Peter Roth

Peter C.L. Roth
Senior Assistant Attorney General
State of New Hampshire
[email protected]
…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…
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,
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
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.
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
“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”
Employment: -- government obligations versus private
sector. Should they be more like us? Or vice versa?
◦ Contracts, leases, financial accommodations
◦ Confidential, public trust, financial dealings, security positions?
◦ Hiring versus firing?
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
FCC v. NextWave Pers. Communs. Inc., 537 U.S. 293, 301 (2002)
“’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.”
“The defendant’s conduct is a cause of the event if it was a
material element and a substantial factor in bringing it about.”
“The word ‘proximate’ is a legacy of Lord Chancellor Bacon, who
in his life committed other sins.” Prosser and Keeton
“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
Bacon, Maxims of the Law
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.
Justice Scalia said,
Proximate cause means “the act or event that triggers
the agency’s decision.”
More of Lord Bacon than of Dr. Prosser.
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).
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)?
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.
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.
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
“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.”
In Nextwave Justice Scalia discussed whether
“there ought to be an exception for
cancellations that have a valid regulatory
“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 . . .
(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…”
“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
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
Courts do not agree on what the “grant” is
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.
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
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!
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
Or perhaps, “other similar grant of authority
from the government to do business.”
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?
(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 selfinsurance 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,
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?
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?
◦ (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?

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