Third Circuit Upholds Narrow Reading of Police Power Exception to Automatic Stay
Adrienne Woods | Bloomberg Law
The United States Court of Appeals for the Third Circuit upheld a district court’s denial of the appeals of the Trustee of Nortel Networks U.K. Pension Plan (the “Trustee”) and the U.K. Board of the Pension Protection Fund (“PPF”) from the bankruptcy courts’ ruling that the police power exception to the automatic stay does not apply to their participation in the U.K. pension proceedings (the “U.K. Proceedings”) initiated by the U.K. Pensions Regulator (“TPR”).
The Multi-Jurisdictional Nortel Group Bankruptcies
In 2009, due to rising pension obligations and a general downturn in the global economy, the Nortel Group (comprised of multiple affiliates, together and individually, “Nortel”), a worldwide provider of telecommunications and computer networking solutions, filed creditor protection proceedings in various jurisdictions including a chapter 11 bankruptcy petition in the United States District Court for the District of Delaware and insolvency proceedings in Canada. Additionally, the High Court of Justice in England placed Nortel into administration. The United States Bankruptcy Court recognized the foreign proceedings as “foreign main” proceedings under chapter 15 of the Bankruptcy Code, triggering the automatic stay.
Nortel eventually entered into a bankruptcy court approved agreement stating that its worldwide assets would be sold and the proceeds held in escrow pending a determination as to how they should be distributed. Thereafter, the Trustee and PPF filed a joint contingent claim against the U.S. Nortel entities alleging that they may be required to provide financial support for an underfunded U.K. pension fund depending on the outcome of the U.K. Proceedings designed to determine such liability. The bankruptcy court granted Debtors’ motion for entry of an order enforcing the automatic stay, seeking to prevent the Trustee and PPF from participating in the U.K. Proceedings with respect to the U.S. Debtors’ contingent liability under the pension plan. In response, the Trustee and PPF asserted that they were entitled to participate in the U.K. Proceedings pursuant to the Police Power exception to the automatic stay. The bankruptcy court concluded that the police power exception to the automatic stay did not apply because (i) neither the Trustee nor PPF qualified as a governmental unit under11 U.S.C. § 101(27); and (ii) the U.K. Proceedings sought to procure a pecuniary benefit for the Trustee – a private party. On appeal, the District Court upheld the bankruptcy court’s opinion.
Police Power Exception Inapplicable to Non-Governmental Units
Beginning its analysis on appeal, the Third Circuit determined that neither the Trustee nor PPF qualified as a governmental unit in the U.K. proceedings. Agreeing with the bankruptcy court’s recommendation, the Third Circuit held that the Trustee’s responsibility to administer the pension plan for the benefit of its participants was that of a private party. Likewise, the Third Circuit found that PPF, although a government-created entity, was a private party since its relationship to the U.K. Pension act was not “active” during the assessment period. The Third Circuit acknowledged that TPR’s status as a governmental unit, but noted that TPR was not a party to the bankruptcy and did not file a claim, and as such could not assert the police power exception.
The Third Circuit also found that the police power exception did not apply because the entities attempting to assert the claim were (i) seeking to protect a pecuniary interest of the government rather than taking an action to protect public health and safety (the “Pecuniary Purpose Test”); and (ii) attempting to adjudicate private rights rather than public policy (the “Public Policy Test”). Noting that the purpose of the Pecuniary Purpose and Public Policy Tests is to eliminate from the police power exception those instances in which the government is attempting to obtain private or pecuniary advantage over a debtor, the Third Circuit observed that the police power exception is generally applied in proceedings related to environmental hazards, health and safety violations and employment discrimination.
Observing the international nature of the quasi-governmental agents seeking to exercise the police power exception to the automatic stay, the Third Circuit cautioned against a broad reading of the exception in such an international context, highlighting that the bankruptcy court’s ability to enjoin proceedings under11 U.S.C. § 105 – necessary to effectuate federal bankruptcy policy – is limited in the case of foreign proceedings.
Third Circuit Upholds Denial of Police Power Exception
In sum, the Third Circuit affirmed the district court’s order finding that the police power exception to the automatic stay did not apply to either PPF or the Trustee.
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