In re Nortel Networks, Inc.
- Summarized by Eric Monzo , Morris James LLP
- 13 years 2 weeks ago
- Citation:
- Case No. 11-1895 (3d. Cir., December 29, 2011)
- Tag(s):
-
- Ruling:
- The United States Court of Appeals for Third Circuit affirms the United States District Court for the District of Delaware’s order affirming the Bankruptcy Court’s decision enforcing the automatic stay because Appellants, the Trustee of Nortel Networks U.K. Pension Plan (“Trustee”) and the U.K. Board of Pension Protection Fund (“PPF”) failed to show that they fall within the police power exception to the automatic stay contained in 11 U.S.C. § 362(b)(4).
- Procedural context:
- The Appellants appealed 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, which were initiated by the U.K. Pensions Regulator (“TPR”) to determine the extent of the liability of Nortel Networks UK Limited and its affiliates (“NNUK”) for an underfunded defined benefit pension scheme established and governed by U.K. law.
On March 9, 2010, the Bankruptcy Court issued a written memorandum opinion setting forth its reasons for its 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 the U.S. Debtors, Nortel Networks, Inc. (“NNI”) and NN Caribbean and Latin American (“NN CALA”) after an evidentiary hearing on February 26, 2010. See In re Nortel Networks Corp., 426 B.R. 84 (Bankr. D. Del. 2010).
On the same day that the Bankruptcy Court issued its stay order, the Ontario Superior Court of Justice, the Canadian Court overseeing the Canadian insolvency proceeding of Nortel Networks Corporation (“NNC”) and other Canadian affiliates, entered a similar order following the motion of the court-appointed monitor of the Canadian debtors seeking to stay the U.K. proceedings. The Court of Appeals for Ontario dismissed TPR’s appeal of the stay order on the merits and subsequently, the Supreme Court of Canada summarily denied appeal.
While the appeal of the Bankruptcy Court’s stay order was pending before the District Court, in the U.K., the Determinations Panel (“DP”), an internal group of TPR that determines whether the regulatory functions should be exercised, held a hearing whether to issue a Financial Support Direction (“FSD”). NNI and NN CALA forfeited their statutory rights to participate and instead complied with the stay order. Op. at 11. On June 25, 2010, TPR issued a determination notice directing FSDs be issued against twenty-five Nortel entities after periods for appeal lapsed. On April 1, 2011, the DP issued FSDs against several Nortel entities including NNI and NN CALA. Under U.K. law, the Nortel entities had six months (until October 1, 2011) to secure financial support for the Plan. Because the Nortel entitles failed to appear and to secure financial support for the Plan, the DP had the authority to issue a Contribution Notice (“CN”) against them. 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.” Op. at 13 quoting U.K. Pensions Act, 2004 c. 35 § 49(3).
On March 29, 2011, the District Court issued an order adopting the report and recommendation (“R&R”) of Magistrate Judge Mary Pat Thynge recommending that the automatic stay order of the Bankruptcy Court 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.” Op. at 12.
The police power exception 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).
Before applying this exception, the Third Circuit first determined whether the U.K. proceeding was a “proceeding by a governmental unit.” The Third Circuit agreed with the Bankruptcy Court’s conclusion that neither the Trustee nor PPF was a “governmental unit” but that TPR was the relevant governmental unit. TPR, however, was not a party to the bankruptcy proceedings and unlike the Trustee and PPF, did not file a claim and therefore could not assert the police power exception.
Affirming the District Court, the Third Circuit next looked at two related, and somewhat overlapping tests: the pecuniary purpose test and the public policy test. See Op. at 20-24. The Court noted that these tests are designed to sort out cases in which the government brings suit in furtherance of either its own or certain private parties’ interests in obtaining a pecuniary advantage over other creditors. Here, the U.K. proceedings did not relate to public health or safety, and there was no issue regarding federal state preemption. Instead, looking at the purpose of the proceedings, construing the police power exception narrowly, the Third Circuit concluded that the U.K. proceedings were not predicated to protect the public. Rather, the proceedings were focused on the pecuniary interests of the PPF and the members of the NNUK’s pension scheme.
- Facts:
- Under the Nortel Networks U.K. Pension Plan (the “Plan”), a defined benefit pension plan established and governed by U.K. law, employees of NNUK became entitled to pension benefits on their final salary, with the employer agreeing to meet the balance of the costs providing such pension benefits after taking into account the employees’ contributions. 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. As stated in the Third Circuit’s opinion, the PPF acts as a “safety net.” Op. at 6. The Trustee is a private party responsible for administering the Plan and ensuring that members receive their benefits. 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 the Plan.
The Appellants insisted that they were not attempting to enforce collection of debt outside of the U.S. bankruptcy proceeding through the U.K. proceedings. Rather, Appellants argued that the FSD process would help quantify the liability of NNUK's affiliates under the U.K. Pensions Act for the benefit of the Bankruptcy Court. The Appellees, defined collectively, as Debtors, including NNI and NN CALA, together with the Committee of Unsecured Creditors of NNI (“Committee”), countered that they believed that Appellants would use the FSD and CN to their advantage and seize assets, which would put Appellants in a better position than other creditors and the Bankruptcy Court is capable of quantifying the liability under U.K. law, as required, within the context of the allocation proceedings. Op. at 14.
- Judge(s):
- Sloviter, Scirica, and Smith
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