Third Circuit Upholds Narrow Reading of Police Power Exception to Automatic Stay

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Adrienne Woods | Bloomberg Law Nortel Networks, Inc., et al. v. Trustee of Nortel Networks UK Pension Plan; Board of the Pension Protection Fund, No. 11-1895, 2011 BL 328797 (3d Cir. Dec. 29, 2011) 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. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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