Nextwave And The Implications Of A Broad Interpretation Of Bankruptcy Code Section 525(A)

By Neil P. Forrest and Marco-Aurelio Casalins III1

Two recent decisions involving interpretations of Section 525(a) of the United States Bankruptcy Code (the "Code"),2 the highly publicized decision of the United States Supreme Court in Federal Communications Commission v. NextWave Personal Communications Inc. ("NextWave")3 and the far less known decision of the Second Circuit in In re Stoltz,4 ("Stoltz") are certain to have wide ranging implications for future cases involving that provision. Section 525(a) of the Code, often referred to as the "anti-discrimination provision," prohibits a governmental unit from engaging in any action to "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 a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, 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 or that was discharged under the Bankruptcy Act."

This provision, which was enacted to codify and expand the Supreme Court's 1971 decision in Perez v. Campbell,5 prevents any governmental unit, as defined in the Bankruptcy Code,6 from revoking, suspending, denying, or refusing to renew, or discriminating in any way with respect to, a government license, permit, employment, or "other similar grant" to a debtor or former debtor or its affiliate "solely because" the debtor is or was in bankruptcy, was insolvent before it was adjudged a bankrupt, or did not pay a debt dischargeable in the bankruptcy case. The statute furthers the "fresh start" policy underlying the Bankruptcy Code.7

Courts have grappled with how broadly Section 525(a) should be interpreted. In particular, much of the litigation has centered on how narrowly the "other similar grant" language should be construed. On the one hand, courts have applied Section 525(a) to prevent a state mortgage fund from denying a mortgage to a former debtor,8 reject a public college's practice of denying transcripts to students whose student loans were discharged in a bankruptcy proceeding,9 deny Florida taxing authorities' attempt to prevent a debtor from obtaining a certification showing that all state and county taxes were paid, as needed for platting or replatting land where the taxes were dischargeable in the debtor's bankruptcy proceeding,10 and prevent the government from revoking a real estate license where payment was made from a government real estate recovery fund.11 On the other hand, some courts have refused to apply Section 525(a) in cases involving State funded mortgage assistance payments,12 the eviction of a public housing tenant where pre-petition rent payments were discharged in bankruptcy,13 and the application of a driver's license restoration fee.14

Moreover, where courts have found that the governmental unit's action occurred "not solely because" the debtor is or was a bankrupt, was insolvent, or is or was the beneficiary of a bankruptcy discharge of a particular debt, consistent with the legislative history, they have refused to apply Section 525(a).15 In particular, courts have refused to apply Section 525(a) in cases involving horse racing commission licenses where the state commission had reasons other than those specified in Section 525(a) for denying or revoking a racing license. For example, in one case, the commission found that the applicant, a Chapter 11 debtor, lacked financial integrity and future financial resources, and that the local market was saturated.16 In another, the commission found that the debtor's license had been suspended three times for failing to maintain insurance, and taken together with his racing related debts and his bankruptcy, were sufficient reasons for license revocation.17 The court agreed and thus Section 525(a) was held not to have been violated.18

In the January 27, 2003 decision of the United States Supreme Court in NextWave,19 and the Second Circuit decision in Stoltz,20 the Courts strengthened the protections to debtors under Section 525(a) and broadly interpreted the statute. In each case, the Court ruled that Section 525(a) controls even where it arguably conflicts with another federal statutory provision. In NextWave the other provision was Section 309(j) of the Communications Act of 1934.21 In Stoltz, the other provision was Section 365 of the Bankruptcy Code.22 In each case, the Court denied the government's "solely because" argument, and in Stoltz, the court also denied the government's "other similar grant" argument.

As discussed infra, the broad interpretations by the Courts in these important cases of the language of the statute make it...