US Supreme Court Cases

With the Second Circuit’s Judge Sotomayor soon to ascend to the Supreme Court, bankruptcy lawyers must be disappointed at the complete absence of any questioning of her on bankruptcy issues.  And it’s not like there’s nothing to talk about!  Only 10 days ago, Judge Gerber felt compelled by the Second Circuit’s Chrysler decision to issue this opinion and order permitting "New GM" to walk away from a few hundred million dollars of product liability claims despite the fact that We, the People (via the US Treasury) were paying $90 billion for a company that had a liquidation value of no greater than about $9 billion (on a good day).  Even putting aside the equities of not assuming a de minimus amount of claims (relatively speaking) of people least able to defend themselves from loss, does she really believe–like her colleagues who decided Chrysler–that Bankruptcy Code section 363 lets a debtor sell its assets "free and clear" of in personam products liability claims that could be asserted against the purchaser under state law theories of successor liability?  And if so, why?  And, furthermore, exactly how was due process advanced when New Chrysler walked away from successor products liability claims of people who haven’t even been injured yet in an accident?  A letter sent by Senators Reid and Durbin late last month gave me hope that we’d hear these questions asked, but it looks like that’s not going to happen.

As for Judge Sotomayor’s bankruptcy jurisprudence, Clean Slate’s Andy Winchell (here and here) and Texas Bankruptcy Lawyer Steve Sather (here and here) were the first (and last) to canvass her opinions involving bankruptcy issues.  All in all, nothing to complain about, and certainly her decision in Official Comm. of Equity Sec. Holders v. Official Comm. of Unsecured Creditors (In re Adelphia Communs. Corp.), 544 F.3d 420 (2d Cir. 2008) (pdf), affirming dismissal of the equity committee’s appeal was a notable one.  There, Bankruptcy Judge Gerber confirmed Adelphia’s chapter 11 plan, which stripped the equity committee of standing previously granted to it to prosecute derivative claims and transferred those claims to a litigation trust established under the plan (the first about $6.5 billion of which would go to unsecured creditors until they were paid in full, leaving equity "hopelessly out of the money").  In affirming Judge Gerber’s confirmation order (but don’t forget to look at Judge Scheindlin’s first crack at the appeal), Judge Sotomayor wrote that a court "may withdraw a committee’s derivative standing and transfer the management of its claims, even in the absence of that committee’s consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate."  In other words, she wrote, the "Equity Committee’s derivative standing under STN [did not] vest it with ownership over its derivative claims."  Curiously, she never addressed the obvious question of whether the appeal was moot because the plan had been substantially consummated.  So maybe there is hope for those concerned that substantial consummation of a plan or sale moots all appeals (especially–as Steve Sather points out–given her having joined in last year’s Manville decision that was just reversed on procedural grounds, as discussed here, by the Supreme Court in Travelers v. Bailey).

This is long-winded background to what I’ve been wanting to write about for a very long time.  And I figured as long as people are giving Judge Sotomayor tips on how to be a better Judge or Justice, I’d offer a tip of my own:


Continue Reading Required Bankruptcy Reading from Klee and Hayes for Justice-To-Be Sonia Sotomayor (and You Too!)

GM objection due tomorrow, so no time to pontificate on today’s "narrow" holding of the United States Supreme Court in Travelers Indem. Co. v. Bailey, No. 08-295 (pdf / WL).  Suffice it to say that those who sit by idly while their rights against third parties are enjoined from further prosecution do

The mantra of the real estate world is that the three most important factors in determining the value of a piece of property are "location, location, location." 

Justice Clarence Thomas (whose sense of humor is surely unappreciated, as my former suitemate and friend Mike Coffield proved one memorable night), writing for a 7-2 majority, today suggests that this mantra should not be forgotten in interpreting Bankruptcy Code provisions.  In Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. 2008 WL 2404077 (pdf), which not surprisingly (see prior post) restricted the stamp tax exemption only to postconfirmation transfers, the Court based its decision in large measure on the particular subchapter of the Bankruptcy Code in which §1146(a) is located (i.e., "Subchapter III – Postconfirmation Matters").  (Op. at 13.)  The Court also agreed, after reviewing each side’s competing grammatical and textual interpretations, that Florida’s narrower reading was "clearly the more natural." (Op. at 7.)

The most interesting part of the case, however, is Justice Thomas’s conclusion that the decision is further compelled by application of two "substantive canons":

Continue Reading “Location, Location, Location”: US Supreme Court Holds The Stamp Tax Exemption Only Applies To Post-Confirmation Asset Transfers

6/16/08 UpdateHere’s a link to my post on the Court’s decision reversing the 11th Circuit’s decision. 

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Bankruptcy lawyers and bloggers eyeing the Supreme Court’s docket this term had to be concerned at the absence of any bankruptcy cases on the Court’s docket after two straight banner years

[6/18/09 Update:  Those looking for my post on today’s Travelers v. Bailey decision can find it here.  This post is about the 2007 decision in Travelers v. PG&E.]

In arguing against cameras in the courtroom in recent testimony before the Senate, Supreme Court Justice Anthony Kennedy noted the special rules of etiquette that govern proceedings before the US Supreme Court.  He said:

We have a language, and ethic and etiquette, a formality, a tradition that’s different than the political branches; not better, not worse, but different.

One of those traditions, embodied in Supreme Court Rule 14.1(a) and many, many Supreme Court cases (e.g., Hines Yellow Pine Trustees v. Martin, 268 U.S. 458, 465, 45 S. Ct. 543 (1925)), is that you don’t raise new issues for the first time in merits briefs on cases before the Court.  Yet that’s exactly what PG&E did in Travelers Casualty and Surety Co. of Am. v. Pacific Gas and Elec. Co., No. 05-1429, 2007 WL 816795 (3/20/07) (pdf), and the Justices were clearly none too pleased about it.  After all, certiorari had been granted for the sole purpose of resolving the conflict among the circuits regarding the validity of the 9th Circuit’s so-called “Fobian rule” (which provides that attorney fees are not recoverable in bankruptcy for litigating issues peculiar to federal bankruptcy law).  (Op. at 4, 7-8.)  And to make matters even worse, PG&E’s counsel admitted at oral argument that the both sides agree (though for different reasons) that the Fobian rule is wrong!  (Op. at 10.) 

Instead of advising the Court in its opposition to the petition for certiorari that it agreed with the petitioner that Fobian was wrong, however, PG&E raised for the first time in its merits response brief why a fair reading of the Bankruptcy Code makes Fobian right, though not for the reason upon which certiorari was granted.  Chief Justice Roberts hoisted PG&E’s counsel on his own petard in calling PG&E’s tactics “an ambush and … a smuggling in the sense we don’t have a Court of Appeals decision one way or the other on that question.”  (Oral Arg. Tr. at 28:1-4.)  Justices Stevens and Ginsburg echoed Chief Justice Roberts’ displeasure with the following exchange (Tr. at 28:17-29:2):

Justice Stevens: Well, why then isn’t the proper disposition of this case to send it back to the Ninth Circuit to consider all these other arguments?

PG&E Counsel: Well, Your Honor, because this issue has been fully ventilated among the lower courts.

Justice Ginsburg: Yes, but we are not a court of first view and you know that very well. We are a court of review. So no matter how well it’s been aired [in other circuit cases], we wait to see what the lower courts have said on a question. We don’t take it in the first instance.

Still, the Justices made the best of the situation, and seemed genuinely interested in exploring the question of whether unsecured creditors have a right to attorneys’ fees expended postpetition.  But, as explained here (Credit Slips blog), here (In the Red Business Bankr. Blog), here (SCOTUS blog), and here (Georgia Bankr. Blog) the case was an easy one to decide because there wasn’t a soul in the entire Supreme Court that day who believed that Fobian was correctly decided.

The task of drafting the opinion fell to Justice Alito, author of the Marrama dissent, who didn’t ask a single question at oral argument.  His opinion is straightforward, but noteworthy for at least reminding us of several fundamental principles of law that remain in the forefront of the Supreme Court’s bankruptcy jurisprudence.  They are:

Continue Reading US Supreme Court Expresses Supreme Displeasure at PG&E’s “Ambush and a Smuggling”

As noted in my brief post of last week, the US Supreme Court held in a 5-4 decision in Marrama v. Citizens Bank of Massachusetts, No. 05-996 (2/21/07) (pdf / WL) that chapter 7 debtors do not have an absolute right to convert their cases to chapter 13.  So much for the broad consensus for which Justice Roberts is striving.  Not surprisingly, it was Justice Kennedy who cast the deciding swing vote.

Don’t throw away the opinion as a useless bit of trivia rarely applicable in practice, though, for the opposing views of the majority and the dissent regarding the scope of the bankruptcy court’s general and equitable powers – a subject that has generated significant academic debate – provide significant food for thought.

By way of background, be sure to read the 2005 article at 79 Am. Bankr. L. J. 1 entitled, The Limited Scope of Implied Powers of a Bankruptcy Judge:  A Statutory Court of Bankruptcy, Not a Court of Equity, where Judge Alan M. Ahart of the Bankruptcy Court for the Central District of California (who was the bankruptcy judge in this messy affair before Judge Real took hold of the reins) argues that the repeal in 1984 of 28 U.S.C. § 1481 stemming from the Supreme Court’s Marathon decision divested the non-Article III bankruptcy courts of equitable powers not specifically granted by statute.  To Judge Ahart,

[t]he only situation in which a bankruptcy judge might be compelled to rely on inherent powers is in the functioning of the court itself.  She must have authority to uphold the dignity and integrity of the judicial process.

Would Judge Ahart agree with the majority’s extension of the bankruptcy court’s "inherent power" to sanction "abusive litigation practices" and thereby enable in this case "a prompt, rather than a delayed, ruling on an unmeritorious attempt to qualify as a debtor under Chapter 13"?  Op. at p. 10 (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, 765, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980)).  Or would Judge Ahart adopt the narrower views of the dissent, which concluded that "a bankruptcy court’s inherent powers may have a role to play in a case such as this, … [b]ut whatever steps a bankruptcy court may take pursuant to … its general equitable powers, a bankruptcy court cannot contravene the provisions of the Code"?  Dissent at pp. 7-9 (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)). 

Regardless, both the majority and dissent confirm Judge Ahart’s view that a bankruptcy court’s inherent powers remain extant at least where necessary to "uphold the dignity and integrity of the judicial process."  (Ahart at p. 6.)  It is the dissent’s unwillingness to use a bankruptcy court’s inherent equitable powers to override a debtor’s apparent absolute right to convert in § 706(a) that distinguishes its view from that of the majority.

Even more significant, however, is the Court’s discussion of the breadth and scope of § 105(a).  In summarizing § 105(a)’s function, Justice Stevens wrote on behalf of the majority:

[T]he broad authority granted to bankruptcy judges to take any action that is necessary or appropriate “to prevent an abuse of process” described in § 105(a) of the Code is surely adequate to authorize an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.

Curiously, the second sentence of § 105(a) upon which the majority relies does not on its face provide the blanket affirmative grant of authority suggested by the majority.  Rather, this second sentence provides:

No provision of his title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.  (Emphasis added.)

A plain reading of the second sentence of § 105(a) suggests that the bankruptcy court’s power to fashion relief "necessary or appropriate … to prevent an abuse of process" is not unbounded, as suggested by the majority, but limited to instances where the Code or rules permit a particular issue to be raised by a party in interest.  In other words, to prevent an abuse of process, the court can sua sponte summarily take "necessary or appropriate" action to shut down a party in interest notwithstanding a provision in the Code that preserves within that party the right to be heard on the issue.  In effect, the majority read this qualification right out of the Code when it stated:

On the contrary, the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate [**note the missing qualification here**] "to prevent an abuse of process" described in § 105(a) of the Code, is surely adequate to authorize an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.  (Op. at pp. 9-10.)

As the following exchange indicates, Chief Justice Roberts seized upon this issue at oral argument, bringing it to a head before respondent’s counsel, Bingham McCutchen’s Eric Brunstad, had even finished just the third short sentence of his opening statement to the Court:

Continue Reading 5-4 US Supreme Court Majority Extends a Bankruptcy Court’s Power to Curtail a “Bad Faith” Debtor’s Seemingly Absolute Rights Under the Code

As discussed here, the US Supreme Court last term surprised many by deciding that the "plain meaning" of a bankruptcy statute must be filtered through a prism that, "in the main, secure[s] equal distribution among creditors [and] take[s] into account, as well, the complementary principle that preferential treatment of a class of creditors is

Elementary courtroom etiquette, and indeed an absolute tradition in Supreme Court argument, requires counsel to first address the Court with the customary respectful opening of, "May it please the Court." 

The lone bankruptcy-related case before the US Supreme Court this coming term will resolve a split in the circuits (previously referenced here) regarding whether a chapter 7 debtor has an absolute right to convert under Bankruptcy Code section 706(a) from chapter 7 to chapter 13, or whether that right is subject to an exception for motions filed in "bad faith."  In so doing, the Court will expound upon the precise statutory meaning of "may" in Bankruptcy Code section 706(a) (which provides that a debtor "may convert a [chapter 7] case to a case under chapter 11, 12, or 13 … at any time").  Marrama v. Citizens Bank of Mass., No. 05-996 (Argument Date:  11/6/06).

Last week, the chapter 7 debtor-petitioner, represented by Boston’s David Baker, filed its opening brief (pdf / WL), and the National Association of Consumer Bankruptcy Attorneys (NACBA), led by WilmerHale’s Seth Waxman and Craig Goldblatt, chimed in with a supporting amicus brief (pdf / WL).

The case began inauspiciously, as many cases that land in the Supreme Court do, when the debtor-petitioner’s flooring business hit the wall in 2003.  Being unemployed, the debtor was ineligible to file for chapter 13 reorganization, and was limited to filing a chapter 7 liquidation.  He subsequently landed a  job, however, and then moved under Code section 706(a) to convert his case to chapter 13.  The bankruptcy court refused to let him do so, finding that the motion was filed in "bad faith."  The bankruptcy appellate panel (pdf/WL) and the First Circuit (pdf/WL) affirmed the bankruptcy court’s decision.

As recounted in this prior post, the Supreme Court last term surprised many by deciding that the "plain meaning" of a bankruptcy statute must be filtered through a prism that, "in the main, secure[s] equal distribution among creditors [and] take[s] into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress."

In Marrama, the Court will consider whether provisions of the Bankruptcy Code that seemingly provide a debtor with an absolute right to do something should be filtered through yet another lens, one that screens for the absence of "bad faith."  With supposed rampant debtor abuse of the Code’s liberal "fresh start" provisions purportedly serving as the primordial mover behind Congressional passage of BAPCPA (though Texas’s Judge Frank Monroe explains the real reason here), we’ll see whether such an animus also moves the Justices to hold that a debtor must be free of "bad faith" if it is to take advantage of seemingly unrestricted permissive rights granted in the Code.  Stay tuned.

For those interested in the arguments advanced in the opening briefs, you’ll find below the table of contents of the briefs filed by both the debtor-petitioner and NACBA:

Continue Reading May It Please the Court? The US Supreme Court to Soon Decide Whether a “Bad Faith” Debtor “May” Do as the Bankruptcy Code Pleases

Yesterday’s Supreme Court head-scratcher is Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 2006 WL 1639224 (pdf), a delightful opinion in which Justice Ruth Bader Ginsburg (for a majority that surprisingly included Justices Scalia and Thomas) took on every issue we hoped here the Court would tackle, and then some.  In the end, we’re left  with another pathbreaking bankruptcy decision that will surely set the contours of the "plain meaning" doctrine in bankruptcy cases for years to come.  With the bankruptcy bench and bar struggling mightily to determine when "plain meaning" should be followed under BAPCPA’s ill-conceived and poorly drafted provisions, Justice Ginsburg’s opinion helps show the way.

The issues presented, and the winning petitioner’s arguments, are discussed at length here, and so won’t be repeated.  The basic question addressed by the Court was whether payments or premiums owing on account of workers’ compensation "plans" are entitled to a priority in bankruptcy as "claims for contributions to an employee benefit plan arising from services rendered within 90 days before the [petition] date."  Given Judge Markell’s recent opinion that when it comes to interpreting BAPCPA’s convoluted provisions, one should consider what a strict textualist like Justice Scalia might say, one would have expected Justice Scalia to join Justice Kennedy’s dissent, for Justice Kennedy (joined by Justices Souter and Alito) wrote in no uncertain terms that the statute’s "plain meaning" should govern (and hence there is no obvious reason to exclude workers’ compensation "plans" from other "plans" that benefit employees).  Instead, however, Justice Scalia (and, surprisingly, Justice Thomas too given his opinion in Ron Pair  that "as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute") sided with Justice Ginsburg in declaring that when it comes to bankruptcy law, "plain meaning" must be viewed through bankruptcy lenses (or bifocals, depending on your eyesight).  Justice Ginsburg wrote (pp.2-3, 14, 15-16):

In holding that claims for workers’ compensation insurance premiums do not qualify for § 507(a)(5) priority, we are mindful that the Bankruptcy Code aims, in the main, to secure equal distribution among creditors. We take into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress….

[W]e are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that provisions allowing preferences must be tightly construed….  Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code’s equal distribution aim.  We therefore reject the expanded [i.e., "plain meaning"] interpretation Zurich invites. (Citations omitted.)

Given the 6-3 vote, the surprise joinder by Justices Scalia and Thomas in the majority opinion clearly changed the outcome in the case.  Who really could have expected that Justices Scalia and Thomas would reject the stricter textualist-based reasoning offered by Justice Kennedy’s dissent in favor of Justice Ginsburg’s bankruptcy-based prism through which "any doubt concerning the appropriate characterization" should be filtered?  Here’s how Justice Kennedy framed the issue (dissent at pp. 1-2):

Before commencing a more detailed discussion of the central issue, certain preliminary matters must be addressed. To begin with, the Court states a background rule of construction that, when we interpret the Bankruptcy Code, “provisions allowing preferences must be tightly construed.”  The Court links this rule with a general objective in the Code for equal distribution. That objective, it is true, is acknowledged by our precedents, and we have said that a Code provision must indicate a clear purpose to prefer one claim over another before a priority will be found. This is different, though, from establishing an interpretive principle of strict construction when the Code addresses priorities, for strict construction can be in tension with the objective of “equality of distribution for similar creditors.” The bankruptcy priorities, then, should not be read simply to give priorities to as few creditors as possible. They should be interpreted in accord with the principle of equal treatment of like claims. In any event the priority provisions should not be read so narrowly as to conflict with their plain meaning.  (Citations omitted.)

I suppose, in retrospect, Justice Scalia’s apparent acceptance of the principle that the "plain meaning" doctrine has its own bankruptcy ocular was apparent from the start given the following opening exchange between Zurich American’s attorney and Justice Scalia at oral argument (at p.25):

Mr. Verrilli (for the respondent):  Thank you, Mr. Chief Justice, and may it please the Court:  I think it’s important to focus on exactly what a workers’ compensation plan provides.  A workers’ compensation plan provides health insurance that pays for the medical costs of a workplace accident, disability insurance —

Justice Scalia:  You’re begging the question by calling it a plan.  I mean, … that’s one of the issues here.  Why don’t you tell us what workmen’s compensation laws require?

So, in the end, here’s how Justice Ginsburg and the majority addressed the five questions regarding statutory interpretation teed up for its consideration:

Continue Reading “Plain Meaning” Through Bankruptcy Bifocals: A Surprising Coalition Joins Justice Ginsburg in Narrowing the Bankruptcy Code’s “Plain Meaning” in Howard Delivery v. Zurich

Part II of our continuing post-mortem analysis of the US Supreme Court’s anti-climactic 9-0 ruling takes a look at the other grounds for reversal argued by Pierce Marshall in his brief to the 9th Circuit. (Sorry, only We$tlaw version available at present). Given the US Supreme Court’s remand of the case “for further proceedings consistent with this opinion,” rest assured that Anna’s and Pierce’s respective legal teams are dusting off their arguments to the 9th Circuit from three years ago. There, in addition to Pierce’s now discredited challenge based on the so-called “probate exception” to federal court jurisdiction, Pierce raised the following issues on appeal:

  • Whether the Probate Court’s prior final judgment holding, among other things, that J. Howard did not intend to give Vickie any gift, precluded the District Court’s judgment on grounds of claim preclusion, issue preclusion, and the Rooker-Feldman doctrine.
  • Whether Texas law recognizes Vickie’s alleged cause of action of “tortious interference” with an “expectancy of an inter vivos gift” and, if so, what are the elements and parameters of her novel cause of action and has Vickie met those elements.
  • Whether the District Court denied Pierce due process of law by refusing to permit him to call percipient witnesses, by substituting its judgment for that of the Texas judge and jury through collateral review of the Texas probate proceedings, by finding J. Howard’s principal estate planning instrument to be invalid, in part, on the hearsay statements of witnesses who did not testify and were not subjected to cross-examination, and by improperly handing over to Vickie all of Pierce’s documents, including privileged documents.
  • Whether the District Court erred in basing its judgment (including compensatory and punitive damages) on speculative inferences and conjecture, nonexistent or insufficient evidence, and presumed facts.

More on Pierce’s answers to these questions later. For this post, however, I want to focus on Pierce’s 71 page opening statement of facts to the 9th Circuit, which refers extensively to the relationship between Anna and J. Howard Marshall. As you’ll see, it’s far from what one would call a true “courtship” (as Justice Ginsburg did in her opinion). Instead, I am reminded of Howard Bashman’s memorable interview of Judge Easterbrook, who remarked that one reason he enjoys being a federal appeals judge is that he’s often “served up [with] facts that were proposed as soap opera scripts and rejected as too implausible.”
Here are direct quotes of some of Pierce’s saucier allegations, which — given the characters and stakes involved — surely rank this case as a leader among ones with a “too implausible,” but probably true, “soap opera script”:

Continue Reading The “Courtship” of Anna Nicole Smith – Part II: Pierce Marshall’s Appellate Arguments Reviewed