Tuesday, March 27, 2012

3rd Circuit Decides “Police Power” Exception to
Automatic Stay Applies Only in Limited Circumstances


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The Third Circuit Court of Appeals recently handed down its decision in In re Nortel Networks, Inc., No. 11-1895, 2011 U.S. App. LEXIS 25929 (3d. Cir. Dec. 29, 2011), where it clarified the exception to the automatic stay under 11 U.S.C. § 362(d)(4), commonly known as the “police power” exception, and  cemented the fact that the automatic stay will bar a party who has submitted to the jurisdiction of a United States Bankruptcy Court from participating in an international proceeding, the outcome of which would affect a U.S. debtor, unless the “police power” exception applies.

On December 29, 2011, the United States Court of Appeals for the Third Circuit handed down its decision in In re Nortel Networks, Inc., No. 11-1895, 2011 U.S. App. LEXIS 25929 (3d. Cir. Dec. 29, 2011).  This decision cemented the fact that the automatic stay will bar a party who has submitted to the jurisdiction of a United States Bankruptcy Court from participating in an international proceeding, the outcome of which would affect a U.S. debtor, unless the exception to the automatic stay under 11 U.S.C. § 362(d)(4), commonly known as the “police power” exception, applies.  In so holding, the Third Circuit shed further light on the scope of the “police power” exception.

By way of background, this case involved U.S. debtors with international entities, and a bankruptcy or similar proceeding was initiated in the U.K. and Canada.  Under U.K. law, if an entity is found to have an underfunded pension plan, affiliates of that entity may be liable for any deficit.  In order to determine what the liability of the affiliates is, the U.K. pension regulator (the “Regulator”) will initiate a proceeding.  As a result of the proceeding to determine liability that was commenced in this case (the “U.K. Proceeding”), the Trustee (the “Trustee”) of the Nortel Networks U.K. Limited (“NNUK”) Pension Plan and the U.K. Board of the Pension Protection Fund (“PPF”) filed contingent and unliquidated joint proofs of claim against the U.S. debtor in the United States Bankruptcy Court for the District of Delaware on account of the potential liability under the NNUK Pension Plan. 

Subsequent thereto, the U.S. debtors filed a motion to enforce the automatic stay and prevent PPF and the Trustee from participating in the U.K. Proceeding to the extent that the U.S. debtors were affected.  The Bankruptcy Court for the District of Delaware granted the U.S. debtors’ motion and found that the police power exception of the automatic stay did not apply.  The District Court for the District of Delaware affirmed.

In its opinion, the Third Circuit analyzed the “police power” exception to the automatic stay and found it inapplicable because neither the Trustee nor PPF was a governmental unit as defined in the Bankruptcy Code.  The Third Circuit also agreed with the Bankruptcy Court that under the pecuniary purpose test and the public policy test, the police power exception could not apply in any event to the U.K. Proceeding because the U.K. Proceeding related to the government’s pecuniary interest in the debtors’ property and/or was primarily to adjudicate private rights.  It did not relate to issues of public policy or safety.   Interestingly, the Third Circuit included an “Additional Comments” section to its opinion, in which it noted that there are real people being affected by the decisions being made in the courtroom – namely, the pensioners – and that the parties would benefit from working to resolve the disputes efficiently.

In sum, the Third Circuit’s decision in Nortel solidified that once a party submits to the jurisdiction of the United States Bankruptcy Courts, the automatic stay will apply to those parties, regardless of whether relevant proceedings are being conducted outside of the United States, and that the “police power” exception to the automatic stay will only apply in limited circumstances, where it is clear that the party at issue is a governmental unit, seeking to deal with issues of public policy and/or public safety and health. 

1 comment:

  1. This is a pressing matter even for most estate planning toronto lawyers as this brings about an issue that not a lot of people are aware of. I hope this gets sorted out real soon.

    ReplyDelete