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 I here]

As I noted three years ago in my "What’s Bothering Ruthie?" post on Justice Ginsburg’s one-liner that stopped the Chrysler sale dead in its tracks, today’s Supreme Court oral argument in RadLAX Gateway Hotel, LLC v. Amalgamated Bank (transcript) left no doubt about what’s bothering the Supreme Court Justices in approaching the question of whether a debtor can cram a chapter 11 plan down a secured lender by selling its collateral at auction without allowing it to credit bid in its claim.  And while lenders viscerally support the Seventh Circuit’s ruling below (as the protest board paraded before the Court leaves no doubt), the final result is no "roll" for them (as one seasoned advocate opined). 

So what’s bothering the Justices in this case?  Here are questions they asked, grouped by category:

  • Indubitable Equivalence:  What is indubitable equivalence?  (Ginsburg at 2.)  Justice Roberts said that "indubitable equivalent" means "doubtless equivalent."  (Roberts at 26.)  But what is it measured by?  Current market conditions or some premium tacked on based on an assumed increase in value over time?  (Id.)  Isn’t allowing the lender to credit bid the "best way" to give it the indubitable equivalent?  (Breyer at 11.)  "[O]ne thing is to say that if you fit into (ii), that’s it, you don’t go to (iii).  Another is to say, well you can go to (iii), but it’s most unlikely that there would be the indubitable equivalent of allowing credit bidding."  (Ginsburg at 41.)  But if the judge finds that the purchaser must bridge the gap to provide indubitable equivalence, "that assumes that you can just pull out a wad of cash from your back pocket, but mostly the debtors are not in that position[,] [s]o it just seems like a gigantic waste of time."  (Kagan at 54.)
  • Fear of Judicial Undervaluation:  But more fundamentally, isn’t the real issue who is going to decide something is really the indubitable equivalent (the bankruptcy judge or the secured creditor via a credit bid)?  (Alito at 6.)  Isn’t the lender’s real fear that the bankruptcy judge will not "indubitably provide the indubitable equivalent."  (Id.)  But to avoid that risk, can’t the judge just open every sale to credit bidding and to be sure that the indubitable equivalent is provided in every instance?  (Scalia at 8.)  Isn’t "the heart of [the lender’s] argument … that the real value of this property is greater than the value that you think the Bankruptcy Court would assign to it if this were done under subsection (iii)? …  Why do you have that fear?"  (Alito at 30.)  "But doesn’t clause (i) depend upon a judicial valuation? … And isn’t subsection (iii) "where it talks about substitute collateral … completely a judicial valuation.?"  (Kagan at 30, 32.)  "[W]hat is it about the auction process that [the lender] think[s] is likely to produce … a valuation that is too low?"  (Alito at 32.)  "Of course, valuing property is what bankruptcy judges do all the time, right?"  (Roberts at 51.)  "What you just said is so long as they come in with some appraisals that are above what the property sold at for cash, then it’s not the indubitable equivalent?  Because you’ve got to have at least one appraiser who says it’s worth more. Is that all it takes?"  (Scalia at 53.)  "What happens if you go to the judge and the judge says: There is one higher bid, so I can’t say it’s indubitable?  Then what happens?"  (Scalia at 54.) 
  • Honoring the Secured Creditor’s Bargain:  Doesn’t allowing credit bidding in all instances give the lender "what he bargained for when he insisted upon security before giving the loan" … and avoid "depriving [it] of the opportunity to hold on to the asset because he thinks it is … unreasonably devalued?"  (Roberts at 7.)  Doesn’t the Code just "help the debtor a little without mucking up the secured creditor’s collateral."  (Breyer at 10.)  People until now "didn’t think they could do [avoid credit bidding] in plan sales. So why should we upset the expectation?"  "What’s the business value for upsetting the norm?"  (Sotomayor at 56.)
  • Maximizing Value:  Doesn’t the "maximum value" in an undersecured credit "always ha[ve] to be the value of the credit.  (Sotomayor at 8.)  "[I]t doesn’t take a genius to figure out that if you allow people to bid for cash or for credit, you are going to get more bids and higher bids than if you allow them to bid for cash only."  (Scalia at 21.)  Won’t the lender allow bidders who bid more than the lender thinks it’s worth, but not allow them if it thinks it’s worth more in its own hands?  (Breyer at 21.)  What’s the purpose of going through the sale at all if you permit credit bidding?  "Why don’t you just turn over the property under (iii)?  Why do you go through the sham of a sale?"  (Sotomayor at 36.) 
  • Who Benefits from Denying Credit Bids in Cram Down Auctions?:  How would junior creditors receive anything in this cram down situation, anyway?  (Kagan at 12.)  Is the debtor here just asking for permission to use the property to pay other debts, which is precisely what a secured interest prevented.  "[W]hy isn’t the secured creditor entitled to all of the proceeds from the property?"  (Sotomayor at 14-15.)  
  • Statutory Construction Exercises: How is it a "sensible statute" to allow credit bidding in clause 1129(b)(2)(A)(ii) and then saying in clause (iii) "you can have this sale not subject to credit bidding?"  (Scalia at 14.)   Is Amalgamated "just kind of elid[ing] the fact that the statute says ‘or’?"  (Roberts at 27.)  "What’s wrong with the debtor’s reading that clause (ii) is procedural and clause (iii) is substantive?"  (Roberts at 29.)  "The Petitioner suggests that the usual rule that the specific governs rather than the general provision doesn’t apply in this case because the specific is not a subset of the general.  What’s your view about that?"  (Kagan at 42.)  "It seems if they are not a subset, then they are alternatives.  I don’t see how the whole doctrine makes any sense if the specific is not a subset of the general?"  (Roberts at 43.)  "So when we say our doctrine says the specific controls over the general, the specific is a subset of the general?"  (Roberts at 44.)
  • Protecting Governmental Interests:  Doesn’t the debtor "feel sorry for the United States [which] is often [a] creditor [and] cannot come up with cash?  (Scalia at 18.)  Isn’t there a "whole cadre of U.S. trustees that presumably can look out for the interests of the poor United States."  (Roberts at 46.) 
  • Understanding the Practicalities:  If a creditor can’t credit bid but thinks the property is worth more than the amount bid at the auction, "what happens" under the debtor’s scenario?  (Kagan at 19.)  "How often does a buyer other than the stalking horse obtain the property?"  (Alito at 23.)
  • Insider Disincentives:  Doesn’t the debtor’s approach encourage insiders to encourage low stalking horse bids to keep the creditor out?  (Breyer at 22.) 
  • Significance of Bankruptcy Code Policy:  Isn’t a good reason to permit cram down without credit bidding, "consistent with the policy of the Bankruptcy Code, … to look out for other creditors as well.  And if the secured creditor is getting indubitably the value of this security, why don’t you weigh in the balance at least the interests of the other creditors … [especially since] we are asked to issue a ruling that is going to apply in every case?"  (Roberts at 33.)

So where do all these questions leave us?  With anything but a slam dunk for the lenders, to be sure.  BAPCPA stripped bankruptcy judges of much discretion and the Justices here will grapple with whether Congress in 1978 also intended to likewise limit judicial discretion in cramdowns of secured creditors.

Notably, there was an empty chair in the Court, with Justice Kennedy having recused himself from the deliberations.  Someone suggested that Justice Kennedy recused himself because he or a friend once stayed at the Radisson LAX and so disliked it that he could no longer be objective.  As a result, however, I have some concern that we’ll witness another Marathon-ish vacuum from a 4-4 split on an opinion of critical importance to the bankruptcy world.  Yet I doubt Justice Roberts–who showed the most even hand at oral argument today–will let that happen.  He certainly didn’t appear to have made his mind up yet, but when he does, I expect a majority of the Court will follow suit. 

I also expect the decision will follow through on (i) the Court’s reasoning in Ransom where an 8-1 majority looked to the "text, context, and purpose of the statutory provision at issue" to interpret a Bankruptcy Code provision and (ii) the Court’s reasoning in Howard Delivery which showed the "plain meaning" doctrine to have its own bankruptcy ocular.

Finally, don’t forget to sign up for the first post-RadLAX argument webinar at 12:30 eastern on April 24 to discuss the RadLAX oral argument, sponsored by Wilmer Hale and LSTA, and featuring LSTA’s Elliot Ganz and WilmerHale Partners Craig Goldblatt and Danielle Spinelli (all of whom were on an amicus brief filed with the Court for a number of leading financial industry trade associations).  Here is the link to the webinar.  Here’s the SCOTUS Blog page linking to all briefs filed in the case.

Thanks for reading!

[Part I here]

[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 Construction Loan Investment Fund (having about $100 million of collateral to support a $300 million original investment). 

Following Chief Judge Black’s rejection of RadLAX’s sister debtor’s (River Road) attempt to jam Amalgamated with a plan that sold the hotel while denying the Bank its proclaimed right to credit bid its claim at auction, Amalgamated proposed its own plan (which was confirmed last July with the Bank effectively "buying" the Debtor’s assets through credit bid, thus mooting out any appeal of Chief Judge Black’s denial of River Road’s original cram down plan).  For whatever reason, however, the Bank in the RadLAX sister case had no interest in confirming its own credit bid plan, thereby leaving the RadLAX debtor to its own devices, which ultimately meant a trip to the Seventh Circuit.  The Seventh Circuit sided with Amalgamated, and the Supreme Court agreed to hear the appeal in order to resolve a split in the federal appellate courts as to whether a debtor can ever propose a cram down plan that offers the lender’s collateral for sale at auction without concurrently giving the lender the right to credit bid in its claims at the auction.

Unlike the lender, which had the support in amicus briefs of some of the most notable bankruptcy professors and scholars to grace a classroom (Lieb, Klee, Baird, Sharfman, Kuney, to name a few), the RadLAX debtor had no official support today–other than the down and out debtor hunched on the sidewalk in front of the Supreme Court succinctly imploring the Justices to "Stop Predatory Credit Bidding Now"!

The oral argument, which started at 10:02 am sharp and lasted 59 minutes, had more Chicago bankruptcy professionals in the room than were probably in Chicago bankruptcy court today (given the dearth of active commercial cases these days).  These included:

  • Chicago’s Chief Bankruptcy Judge Bruce Black (who, as noted above, started the ball rolling);
  • Perkins Coie’s David Neff (argued) and Brian Audette (second chair) (pictured right), along with partners Dan Zazove and Deborah Gutfeld (representing the Debtor);
  • Katten’s John Sieger (representing US Bank);
  • US DOJ’s newly minted appellate practice lawyer (and former DOJ counsel to the US Trustee in Chicago) Cameron Gulden;
  • Jones Day’s Brad Erens; and
  • Me.

Other bankruptcy professionals in attendance included Craig Goldblatt, Prof. Eric Brunstad, fellow bloggers Peter Friedman and Doug Mintz of Cadwalader, Gary Holzer, and of course, Adam Lewis and Norm Rosenbaum for Amalgamated, and many others.

Part II of this post will focus on what’s bothering the Justices (there’s always something bothering them!) as gleaned from the key points around which the Justices’ questions continually revolved.

Meanwhile, don’t forget to sign up for tomorrow’s first webinar (April 24) to discuss today’s arguments at the Court, sponsored by Wilmer Hale and LSTA, and featuring LSTA’s Elliot Ganz and WilmerHale Partners Craig Goldblatt and Danielle Spinelli (all of whom were on an amicus brief filed with the Court for a number of leading financial industry trade associations).  Here is the link to the webinar.

Thanks for reading!

[4/24 Update:  Part II here]

In my last post, I wondered whether the Court’s decision in Stern v. Marshall (pdf) (WL) would be a bombshell or a dud.  It certainly was no dud.  And after reading the 5-4 opinion, I’d say that it’s a bombshell in several respects, both from a bankruptcy and constitutional perspective.  Here’s four reasons why:

  • First, Justice Roberts’ masterfully written majority opinion (joined by Justices Scalia, Kennedy, Scalia, Thomas, and Alito) declared Pierce Marshall’s estate the final victor and blew poor Anna Nicole Smith’s estate completely out of the water.  The fact that this litigation is finally over is itself cause for celebration everywhere, except among Anna Nicole’s heirs.
  • Second, bankruptcy courts will no longer be able to enter final judgments "on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime … [and] is not resolved in the process of ruling on a creditor’s proof of claim."  (Op. at 29, 38.)  This holding will likely be applauded―at least in part―by Bankruptcy Court judges, who already are severely overworked by a bloated chapter 7 and 13 individual debtor docket.  (One Chicago judge recently commented at the end of a day’s hearing that he was retiring to his chambers to review the 546 motions in individual chapter 7 and 13 cases set for status the next day.)  Being a nearly zero-sum game, however, District Court judges are equally likely to be distraught by the prospect of now having to hear innumerable counterclaims (and corresponding creditor claims that should accompany them as a matter of judicial economy) commenced by zealous debtors and trustees (who themselves can’t relish the prospect of losing their perceived "home-court" advantage).  Expect to see a flurry of motions filed in the coming days, weeks, months, and years attempting to establish (perhaps through a game of judicial "hot potato") the appropriate timing, protocol, and venue for these newly minted "non-core" proceedings.
  • Third, as WilmerHale’s Craig Goldblatt (who was on the merits brief for Pierce’s estate) noted to me, the Court’s opinion at pages 33-34 makes pretty clear that Section 157(b)(2)(H)―which provides that fraudulent conveyance actions are "core proceedings"―is also unconstitutional.  ("We see no reason to treat Vickie’s counterclaim any differently from the fraudulent conveyance action in Granfinanciera.")  This will mandate a sea-change in current litigation practice along the lines discussed above, though I expect many Bankruptcy Judges will long for the "good old days" when they could enter final judgments in these more interesting proceedings.
  • Fourth, Chief Justice Roberts assembled a majority that firmly rejected the creeping erosion of Article III judicial power advocated by the dissent and reflected in Thomas v. Union Carbide Agr. Prods. Co., 473 U.S. 568 (1985) and Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833 (1986).  In fact, it was the Court’s factor-based rulings in Thomas and Schor that led Professor Erwin Chemerinsky in 1991 to argue that if Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) had been decided 10 years later, the case would have been decided differently and the authority of Bankruptcy Court judges to enter final judgments would not have been limited to just "core" matters.  Professor Chemerinsky wrote:

The test used in Schor cannot sustain the result in Northern Pipeline.  In fact, the test seems identical to the approach urged by Justice White in [the Northern Pipeline] dissent.  The Court in Schor said that in evaluating Article I courts it looks to fairness to the litigants and the degree of intrusion into separation of powers.  However, there were no allegations before the Court in Northern Pipeline that bankruptcy courts under the 1978 amendments were unfair to litigants.  Nor was there any indication that Congress used Article I bankruptcy courts to gain any institutional advantage at the expense of the judiciary.  In short, in assessing the effects of Article I bankruptcy courts, “the magnitude of any intrusion on the Judicial Branch can only be termed de minimis.”

Therefore, if Northern Pipeline were decided today, there is every reason to believe that it would be resolved differently.  The approach endorsed in Schor indicates a strong likelihood that Justice White’s opinion might attract a majority of the Court.  Additionally, it should be noted that the Court’s composition has changed substantially since Northern Pipeline, and even since Schor. It is unclear how Justices Scalia, Kennedy, and Souter will vote on these questions. 

Chemerinsky, Ending The Marathon: It Is Time to Overrule Northern Pipeline, 65 Am. Bankr. L. J. 311, 320 (1991).

Well, we now know that Justices Scalia and Kennedy would have supported an impassioned defense―like that delivered in Justice Roberts’ majority opinion―against incremental encroachments of Article III judicial power and the view that Thomas and Schor are "controlling precedent" that require a "pragmatic … examination of relevant factors [in determining] whether [congressional] delegation [of adjudicatory authority to a non-Article III judge] constitutes a significant encroachment by the Legislative or Executive Branches … upon the realm of authority that Article III reserves for exercise by the Judicial Branch…."  (Dissent at 9.)  Expounding on this position, Justice Roberts wrote:

What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime.  If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous “public right,” then Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking….

We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a “narrow” one.  Brief for the United States as Amicus Curiae 23.  If our decision today does not change all that much, then why the fuss?  Is there really a threat to the separation of powers where Congress has conferred the judicial power outside Article III only over certain counterclaims in bankruptcy?  The short but emphatic answer is yes.  A statute may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely. “Slight encroachments create new boundaries from which legions of power can seek new territory to capture.”  Reid v. Covert, 354 U.S. 1, 39 (1957) (plurality opinion).  Although “[i]t may be that it is the obnoxious thing in its mildest and least repulsive form,” we cannot overlook the intrusion: “illegitimate and unconstitutional practices get their first footing in that way, namely, by silent approaches and slight deviations from legal modes of procedure.”  Boyd v. United States, 116 U.S. 616 (1886).  We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.

(Op. at 29, 37-38.)

Much more will be written and discussed regarding the meaning, implications, and fallout of the Court’s decision, but hopefully this provides some early grist for the mill.

For good summaries of the decision itself, read Steve Sather’s Texas Bankruptcy Lawyers’ Blog and Lyle Dennison’s write-up on SCOTUSblog.

Thanks for reading!

© Steve Jakubowski 2011

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.

*          *          *          *

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.  Nice summary here.

*          *          *          *

Three or four more opinion days before the United States Supreme Court’s term closes.  Sixteen opinions have yet to be delivered.  But if a lifelong, diehard, Bronx-born Yankee fan, Justice Sotomayor (who some say saved baseball), is willing to sport a CUBS jersey while throwing out the ceremonial first pitch in Saturday’s Yankee-Cubs game (I can’t imagine a White Sox fan ever doing that!), then I think it’s fair to say the remaining cases of this term on which she’s working are confusing to the core.

For bankruptcy lawyers, the Court’s forthcoming opinion in Stern v. Marshall represents either the most important decision on bankruptcy court jurisdiction since 1982 (Northern Pipeline v. Marathon) or the biggest dud in bankruptcy history (with the Court avoiding tackling the tough constitutional questions in favor of a finding that Anna’s counterclaim against Pierce was a tort claim covered by 28 U.S.C. § 157(b)(5) that all concede the bankruptcy court could not decide with finality).

As we await the ruling, and assuming it’s not a big dud, here are key background materials you need to be armed with to better understand the opinion once it’s delivered and the issues and cases it will navigate through:

  • First, it’s always good to understand the factual background to the case.  And, as in all cases, there’s the record, and the far more interesting stuff off the record (as reported early this month in the New York Magazine article, Paw Paw and Lady Love, by far the best I’ve read on the personal dynamics that drove the parties to act as they did).
  • Second, there’s the Supreme Court’s decision on May 1, 2006, which I blogged about extensively both before and after (including here and here).
  • Third, there’s the Ninth Circuit opinion of March 19, 2010, which is the opinion being appealed to the Supreme Court.  The Ninth Circuit held that Anna Nicole Smith’s counterclaim against Pierce Marshall 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), 600 F.3d 1037 (9th Cir. 2010) (pdf).
  • Fourth, there’s the briefs submitted to the Court:

The Merits Briefs

Brief for Petitioner Howard K. Stern, Executor of the Estate of Vicki Lynn Marshall

Brief for Respondent Elaine T. Marshall, Executrix of the Estate of E. Pierce Marshall

Reply Brief for Petitioner Howard K. Stern, Executor of the Estate of Vicki Lynn Marshall

The Amicus Briefs:

Brief for the United States in Support of Petitioner

Brief for National Association of Bankruptcy Trustees in Support of Petitioner

Brief for Professors Richard Aaron, Laura Bartell, Jagdeep S. Bhandari, Susan Block-Lieb, Robert D’Agostino, Jackie Gardina, Ingrid Hillinger, George W. Kuney, Lois Lupica, C. Scott Pryor, Keith Sharfman, Michael D. Sousa, and Robert M. Zinman in Support of Petitioner

Brief for Law Professors S. Todd Brown, G. Marcus Cole, Ronald D. Rotunda, and Todd J. Zywicki in Support of Respondent

Brief for the Washington Legal Foundation in Support of Respondent

Brief for the National Black Chamber of Commerce and the American Board of Trial Advocates in Support of Respondent

Brief for the Center for the Rule of Law in Support of Respondent

  • Fifth, there’s the oral argument.  Listen to it on Oyez, and pay particular attention to the argument of Roy T. Englert, Jr., which is about as good as oral advocacy gets at this level.  (Transcript PDF)
  • Finally, the key precedential decisions that provide the legal backdrop to the case:

One can’t predict on which of the next two Mondays and Thursdays the Court will issue the opinion, but I sure hope it’s not next Monday when I’ll be traveling!

Thanks for reading!

© Steve Jakubowski 2011

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 the 8-1 majority to employ a traditional approach that looks to the "text, context, and purpose of the statutory provision at issue."  (Op. at 1.)  But it’s really all fiction, because the text is convoluted, the context is manufactured, and the purpose presupposed. 

In his last two lone bankruptcy dissents, Justice Scalia calls out the elephant in the room, even refusing in his latest dissent to be coerced (or better, ransomed) to join the bored and uncaring majority by a Chief Justice who shrewdly assigned this first (and traditionally unanimous) opinion to Justice Kagan, presumably in hopes of compelling Justice Scalia to stop his backbiting and join the team that finds sense in nonsense.

So the Court in Ransom held, seemingly innocuously so, that when determining the "disposable income" that a chapter 13 debtor has available to pay creditors over the 5 year life of a plan, the debtor has no deductible "car ownership cost" expense that can be shielded from creditors if he owns a car but does not make loan or lease payments on it.  While this decision may make eminent practical sense when considered in a vacuum by mandating that a debtor shield from creditors only actual payments and not theoretical payments drawn from an IRS manual, it is the Court’s reliance on "text, context, and purpose" that disappoints here because–as shown below–none prove the point.

For what bankruptcy judge or professional really believes that BAPCPA merits application of the rule that every word in a statute "carries meaning"?  (Op. at 8.)  Certainly Justice Scalia doesn’t.  (Dissent at 2, "The canon against superfluity is not a canon against verbosity.")  And I doubt most readers of this blog do either.  (See, e.g., here, here, here, here, here, and here.)

And is the Court properly confident that BAPCPA’s "context" mandates that a debtor "should be required to qualify for a deduction by actually incurring an expense in the relevant category"?  (Op. at 8.)  The "expense" that the Court mandates the debtor incur to be entitled to a "car ownership" deduction is in fact nothing more than a "debt" under a loan or lease that the statute itself unequivocally states can NEVER qualify as a deduction.  (See § 707(b)(2)(A)(ii)(I), "Notwithstanding any other provision of this clause, the monthly expenses shall not include any payments for debts.").  No problem, Justice Kagan writes, because "any friction between the two likely reflects only a lack of attention to how an across-the-board exclusion of debt payment would correspond to a particular IRS allowance."  (Op. at 15.)  And we’re supposed to believe that "meaning, context, and purpose" can be found in Congressional "lack of attention"?

Finally, Justice Kagan writes, the Court’s conviction in the correctness of the result is "strengthen[ed] [by] consideration of BAPCPA’s purpose … of  ensur[ing] that [debtors] repay creditors the maximum they can afford."  (Op. at 9.)  But I thought discretion in bankruptcy judges was precisely what BAPCPA was designed to eliminate!   See In re Pak, 343 B.R. 239 (Bankr. N.D. Cal. 2006) (Tchaikovsky, J.) ("BAPCPA did severely limit judicial discretion for above-median-income debtors").  And isn’t "ensuring that debtors repay creditors the maximum they can afford" through statutory gymnastics just another way of exercising judicial discretion on the grandest of all scales?

In the end, I prefer Justice Scalia’s reluctant dissent and side with his conclusion that "the Court’s interpretation does not, as promised, maintain ‘the connection between the means test and the statutory provision it is meant to implement.’"  (Dissent at 5.)  "Our job," he reminds all, "is not to eliminate or reduce [BAPCPA’s] oddities, but to give the formula Congress adopted its fairest meaning."  (Id.)  While I expect every member of the Court would agree with that statement, I also expect many more lone dissents by Justice Scalia as BAPCPA’s many splits wind their way up the chain.  But Justices Brennan and Marshall relentlessly dissented in every death penalty case, and Justice John Marshall Harlan was the lone dissent in Plessy v. Ferguson too.  Better to "stick to your guns principles" (dead phrase’s origins here) than to compromise them for a false unity.

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Woe to Justice Kagan!  Forced in her first opinion to find Congressional meaning in a hastily-designed and poorly-crafted statute as to which (at least according to the highly-regarded US Bankruptcy Judge, Frank Monroe) "those responsible for … passing … did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act."  (Discussed here.)  Fittingly, Justice Scalia refused to "Ransom" his principles, and so thwarted the Chief Justice’s calculated designs, while most unfortunately dishonoring a Justice who deserved (albeit in another case) a unanimous first judicial opinion. 

And BAPCPA’s sad and unintended consequences thereby continue unabated.  (See others here, here, here, and here).

Thanks for reading!

© Steve Jakubowski 2011

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 Court held:

The petition for a writ of certiorari is granted.  The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Second Circuit with instructions to dismiss the appeal as moot.  See United States v. Munsingwear, Inc., 340 U.S. 36 (1950).

One may be tempted (as this esteemed blogger was) to claim that Chrysler remains persuasive authority, but was simply “vacated on other grounds.”  I don’t think that’s the case here, however.  For starters, the Supreme Court couldn’t have vacated Chrysler on the basis that the matter was moot at the time the case was decided.  After all, the 2d Circuit’s original order of 6/5/09 denying the appeal on the merits wasn’t moot at the time of entry since the effectiveness of the bankruptcy court’s sale order had been stayed by the 2d Circuit itself until it had a chance to rule on the merits.  Additionally, the effectiveness of the 2d Circuit’s judgment itself was stayed by the Supreme Court.  As such, there’s no basis for the Supreme Court now to have vacated Chrysler based on an argument that the matter was moot at the time of the original decision.

Perhaps then, a better reading of today’s mysterious "summary disposition" is that the Court found merit in the petition, and hence granted it, and furthermore didn’t much care for the opinion on substantive grounds, so vacated it.  Having done so, however, the Court had nothing left to decide since the matter truly was moot because the sale had closed and couldn’t be unwound.

One also may be tempted to say that the Court wasn’t tipping its hand in this way, but if not, then why not simply deny the petition as moot, which it clearly is at this point?  Why take the extra, unnecessary step of vacating the judgment and only then dismissing the appeal as moot?  Also, why cite to Munsingwear if the Court didn’t intend to erase the precedential effect of the decision, for there the Court noted:

Our supervisory power over the judgments of the lower federal courts is a broad one.  As already indicated, it is commonly utilized in precisely this situation to prevent a judgment, unreviewable because of mootness, from spawning any legal consequences.  (Citations omitted, emphasis added).

If nothing else, reading the Court’s summary disposition today as a spaying of Chrysler to "prevent a … spawning of any legal consequences" surely neuters any reading of the Court’s 2 page per curiam opinion from last June suggesting there wasn’t a "fair prospect that a majority of the Court will conclude that the decision below was erroneous."

Given all the speeches, articles, and thought advanced about the significance and game-changing nature of Chrysler, it’s amazing how two simple sentences from the highest court in the land can turn the bankruptcy world on its head.

I’d say the slow boat’s finally catching some wind!

[Inset is an artist’s rendition of the USS Constitution (a/k/a "Old Ironside"), the oldest commissioned naval vessel still afloat today.]

[12/15/09 Update:  Be sure to check out Steve Lubben’s Credit Slips post linking to the Alvarez v. Smith case for further insights into the Court’s practice of vacating lower court judgments that, by happenstance, are moot.]

© Steve Jakubowski 2009