Affairs of State: When States Are Creditors: Why § 525 Matters and Should Be Expanded

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One of the pillars of a debtor’s fresh start is the anti-discrimination provisions of § 525 of the Bankruptcy Code, which codifies the U.S. Supreme Court’s decision in Perez v. Campbell. The Court held that two state statutes that required satisfaction of a dischargeable tort claim as a condition for the renewal of the debtor’s drivers’ license were invalidated by the discharge provisions of the Bankruptcy Act. The section featured prominently in the Court’s decision to overturn the Federal Communications Commission’s (FCC) revocation of the debtor’s wireless spectrum licenses in FCC v. NextWave Pers. Communs. Inc., wherein the FCC sought to recover the auction value of those licenses.

The utility of § 525 extends beyond the Code’s fresh-start policy. State-created priorities violate the common pool problem by advancing a state’s creditor self-interest by contravening the interests of all creditors as a group. Although the statute prohibits post-discharge discrimination with respect to stateissued licenses and private employment, the potential for harm to the bankruptcy estate and reorganization arises most acutely with respect to licenses. Corporate debtors face discrimination with unpaid fees in a variety of regulatory environments or government contracting. The following are some examples...

Originally published in ABI Journal - March 2014. Republished with permission from the Copyright Clearance Center.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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