Amendments To Section 525(a)SABA/NAAG

Santa Fe New MexicoOctober 2013

Peter C.L. RothSenior Assistant Attorney General

State of New HampshirePeter.Roth@doj.nh.gov

…a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title…or another person with whom such …debtor has been associated, solely because such … debtor is or has been a debtor under this title…, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title…

Section 525(a)

• Codifies the result in Perez v. Campbell. S. Rep. No. 989, 95th Cong., 2nd Sess. 81, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5867

• Section 525 “does not prohibit consideration of other factors, such as future financial responsibility or ability…”

• Section 525 does not prevent a state from denying a debtor a license if such denial is prompted by “misdeeds or questionable conduct” H.R. Rep. 95-595, 95th Cong., 1st Sess.

246, reprinted in 1978 U.S. Code Cong. & Admin. News 5963, 6243

Legislative History

• Congress did not intend to prohibit the “examination of the factors surrounding the bankruptcy … the examination of prospective financial condition or managerial ability.”

H.R. Rep. 95-595 at 6126. • Congress intended specifically to avoid interfering with

“legitimate regulatory objectives.” H.R. Rep. 95-595 at 6243

More Legislative History

BUT, “The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms of discrimination. The courts have been developing the Perez rule. This section permits further development to prohibit actions by governmental or quasi governmental organizations that perform licensing functions, such as a state bar association or medical society, or by other organizations that can seriously affect the debtor’s livelihood or fresh start …”

H. Rep 95-595, at 367.

Legislative History (cont.)

402 US 637 (1971)

• Supreme Court struck down two state laws that permitted the state automatically to deny driving privileges to individuals who had used bankruptcy to discharge tort claims arising from automobile accidents

• Primarily concerned with State laws that used the leverage of a driver’s license privilege to secure the payment of dischargeable tort claims

• Did not rule on the question of whether a state could require other conditions to licensing, such as providing proof of financial responsibility

Perez

“Congress left it to the courts to develop and expand the anti-discrimination objective of the statute.” In re Environmental Source Corp., 431 B.R. 315, 322 (Bankr. D. Mass. 2010)

“proximate cause” … “solely because”

“other similar grant”◦ Contracts, leases, financial accommodations

Employment: -- government obligations versus private sector. Should they be more like us? Or vice versa?◦ Confidential, public trust, financial dealings, security positions?◦ Hiring versus firing?

Language Issues Emerging From Recent Jurisprudence

Proximate cause = “solely because”

“Section 525 means nothing more or less than that the failure to pay a dischargeable debt must alone be the proximate cause of the cancellation, the act or event that triggers the agency’s decision to cancel, whatever the agency’s ultimate motive in pulling the trigger may be.”

FCC v. NextWave Pers. Communs. Inc., 537 U.S. 293, 301 (2002)

Nextwave

“’proximate cause’ – in itself an unfortunate term”Prosser and Keeton on Torts

Is it…

“The defendant’s conduct is a cause of the event if the event would not have occurred but for that conduct; conversely, the defendant’s conduct is not a cause of the event, if the event would have occurred without it.”

Or,

“The defendant’s conduct is a cause of the event if it was a material element and a substantial factor in bringing it about.”

Proximate cause

“The word ‘proximate’ is a legacy of Lord Chancellor Bacon, who in his life committed other sins.” Prosser and Keeton

Prosser Bacon

“In jure non remota causa, sed proxima spectatur. (In law the near cause is looked to, not the remote one.) It were infinite for the law to judge the cause of causes, and their impulsion of one another; therefore it contenteth itself with the immediate cause, and judgeth of acts by that, without looking to any further degree.” Bacon, Maxims of the Law

In jure non remota causa, sed proxima spectatur

Did Justice Scalia mean proximate in the sense of foreseeable risk or was he referring to direct consequences?

Case involved bids for airwave spectrum; bidding process held by Second Circuit to have a regulatory function, but

Bidder defaulted on payments and FCC cancelled license. Argued that there was a regulatory motive for the cancellation.

Foreseeable risks vs. direct consequences

Justice Scalia said,Proximate cause means “the act or event that triggers

the agency’s decision.”

More of Lord Bacon than of Dr. Prosser.

…solely because…

In many cases decisions are made with other lawful reasons in mind in addition to bankruptcy or failure to pay debt.

Great deal of case law on what to do if improper reason was “a motivating factor,” but defendant had other proper reasons that might still have caused the same result. See Mt. Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274 (1977) and its progeny.

42 U.S.C. sec. 2000e-2(m).

Mixed Motives

Congress intended something more rigorous when it chose “solely because” and not “a motivating factor.”

Should Nextwave be read as importing a similar mixed motive test into the law through the proximate cause discussion? Or are courts using that approach reading too much into its discussion and not staying true to Congress’ “solely because” language in section 525(a)?

“solely because” ≠ “a motivating factor”

Strangely (or not) courts have largely ignored Nextwave and continue seemingly unperturbed by the proximate cause puzzle.

Some interpret Nextwave to mean what the statute says – “solely because.” But not always.

Environmental Source Corp. (Bankr. D. Mass.) – debarment for failure to pay unemployment premiums - unlawful.

Ellis v. US Dept of Homeland Security, (Bankr. D. Colorado) – hiring policy that looks at “suitability and security” issues arising from debtor’s bankruptcy legal, where debtor was allowed to present evidence to resolve agency concerns.

Following Nextwave

Those taking a broad reading of Nextwave’s language to causation argue that it is consistent with the purpose of Section 525 to interpret the phrase in a way that strengthens the protection to debtors.

Attempts to reconcile the unreconcilable.

Riding the Nextwave

While courts could simply rely on the plain meaning of the term, “solely because,” there could also be value to adding a definition to avoid any confusion that might arise from Nextwave’s “proximate cause” discussion.

Thus, one could add a provision along the lines of:

“a claim arises solely because of the factors set forth in subsection (a) only when the plaintiff establishes that no other lawful factors were part of the motivation for the decision.”

Consider

In Nextwave Justice Scalia discussed whether “there ought to be an exception for cancellations that have a valid regulatory purpose.”

“No” – he said, finding that the exception would consume the rule. . .

and Congress did not see fit to include it. Maybe there should be, though . . .

A Regulatory Exception

(d). “Nothing in this section shall preclude a governmental unit from

(i) imposing conditions with respect to any provisions of subsection (a);

(A) based on considerations relating to the debtor’s future financial responsibility, or

(B) as reasonably necessary to protect public health, safety, and welfare, including the enforcement of economic and consumer protection regulations…”

Consider

“a license, permit, charter, franchise, or other similar grant”

“target of sec. 525(a) is government’s role as a gatekeeper in determining who may pursue certain livelihoods” Toth v. Michigan State Hous. Dev. Auth., 136 F.3d 477, 480 (6th Cir. 1998).

“Peculiarly governmental functions, i.e. for which a citizen must resort to the government” – In re Jasper, 325 BR 50 (Bankr. D. Maine 2005)

Other Similar Grant

Of authority to do business with others? (i.e., the gatekeeper concept?)

Or grant as in gift?

◦ Public Housing leases◦ Financial accommodations, credit union account,

veteran’s loan guarantee, cross-default clause.◦ IRS offers in compromise◦ Government contracting ◦ Government job

Grant? Two Very Different Concepts

Courts do not agree on what the “grant” is Possession? Lease itself? Ability to participate in the future? Or the fact that the below-market rates

charged are in the nature of a gift benefit to the tenant?

Deciding what concept of grant applies helps to explain the difference in result between Toth and the Second Circuit’s approach.

Public Housing Leases

Grant = low income housing unit lease (i.e., the benefit of a below-market rate), not just the right to reapply.

525 controls over 365, says that it is more specific as applied to types of landlords -- government.

Rejects claim that 365 is more specific because it refers to leases which 525 does not.

Brattleboro Housing Auth’y

Interpretation of grant as the gift of the right to a reduced housing payment means government cannot evict people the way private landlords can and tenants, like Ms. Stoltz, can stay almost indefinitely.

More sensible interpretation of grant consistent with the other enumerated government grants and the object of anti-discrimination, is to say grant = right to apply/re-apply without regard to the unpaid prior rent, but not the ability to avoid in rem remedies.

Best approach is to decide that a residential lease is not a grant within the meaning of section 525(a).

Approach solves the artificial 365/525 conflict too!

Brattleboro Housing Auth’y

Change “other similar grant” to “or other grant similar to said license, permit, charter or franchise of such type and kind as are ordinarily available only from a governmental unit”

Or perhaps, “other similar grant of authority from the government to do business.”

Consider

Does a state violate section 525(a) by refusing to contract with (or debarring) a bankrupt entity that failed to make workers compensation payments?

Environmental Source Corp. says yes. See also In re Ray, 355 B.R. 253 (Bankr. D. Ore. 2006).

Whether the permission to do business with the state fit any of the literal terms of the statute was not even considered in Environmental Source.

Government contracting is not employment, and its not a required gateway to the contracting business with other entities.

Court assumed contracting was covered and just focused on “solely because” and proximate cause issue, saying ◦ “Nextwave instructs me to ignore as irrelevant the Commonwealth’s

motive to provide financial protection to victims of industrial accidents and penalize employers who fail to do so.”

Is that a correct reading of Nextwave? If it is, should it be?

Contracting/debarment

(d). Nothing in this section shall preclude a governmental unit from

(i) imposing conditions with respect to any provisions of subsection (a); (A) based on considerations relating to the debtor’s

future financial responsibility, or (B) as reasonably necessary to protect public health and

safety, security, confidence and public trust, including the enforcement of economic and consumer protection regulations…”

(ii) refusing to allow a debtor to continue to participate in self-insurance programs or if a debtor has previously defaulted on such program and been discharged from the obligation to make payments thereunder,

(iii) making decisions with respect to its own contracting obligations, including contracts to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor,

Consider

A number of cases have noted that under section 525(a) the government may not discriminate in making a hiring decision because of bankruptcy but private employers may.

Litigants have been unsuccessful in persuading courts that the failure to extend the protection given to hiring for government jobs to private employers was a scrivener’s error.

Government employment, like housing and contracting, is not the sole means of access to a profession, so should government be held to a different standard?

Employment

Issues arise because many government jobs involve positions of public trust, confidence, security, financial dealings, and health and safety. Financial difficulties can leave one open to outside pressures, even blackmail and the like.

In such situations it is not unreasonable for the government to place a higher bar on applicants and often does.

Private employers can consider whether a bankruptcy filing is indicative of a lack of financial responsibility.

Can governments? Should they be able to?

Employment II

(d)◦ (iv) refusing to offer employment when the position is

one of public health and safety, security, involves the public trust, or is of a confidential nature.

Or some other language that may not go so far but still explicitly ensures that when its necessary the government may take concerns about the effect of a candidate’s financial situation into effect in vetting him or her initially and retaining him thereafter.

Final issue – should private employers be made subject to the same standard?

Consider