Farewell to Chevron Deference

One of the many controversial opinions coming from the Supreme Court at the end of its term was Loper Bright Enterprises v. Raimondo, No. 22-451 (6/28/24) which abolished what is known as Chevron deference. The commentators on the podcasts that I listen to were aghast that the Supreme Court felt that judges should hold themselves out to make difficult decisions as to clean air and water or whether to approve a prescription drug when there were agencies who had expertise in these areas.  Several commentators pointed out that it might not be a good idea to rely on federal judges to make scientific determinations after Justice Gorsuch confused nitrous oxide with nitrogen oxide in another case.  \

Supreme Court Nixes Non-Consensual Third-Party Releases

In an opinion that resolves decades of circuit court splits, the Supreme Court ruled against allowing nonconsensual third-party releases. Harrington v. Purdue Pharma, LP, No. 23-124 (6/27/24) which can be found here.  While the opinion is emphatic in its rejection of extra-textual plan provisions, the 5-4 ruling and numerous caveats mean this won't be the last time creative lawyers will be testing the limits of the Code.

Grammar Dooms Innocent Spouse in Non-Dischargeability Case

While we often recite that bankruptcy is for the honest but unfortunate debtor, a new case from the Supreme Court shows that getting into bed or business with the wrong person can lead to a non-dischargeable debt for an innocent spouse. The case is No. 21-908, Bartenwerfer v. Buckley, which you can find here.

A Look at the Jurisprudence of Judge Ketanji Brown Jackson (Bankruptcy and Otherwise)

Supreme Court nominee Judge Ketanji Brown Jackson has played a variety of roles in her legal career. She has been a public defender, an attorney in private practice, a member of the U.S. Sentencing Commission, a U.S. District Judge and a Court of Appeals Judge. Unfortunately, these jobs have given her scant exposure to bankruptcy law. I will explore all three of her bankruptcy related opinions (out of a total of about 600) as well as a handful of her other jurisprudence.

Supreme Court Rules That Passive Retention Does Not Violate Stay

 The Supreme Court decided that a creditor which passively retains possession of estate property does not "exercise control" over such property in violation of 11 U.S.C. Sec. 362(a)(3). The Court viewed the word "exercise" to require active measures.  Case No. 19-357, Chicago v. Fulton (1/14/21), which can be found here.

In the Fulton case, the City of Chicago impounded the Debtor's vehicle over failure to pay fees. The Debtors (there were multiple consolidated cases) filed chapter 13 and demanded return of their vehicles. The City refused. The Seventh Circuit held that the refusal to relinquish possession was a violation of the automatic stay.

A Few Thoughts on the Opinions of Amy Coney Barrett

 This post was originally intended to be about the bankruptcy jurisprudence of Supreme Court nominee Amy Coney Barrett. That would have been a very short post. She has been on panels which issued seven per curiam unpublished opinions in bankruptcy matters, none of which were very remarkable. Instead, I will look at three of her opinions dealing with consumer financial services and cases where she did not rule for law enforcement or employers,  traditional favorites of conservatives. While most of her writing is workmanlike, she occasionally reaches for a memorable turn of phrase.

The Consumer Protection Decisions

In determining a case under the Telephone Consumer Protection Act, Judge Barrett lamented that the provision in question was "enough to make a grammarian throw down her pen." Gadelhak v. AT&T Services, 950 F.3d 458 (7th Cir. 2020).  She succinctly stated that:

We'll save the intense grammatical parsing for the body of the opinion—here, we'll just give the punchline. We hold that "using a random or sequential number generator" modifies both "store" and "produce." The system at issue in this case, AT&T's "Customer Rules Feedback Tool," neither stores nor produces numbers using a random or sequential number generator; instead, it exclusively dials numbers stored in a customer database. Thus, it is not an "automatic telephone dialing system" as defined by the Act—which means that AT&T did not violate the Act when it sent unwanted automated text messages to Ali Gadelhak.

While Judge Barrett may have wanted to throw down her pen, she did follow the grammar.

However, the statutory language did not keep her from ruling against an FDCPA plaintiff who alleged a technical notice violation. In Casillas v. Madison Ave. Associates, 926 F.3d 329 (7th Cir. 2019), a debt validation notice failed to state that any requests for validation must be made in writing. The consumer did not attempt to make a written or verbal request for validationbut did file an FDCPA class action. Judge Barrett wrote that under the Supreme Court's Spokeo decision that a plaintiff cannot claim "a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III."

Judge Barrett also wrote an opinion affirming a summary judgment for the defense in a case under the FDCPA and FCRA in Walton v. EOS CCA, 885 F.3d 1024 (7th Cir. 2018).  This was a case about verification of a debt to ATT in the amount of $268.47. When ATT sent the debt to the debt collector, it transposed several of the digits in the account number. The clever consumer wrote to the debt collector stating that she did not "own (sic) AT&T any money under the account number listed above." The debt collector responded that it had verified that her name, address and the last four digits of her social security number matched the debt report it had received from AT&T. The debt collector reported the debt to two credit reporting agencies but indicated that it was disputed.   The consumer filed two complaints with the credit reporting agencies. In the second, she stated that the account number was incorrect. At that point, the debt collector deleted the trade line. The consumer sued under FDCPA contending that the debt collector failed to verify the debt with the original creditor and under FCRA asserting that it failed to reasonably investigate the disputed information.

Judge Barrett went to the dictionary to see what the term "verification" meant but then noted that the "question here is what the debt collector is supposed to be verifying." The consumer argued that the debt collector was required to verify the original debt while the debt collector argued that it was required to verify that the notice it provided to the consumer matched the information it had received from the creditor. Judge Barrett agreed with the debt collector.

Judge Barrett also ruled that the debt collector properly investigated the dispute made to the credit reporting agencies. The first dispute asserted that the debt was not hers. The debt collector properly verified that the information that it received from the creditor identified the account as belonging to the consumer. When she clarified that the account number was wrong, the debt collector deleted the trade line. 

These opinions demonstrate that Judge Barrett has a passing familiarity with the three major federal consumer protection statutes and that she appears to take these issues seriously.

Judge Barrett Does Not Always Rule for the Authority Figure

In the classic film, School of Rock, Jack Black's character tells his young charges that the purpose of rock and roll is to stick it to the man. Although Judge Barrett is a conservative judge, there are definitely opinions in which she has been willing to stick it to the man. This was the most interesting thing that I found in examining her slight judicial record of less than one hundred published opinions.

 Judge Barrett has ruled against the employer in several cases involving discrimination on the basis of sex. Judge Barrett affirmed a judgment against Costco for failing to prevent a hostile work environment when a customer relentlessly stalked and harassed a female employee. While Costco argued that other unsuccessful Title VII plaintiffs had alleged far worse conduct, Judge Barrett found that the evidence was sufficient for the jury to find in the EEOC's favor.  EEOC v. Costco Wholesale Corp., 903 F.3d 618 (7th Cir. 2018).  In a male on male sexual harassment case, Judge Barrett affirmed the jury verdict. Where male employees grabbed another man's buttocks and genitals and reached down his pants among other actions, there was sufficient evidence to conclude that he was harassed based on sex where there was no evidence that female employees were subject to the same treatment. (He was also told to go back to Africa which would indicate racial discrimination as well). Smith v. Rosebud Farm, Inc., 898 F.3d 747 (7th Cir. 2018). These decisions show a willingness to uphold jury verdicts based on evidence. However, they also show a lack of judicial activism to protect employers from being sued.

 Judge Barrett was also unwilling to reverse a district court's determination that a detective was not entitled to qualified immunity in a Section 1983 case. The detective contended that even though he lied in his probable cause affidavit, his lies were not material. Judge Barrett wrote that "when the lies are taken out and the exculpatory evidence is added in" there was not sufficient evidence to arrest a man for the murder of his mother.  The fact that he had a key to his mother's apartment, checked on her and stood to inherit was not enough to establish probable cause. Rainsberger v. Benner, 913 F.3d 640 (7th Cir. 2019). 

In another case, the DEA arrested a suspect and then went to search his apartment. A woman wearing a bathrobe let them in. The agents did not ask her who was or why she was there until partway through the search.  Judge Barrett reversed the trial court's decision not to suppress the evidence obtained during the search. She wrote that "A bathrobe alone does not clothe someone with apparent authority over a residence, even at 10:00 in the morning." United States v. Terry, 915 F.3d 1141 (7th Cir. 2018).

Judge Barrett also ruled that a defendant was entitled to a new sentencing hearing before a different judge after the judge refused to recuse himself.  The judge had previously been a prosecutor in the same U.S. Attorney's office which was prosecuting the defendant. It came to light that the judge had had over 100 ex parte communications with the U.S. Attorney's office about other cases. As a result, the Chief Judge removed the judge from any cases involving his former office. The defendant raised the judge's failure to recuse for the first time on appeal because the ex parte contacts were not disclosed until after sentencing. Judge Barrett wrote that "Allowing Atwood's sentence to stand would undermine the public's confidence in the fairness of this sentence and in the impartiality of the judiciary." United States v. Atwood, 941 F.3d 883 (7th Cir 2019).

There are other similar cases that I could discuss as well. To me, this second set of cases demonstrates that Judge Barrett displays judicial independence in cases where business and law and order advocates might have preferred a different result. The decisions appear to be carefully thought out and correct. If Judge Barrett is a dangerous idealogue, she has not provided her critics with evidence in this handful of cases.

 

 

Supreme Court Set to Hear Passive Stay Violation Case

Seeking to resolve a 5-3 split among the Courts of Appeals, the Supreme Court will consider whether a creditor which passively retains property of the estate violates the automatic stay.  Case No. 19-357, City of Chicago v. Fulton. The Second, Seventh, Eighth, Ninth and Eleventh Circuits have ruled that retaining possession or control of property of the debtor violates the stay. The Third, Tenth and D.C. Circuits have held that passive retention of property is not an "act" to exercise control over property of the estate.

Justice Gorsuch Addresses NCBJ

Bankruptcy Judge Michael Romero had a fireside chat with Supreme Court Associate Justice Neil Gorsuch about his role on the Court and his new book, The Republic If You Can Keep It.   If it looks like they are speaking from the pit of Hell, it is because there was a giant video fireplace behind them.

Judge Romero started by reminding Justice Gorsuch about the quiet and happy life he left behind in Denver when they had  courthouses across the street from each other.

The Big Announcement

Justice Gorsuch told the story of how he had to evade the press for President Trump's rollout of his nominated.  He said that the President "likes a surprise.   He  wanted us to sneak out of Colorado and sneak into the white house.  How do you sneak into the White House when the entire Washington press corps knows there is going to be an announcement?"  The answer was through the kitchen.

However, the more interesting story was how he slipped the press who had been staking out his neighborhood.   He said that two men dressed in suits showed up to his home.  The first thing they did was to send them to Walmart to get some clothes that didn’t like Washington lawyers.  They suggested that the Justice-to-be and his wife hike up the trailhead where they could meet them with an SUV.  Even though it was only a mile, then-Judge Gorsuch said that he was not about to pull his wife's rollerbag up the trail.  Instead, he went to his neighbor for help.   His neighbor told him that he could drive out a horse trail.   His neighbor grew up in Iran during the revolution and made sure that he would never buy a house with only one way out.

Judge Gorsuch was given the Lincoln bedroom as an office for the day.  His wife, who is from England, was allowed use of the Queen’s bedroom.   She was only allowed one phone call so she called her father in England.  Her father insisted that the President had already decided to pick someone else.

ABI's Keynote Address: CBS's Jan Crawford Talks About the Supreme Court

Jan Crawford of CBS News gave a talk on The Supreme Court Under Trump at the ABI Luncheon.  She asked the audience to turn back to 1990 – 1991.  David Souter and Clarence Thomas had just replaced two liberal giants on the court.  After Ruth Bader Ginsberg and Stephen Breyer were appointed in 1994,the same nine justices would serve together for eleven years.   It was a time of great hope for conservatives. With seven Justices nominated by Republicans, they were poised to undo the great excesses of the Warren Court.  Instead, the Rehnquist Court put Roe v. Wade on firmer ground, affirmative action was upheld and the wall of separation between church and state remained intact.

How Would Supreme Court Nominee Brett Kavanaugh Approach Bankruptcy?

President Donald Trump has selected D.C. Circuit Judge Brett Kavanaugh to be his second Supreme Court nominee.    A post describing his bankruptcy opinions would be very short.  I could find only one opinion authored by Judge Kavanaugh arising out of bankruptcy court and that case dealt with equitable subrogation under the laws of the District of Columbia.   Smith v. First American Title Ins. Co. (In re Stevenson), 789 F.3d 197 (D.C. Cir. 2015). This is not surprising given the D.C. Circuit's footprint.   The D.C. Circuit has one bankruptcy court with one bankruptcy judge.  By contrast, the Fifth Circuit has nine districts staffed by 26 judges.   

Supreme Court Decides Three Narrow Bankruptcy Issues

The Supreme Court resolves about eighty cases each year, ranging from major constitutional issues to smallish questions of statutory interpretation. The three bankruptcy cases decided this term fall into the latter category, answering narrow statutory questions.

Supreme Court Sinks Safe Harbor

The first case decided was Merit Management Group, LP v. FTI Consulting. Inc., Case No. 16-784 (2/27/18). This case asked whether a shareholder of a business could be protected from a fraudulent transfer action where the funds passed through a third-party escrow agent which happened to be a bank. Section 546(e) of the Bankruptcy Code exempts from recovery "a transfer made by or to (or for the benefit of) … a financial institution...in connection with a securities contract...." In this case, the funds to purchase the stock flowed from the purchaser through two financial institutions to the stock seller. The statutory issue was whether the payment was protected where it flowed through two financial institutions that were merely intermediaries and did not receive the funds for their own benefit.

Writing for a unanimous court, Justice Sotomayor held that the relevant transfer to consider was the one that the Trustee sought to avoid. Since neither the buyer nor the seller was a financial institution, the safe harbor did not apply.   This decision prevents parties from insulating themselves from potential liability for a fraudulent transfer by routing the proceeds through a financial institution which does not have an interest in the transaction.

How Do You Review a Non-Statutory Insider?

Next, the Supreme Court weighed in on the narrow issue of the proper burden of proof when deciding whether a transferee was a non-statutory insider under 11 U.S.C. § 101(31).  U.S. Bank, N.A. v. Village at Lakeridge, LLC, No. 15-1509 (3/5/18).  In order to achieve a cram-down of a chapter 11 plan, a debtor must obtain the consent of a least one impaired class of creditors without counting votes of insiders. The class that accepted the plan consisted of a claim held by the debtor's sole owner, clearly an insider. One of the directors of the insider creditor  (Bartlett) offered to sell the claim to a retired surgeon (Rabkin) with whom she had a romantic relationship (more on this later). Rabkin agreed to purchase the $2.76 million claim for $5,000.00 and agreed to accept the plan. 

The list of defined insiders does not include a person in a romantic relationship with a director of an insider. However, the definition of "insider" states that the term "includes" the defined categories, meaning that the list is not exhaustive. U.S. Bank, which objected to the plan, argued that the romantic doctor was a non-statutory insider. The Bankruptcy Court found that the doctor was not an insider because he purchased the claim as a speculative investment after conducting due diligence. The Ninth Circuit affirmed applying a test that looked at (1) the closeness of the relationship and (2) whether the transaction was negotiated at less than arms-length. The Circuit found that the Bankruptcy Court's determination that the transaction was negotiated at arms-length was not clearly erroneous and affirmed.

The Supreme Court accepted the case, not on the question of the correct legal test to apply, but whether the Court of Appeals had applied the proper standard of review. Factual determinations must be upheld unless they are clearly erroneous while legal conclusions are reviewed on a de novo basis.

Justice Kagan, again writing for a unanimous court, found that it took a three step process to answer the question.    The first step was purely legal, to determine the appropriate legal test to apply.   The second step was purely factual, to determine the “basic” or “historical” facts relevant to the legal test.   The final step was to apply the historical facts to the legal test.   If factual issues predominated, the final step would be reviewed on the clear error standard, while de novo review would apply if legal issues dominated.

The Supreme Court denied cert on whether the Ninth Circuit applied the right legal test, which was the more interesting question.   While applying the historic facts to the legal test is a mixed question of law and fact, it ultimately depends on its component parts—the legal test and the facts.   Since the legal test was not at issue, what remained was the Bankruptcy Court’s fact-finding which is reviewed for clear error.   

The Ninth Circuit’s clear error review may have been assisted by the following testimony from Bartlett, the party offering the claim for sale:

Q:        Okay.  I think the term has been a romantic relationship—you have a romantic relationship?

A:        I guess.

Q.        Why do you say I guess?

A.        Well, no—yes.

Justice Kagan observed that “One hopes Rabkin was not listening.”

It is not clear why the Supreme Court accepted this case and this question since the answer was rather obvious.   Justice Sotomayor, joined by Justices Kennedy, Thomas and Gorsuch, had the same concern.   Justice Sotomayor said that “if that test is not the right one, our holding regarding the standard of review may be for naught.”  Because the Court did not accept the legal standard question, Justice Sotomayor did not provide an answer either.   However, she did suggest that the lower courts might want to spend some time thinking about what the legal test should be.   Justice Kennedy, in his own concurrence, went further.   He said, “The Court’s holding should not be read as indicating that the non-statutory insider test as formulated by the Court of Appeals is the proper or complete standard to use in determining insider status.”   He also suggested that the Bankruptcy Judge may have erred in concluding that the transaction was made on an arms-length basis since the claim was not shopped to other parties.

Thus, what we have is a rather unnecessary explication of how to decide mixed questions of law and fact combined with a statement by four Justices encouraging the lower courts to look for a different standard than the one articulated by the Ninth Circuit.    As a result, this opinion is more interesting for what it didn’t decide than for what it did.

Supreme Court Says Get It in Writing

            Finally, in Lamar, Archer & Cofrin v. Appling, No. 16-1215 (6/4/18), the Court decided whether a false statement about a single asset constituted a statement of financial condition which must be in writing to form the basis for a non-dischargeable debt.  11 U.S.C. §523(a)(2)(B) carves out an exception from the general rule that debts arising from fraud are non-dischargeable.  It provides that a statement “regarding the debtor’s or an insider’s financial condition” must be in writing in order to give rise to a non-dischargeable debt.   

            The case involved a client who got behind on paying his lawyers.   When the lawyers threatened to withdraw, he told them that he was expecting to receive a tax refund of approximately $100,000 and would use those funds to bring the lawyers current and pay future fees.   The trusting lawyers accepted his promise and soldiered on.   However, it turned out that the tax refund was closer to $60,000 and the client spent the money on business expenses.

            When the debtor filed bankruptcy, the unhappy law firm sued to prevent the debt from being discharged, claiming that the client made a false representation to gain their continued services.   The Bankruptcy Court ruled that a statement regarding a single asset, in this case, the tax refund, was not a statement regarding financial condition, and found the debt to be non-dischargeable.   The Eleventh Circuit disagreed.

            Justice Sotomayor, writing once more for a unanimous court, found that a statement regarding a single asset qualified as regarding the debtor’s financial condition.   Relying on grammar, she found that the term “regarding” in the statute broadened the clause such that it referred to both the object, statements of financial condition, and items related to the object.   She also relied on the fact that cases interpreting similar language under the Bankruptcy Act had arrived at the same result.   Since Congress did not change the verbiage, it must have intended to adopt the prior jurisprudence.   

            The lesson here is that a verbal statement about a debtor’s assets is not worth the paper it isn’t written on.   If a creditor wants to rely on a statement about a debtor’s assets, it should get it in writing.   In the case of the law firm, a simple email asking the debtor to confirm that he was expecting to receive a $100,000 tax refund (as opposed to the paltry $60,000 refund), if acknowledged by the client would have sufficed.