In Re Nortel Networks, Inc.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________
No. 11-1895
_________
IN RE: NORTEL NETWORKS, INC., ET AL.,
Debtors
TRUSTEE OF NORTEL NETWORKS
UK PENSION PLAN;
BOARD OF THE PENSION PROTECTION FUND,
Appellants
________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1-10-cv-00230)
District Judge: Honorable Leonard P. Stark
_______
Argued September 13, 2011
Before: SLOVITER, SCIRICA, and SMITH, Circuit Judges
(Filed: December 29, 2011)
______
Marc Abrams
Brian E. O‘Connor (Argued)
Willkie, Farr & Gallagher
New York, NY 10019
Justin R. Alberto
Charlene D. Davis
The Bayard Firm
Wilmington, DE 19899
Attorneys for Appellants
Derek C. Abbott
Ann C. Cordo
Morris, Nichols, Arsht & Tunnell
Wilmington, DE 19899
James L. Bromley
Deborah M. Buell (Argued)
Neil P. Forrest
Cleary, Gottlieb, Steen & Hamilton
New York, NY 10006
Attorneys for Debtors – Appellee Nortel Networks
David H. Botter
Fred S. Hodara
Akin, Gump, Strauss, Hauer & Feld
New York, NY 10036
L. Rachel Lerman
Akin, Gump, Strauss, Hauer & Feld
Los Angeles, CA 90067
Patricia A. Millett (Argued)
Akin, Gump, Strauss, Hauer & Feld
Washington, DC 20036
Mark D. Collins
Christoper M. Samis
Richards, Layton & Finger
Wilmington, DE 19899
Attorneys for Appellee Official Comm.
Of Unsecured Creditors
2
_____________
OPINION OF THE COURT
_____________
SLOVITER, Circuit Judge.
The bankruptcy proceeding that is the subject of this
appeal is one of three matters pending in three jurisdictions.
We are advised by the parties that the amount ultimately at
issue is between 8 or 9 billion dollars. The specific issue
before us is the interpretation of the police power exception to
the automatic stay contained in 11 U.S.C. § 362(b)(4). The
Bankruptcy Court, affirmed by the District Court, held that
the automatic stay applies to appellants who have interposed
various arguments in their effort to overturn that holding.
Those efforts are unsuccessful and we will affirm.
The Trustee of Nortel Networks U.K. Pension Plan
(―Trustee‖) and the U.K. Board of the Pension Protection
Fund (―PPF‖) (collectively ―Appellants‖) appeal from the
District Court order affirming the decision of the Bankruptcy
Court to enforce the automatic stay against Appellants with
respect to their participation in U.K. pension proceedings.
Appellants argue that the U.K. pension proceedings, which
were initiated by the U.K. Pensions Regulator (―TPR‖ or ―the
Regulator‖),1 fall within the police power exception to the
automatic stay, 11 U.S.C. § 362(b)(4), which allows ―a
governmental unit‖ to bring or continue actions against a
debtor to prevent or stop violations of law affecting matters of
public health, safety, or welfare. The Debtors, including
1
The U.K. Pensions Regulator is ―a regulatory entity
created by the U.K. Pensions Act 2004 to protect the benefits
of members of work-based pension schemes.‖ In re Sea
Containers, Ltd., No. 06-11156 (KJC), 2008 WL 4296562, at
*2 (Bankr. D. Del. Sept. 19, 2008); see also U.K. Pensions
Act, 2004, c. 35, § 1.
3
U.S.-based Nortel Networks, Inc. (―NNI‖) and NN Caribbean
and Latin American (―NN CALA‖), together with the
Committee of Unsecured Creditors of NNI (―Committee‖)
(collectively ―Appellees‖) argue that the police power
exception does not apply because the Trustee and PPF are
private parties and not ―governmental units‖ as defined in the
Bankruptcy Code, and the purpose of the U.K. proceedings is
to address private pecuniary interests rather than a matter of
public concern. This appeal requires us to decide whether
the police power exception under § 362(b)(4) applies to
Appellants‘ participation in the U.K. proceedings.
I.
Background
The Nortel Group (―Nortel Group‖ or ―Nortel‖),
founded in 1895 as Bell Telephone Company of Canada, was
a global supplier of telecommunications and computer
networking solutions. Nortel‘s global revenue for the 2007
calendar year was approximately $11 billion, of which 25%
was generated by the Europe, Middle East and Africa
(―EMEA‖) region. As of 2009, the Nortel Group employed
approximately 24,000 people worldwide. However, due to
changes in the industry, Nortel‘s rising pension obligations,
and the general downturn in the global economy, Nortel
―faced a deterioration of cash and liquidity‖ and ―concluded
that a comprehensive financial and business restructuring
could be most effectively and quickly achieved within the
framework of creditor protection proceedings in multiple
jurisdictions.‖ J.A. at 329.
In early 2009, the Debtors filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code in the United
States District Court for the District of Delaware and the
Committee of Unsecured Creditors was then formed.
Concurrently, Nortel Networks Corporation (―NNC‖)—
Nortel Group‘s ultimate holding company listed on the
Toronto Stock Exchange—and other Canadian affiliates
entered insolvency proceedings in Canada. In addition, the
4
High Court of Justice in England placed Nortel Networks
U.K. Limited (―NNUK‖) and other European Nortel entities
into administration.2 The Bankruptcy Court recognized the
Canadian and U.K. proceedings as ―foreign main‖
proceedings under Chapter 15 of the Bankruptcy Code, which
triggered the automatic stay of 11 U.S.C. § 362(a). 11 U.S.C.
§§ 1502(4), 1517(b)(1), 1520(a)(1).
Later, in June 2009, Nortel entities from the United
States, Canada and the EMEA region entered into the Interim
Funding and Settlement Agreement (―IFSA‖), which was
approved by the Bankruptcy Court. The IFSA provides for
the parties‘ cooperation in the global sales of Nortel‘s
business units and agreement that the proceeds of any sale
will be held in escrow until the parties either reach a
consensual allocation or obtain a binding procedure for the
allocation pursuant to an agreed upon protocol.
In an opinion entered February 17, 2011, the Canadian
trial court noted that ―Nortel has sold substantially all of its
operating businesses in the course of insolvency proceedings
in Canada, England and the United States,‖ and ―[t]he
proceeds are being held in escrow pending determination of
how they are to be allocated among the various Nortel
Companies.‖ In re Nortel Networks Corp., 2011 CarswellOnt
1074, ¶ (Can. Ont. Sup. Ct. J.) (WL). At oral argument
before us, the parties explained that the proceeds, which total
upwards of $8 billion, are being held in escrow in New York
subject to the jurisdiction of the courts in Canada and the
United States.
In September 2009, the Trustee and PPF timely filed
joint claims against the U.S. Nortel entities in the Bankruptcy
2
Under U.K. law, the court appoints a person (―the
administrator‖) to manage ―the affairs, business and property
of the company‖ during the period that the company is in
administration. One of the purposes of an administration
order may be ―the survival of the company . . . as a going
concern[.]‖ Insolvency Act, 1986, c. 45, § 8(2)-(3) (U.K.).
5
Court. Those claims allege that the NNUK pension plan is
underfunded by an estimated $3.1 billion (or £2.1 billion),
and that TPR may seek to require certain of the U.S. Debtors,
including NNI and NN CALA, to provide financial support
for the NNUK plan under the U.K. Pensions Act 2004.
Appellants‘ claims in the U.S. bankruptcy proceedings were
filed as contingent and unliquidated because they are
predicated on the outcome of the U.K. proceedings. As
counsel for the U.S. Debtors stated, Appellants‘ claims are
―among the largest, if not the largest, claims filed in [the U.S.
bankruptcy proceedings].‖ J.A. at 615-16.
The U.K. regulatory proceedings are to determine the
extent of the liability of NNUK affiliates for the deficit
because NNUK‘s pension plan is a defined benefit pension
scheme established under and governed by U.K. law. As
explained by the U.S. Debtor‘s expert Richard Hitchcock, in
defined benefit plans, ―it is not until a member comes to retire
that the true extent of his or her pension entitlement [based in
this case on final salary] can be known[. Thus,] funding on
an ongoing basis is always a matter of estimation.‖ J.A. at
71. In February 2010, NNUK‘s plan had over 40,000
members including those not yet in retirement.
With respect to Appellants‘ roles in the U.K.
proceedings under U.K. law, the PPF is a government-created
but privately funded entity that provides payments to
members of defined benefit pension plans whose employers
cannot fully fund their pension obligations. In other words,
the PPF acts as a ―safety net.‖ J.A. at 72-73, 400.
Appellants‘ expert Richard Favier stated that after
receiving notice that NNUK was placed into administration,
PPF entered an ―assessment period‖ during which PPF
―assess[es] whether it is required under the relevant statutory
provisions to take responsibility to pay members‘ benefits,‖
and ―tr[ies] to ensure that the scheme recovers all debts due to
it.‖ J.A. at 402. The U.S. Debtor‘s expert Hitchcock
explained that the Trustee is a private party responsible for
administering the plan and ensuring that members receive
6
their benefits. It ―retain[s] responsibility for paying benefits,
during the assessment period.‖ J.A. at 73. However, its
―rights and powers . . . in relation to any debt . . . due to [it]
by the employer. . . are exercisable by the Board [of the PPF]
to the exclusion of the trustees or managers.‖ U.K. Pensions
Act, 2004, c. 35, § 137(2). PPF is still in an assessment
period with respect to NNUK‘s plan and has not yet stepped
in to pay benefits to NNUK plan members.
TPR was established under the U.K. Pensions Act
2004 as the U.K. governmental agency charged with
regulating occupational pension schemes in the U.K., such as
NNUK‘s plan. The objectives of TPR as originally stated
under the Act are: ―(a) to protect the benefits under
occupational pension schemes of, or in respect of, members
of such schemes, (b) to protect the benefits under personal
pension schemes of, or in respect of, members of such
schemes . . ., (c) to reduce the risk of situations arising which
may lead to compensation being payable from the Pension
Protection Fund . . ., and (d) to promote, and to improve
understanding of, the good administration of work-based
pension schemes.‖3 U.K. Pensions Act, 2004, c. 35, § 5(1).
TPR is not a party to the instant lawsuit and has not sought to
intervene.4
The UK Pensions Act provides that to meet its
objectives, TPR ―may determine whether or not to take
regulatory action, which includes, inter alia, determining
whether the applicable pension is underfunded, quantifying
the deficit and holding the employer or a related party
responsible for such deficit.‖ In re Nortel Networks Corp.,
3
The U.K. Pensions Act of 2008 added to TPR‘s stated
objectives by inserting ―(ca) to maximise compliance with the
duties under Chapter 1 of Part 1 (and the safeguards in
sections 50 and 54) of the Pensions Act 2008….‖ U.K.
Pensions Act, 2008, c. 30, § 65.
4
TPR is a party to the proceedings in Canada.
7
2010 CarswellOnt 1597, ¶ 7 (Can. Ont. Sup. Ct. J.) (WL)
(citing U.K. Pensions Act, 2004, c. 35, § 96). The
Determinations Panel (―DP‖) is an internal group of TPR that
―determines whether the regulatory functions should be
exercised.‖ Id. In this case, TPR concluded that NNUK was
―insufficiently resourced‖ on June 30, 2008.5 Thus, grounds
existed for TPR to institute administrative proceedings under
the U.K. Pensions Act 2004 to recover the underfunding from
NNUK and its affiliates.
Thereafter, in August and September 2009, TPR
advised NNUK and other Nortel entities that it was
considering issuing a warning notice, which is a mandatory
step towards issuing a Financial Support Direction (―FSD‖).
A warning notice sets out the grounds for the potential
issuance of an FSD, which is a direction requiring the target
entity to put financial support in place for an underfunded
pension scheme. See U.K. Pensions Act, 2004, c. 35, §
43(3). Any company that is an associate of or is otherwise
connected with a U.K. pension fund employer may be issued
an FSD. See U.K. Pensions Act, 2004, c. 35, § 43(6).
In January 2010, TPR issued a warning notice to NNC,
NNI, NN CALA, and twenty-six other companies in the
Nortel Group. The notice informed the target companies that
they had until March 1, 2010 to make submissions to TPR
under the U.K. Pensions Act. Under the U.K. Pensions Act,
the decision to issue an FSD must occur within two years
after the ―relevant time‖ commences. In this case, TPR has
determined that the time commenced when it determined that
the fund was insufficiently resourced on June 30, 2008, such
that the decision to issue an FSD had to be made by June 30,
2010.
On February 18, 2010, the U.S. Debtors filed a Motion
for Entry of an Order Enforcing the Automatic Stay Against
5
The U.S. Debtors did not file their Chapter 11 petition
until January 14, 2009. (Bankr. Ct. Dist. Del., Case No. 09-
10138-KG, ECF No. 1).
8
Certain Claimants With Respect to the U.K. Pension
Proceedings pursuant to 11 U.S.C. § 362(a)(1) and (a)(6).
Essentially, the Debtors asked the Bankruptcy Court to
enforce the automatic stay to prevent Appellants from
participating in the U.K. proceedings with respect to U.S.
Debtors‘ liability for NNUK‘s plan deficit.
On February 26, 2010, the Bankruptcy Court
conducted an evidentiary hearing on the motion, at which the
parties presented testimony from expert witnesses and made
arguments. The Debtors submitted the expert testimony of
Richard Hitchcock, an English pension lawyer describing the
relevant statutory regime, the powers of TPR, and who
benefits from TPR‘s exercise of its power, as well as John
Ray, the Principal Officer to Debtors appointed by the
Bankruptcy Court, opining that enforcement of the stay is
needed because the allocation issue to be determined in the
U.K. proceedings overlaps with the issue before the
Bankruptcy Court. Appellants submitted expert testimony of
David Wyndham Davies, Chairman of the Board of NNUK
Pension Trust, opining that the Determinations Panel is the
best forum for resolving U.K. regulatory procedure, Richard
Favier, Senior Insolvency Advisor to PPF, describing the role
of PPF and importance of Appellants‘ participation in the
U.K. proceedings, and Robert Wallace Ham, an English
pension lawyer, explaining the law and practice related to
FSDs.
After the hearing, the Bankruptcy Court issued an
Order Enforcing the Automatic Stay Against Certain
Claimants with Respect to the U.K. Pensions Proceedings
prohibiting Appellants from participating in the U.K.
proceedings as to U.S. Debtors NNI and NN CALA. The
automatic stay order provides: ―The automatic stay imposed
by Section 362 . . . is hereby enforced as to the . . . Trustee
and the PPF and is fully applicable to the U.K. Pension
Proceedings with respect to the Debtors . . . and with respect
to the Debtors such Proceedings are deemed void and of no
force or effect; to the extent that either . . . the . . . Trustee or
the PPF participate in the U.K. Pension Proceedings as to any
Debtors, such participation will be in violation of the
9
automatic stay and subject . . . to sanctions under Section
362.‖ J.A. at 30.
On March 9, 2010, the Bankruptcy Court issued a
written memorandum opinion setting forth its reasoning for
the stay order. See In re Nortel Networks Corp., 426 B.R. 84(Bankr. D. Del. 2010). The Court concluded that the police
power exception to the automatic stay does not apply because
(1) neither the Trustee nor PPF is a ―governmental unit‖ as
defined in 11 U.S.C. § 101(27); and (2) narrowly construing
the police power exception, the U.K. proceedings do not pass
the public policy or pecuniary purpose tests because ―the
focus of the U.K. Proceedings is to procure a pecuniary
benefit[ ] for a private party — the Trustee. . . . [U]nder the
U.K. Pensions Act . . . if necessary, the TPR will attempt to
impose and liquidate an enforceable debt, to be enforced by
or on behalf of the Trustee, for an amount to be paid to the
Trustee.‖ J.A. at 48. Having decided the issue before it, the
Court then opined on prejudice: ―The question of whether
and to what extent affiliates of NNUK should be responsible
for NNUK‘s obligations is part and parcel of the entire cross-
affiliate benefit and contribution issue and the allocation
process. . . . [T]hese issues . . . should not be decided, even in
part, by an administrative body [referring to TPR] in a single
jurisdiction with a single constituency.‖ J.A. at 52.
Similar to the U.S. Debtors, the court-appointed
monitor for the Canadian debtors filed a motion in Canada
seeking a stay of the U.K. proceedings. On the same day the
Bankruptcy Court issued its stay order in the instant case, the
Ontario Superior Court of Justice granted the monitor‘s
motion and held that ―for the purposes of the [Canadian
insolvency] proceedings, the actions taken by The [U.K.]
Pensions Regulator, are null and void in Canada and are to be
given no force or effect.‖ J.A. at 780; see also In re Nortel
Networks Corp., 2010 CarswellOnt 1597, ¶ 1(d) (Can. Ont.
Sup. Ct. J.) (WL). TPR appeared in the Canadian
proceedings and pursued relief from the stay, but it has not
participated in the U.S. proceedings.
10
The Court of Appeal for Ontario dismissed TPR‘s
appeal of the stay order on the merits and held that ―the
service of the Warning Notice [by TPR] breached the stay
provisions in the [Superior Court‘s] Initial Order. The service
of the Notice is, therefore, a nullity for purposes of the
[Canadian insolvency] proceedings.‖ In re Nortel Networks
Corp., 2010 CarswellOnt 4112, ¶ 1(Can. Ont. C.A.) (per
curiam) (WL). The Supreme Court of Canada summarily
denied appeal. See U.K. Pensions Regulator v. Nortel
Networks Corp. et al., 2011 CarswellOnt 303 (S.C.C.) (per
curiam) (WL). Appellants, who are also parties to the
litigation in Canada, subsequently moved to lift the stay in
Canada to permit them to participate in the U.K. proceedings
with respect to the Canadian debtors. At oral argument
before this court, the parties stated that Justice Winkler (the
Ontario Chief Justice) will oversee mediation proceedings
beginning in November, which will focus on the allocation of
Nortel‘s assets. We consider that statement and forthcoming
proceeding of extreme significance.
While the appeal of the Bankruptcy Court‘s stay order
was pending before the District Court, the Determinations
Panel held a hearing in the U.K. to decide whether to issue an
FSD. NNI and NN CALA forfeited their statutory rights to
participate and instead complied with the stay order.
According to TPR, the Trustee participated in the proceedings
by providing witness statements, expert reports and
documentary evidence, but only with respect to TPR‘s request
for an FSD against Nortel entities that are not subject to the
stay order. See Reasons of the Determinations Panel of the
Pensions Regulator, Case Ref. TM6409, ¶¶ 6, 14 (Jun. 25,
2010), available at
www.thepensionsregulator.gov.uk/docs/DN1709618.pdf
[hereinafter cited as ―Reasons of the Determinations Panel‖].
On June 25, 2010, TPR issued a determination notice
directing that FSDs be issued against twenty-five Nortel
entities after periods for appeal lapsed. See Determinations
Panel, Determination Notice, Case Ref. TM6409 (Jun. 25,
2010), available at
11
http://www.thepensionsregulator.gov.uk/docs/DN1694856.pd
f. In its separately filed statement of reasons, the DP stated
that even though the Canadian and American Nortel entities
did not participate, ―much of the evidence and representations
which have been submitted to [TPR] are based on the
Group‘s own documentation in submissions to the regulatory
or tax authorities or on documentation submitted by
representatives for the individual companies to the UK or
North American courts in insolvency proceedings.‖ Reasons
of the Determinations Panel at ¶ 19. The Determinations
Panel concluded that it was reasonable to issue FSDs against
NNUK‘s affiliates because the Nortel Group operated as a
―single global entity,‖ and the U.S. entities ―benefited
indirectly . . . as a result of [the] failure adequately to repair
the Scheme‘s deficit.‖ Id. at ¶¶ 91, 108.
After briefing in the U.S. District Court, the Magistrate
Judge issued a report and recommendation (―R&R‖),
recommending that the automatic stay order be affirmed in all
respects because ―(1) the police power exception is to be
narrowly construed; (2) the [U.K.] Proceedings do not pass
the pecuniary purpose or public policy test which would
exempt them from the stay; and (3) the Bankruptcy Court did
not impermissibly base its decision on the issue of prejudice.‖
J.A. at 18. Appellants filed objections, arguing that the
Magistrate Judge erroneously applied an abuse of discretion
standard of review, read the statute too narrowly, incorrectly
determined the exception did not apply, and incorrectly
concluded that the Bankruptcy Court did not err by discussing
prejudice.
On March 29, 2011, the District Court issued an order
adopting the R&R and affirming the Bankruptcy Court‘s
automatic stay order. The Court stated: ―Reviewing the
R&R, de novo, with respect to the objections lodged, the
Court concludes that [the Magistrate] Judge . . . did not err in
her conclusions with respect to the Bankruptcy Court‘s
findings of fact and its legal determinations.‖ J.A. at 8-9.
12
The Trustee and PPF timely appealed. Appellants
filed a motion to expedite their appeal, and this court granted
the motion in a summary order.
On April 1, 2011, the DP issued FSDs against several
Nortel entities including NNI and NN CALA. Thus, under
U.K. law, the Nortel entities had six months—until October 1,
2011—to secure financial support for NNUK‘s plan. That
time has passed and, inasmuch as it appears the Nortel entities
failed to appear and to secure financial support for NNUK‘s
plan, the DP has the authority to issue a Contribution Notice
(―CN‖) against them. A CN ―state[es] that the [entity] is
under a liability to pay to the trustees . . . the sum specified in
the notice,‖ which can be either all or some of the plan
deficit. J.A. at 99, 101. Under U.K. law, ―[t]he sum specified
in the [contribution] notice is to be treated as a debt due from
the [entity] to the trustees or managers of the scheme.‖ U.K.
Pensions Act, 2004, c. 35, § 49(3). That law provides that the
DP should issue such a notice only if it is reasonable to do so
and upon consideration of several criteria set forth in the
Pensions Act, which are similar to those considered in
connection with issuance of an FSD. Despite this similarity,
the Appellees emphasize that a CN cannot be issued until the
TPR determines the financial situation of the relevant entities.
See U.K. Pensions Act, 2008, c. 35, § 38(7).
Appellants nevertheless insist that they are not
attempting to enforce collection of debt outside of the U.S.
bankruptcy proceedings. Instead, they assert that the FSD
process will help quantify the liability of NNUK affiliates
under the U.K. Pensions Act for the benefit of the Bankruptcy
Court. Indeed, after receiving word of the U.S. Debtors‘
motion to enforce the automatic stay, TPR wrote a letter to
the Debtors‘ U.K. counsel stating: ―It is crucial to note that an
FSD is not a claim against assets of a party, and the
Regulator6 is not engaged in a process of enforcement or of
seeking priority for claims lodged in the Chapter 11
proceedings. An FSD may result in the agreement of a party
6
See supra note 1.
13
to offer financial support, or the issue by the DP of a
contribution notice . . . which is treated as a debt due . . . .‖
J.A. at 394. The letter continued: ―It is not a process that
targets assets but will allow the debt due to the Trustees of the
NNUK pension scheme from parties such as the Debtors to be
ascertained and quantified.‖ J.A. at 396 (emphasis in
original).
Appellees counter that they believe Appellants will use
the FSD and CN to their advantage and seize assets, which
will put Appellants in a better position than other creditors.
As the Bankruptcy Court stated, ―[w]hat we have here are
creditors who have filed claims in this Court and who are
seeking to litigate those claims clear of the Court‘s
jurisdiction and the automatic stay. Their effort to do so is
inimical to the Debtors‘ effort and those of non-U.S. debtors
in a highly complex liquidation to assemble the assets, reduce
them to money, allocate those assets among numerous entities
in many countries and then distribute the assets.‖ J.A. at 46-
47. Appellees also point out that the Bankruptcy Court is
capable of quantifying the liability under U.K. law, as
required, within the context of the allocation proceedings. As
such, Appellees object not only to the collection of assets in
the U.K. outside of the allocation process but also the
assessment and quantification of the liability in the U.K. even
if only used as a guide for the Bankruptcy Court.7
II.
7
The Canadian court noted that the majority of Nortel‘s
creditors are individual unsecured creditors, such as
employees and former employees with claims for pension and
medical benefits. ―For many of these individuals, the delay in
receiving a meaningful distribution can be significant . . . .
For this group of creditors, time is not on their side. . . .
[Whereas,] the timing of a receipt of a distribution may be
less critical for a financial player . . . .‖ See In re Nortel
Networks Corp., 2011 CarswellOnt 5740, ¶¶ 12, 14 (Can.
Ont. Sup. Ct. J.) (WL).
14
Standard of Review
This court has jurisdiction under 28 U.S.C. §
158(d)(1). We exercise plenary review of an order from a
district court sitting as an appellate court in review of a
bankruptcy court and we will review both courts‘ legal
conclusions de novo.8 We review a bankruptcy court‘s
factual findings for clear error. We engage in a mixed
standard of review for mixed questions of law and fact, and
apply a clearly erroneous standard to ―integral facts,‖ but
exercise plenary review of the court‘s interpretation and
application of those facts to legal precepts. In re Exide
Techs., 607 F.3d 957, 961-62 (3d Cir. 2010).
―This issue requires us to interpret and apply the legal
precepts underlying section 362. Accordingly, the standard
of review is plenary.‖ Mar. Elec. Co. v. United Jersey Bank,
959 F.2d 1194, 1203 (3d Cir. 1991) (citation omitted). To the
extent that we consider the decisions of the bankruptcy court
and district court regarding comity, we review for abuse of
discretion. Remington Rand Corp.-Del. v. Bus. Sys., Inc., 830
F.2d 1260, 1266 (3d Cir. 1987).
III.
8
―Because the District Court sat below as an appellate
court, this Court conducts the same review of the Bankruptcy
Court‘s order as did the District Court.‖ In re Telegroup,
Inc., 281 F.3d 133, 136 (3d Cir. 2002) (citation omitted).
Accordingly, even if we were to accept Appellants‘ argument
that the Magistrate Judge and District Court ―gave
unwarranted deference to the Bankruptcy Court‘s erroneous
conclusions of law,‖ see Appellants‘ Br. at 52, the result of
this appeal would be the same. Similarly, we need not
evaluate Appellants‘ argument that the Bankruptcy Court
improperly considered prejudice when deciding whether the
U.K. proceedings fit within the police power exception
because we have exercised plenary review over this legal
issue and accordingly have not considered prejudice.
15
Analysis
When a debtor files for bankruptcy, Section 362(a) of
the Bankruptcy Code imposes a broad automatic stay. That
stay prohibits ―all entities‖ from, inter alia, ―the
commencement or continuation . . . of a judicial,
administrative, or other action or proceeding against the
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.‖ 11 U.S.C. § 362(a)(1), (6). The
automatic stay provides one of the fundamental protections
for debtors found in the Bankruptcy Code. See, e.g.,
Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S.
494, 503 (1986).
Congress, however, has created certain statutory
exceptions that prevent the operation of the automatic stay.
The police power exception at issue in this case allows for
―the commencement or continuation of an action or
proceeding by a governmental unit or any organization
exercising authority . . . to enforce such governmental unit‘s
or organization‘s police and regulatory power, including the
enforcement of a judgment other than a money judgment,
obtained in an action or proceeding by the governmental unit
to enforce such governmental unit‘s or organization‘s police
or regulatory power.‖ 11 U.S.C. § 362(b)(4). ―This
exception discourages debtors from submitting bankruptcy
petitions either primarily or solely for the purpose of evading
impending governmental efforts to invoke the governmental
police powers to enjoin or deter ongoing debtor conduct
which would seriously threaten the public safety and welfare
(e.g., environmental and/or consumer protection
regulations).‖ In re McMullen, 386 F.3d 320, 324-25 (1st Cir.
2004) (citing In re First Alliance Mortg. Co., 263 B.R. 99,
107 (B.A.P. 9th Cir. 2001) (noting that fundamental policy of
§ 362(b)(4) is to ―prevent[ ] the bankruptcy court from
becoming a haven for wrongdoers‖) (internal quotation marks
and citation omitted)); see also United States v. Nicolet, Inc.,
16
857 F.2d 202, 207 (3d Cir. 1988) (―To combat the risk that
the bankruptcy court would become a sanctuary for
environmental wrongdoers, among others, Congress enacted
the police and regulatory power exception to the automatic
stay.‖).
The parties do not challenge the extraterritorial
application of the automatic stay to the U.K. proceedings.9
See David P. Stromes, Note, The Extraterritorial Reach of the
Bankruptcy Code’s Automatic Stay: Theory vs. Practice, 33
BROOK J. INT‘L. L. 277, 281 (2007) (―Since 1987, United
States courts have uniformly upheld the extraterritorial
application of the automatic stay.‖). In the absence of an
exception, the plain language of the automatic stay covers
Appellants‘ participation in the U.K. proceedings because the
U.K. proceedings are an attempt to ―assess‖ a claim against
the Debtors that arose pre-petition.10
The exception on which Appellants rely for their
contention that the automatic stay does not preclude their
participation in the U.K. proceedings is the police power
exception as set forth in § 362(b)(4). Application of that
exception requires us to determine in the first instance
whether the U.K. proceeding is a ―proceeding by a
governmental unit‖ and, necessarily, which entity, if any, is
the relevant ―governmental unit.‖ 11 U.S.C. § 362(b)(4).
A. Governmental Unit
The police power exception to the automatic stay
applies to ―the commencement or continuation of an action or
9
Appellants‘ Br. 23 n.14; Debtors‘ Br. 24 n.17.
10
Appellants insist that they are not seeking to ―recover‖
anything in the U.K. proceedings. As they state in their
Reply Brief, ―each of the Trustee and PPF has expressly
represented to the Bankruptcy Court that it will make no
effort to enforce that debt outside the Bankruptcy Court‘s
claims allowance process.‖ Reply Br. at 24.
17
proceeding‖ taken by a ―governmental unit . . . to enforce
such governmental unit‘s . . . police and regulatory power.‖
11 U.S.C. § 362(b)(4). We must first determine which entity
is the relevant governmental unit in the U.K proceedings.
As we set forth at the outset, the two Appellants are
the Trustee and PPF. The Bankruptcy Court held that neither
Appellant is a governmental unit as defined under the Code.
Under the Bankruptcy Code, ―[t]he 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). The legislative history of
§ 101(27) instructs that ―‗[d]epartment, agency, or
instrumentality‘ does not include entities that owe their
existence to state action such as the granting of a charter or a
license but that have no other connection with a State or local
government or the Federal Government. The relationship
must be an active one in which the department, agency, or
instrumentality is actually carrying out some governmental
function.‖ In re Wade, 948 F.2d 1122, 1123 (9th Cir. 1991)
(quoting H.R. Rep. No. 95-595 (1977)).
We see no basis to disagree with the Bankruptcy
Court‘s conclusion that neither the Trustee nor PPF is a
―governmental unit‖ within the scope of the police power
exception. Under U.K. law, the Trustee is a private party
responsible for administering the plan and ensuring that
members receive their benefits; the PPF is a government-
created but privately funded entity that acts as a ―safety net‖
by providing payments to members of defined benefit pension
plans whose employers cannot fully fund their pension
obligations. J.A. at 72-73, 400. Even though PPF ―owe[s] its
existence‖ to the U.K. Pensions Act, the relationship is not
―active‖ during the assessment period because PPF is
standing in the shoes of a private party. Accordingly, neither
the Trustee nor PPF is a governmental unit during the
18
assessment period for the purposes of the police power
exception.
The Bankruptcy Court proceeded to analyze the
applicability of the police power exception using TPR as the
relevant governmental unit. In the only case cited by the
parties that addressed whether the U.K. regulatory procedure
initiated by TPR violates the automatic stay, a bankruptcy
court in Delaware also concluded that TPR was the relevant
governmental unit. See In re Sea Containers Ltd., No. 06-
11156, 2008 WL 4296562, at *9 (Bankr. D. Del. Sept. 19,
2008) (approving a Settlement Agreement).
It is TPR that has been fulfilling its statutory objectives
―to protect the benefits of members of occupational pension
schemes‖ and ―to reduce the risk of situations arising
whereby compensation would become payable by the PPF‖
by initiating the U.K. proceedings, which only TPR had the
authority to do. See Reasons of the Determinations Panel,
supra p.13 at ¶ 3. Therefore, it appears that TPR is a
governmental unit for the purposes of determining the
applicability of the police power exception to the U.K.
proceedings. However, TPR is not a party to the pending
bankruptcy proceedings. Unlike the Trustee and PPF, it did
not file a claim and therefore cannot assert the police power
exception.11
11
We assume but do not decide that private parties can
rely on the police power exception to participate in
proceedings to enforce a governmental unit‘s police and
regulatory power when the relevant governmental unit is not a
party to the bankruptcy proceedings. Cf. In re Aerobox
Composite Structures, LLC, No. 11-07-10138, 2008 WL
1733601 (Bankr. D.N.M. Apr. 10, 2008) (holding that an
individual who had received notice of the filing of debtor‘s
bankruptcy proceeding was permitted to participate in post-
petition proceedings before the human rights commission of
the State of New Mexico Department of Labor through the
operation of the police power exception).
19
B. Pecuniary Purpose and Public Policy Tests
There is yet another obstacle to the Appellants‘
argument that the proceedings at issue fall within the police
power exception to the automatic stay. To make this
determination, courts have applied two ―related, and
somewhat overlapping‖ tests: the pecuniary purpose test and
the public policy test.12 Lockyer v. Mirant Corp., 398 F.3d
1098, 1108 (9th Cir. 2005). The pecuniary purpose test asks
whether the government primarily seeks to protect a
pecuniary governmental interest in the debtor‘s property, as
opposed to protecting the public safety and health. The
public policy test asks whether the government is effectuating
public policy rather than adjudicating private rights. If the
purpose of the law is to promote public safety and welfare or
to effectuate public policy, then the exception to the
automatic stay applies. If, on the other hand, the purpose of
the law is to protect the government‘s pecuniary interest in
the debtor‘s property or primarily to adjudicate private rights,
then the exception is inapplicable. See, e.g., Chao, 270 F.3d
at 385. The complementary tests ―are designed to sort out
cases in which the government is bringing suit in furtherance
of either its own or certain private parties‘ interest in
obtaining a pecuniary advantage over other creditors.‖ Id. at
389.
12
It is unclear whether the government action must meet
both tests to fall within the police power exception. Compare
Lockyer, 398 F.3d at 1108 (―A suit comes within the
exception of § 362(b)(4) if it satisfies either test.‖); Collier on
Bankruptcy ¶ 362.05[5][a] (Alan N. Resnick & Henry J.
Sommer eds., 16th ed. 2011) (if action satisfies ―either‖ test
―then the exception applies‖), with Chao v. Hosp. Servs., Inc.,
270 F.3d 374, 389, 394 (6th Cir. 2001) (finding a suit filed by
the Secretary of Labor passed the pecuniary interest test but
failed the public policy test, and therefore did not fall within
the police power exception). In light of our holding hereafter,
we need not decide this issue.
20
The issue is not new to this court. We have held that
regulatory proceedings related to environmental hazards,
health and safety violations, and employment discrimination
all fall within the police power exception to the automatic
stay. See, e.g., In re Mystic Tank Lines Corp., 544 F.3d 524(3d Cir. 2008) (recognizing that state action to recover the
costs of cleanup of contaminated site fall within police power
exception); Brock v. Morysville Body Works, Inc., 829 F.2d
383 (3d Cir. 1987) (petition by Secretary of Labor to enforce
Occupational Safety and Health Administration citation for
violations of safety and health standards); E.E.O.C. v. Hall’s
Motor Transit Co., 789 F.2d 1011, 1014 (3d Cir. 1986)
(employment discrimination action brought by Equal
Employment Opportunity Commission). Additionally, this
court has concluded that under circumstances involving a
question of federal-state preemption arising in a case
involving environmental hazards, ―the exception to the
automatic stay provision contained in subsections 362(b)(4)-
(5) should itself be construed broadly, and no unnatural
efforts be made to limit its scope.‖ Penn Terra Ltd. v. Dep’t
of Envtl. Res., 733 F.2d 267, 273 (3d Cir. 1984).
The U.K. proceedings in this case do not relate to
public health or safety, and the issue of federal state
preemption is not present here. Therefore, the reasons for our
earlier statement in Penn Terra that the police power
exception to the automatic stay should be construed broadly
are not applicable here.13
13
In fact, the legislative history expressly supports a
narrow construction of the police power exception. In Penn
Terra we quoted the statements of
Rep. Don Edwards, Chairman of the
Subcommittee on Civil and Constitutional
Rights of the House Judiciary Committee, and
Senator Dennis DeConcini, Chairman of the
Subcommittee on Improvements in the Judicial
Machinery of the Senate Judiciary Committee
[who] remarked during the debates on the
21
Instead of making a broad generally applicable
pronouncement as to how the police power exception should
be interpreted, we must look to the purpose of the proceeding
at issue. In Penn Terra, the environmental purpose behind
the proceedings at issue fell ―squarely within Pennsylvania‘s
police and regulatory powers.‖ Id. at 274 (―No more obvious
exercise of the State‘s power to protect the health, safety, and
welfare of the public can be imagined.‖). Moreover, in that
case we were focused on the unique concerns involving
federal-state preemption.14 We supported our decision by
Bankruptcy Reform Act that ―This section [§
362(b)(4)] is intended to be given a narrow
construction in order to permit governmental
units to pursue actions to protect the public
health and safety and not to apply to actions by
a governmental unit to protect a pecuniary
interest in the property of the debtor or property
of the estate.‖
Penn Terra, 733 F.2d at 274 n.6 (quoting 1978 U.S. Code
Cong. & Ad. News at 6444-45 (remarks of Rep. Edwards);
1978 U.S. Code Cong. & Ad. News at 6513 (remarks of Sen.
DeConcini)).
14
Appellants argue that the concerns relating to federal-
state preemption present in Penn Terra ―apply with equal, if
not greater, force where a foreign sovereign‘s interests are
implicated.‖ Appellants‘ Br. at 22. Principles of comity do
not require us to construe the police power exception as
applying more broadly for foreign proceedings than for
domestic proceedings. The Bankruptcy Court did not abuse
its discretion in its consideration of comity while determining
that the U.K. proceedings fail both the pecuniary purpose test
and public policy test. On the other hand, we do not adopt the
Magistrate Judge‘s assertion that ―the police powers
exception should be interpreted narrowly with regard to
foreign entities.‖ J.A. at 19. The plain language of the
Bankruptcy Code defining ―governmental unit‖ as including
22
noting the bankruptcy court‘s ability to enjoin State
proceedings under § 105 should it be necessary to effectuate
federal bankruptcy policy. A bankruptcy court cannot easily
enjoin foreign proceedings under § 105. Therefore, the
reasoning from Penn Terra cautions against a broad reading
of the exception under the circumstances of this case.
Like the environmental purpose in Penn Terra, the
purposes behind the proceedings in Morysville Body Works
and Hall’s Motor Transit Co. also fit squarely within the
goals intended to be covered by the police power exception.
According to the legislative history, § 362(b)(4) ―excepts
commencement or continuation of actions and proceedings by
governmental units to enforce police or regulatory powers.
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 a law,
the action or proceeding is not stayed under the automatic
stay.‖ S. Rep. No. 95-989 at 49 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5838.
By contrast, the U.K. proceedings in this case do not
fit within this expressed purpose because they are not
predicated upon any allegation of wrongdoing on the part of
Nortel.15 Although a close question, we therefore agree with
―a foreign state, or other foreign or domestic government,‖ 11
U.S.C. § 101(27), provides no justification for drawing any
distinction between a foreign and domestic state in the
application of the police power exception. We note that the
U.K. proceedings have continued without the participation of
the parties in this case, and Appellants remain free to file a
motion for relief from the stay for cause.
15
Allegations of wrongdoing are not a prerequisite to a
determination that a particular action or proceeding
effectuates public policy. Indeed, the absence of wrongdoing
is not dispositive here.
23
the Bankruptcy Court‘s conclusion that the U.K. proceedings
fail both the pecuniary purpose test and the public policy test.
Through these proceedings, TPR is primarily seeking to
determine the liability for a financial shortfall in a private
pension plan. This purpose does not protect the public safety
and health as those terms have been applied in the context of
the police power exception.16 Appellants argue that the U.K.
proceedings advance a public policy because they ―encourage
16
Appellants argue that the U.K. Proceedings are similar to
actions taken by the Pension Benefit Guaranty Corporation
(PBGC) that have been held to fall within the police power
exception. See, e.g., Pension Benefit Guar. Corp. v. LTV
Corp. (In re Chateaugay Corp.), 87 B.R. 779, 806 (S.D.N.Y.
1988) (section 362(b)(4) exception applies to imposition of
funding liability following restoration of plan by PBGC),
aff’d, 875 F.2d 1008 (2d Cir. 1989), rev’d on other grounds,
496 U.S. 633 (1990). Appellants emphasize the similarities
between the entities established by the U.K. Pensions Act
2004 and the PBGC. Without deciding whether certain
actions of the PBGC fall within the police power exception,
we note that there are also significant differences between
these systems. The U.K. Pension Act 2004 has divided the
roles that the PBGC takes on in the U.S. system between
multiple entities such that the TPR, DP, and PPF each have
distinct roles in the U.K. system, with distinct goals. In the
U.K. proceedings here, TPR‘s primary goal is to determine
whom to hold liable for the deficiency in NNUK‘s pension
scheme. Even assuming that the broader goal of protecting
pension plans in the U.K. protects the public welfare within
the meaning of the exception, the specific goal of the U.K.
proceedings here is too far removed from that purpose for
them to fall within the police power exception. Notably, even
the PBGC is subject to the force of the automatic stay under
some circumstances. See, e.g., Pension Benefit Guar. Corp.
v. Belfance (In re CSC Indus., Inc.), 232 F.3d 505 (6th Cir.
2000) (holding that the PBGC‘s claim for missed minimum
funding contributions was not entitled to a tax priority in the
bankruptcy context because a lien could not be imposed due
to operation of automatic stay).
24
the proper funding and administration of pension schemes
and also serve to deter the ‗moral hazard‘ created when
employers and their affiliates evade pension obligations and
pass off the burden of pension liabilities to the PPF.‖
Appellants‘ Br. at 32. The passage of the U.K. Pensions Act
2004 and the system established by the Act clearly reflect
public policy decisions. It does not follow, however, that the
purpose of the particular U.K. proceedings at issue here is to
protect the public. Rather, these particular proceedings are
focused on the pecuniary interests of the PPF and the
members of NNUK‘s pension scheme.
This conclusion is reinforced by the fact that TPR is
primarily adjudicating private rights through these
proceedings. Indeed, the U.K. Pensions Act 2004 expressly
states that the ―main objectives of [TPR] in exercising its
[regulatory] functions‖ include ―to protect the benefits under
occupational pension schemes of, or in respect of, members
of such schemes‖ and ―to reduce the risk of situations arising
which may lead to compensation being payable from the
Pension Protection Fund . . . .‖ U.K. Pensions Act, 2004, c.
35, §5(1). The English High Court of Justice Chancery
Division has also recognized that ―[i]n essence, [TPR‘s]
function is to protect members of occupational and personal
pension schemes, and to reduce the risk of claims being made
on the PPF.‖ Indep. Tr. Servs. Ltd. v. Hope & Others, [2009]
EWHC (Ch) 2810, [10], 2009 WL 3643864 (U.K. Ch. Nov.
10, 2009).
Because the Appellants have not shown that they fall
within the police power exception to the automatic stay, we
affirm the decision of the District Court that affirmed the
decision of the Bankruptcy Court enforcing the automatic
stay.
IV.
Additional Comments
25
Although our judgment affirming the decision of the
District Court and approving that of the Bankruptcy Court is
dispositive of the appeal before us, we nonetheless consider
the additional arguments made by the parties in the hope it
will resolve some of the remaining matters. The Appellants
argue that ―the lower courts erroneously concluded that the
regulatory power exception does not apply to the U.K.
regulatory procedure,‖ Appellants‘ Reply Br. at 6, and they
rely on what they characterize as ―principles of international
comity‖ in support of their argument. As we discussed
above, neither the Trustee nor PPF is a ―governmental unit‖
within the scope of the police power exception. The issue of
the application of the automatic stay with respect to
proceedings pending in foreign tribunals has been the subject
of some academic discussion, see, e.g. Stromes, supra page
19, at 380-83, and we see no need to add to that body of
writing.
Appellants challenge the paragraph of the Bankruptcy
Court‘s order stating that the automatic stay imposed by §
362 is enforced as to the U.K. Pension Trustee and the PPF
―and is fully applicable to the U.K. Pension Proceedings‖ and
―with respect to the Debtors such Proceedings are deemed
void and of no force or effect; to the extent that either of the
U.K. Pension Trustee or the PPF participate in the U.K.
Pension Proceedings as to any Debtors such participation will
be in violation of the automatic stay and subject the
participating persons or entities to sanctions under Section
362.‖ J. A. at 30. These statements are no more than
required by the language and scope of the automatic stay.
Once the Appellants subjected themselves to the jurisdiction
of the Bankruptcy Courts by filing their claims, they became
subject to the provisions of the automatic stay.
Of course, there is nothing now before the Bankruptcy
Court that requires it to determine what effect, if any, it
should accord to the estimate adopted by TPR quantifying the
claim emanating from the U.K. regulatory procedure to $3.1
billion. We are not even at the stage at which the Bankruptcy
Court must decide the admissibility of the findings emanating
26
from the U.K. proceedings. One factor to be considered by
the Bankruptcy Court if and when there is an attempt to
introduce those findings into evidence at a hearing is that
none of the parties before the Bankruptcy Court participated
in the U.K. proceedings with respect to the U.S. parties.17
In summary, the situation before the various courts and
tribunals is that there are insufficient funds to satisfy the
claims of all the creditors. We have seen no estimate as to the
total of the claims filed in the United States and Canadian
bankruptcies. The issues of the competing claims will be
determined in the allocation stage.
We are concerned that the attorneys representing the
respective sparring parties may be focusing on some of the
technical differences governing bankruptcy in the various
jurisdictions without considering that there are real live
individuals who will ultimately be affected by the decisions
being made in the courtrooms. It appears that the largest
claimants are pension funds in the U.K. and the United States,
representing pensioners who are undoubtedly dependent, or
who will become dependent, on their pensions.18 They are
the Pawns in the moves being made by the Knights and the
Rooks.
Mediation, or continuation of whatever mediation is
ongoing, by the parties in good faith is needed to resolve the
differences. No party will benefit if the parties continue to
clash over every statement and over every step in the process.
17
We note that the parties agree that the English Appeal
Court‘s decision issued on October 14, 2011 has no effect on
the issues before this court. See Re Nortel GMBH [2011]
EWCA Civ 1124 (―COA‖) (holding an FSD or CN issued by
TPR to a company in administration ranks as an expense of
the administration under English pensions law); see also
Debtors‘ Resp. at 2; Creditors‘ Resp. at 1; Appellants‘ Resp.
at 3.
18
See supra note 7.
27
This will result in wasteful depletion of the available assets
from which each seeks a portion. There appears to be one
constructive solution – the protocol agreed upon by
appointing Justice Winkler to resolve the allocation issues.
He apparently has the respect of all parties and we hope
(although it is not in our power to order) that the parties
promptly devise a process by which all conflicting claims are
put in his hands for resolution.
For the reasons set forth, we will affirm the order of
the District Court.
28