty agreement between the Association and a mortgage banker, an eviction proceeding by a municipal housing authority for nonpayment of rent, and a hearing by a state motor vehicle commission for termination of a motor vehicle franchise agreement.  Id.

Another important section for governmental units is § 525 of the Bankruptcy Code which prohibits a governmental unit from discriminating against a person or refusing to grant a license, or permit, charter, franchise, or other similar grant, to a person who has previously been a party to a bankruptcy proceeding or declared bankrupt.  11 U.S.C. § 525. Finally, another relevant section includes § 523 which exempts debts from discharge that is for a fine, penalty, or forfeiture payable for the benefit of a governmental unit, unrelated to any actual pecuniary loss. 11 U.S.C. § 523

Michael D. Fielding 
Ross H. DeLong 
Husch Blackwell LLP²

¹ Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 503, 505, 506, 510, 522, 523, 524, 525, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 744, 749, 764, 901, 922, 926, 928, 929, 944, 1107, 1141, 1142, 1143, 1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305, and 1327

² The views expressed herein are solely those of the authors and do not necessarily reflect the views or opinions of Husch Blackwell LLP.  This article is solely for educational purposes and is not intended to constitute legal advice.