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Preventing a Haven for Wrongdoers

By Frederick M. Joyce and Ronald E. Quirk, Jr.
August 15, 2003

The current economic downturn has resulted in a huge number of bankruptcy filings by publicly traded companies. During 2001, for example, a record 257 publicly traded companies filed for bankruptcy. See FDIC Bank Trends, No. 02-01 (Jan. 2002). The telecommunications sector was particularly hard hit, as 14% of those bankruptcies were filed by publicly traded telecom companies. Id. The downward trend continued in 2002, with industry giants such as WorldCom and Global Crossing filing for bankruptcy, not to mention the numerous CLECs and wireless carriers that have sought protection through the bankruptcy courts.

The Code's Automatic Stay and Its Police/Regulatory Exception

The U.S. Bankruptcy Code's automatic stay provision (11 U.S.C. ' 362(a)) would appear to deflect some of the immediate problems faced by financially troubled companies. But the automatic stay does not prevent the government from enforcing the law and defending the public interest. The Code provides an important exception, which precludes a bankruptcy filing from operating as a stay of an action by a government entity to enforce its police or regulatory powers. See 11 U.S.C. ' 362(b)(4). Although 'police or regulatory powers' have not been defined, the U.S. Supreme Court has held that they are 'the least limitable' of all government powers. See Queenside Hills Realty Co., Inc. v. Saxl Com'r of Housing and Buildings of New York, 328 U.S. 80, 83 (1946). Hence, courts have broadly construed the scope of Section 362(b)(4).

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