US Supreme Court Cases

Last week I published a blog post on the US Supreme Court’s unanimous decision in Bullock v. BankChampaign, N.A., No. 11-1518 (May 13, 2013) (pdf), that focused on the Court’s application of the noscitur a sociis canon to the bankruptcy nondischargeability statute dealing with “defalcation in a fiduciary capacity.”

I write this second blog post discussing Bullock because I think the case will prove especially noteworthy for those who deal with the concept of “recklessness” in their civil practice.

Professor Ann Morales Olazábal authored an article entitled Defining Recklessness: Doctrinal Approach to Deterrence of Secondary Market Securities Fraud, 2010 Wis. L. Rev. 1415, in which she looked at attempts to define “recklessness” in tort, criminal, patent, securities, and employment law (among others) and concluded that “the single common thread among the recklessness standards employed in this mixed bag of legal inquiries may be their opacity and lack of susceptibility to any kind of uniform application.”  Id. at 1422.  In the federal securities context, she writes, “[a]s in other legal arenas, recklessness in the 10(b) context has nowhere been defined serviceably or with any real consistency.”  Id. at 1424.

In What Is Securities Fraud?, 61 Duke L.J. 511, 534-36 (2011), Professor Sam Buell wrote that courts in the securities law context differ on whether recklessness should be defined by a “conscious disregard” or a “super-negligence” standard:Continue Reading US Supreme Court’s Decision in Bullock: A Significant Development in Determining “Recklessness” Under Federal Law?

The US Supreme Court has long taught the importance of certain canons of interpretation unique to bankruptcy law, the more significant ones being:

  • The Fresh-Start Policy:  A primary purpose of bankruptcy is to relieve the debtor “from the weight of oppressive indebtedness and permit him to start afresh….” (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
  • Equality of Distribution:  “[H]istorically one of the prime purposes of the bankruptcy law has been to bring about a ratable distribution among creditors of a bankrupt’s assets….”  Young v. Higbee Co., 324 U.S. 204, 210 (1945); Union Bank v. Wolas, 502 U.S. 151, 161 (1991).  “Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code’s equal distribution aim.”  Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 547 U.S. 651, 667 (2006) (discussed at length in this blog post).
  • Narrow Construction of Priority Provisions:  Canon favoring equality of distribution gives rise to a “corollary principle that provisions allowing preferences must be tightly construed.”  Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 547 U.S. 651, 667 (2006).
  • Narrow Construction of Exceptions to Discharge:  “[E]xceptions to the operation of a discharge … should be confined to those plainly expressed.”  Gleason v. Thaw, 236 U.S. 558, 562 (1915).  This furthers bankruptcy’s policy of achieving a “fresh start.”  Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998).
  • Significance of Past Bankruptcy Practice:  “[Do] not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”  Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563 (1990).

  • Property Rights in Estate Assets Dependent on State Law:  “Property interests are created and defined by state law…. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”  Butner v. United States, 440 U.S. 48, 57 (1979).

  • Creditors’ Rights Dependent on State Law:  “What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law.”  Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161 (1946).

Last year, Justice Scalia and Professor Bryan Garner published a phenomenal book, Reading Law: The Interpretation of Legal Texts.  Many know of Justice Scalia, though he’s probably at the low end of the already (unfairly) historically low favorability rating for the Supreme Court.  Many fewer know of Professor Garner, but if you’re not his fan, you should be.  He’s prolific beyond words, which are his specialty (and as to which he has no modern equivalent).  His writings include: Garner’s Modern American Usage, Legal Writing in Plain English, Garner’s Dictionary of Legal Usage, and The Winning Brief, each one of which should be on your bookshelf.  He also has been the Editor-in-Chief of Black’s Law Dictionary since 1995.  Follow Professor Garner on Twitter and learn, among other things, of the latest smiling antiquarian bookseller whose shelves he recently raided.  Before Reading Law, Justice Scalia and Professor Garner published an invaluable guide to litigators entitled, Making Your Case: The Art of Persuading Judges (2008).

In the book’s introduction, Chief Judge Easterbrook called Reading Law “a great event in American legal culture.”  Judge Posner, however, wasn’t quite as enamored with it, which apparently got a bit under Justice Scalia’s skin, prompting this retort from Judge Posner.  (All seems well now, however, as Judge Posner was placed at the same table as Justice Scalia at last month’s Chicago Lawyers’ Club luncheon event promoting the book, though as fate would have it Justice Scalia’s plane was late, so we’ll never know how that seating arrangement would have worked out.)

The book cites to 57 interpretive canons (split among 5 “fundamental principles,” 11 “semantic” canons, 7 “syntactic” canons, 14 “contextual” canons, 7 “expected-meaning” canons, 3 “government-structuring” canons, 4 “private right” canons, and 6 “stability” canons) and concludes by “exposing” 13 far more controversial “falsities” (such as “the false notion that committee reports and floor speeches are worthwhile aids in statutory construction”).  It also contains the best bibliography imaginable of over 1,500 books and articles on legal interpretation dating back as early as 1621 (Coke’s First Part of the Institutes of the Laws of England) and 1677 (Hatton’s Treatise Concerning Statutes).

The Supreme Court’s recent unanimous decision in Bullock v. BankChampaign, N.A., No. 11-1518 (May 13, 2013) (pdf), which was decided primarily based on the book’s Canon No. 31, the “Associated-Words Canon” (better known as noscitur a sociis–“it is known by its associates”), highlights the importance of keeping Justice Scalia’s and Professor Garner’s book close at hand.  In describing how this canon works, Justice Scalia and Professor Garner call it “a classical version, applied to textual explanation, of the observed phenomenon that birds of a feather flock together.”  They further explain:Continue Reading US Supreme Court Deciphers “Defalcation” in Bullock: A Canonical Exercise in “Reading Law” (Scalia/Garner)

[4/24 Update:  Part II here]

Chicago bankruptcy professionals descended on the US Supreme Court to catch the final chapter in the RadLAX bankruptcy saga, one that had a remarkably swift journey to the highest court of the land.  The case started as the neglected stepchild of Amalgamated Bank, the trustee of the deeply undersecured Longview Ultra I

6/24/11 Update:  Here’s my blog post providing an early analysis of the Court’s decision, entitled US Supreme Court’s Bombshell Opinion in Stern v. Marshall Draws the Line Against Incremental Erosion of Article III Judicial Power.

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6/23/11 Update:  5-4 decision delivered affirming 9th Circuit’s ruling and handing Pierce Marshall’s estate a

When reading recent US Supreme Court opinions interpreting BAPCPA, the statute’s manifest flaws are the "elephant in the room" (origins of phrase here), and Justice Kagan’s recent opinion for the Court in Ransom v. FIA Card Services , N.A, No. 09-907, 2011 WL 66438 (Jan. 11, 2011), is no exception.  She professes on behalf of

6/24/11 Update:  Here’s my blog post providing an early analysis of the US Supreme Court’s final 5-4 decision in favor of Pierce’s estate, entitled US Supreme Court’s Bombshell Opinion in Stern v. Marshall Draws the Line Against Incremental Erosion of Article III Judicial Power.

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6/23/11 Update:  5-4 decision delivered affirming 9th Circuit’s ruling and handing Pierce Marshall’s estate a complete and final victory.  Justice Roberts with an extremely well written opinion; Justice Breyer dissenting. Opinion here.  Pre-opinion writeup here.

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And so, it appears, 19 years of hell for the remaining surviving heirs of J. Howard Marshall II come near an end.  Here’s the chronology:

  • First, in October 1991, the so-called "courtship" between J. Howard and Anna begins.
  • In April 1995, Anna sues J. Howard’s son and guardian, Pierce, in Texas Probate Court (amended several times after J. Howard’s death) for, among other things, tortious interference with her expectation of support during the marriage and after his death and for fraud and undue influence in connection with J. Howard’s estate planning.
  • In August 1995, J. Howard dies, leaving her nothing.
  • In January 1996, Anna files bankruptcy. 
  • In May 1996, Pierce brings a non-dischargeability adversary for defamation.
  • In June 1996, Pierce files a corresponding proof of claim in Anna’s bankruptcy case. 
  • In June 1996, Anna counterclaims in bankruptcy, asserting the same claims she made in probate court.
  • In October 2000, the bankruptcy court rules against Pierce on the defamation claims and, in December 2000, it enters a $475 million judgment in favor of Anna on the counterclaims.  Marshall v. Marshall, 253 B.R. 550 (Bankr. C.D. Cal. 2001).
  • In January 2001, Pierce appeals. 
  • In January 2001, Anna nonsuits her claims against J. Howard’s estate and Pierce individually in probate court.
  • In February 2001, Pierce files an amended counterclaim against Anna in probate court for declaratory relief to determine her rights to the estate and property of J. Howard and a complaint for a declaratory judgment against Anna and J. Howard’s estate that J. Howard’s Living Trust reflected his intentions and were valid.
  • In March 2001, after a five month jury trial in the Texas Probate Court, the jury unanimously finds that the Living Trust and will were valid and had not been forged or altered, that J. Howard wasn’t the victim of fraud or undue influence, that J. Howard had the requisite mental capacity at all relevant times, and that J. Howard had no agreement with Anna to give her 1/2 of all his property.
  • In December 2001, the probate court enters final judgment in favor of Pierce on all claims, holding that Pierce was entitled to his inheritance, free from all claims by Anna or Pierce’s older brother.
  • After the jury verdict in probate court, Pierce moved to dismiss Anna’s claims against him in district court on the appeal of the bankruptcy court ruling on grounds of claim and issue preclusion, but the district court denied this motion in December 2001.  Marshall v. Marshall, 271 B.R. 858 (C.D. Cal. 2001).
  • In March 2002, the district court entered judgment in favor of Anna, finding that "J. Howard always intended to give [Anna] … half of his ‘new community’" (i.e., the appreciation of his estate during their marriage) and that Pierce "backdated documents, altered documents, destroyed documents, suborned falsified notary statements, presented documents to [J. Howard] under false pretenses, and committed perjury,” in order to deny any distributions to Anna from J. Howard’s estate.  In re Marshall, 275 B.R. 5 (C.D. Cal. 2002).
  • In 2004, the 9th Circuit vacated the judgment against Pierce on the basis that the so-called probate exception to federal subject matter jurisdiction precluded consideration of the case.  Marshall v. Marshall (In re Marshall), 392 F.3d 1118 (9th Cir. 2004).
  • In 2005, the US Supreme Court granted Anna’s petition for certiorari, as I discussed here, here, here, and here.
  • On May 1, 2006, as discussed here, here, here, and here, the US Supreme Court reversed the 9th Circuit’s decision, concluding that the probate exception did not apply to Anna’s in personam counterclaims against Pierce.  The 9th Circuit only considered the issue of federal subject-matter jurisdiction.  The Supreme Court remanded for consideration of whether Anna’s claims were "core" and whether Anna’s claims were barred under principles of claim and issue preclusion based on the earlier judgment entered in the Texas Probate Court.  Marshall v. Marshall, 547 U.S. 293 (2006).
  • Finally, and that’s the purpose of this post, the 9th Circuit concludes on March 19, 2010, that Anna’s counterclaim is not a core proceeding but, at most, "related to" her bankruptcy case.  As a result, the earlier judgment entered in her favor by the bankruptcy court was not final at the time that the Texas Probate Court entered its judgment in favor of Pierce, and so the Texas Probate Court judgment was the earliest final judgment that precludes all of Anna’s claims.  Marshall v. Stern (In re Marshall), No. 02-56002, 2010 WL 986781 (9th Cir. Mar 19, 2010) (NO. 02-56002) (pdf).

The 9th Circuit’s opinion is certainly worth reading for many reasons.  First, it provides an excellent review of "the evolution of the current bankruptcy regime in order to appreciate the important distinctions between ‘arising under,’ ‘arising in,’ and ‘related to’ proceedings and how the notion of ‘core’ proceedings came to exist."  (Idat p. 4508).  The case also is interesting in its analysis of how "counterclaims by the estate against persons filing claims against the estate"―that by statute (28 U.S.C. § 157(b)(2)(C)) are defined as "core"―can still be narrowly construed as non-core "in order to avoid potential constitutional problems arising from having Article I judges issue final orders in cases requiring an Article III judge."  (Idat p. 4521).  Even compulsory counterclaims may not be "core" proceedings, the Court held, writing:

Continue Reading 9th Circuit Declares Anna Nicole Smith’s Estate the Big Loser on Preclusion Grounds in Dispute with Pierce’s Estate Over Her Right to Money from J. Howard Marshall’s Estate

Back in the good old days when bashing BAPCPA was in vogue, I posited here that BAPCPA’s "debt relief agency" provisions "look more like an effort to create a consumer bankruptcy lawyer clone who, much like the ever-multiplying Agent Smith from The Matrix-Reloaded, speaks and does precisely as directed with ruthless efficiency."  Today’s unanimous opinion from Justice Sonia Sotomayor (with concurrences from Justices Scalia and Thomas) tells us not to worry because while attorneys in fact are "debt relief agents" under the Code, §526(a)(4) "prohibits a debt relief agency only from advising a debtor to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy."  Milavetz, Gallop & Milavetz, P.A., v. United States, No. 08-1119 (Op. at 13). 

As with most bankruptcy decisions from the Supreme Court, the path taken to the holding is more interesting than the actual holding itself.  This post examines two aspects of that road:

  • First, the Court’s discussion of the application of the "plain meaning" rule and the relevance of legislative history; and
  • Second, the Court’s recognition of the ethical boundaries of the attorney-client relationship and, in particular, the line where advice crosses into conspiracy. 

1.     Attorneys as "Debt Relief Agents" and Footnote 3’s "Bridge Too Far"

This first conclusion comes as no surprise as the attorneys’ arguments "failed to persuade [the Court] to disregard the statute’s plain language."  (Op. at 7).  But rather than stop at plain meaning, the Court dropped a footnote finding support for the plain meaning in BAPCPA’s legislative history (Op. at 6, n. 3).  This single footnote prompted Justice Scalia to write a separate concurring opinion just so that he could attack the premise of Footnote 3.

In Part II, Section B of my BAPCPA outline, entitled BAPCPA’s "Plain Meaning" Not Followed, I reviewed five cases in the first year following BAPCPA’s enactment where bankruptcy judges were so confounded by BAPCPA that they felt compelled to deviate from its "plain meaning" in order to avoid virtually nullifying certain of its key provisions.  Justice Scalia’s concurrence highlights the problem facing bankruptcy lawyers who attempt to rely upon the legislative history of BAPCPA for interpreting an ambiguous statutory provision.  He wrote:

I join the opinion of the Court, except for footnote 3, which notes that the legislative history supports what the statute unambiguously says.  The Court first notes that statements in the Report of the House Committee on the Judiciary “indicate concern with abusive practices undertaken by attorneys.”  Ante, at 6, n. 3.  Perhaps, but only the concern of the author of the Report.  Such statements tell us nothing about what the statute means, since (1) we do not know that the members of the Committee read the Report, (2) it is almost certain that they did not vote on the Report (that is not the practice), and (3) even if they did read and vote on it, they were not, after all, those who made this law.  The statute before us is a law because its text was approved by a majority vote of the House and the Senate, and was signed by the President.  Even indulging the extravagant assumption that Members of the House other than members of its Committee on the Judiciary read the Report (and the further extravagant assumption that they agreed with it), the Members of the Senate could not possibly have read it, since it did not exist when the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  And the President surely had more important things to do.

The Court acknowledges that nothing can be gained by this superfluous citation (it admits the footnote is “unnecessary in light of the statute’s unambiguous language,” ante, at 6, n. 3).  But much can be lost.  Our cases have said that legislative history is irrelevant when the statutory text is clear. See, e.g., United States v. Gonzales, 520 U.S. 1, 6 (1997); Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992).  The footnote advises conscientious attorneys that this is not true, and that they must spend time and their clients’ treasure combing the annals of legislative history in all cases:  To buttress their case where the statutory text is unambiguously in their favor; and to attack an unambiguous text that is against them.  If legislative history is relevant to confirm that a clear text means what it says, it is presumably relevant to show that an apparently clear text does not mean what it seems to say.  Even for those who believe in the legal fiction that committee reports reflect congressional intent, footnote 3 is a bridge too far.

2.     § 526(a)(4)’s Narrow Scope Does Not Impair the Attorney-Client Relationship

Here, the Justices unanimously agree that § 526(a)(4)’s prohibition against a debt relief agent’s "advis[ing] an assisted person … to incur more debt in contemplation of" filing for bankruptcy is limited to "advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose."  (Op. at 13).  To the Court, the "controlling question … is whether the impelling reason for ‘advis[ing] an assisted person … to incur more debt" was the prospect of filing for bankruptcy."  Additionally, the Court held, "’load[ing] up’ on debt with the expectation of obtaining its discharge … is abusive per se"  (Op. at 14) (emphasis added).  (That should seal the fate of those debtors fighting dischargeability under Sections 523(a)(2), (4), and (6) who "loaded up on debt" in advance of the filing).
Equally important for those looking for guidance on the Court’s tools of statutory interpretation in bankruptcy is the Court’s statement, citing United States v. Granderson, 511 U.S. 39, 55 (1994):  "That ‘[n]o other solution yields as sensible a’ result further persuades us of the correctness of this narrow reading."  (Op. at 15).  The Court reasoned:

Continue Reading US Supreme Court on Justice Holmes’ 169th B-day Holds in Milavetz that the Bankruptcy Code’s Speech Restrictions on Attorneys Do Not Turn Them into Ruthless Drones

Hard to ignore today’s bombshell summary disposition by the US Supreme Court today on the Indiana Pension Funds’ appeal of the Second Circuit’s decision in Chrysler (see earlier discussion of case here).  Clearly, however, the Court’s six line summary disposition tossing the 2d Circuit’s decision in Chrysler requires careful thought.  First, here’s what the Supreme