Richards Layton & Finger

3rd Circuit Narrowly Construes Police Power Exception to Automatic Stay

January 18, 2012

In a recent decision in In re Nortel Networks Inc., the 3rd U.S. Circuit Court of Appeals held that Bankruptcy Code Section 362(b)(4)'s "police power exception" to the automatic stay should be narrowly construed. Thus, it upheld the Delaware Bankruptcy Court's order prohibiting two United Kingdom entities from bringing or continuing proceedings in the U.K. to assess and quantify the liability of the U.S. debtors with respect to pensions of their U.K. affiliates. In addition to establishing that the police power exception will be construed narrowly, Nortel illustrates how application of the exception requires a highly fact-intensive inquiry.