805 F.

2d 440
55 USLW 2290, 15 Collier Bankr.Cas.2d 1375,
Bankr. L. Rep. P 71,511

In re CORPORACION de SERVICIOS MEDICOS

HOSPITALARIOS de
FAJARDO, Debtor.
CORPORACION de SERVICIOS MEDICOS
HOSPITALARIOS de FAJARDO,
Plaintiff, Appellee,
v.
Hon. Luis Izquierdo MORA, etc., et al., Defendants,
Appellants.
No. 86-1451.

United States Court of Appeals,

First Circuit.
Heard Sept. 12, 1986.
Decided Nov. 10, 1986.

Marcos A. Ramirez Lavandero, with whom Ramirez & Ramirez and

Maria Luisa Contreras, Hato Rey, P.R., were on brief, for defendants,
appellants.
George A. Davidson, with whom Bradley J. Andreozzi, Hughes Hubbard
& Reed, New York City, Virgilio Mendez Cuesta, Rio Piedras, P.R., and
Hector Urgell Cuebas, were on brief, for plaintiff, appellee.
Before CAMPBELL, Chief Judge, COFFIN and BOWNES, Circuit
Judges.
COFFIN, Circuit Judge.

This case raises important issues of first impression regarding the scope of the
police power exception to the Bankruptcy Code's automatic stay and the ability
of debtors to assume contracts for the provision of governmental services. 11

U.S.C. Secs. 362(b)(4), 365. The Department of Health for the Commonwealth
of Puerto Rico ("Department"), represented by Secretary of Health Luis
Izquierdo Mora ("Secretary"), appeals the district court's affirmance of two
orders issued by the bankruptcy court in the course of Chapter 11 proceedings
initiated by appellee, Corporacion de Servicios Medicos Hospitalarios de
Fajardo ("Corporacion"). One order permitted Corporacion to assume a
lucrative hospital administration contract that it entered with the Department in
1982. The other order enjoined the Department of Health from continuing
license revocation proceedings against Corporacion. We affirm the first order
and hold that the issues raised by the second order are moot.
2I. Factual Setting.
3

The events giving rise to this appeal commenced on December 1, 1982 when
Corporacion, a private corporation, entered into a ten-year contract with the
Department to operate the Fajardo Subregional Hospital. The contract grew out
of a Puerto Rican legislative effort during the mid-1970s to reduce the
Department's role as health care provider and install private administrators to
operate the formerly public hospitals. See P.R. Laws Ann. tit. 24, Secs. 337,
337d. The terms of the contract obligated the Department to pay Corporacion a
fixed annual fee, totalling several million dollars each year, for the care of
indigent patients. Corporacion was also entitled to receive sums from paying
patients and third-party sources such as Medicare and Blue Cross/Blue Shield.
Operation of the Fajardo Subregional Hospital was Corporacion's only business
and the contract with the Department was its principal asset.

During March 1985, following the issuance of reports by an auditing firm and
an advisory team appointed to evaluate Corporacion's performance under the
contract, newly installed Secretary of Health Izquierdo Mora sought to
terminate the Department's contract with Corporacion. On April 30, 1985, he
filed suit seeking to have the Commonwealth Superior Court declare
Corporacion in default and rescind the contract. Corporacion, however, filed a
petition for reorganization under Chapter 11 of the Bankruptcy Code on May
10, 1985. It continued to perform the contract and receive payments from the
Department even after filing for bankruptcy.

On July 12, 1985, upon motion by the Secretary, the bankruptcy court issued an
order pursuant to 28 U.S.C. Sec. 1334(c)(2) abstaining from jurisdiction over
the contract matter only "as to the Request for Declaratory Judgment" made
before the Commonwealth court. The contract action continued, therefore, until
November 1, 1985, when the Commonwealth court filed its decision purporting
to dissolve the contract and force Corporacion to surrender the hospital and

other equipment to the Department. The next morning, without notice to the
bankruptcy court, the Department forcibly seized control of the hospital from
Corporacion. Just over two weeks later, on November 18, Corporacion moved
the bankruptcy court for permission to assume the contract and offered
assurances of cure and future performance as required by section 365(b)(1) for
contracts in default. Following an evidentiary hearing regarding the adequacy
of these assurances, the bankruptcy court granted Corporacion's motion on
January 24, 1986. The district court affirmed this order on April 15, 1986, and
also enjoined the Secretary "from further prosecuting this matter in any other
forum not having bankruptcy jurisdiction."
6

In addition to initiating the contract action in Commonwealth court, Secretary

Izquierdo also attempted to revoke or suspend Corporacion's license to operate
the hospital by commencing an administrative proceeding in early June, 1985.
Prior to the hearing date, however, Corporacion secured a temporary restraining
order from the bankruptcy court to block the proceedings. Following two days
of hearings and a personal inspection of the hospital, the bankruptcy judge
stayed the license revocation proceeding pending the outcome of the
Department's previously filed contract action. The district court also affirmed
this decision in its order of April 15, 1986, 60 B.R. 920.

In light of the district court's order, the Department returned administration of

the hospital to Corporacion on April 27, 1986, two days after we refused to
grant the Secretary's motion for stay pending appeal. On June 30, 1986,
Corporacion's license to operate the hospital expired by its own terms. The
Department, however, reviewed Corporacion's new application, conducted an
inspection of the hospital, and issued a new license permitting Corporacion to
operate the hospital from July 1, 1986 to June 30, 1988.

8II. Assumption of the Contract.

9

Appellant first contends that the district court improperly reviewed the
abstention order issued by the bankruptcy court and, more generally, that the
district court erroneously affirmed the bankruptcy court's order permitting
Corporacion to assume the hospital administration contract. Appellant's basic
position on the assumption issue is that the judgment of the Commonwealth
court terminated the contract and that, therefore, there was no executory
contract for Corporacion to assume after November 1, 1985. This argument
fails, however, because the actions of the Commonwealth court violated the
automatic stay provisions of the Bankruptcy Code, 11 U.S.C. Sec. 362, and did
not escape operation of the stay by virtue of the "police power" exception
contained in section 362(b)(4). We also hold, contrary to appellant's assertion,

that appellee satisfied all the requirements for assumption of an executory

contract pursuant to section 365 and, specifically, offered adequate assurances
of cure and future performance as required by section 365(b)(1). We address
each of these issues in turn.
A. Review of the Abstention Order.
10
11

As a preliminary matter, we must address appellant's claim that it was improper

for the district court to review the bankruptcy court's abstention order in the
course of permitting assumption of the contract. In support of its contention,
appellant cites the express language of the abstention statute, which states that
"[a]ny decision to abstain made under this subsection is not reviewable by
appeal or otherwise." 28 U.S.C. Sec. 1334(c)(2). The district court, relying on
In re Cash Currency Exchange, Inc., 37 B.R. 617 (N.D.Ill.1984), aff'd, 762 F.2d
542, 545 (7th Cir.), cert. denied, --- U.S. ----, 106 S.Ct. 233, 88 L.Ed.2d 232
(1985), purported to review not the actual decision to abstain, but rather the
jurisdictional basis for the abstention order.1 It determined that the bankruptcy
court lacked authority to abstain because the action before the Commonwealth
court was a proceeding "arising under" title 11 of the United States Code. See
28 U.S.C. Sec. 157(b)(2). Accordingly, it found that the abstention order had
issued in violation of the Code's automatic stay provisions, 11 U.S.C. Sec.
362(a), and was therefore null and void.

12

Without determining the validity of the approach taken by the district court, we
believe that there are two independent grounds for upholding the result reached
below. First, we believe a strong case can be made for the proposition that,
because of the statutory amendments following the Supreme Court's ruling in
Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50,
102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the bankruptcy court lacked
jurisdiction to issue an abstention order without the authorization of the district
court. The powers of a bankruptcy court, as enumerated in 28 U.S.C. Sec. 157,
are limited to the "authority ... conferred upon the court under ... [the
Bankruptcy Code]." 11 U.S.C. Sec. 105(c). A bankruptcy judge, therefore, may
enter "appropriate orders and judgments", 28 U.S.C. Sec. 157(b)(1), only in
"core" proceedings "arising under" title 11. See 28 U.S.C. Sec. 157(b)(2)
(inclusive list of "core" proceedings). In other cases the bankruptcy judge can
do no more than "submit findings of fact and conclusions of law to the district
court." 28 U.S.C. Sec. 157(c).

13

As recently recognized by the Advisory Committee on Bankruptcy Rules,

which is charged with the task of drafting the post-Marathon amendments to
the Bankruptcy Rules, decisions to abstain pursuant to 28 U.S.C. Sec. 1334(c)

(2) do not, by definition, involve matters "arising under" title 11 and, therefore,
only district courts possess the jurisdictional authority to issue such orders. See
Proposed Bankruptcy Rule 5011(b) (permitting bankruptcy court to hear
motion for abstention and file report and recommendation with district court).
Indeed, section 1334(c)(2) states that "the district court shall abstain from
hearing such proceeding...." 28 U.S.C. Sec. 1334(c)(2) (emphasis supplied). In
the case at bar, therefore, we do not believe the district court erred in reviewing
the abstention order of the bankruptcy court. On the contrary, we are persuaded
that the constitutional status of bankruptcy courts and the Bankruptcy Code
itself compel district courts to undertake such review.
14

Nevertheless, we are reluctant to rest our decision on this ground alone,

although we find it dispositive, because the issue was neither briefed nor
argued by the parties on appeal. Even if we were to accept the premise that
district courts may not review abstention orders directly, however, an
alternative theory exists that adequately supports the result reached below and
renders harmless any error committed by the district court. Appellee argues,
correctly in our view, that the bankruptcy court's order in this case was
carefully circumscribed and did not permit the Commonwealth court to enter
and enforce judgment against the property of the estate. Responding to the
Secretary's "Request for Declaratory Judgment and Injunction" pending before
the Commonwealth court, the bankruptcy court abstained only "as to the
Request for Declaratory Judgment" and further provided that "such abstention
is not a waiver of the exclusive jurisdiction over the property of the debtor
estate under 28 U.S.C. [Sec.] 1134(d) nor the granting of relief from the
automatic stay of 11 U.S.C. [Sec.] 362(a) except as expressly indicated by this
order."2 Regardless of whether the bankruptcy court properly granted the
abstention order pursuant to section 1334(c)(2), we do not read its language as
a total and unconditional abstention permitting the Commonwealth court to
enjoin appellee's conduct, terminate the contract, and authorize the
Department's takeover of the hospital. Rather, the bankruptcy court abstained
only as to the declaration of the parties' contractual rights under Puerto Rico law
and the Commonwealth court lacked subject matter jurisdiction to issue any
orders except a declaratory judgment.3

B. Violation of the Automatic Stay.

15
16

Despite our alternative holdings that the abstention order was either improperly
issued or too narrow to permit contract termination, appellant contends that the
provisions of section 362(a) did not automatically stay its contract action before
the Commonwealth court. It finds support for this position in the "police
power" exception to the automatic stay enumerated in section 362(b)(4), (5).

Section 362 provides in relevant part:

(a) Except as provided in subsection (b) of this section, a petition filed under section
17
301, 302 or 303 of this title ... operates as a stay, applicable to all entities, of-18 the commencement or continuation ... of a judicial, administrative or other action
(1)
or proceeding against debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a claim against the debtor
that arose before the commencement of the case under this title;
19 the enforcement, against the debtor or against property of the estate, of a
(2)
judgment obtained before the commencement of the case under this title;
20 any act to obtain possession of property of the estate or of property from the
(3)
estate or to exercise control over property of the estate; ...
21 The filing of a petition under section 301, 302, or 303 of this title ... does not
(b)
operate as a stay-***
22
23 under subsection (a)(1) of this section, of the commencement or continuation of
(4)
an action or proceeding by a governmental unit to enforce such governmental unit's
police or regulatory power;
24 under subsection (a)(2) of this section, of the enforcement of a judgment,
(5)
obtained in an action or proceeding by a governmental unit to enforce such
governmental unit's police or regulatory power; ....
25

11 U.S.C. Sec. 362 (emphasis provided). The Department contends that the
contract termination suit it filed in Commonwealth court was "an action or
proceeding by a governmental unit to enforce such governmental unit's police
or regulatory power." 11 U.S.C. Sec. 362(b)(4). We disagree.

26

We begin by stating the obvious. First, "the stay provisions of 11 U.S.C. Sec.
362(a) do not always operate automatically." Cournoyer v. Town of Lincoln,
790 F.2d 971, 974 (1st Cir.1986). Second, we do not doubt that one of the
purposes animating section 362(b)(4) is the protection of public health and
safety. See Midlantic National Bank v. New Jersey Department of
Environmental Protection, --- U.S. ----, 106 S.Ct. 755, 761, 88 L.Ed.2d 859
(1985). It is apparent from the legislative history, however, that Congress
intended the section 362(b)(4) exception to apply exclusively to actions
enforcing generally applicable regulatory laws governing the behavior of

debtors:
27
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 law, the action or
proceeding is not stayed under the automatic stay.
28

H.R.Rep. No. 595, 95th Cong., 1st Sess. 343 (1977), reprinted in 1978
U.S.Code Cong. & Admin.News 5963, 6299 [hereinafter House Report];
S.Rep. No. 989, 95th Cong., 2d Sess. 52, reprinted in 1978 U.S.Code Cong. &
Admin.News 5787, 5838 [hereinafter Senate Report]. Nowhere is it mentioned
that section 362(b)(4) permits government agencies to enforce contractual
rights against debtors without first seeking relief from the automatic stay.4 Nor
has appellant cited any cases holding that actions by a governmental agency to
enforce contractual rights, even if related to the agency's general regulatory
power, are exempt from the automatic stay.5 See In re Adana Mortgage
Bankers, Inc., 12 B.R. 989, 1000 (Bankr.N.D.Ga.1980), vacated as moot by
stipulation, 687 F.2d 344 (11th Cir.1982) (holding that a government
corporation, "[w]ith respect to actually implementing its contractual remedies
after the [debtor] has filed for relief under Chapter 11 of the Bankruptcy Code,
... is in the same position as any other party in interest.").

29

The alleged breach of contract by Corporacion and the Department's

subsequent decision to bring suit did not directly involve the enforcement of
generally applicable regulatory laws. If the Department had reason to believe
that appellee was in violation of applicable health or safety regulations, then it
could have taken steps immediately to revoke appellee's license to operate the
hospital. See P.R. Laws Ann. tit. 24, Sec. 333g. Instead, the Department sought
to have the Commonwealth court enforce rights created by the contract it
entered with Corporacion in 1982. Appellant now contends that appellee's
mismanagement of the Fajardo Hospital had produced utter chaos and a serious
threat to the health and safety of citizens served by that facility. The fact
remains, however, that the Department did not initiate proceedings to revoke
appellee's license until several weeks after filing suit in Commonwealth court.6
This decision by the Department to pursue its contractual remedies, rather than
exercise its broad police and regulatory power at the outset, suggests to us that
the threat to the health and safety of the citizens served by the Fajardo
Subregional Hospital was not as great as appellant would have us believe.7 We
also note, moreover, that appellant's characterization of appellee's performance
is contradicted by both a personal inspection of the hospital by the bankruptcy
judge 8 on August 1, 1985, and a Medicare compliance inspection conducted by
the Health Care Financing Administration of the United States Department of

Health and Human Services9 on October 21 and 22, 1985, just over a week
before the Department seized control of the facility.
30

The Department's decision to forgo direct enforcement of its regulatory powers

and seek direct termination of the contract was also potentially disastrous to the
estate. The contract termination suit threatened to deprive Corporacion of its
principal asset, jeopardize its only opportunity for reorganization, and force it
into chapter 7 liquidation proceedings. In light of the Supreme Court's
statement that "the policy of Chapter 11 is to permit successful rehabilitation of
debtors," NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, 104 S.Ct. 1188,
1197, 79 L.Ed.2d 482 (1984), we simply cannot accept the Department's
characterization of its contract action as an exercise of its "police or regulatory
powers." Appellant here had ample means and opportunity to enforce its
generally applicable health and safety regulations by moving to revoke
appellee's license, but instead chose to pursue a contractual remedy. Because we
cannot conceive of any situation in which an action for contractual relief would
be the only avenue available for the enforcement of generally applicable
regulatory laws, we choose to follow the congressional directive to give section
362(b)(4) a "narrow construction," 124 Cong.Rec. H11089 (statement of Rep.
Edwards), reprinted in 1978 U.S.Code Cong. & Admin.News 6436, 6444, and
hold that an action by a governmental unit to enforce contractual rights is not
exempt from the provisions of the automatic stay by virtue of section 362(b)(4).
Accordingly, the actions taken by the Commonwealth court to terminate the
contract between the Department and Corporacion violated the automatic stay.

C. Adequate Assurances.
31
32

Section 365 of the Bankruptcy Code permits a debtor, subject to the approval of
the bankruptcy court, to assume or reject executory contracts and unexpired
leases. The debtor may assume a contract that was executory as of the date of
filing "at any time before the confirmation of a [reorganization] plan," unless
the court, following a request by another contracting party, has designated a
specific date by which the debtor must act to assume the contract. 11 U.S.C.
Sec. 365(d)(2). There is no question that Corporacion filed a timely motion to
assume its contract with the Department. The only section 365 issue on appeal10
exists because of the Commonwealth court's holding that debtor had defaulted
on the contract. Before a debtor can assume an executory contract that is in
default it must first comply with the cure, compensation and future
performance requirements of section 365(b)(1).11 The debtor must at least
provide the bankruptcy court with "adequate assurances" that each of these
requirements will be satisfied. On appeal, however, we must accept the
bankruptcy court's findings of fact and conclusions as to mixed questions of fact

and law unless they are clearly erroneous. See Briden v. Foley, 776 F.2d 379,
382 (1st Cir.1985).
33

The bankruptcy court, accepting the Commonwealth court's findings regarding

default, conducted a hearing to determine whether appellee had satisfied the
"adequate assurance" standard outlined in section 365(b)(1). The court heard
the testimony of Dr. Carlos Lopategui, Corporacion's principal shareholder and
chairman of its board of directors since February 7, 1985. It also considered the
specific plan contained in appellee's motion to assume the contract concerning
how each default had been or would be cured. Finally, the court benefitted from
its own personal inspection of the hospital and the federal inspection conducted
by the Department of Health and Human Services just ten days prior to the
Department's takeover of the hospital. The Department did not contest any of
this evidence, offering only the testimony of an expert witness who admitted
having no actual knowledge of the hospital's operations. The bankruptcy court
determined that Dr. Lopategui's testimony was "credible and believable," that
appellee's evidence of cure was "uncontradicted," and that appellee's proposals
to cure the non-economic defaults identified by the Commonwealth court were
"reasonable." Based on our reading of the record, we cannot conclude that the
bankruptcy court's findings are clearly erroneous. We therefore affirm its
determination that appellee offered evidence or "adequate assurance" of cure
sufficient to justify assumption of the contract. 11 U.S.C. Sec. 365(b)(1)(A).

34

There being no claims for compensation due to the defaults enumerated by the
Commonwealth court, the only remaining issue is whether appellee offered
adequate assurance of future performance pursuant to section 365(b)(1)(C). At
the hearing before the bankruptcy court, Corporacion did not offer any separate
evidence on this point, leading counsel for appellant to move for a nonsuit.
Appellee responded by insisting that such adequate assurance could be inferred
from its past experience operating the hospital. Dr. Lopategui testified that most
of the defaults identified by the Commonwealth court had been cured within
the first two months after Corporacion filed its bankruptcy petition and that,
until the Department's takeover of the hospital on November 1, 1985,
Corporacion had been performing the contract satisfactorily. It was during this
period, moreover, when the Department of Health and Human Services
inspectors determined that Corporacion was operating the hospital in
compliance with all Medicare conditions of participation. The bankruptcy
court, being most familiar with Corporacion's operations and financial
condition, found that "as to adequate future performance the debtor has already
performed or put into motion the process." The Department's scant evidence
fails to suggest that appellee's demonstrated ability to perform its obligations is
illusory. Furthermore, the Department, which has recently issued appellee a

new license to operate the hospital until 1988,12 appears satisfied that
Corporacion can operate the hospital in full compliance with its legal
obligations.13 Accordingly, we uphold the bankruptcy court's determination that
appellee has offered "adequate assurance" of future performance to justify
assumption of the contract. 11 U.S.C. Sec. 365(b)(1)(C).
III. Injunction of License Revocation Proceeding.
35
36

Appellant contends that the district court erroneously affirmed the bankruptcy
court's order of August 2, 1985, enjoining the administrative proceeding to
revoke or suspend Corporacion's license to operate the hospital. The
bankruptcy court, however, expressly limited its injunction by stating that the
proceeding would be stayed "only for such time as the Superior Court requires
to hear and determine the case now before it." The injunction therefore expired
of its own terms on November 1, 1985, when the Commonwealth court issued
its decision in the contract action. The license that the Department sought to
revoke, moreover, expired on June 30, 1986, and the Department, following an
inspection of the hospital, has issued Corporacion a new two-year license.
Based on these facts, the issue of whether the bankruptcy court properly
enjoined the administrative proceeding is moot.14 Furthermore, we do not
believe that the case is "capable of repetition yet evading review." Roe v.
Wade, 410 U.S. 113, 125, 93 S.Ct. 705, 712, 35 L.Ed.2d 147 (1973).15

IV. Conclusion.
37
38

We affirm the order of the bankruptcy court permitting appellee to assume its
contract with the Department of Health to operate the Fajardo Subregional
Hospital. In reaching this decision we hold that the Department's contract
termination action before the Commonwealth Superior Court was not exempt
from the automatic stay under section 362(b)(4), that the Commonwealth court
violated the stay by purporting to terminate the contract, and that appellee has
satisfied all the requirements of section 365(b)(1) regarding the assumption of a
contract in default.

39

We also find that the issue of whether the bankruptcy court properly stayed the
Department's license revocation proceeding is now moot.

40

Affirmed.

Although the lower court order in Cash Currency supports review of the

bankruptcy court's jurisdiction to abstain, the Seventh Circuit opinion in that

case did not endorse such an exception to the general rule of nonreviewability
set forth in 28 U.S.C. Sec. 1334(c)(2). In re Cash Currency Exchange, Inc., 762
F.2d 542, 555 (7th Cir.1985) ("Even if this court were to sanction the judicial
creation of exceptions to this rule, which we do not, the one created by the
district court must fail.")
2

If there was ever any question as to the scope of the bankruptcy court's
abstention order, it was settled in that court's subsequent order of January 24,
1986. The court stated that its abstention order did not provide the
Commonwealth court "with authority to execute or carry out the judicial
process of collecting or enforcing the determination against property of the
estate; such property upon the commencement of the case fell under this court's
jurisdiction, which jurisdiction was not waived by this court, and probably
could not be." Order of January 24, 1986, at 11-12 (footnotes omitted)

The relevant provisions of the Bankruptcy Code buttress our finding that the
Commonwealth court could not obtain subject matter jurisdiction to enforce its
judgment terminating the contract. Upon the filing of a petition under chapter
11, all property of the debtor, including intangible property such as contracts
and licenses, falls within the exclusive jurisdiction of the bankruptcy court. 11
U.S.C. Sec. 541(a). Furthermore, section 362(a)(3) automatically stays "any act
to obtain possession of property of the estate," and section 365 grants the
bankruptcy court exclusive jurisdiction to determine whether contracts in
default may be assumed or rejected. 11 U.S.C. Secs. 362(a)(3), 365. These
provisions clearly preempt any contradictory state law because "a corporation
may not be precluded by state law from availing itself of federal bankruptcy
law." In re Cash Currency Exchange, 762 F.2d at 552

The legislative history of section 362, supported by subsequent judicial

interpretation, distinguishes two types of police or regulatory actions: (1)
actions in which the government seeks to protect public health, safety, and
welfare, and (2) actions in which the government seeks to protect a pecuniary
interest. See 124 Cong.Rec. H11089 (statement of Rep. Edwards), reprinted in
1978 U.S.Code Cong. & Admin.News 6436, 6444-45; State of Missouri v.
United States Bankruptcy Court, 647 F.2d 768, 776 (8th Cir.1981), cert.
denied, 454 U.S. 1162, 102 S.Ct. 1035, 71 L.Ed.2d 318 (1982). Only the
former are exempt from the automatic stay pursuant to section 362(b)(4). Based
on this distinction, appellant argues that its contract action was not an attempt
to protect a pecuniary interest and that, therefore, its actions must have been
directed at protecting public health and safety. We acknowledge that the
distinction drawn by Congress and the courts narrows the scope of the "police
power" exception by excluding from its coverage legitimate police or

regulatory actions brought for pecuniary purposes. We do not accept appellant's

position, however, because its contract termination action does not even fall
within the category of "police or regulatory" actions envisioned by the drafters
of section 362(b)(4). Consequently, we do not reach the question of whether
the Department's actions were directed at protecting public health or protecting
a pecuniary interest
5

In fact, all of the cases cited by appellant to support its interpretation of section
362(b)(4) involve proceedings to enforce specific provisions of general
regulatory schemes. See, e.g., Cournoyer v. Town of Lincoln, 790 F.2d 971 (1st
Cir.1986) (zoning ordinance); Penn Terra, Ltd. v. Department of Environmental
Resources, 733 F.2d 267 (3d Cir.1984) (environmental regulations); SEC v.
First Financial Group of Texas, 645 F.2d 429 (5th Cir.1981) (securities laws);
NLRB v. Evans Plumbing Co., 639 F.2d 291 (5th Cir.1981) (per curiam) (labor
laws). One of the cited cases, moreover, directly contradicts appellant's
position. State of Missouri v. United States Bankruptcy Court, 647 F.2d at 776
("[W]e believe that the term 'police or regulatory power' refers to the
enforcement of state laws affecting health, welfare, morals, and safety, but not
regulatory laws that directly conflict with the control of the res or property by
the bankruptcy court.")

Appellant filed its contract action on April 30, 1985, but did not initiate an
administrative proceeding to revoke or suspend appellee's license until June 5,
1985

Appellant further argues that the decision we reach today will have the effect of
insulating debtors who contract with the government to provide essential
services from the government's legitimate regulatory and police power. This is
simply false. At all relevant times the Department was free to initiate
administrative proceedings to revoke or suspend appellee's license to operate
the hospital. This is the same process that the Department must employ to
regulate the operation of all hospitals in Puerto Rico, regardless of whether a
government contract is involved in their operation. We have reason to believe,
moreover, that such proceedings would constitute a legitimate exercise of the
Department's police or regulatory power and would be exempt from the
automatic stay under section 362(b)(4), (5), provided the Department was not
seeking merely to protect a pecuniary interest. Our interpretation of the
Bankruptcy Code today in no way jeopardizes the government's ability to
protect the health and safety of its citizens by invoking the legitimate regulatory
powers delegated to it by the people of Puerto Rico

Following his visit to the hospital, the bankruptcy judge noted that "the
impression we had of the facility of debtor after seeing same flatly contradicts

the impression we obtained previously from the evidence and representation of

the Department."
9

The Department of Health and Human Services reported on December 6, 1985,

that "as a result of a Federal survey of the above referenced hospital conducted
on October 21 and 22, 1985 the hospital was found in compliance with all
Medicare conditions of participation and will continue to be 'deemed' to meet
applicable Medicare requirements based upon accreditation by the Joint
Commission on Accreditation of Hospitals."

10

Appellant did not raise the issue of whether section 365 is available to debtors
seeking to assume contracts for the provision of governmental services.
Nevertheless, we feel compelled to address this novel issue because it has yet
to be treated by the reported cases. We find nothing in the Code or subsequent
case law to persuade us that debtors with government contracts should be
denied the opportunity to assume those contracts. Nor do we believe that
government agencies, after choosing to contract with private corporations,
should receive more favorable treatment than other similarly situated parties.
The "police power" exception to the automatic stay, section 362(b)(4), (5),
sufficiently protects the regulatory power of government agencies. Given these
protections, we see no reason why section 365 should not apply with full force
to permit the assumption or rejection of government contracts by debtors.
Section 365 "provides a means whereby a debtor can force others to do
business with it when the bankruptcy filing might otherwise make them
reluctant to do so." Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d
1303, 1310 (5th Cir.1985). So long as the governmental unit is free to exercise
its police or regulatory powers by other means, it should be treated in the same
manner as other "reluctant" parties doing business with the debtor.
Accordingly, we find that contracts for the provision of governmental services,
including the contract to operate the Fajardo Subregional Hospital at issue here,
may be assumed by debtors according to the terms of section 365

11

That subsection provides:

(b)(1) If there has been a default in an executory contract or unexpired lease of
the debtor, the trustee may not assume such contract or lease unless, at the time
of assumption of such contract or lease, the trustee-(A) cures, or provides adequate assurance that the trustee will promptly cure,
such default;
(B) compensates, or provides adequate assurance that the trustee will promptly
compensate, a party other than the debtor to such contract or lease, for any
actual pecuniary loss to such party resulting from such default; and

(C) provides adequate assurance of future performance under such contract or

lease.
11 U.S.C. Sec. 365(b)(1).
12

We do not find credible appellant's assertion, supported only by the Secretary's

affidavit, that the new license was issued under duress. Although the Secretary
possesses the statutory power to issue only a provisional one-year license when
an applicant fails to meet one or more of the Department's health and safety
regulations, see P.R. Laws Ann. tit. 24, Sec. 333f, here he chose to authorize
completely appellee's operation of the Fajardo Hospital for a full two-year term

13

The Department is not without remedy if Corporacion should fail to satisfy its
contractual obligations at some point in the future. As the district court order
stated:
The contract between the parties shall be respected as fully as possible within
the bankruptcy context. The bankruptcy court will have jurisdiction to entertain
any future petition by any interested party, including the Department, as it
relates to the contract in the event that the status of the debtor so warrants.
Order of April 15, 1986, at 32 (citations omitted).

14

In its order the district court enjoined the Department "from further prosecuting
this matter in any other forum not having bankruptcy jurisdiction." Our reading
of that portion of the order, and our understanding of 28 U.S.C. Sec. 157(b)(2),
lead us to conclude, contrary to appellant's assertion, that the court's injunction
applies only to the contract termination action. The automatic stay does not bar
an action to enforce an agency's police or regulatory power unless the action
has been initiated to protect a pecuniary interest. The court's order, therefore, if
interpreted to enjoin future efforts by the Department to initiate license
revocation proceedings, would likely be overbroad. We reaffirm, however, that
a bankruptcy court does possess the power, in exceptional circumstances, to
enjoin even administrative proceedings that are exempt from the automatic stay
pursuant to section 362(b)(4), (5). 11 U.S.C. Sec. 105 ("The court may issue
any order, process, or judgment that is necessary or appropriate to carry out the
provisions of this title."); House Report, supra, at 342, reprinted in 1978
U.S.Code Cong. & Admin.News 5963, 6298; Senate Report, supra, at 51,
reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5837 ("The court has
ample other powers to stay actions not covered by the automatic stay. Section
105 ... grants the power to issue orders necessary or appropriate to carry out the
provisions of title 11."); State of Missouri v. United States Bankruptcy Court,
647 F.2d at 776 (citing section 105 for the proposition that "[t]he bankruptcy
court could take appropriate steps to protect its jurisdiction over the estate,

regardless of whether a proceeding falls within the section 362(b)(4)

exception.")
15

In issuing its order temporarily enjoining the license revocation proceeding, the
bankruptcy court admitted to being influenced by the contract termination suit
pending before the Commonwealth court. Because the proceedings before the
Commonwealth court have now ended, we do not believe that the precise
actions presently challenged by appellant are likely to recur