US Supreme Court Expresses Supreme Displeasure at PG&E's "Ambush and a Smuggling"

[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:

  • Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.” (Quoting Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20, 120 S. Ct. 1951 (2000)).

  • "[The] 'basic federal rule' in bankruptcy is that state law governs the substance of claims, Congress having 'generally left the determination of property rights in the assets of a bankrupt's estate to state law.'"   (Quoting Butner v. United States, 440 U.S. 48, 57, 99 S. Ct. 914 (1979)).
  • "Property interests are created and defined by state law," and "[u]nless 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."  (Quoting Butner, 440 U.S. at 55)).
  • "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."  (Quoting Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161, 67 S. Ct. 237 (1946)).
  • "Where Congress has intended to provide ... exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly."  (Quoting FCC v. NextWave Personal Communications Inc., 537 U.S. 293, 123 S. Ct. 832 (2003)).
  • "We ... 'will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure'."  (Quoting Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563, 110 S. Ct. 2126 (1990)).

So, if the case ever gets decided on remand, possibly years from now if the Ninth Circuit itself decides to send the case back to the bankruptcy court for further findings and rulings, maybe the Supreme Court will take up the matter again and answer the question with some degree of certainty.  Alternatively, now that the issue has been addressed by the Court, maybe Congress will moot the issue by amending the Code in some future round of “technical” amendments and expressly allow such claims.  (Fat chance!)

Meanwhile, those interested in further exploring whether “other principles of bankruptcy law might provide an independent basis for disallowing Travelers’ claim for attorneys’ fees” (Op. at 12) should compare the arguments made by PG&E in its response brief / (pdf) (with the support of 19 professors in this amicus brief) with the arguments made by Travelers’ in its reply brief / (pdf) (without--as Justice Stevens noted at oral argument [at Tr. 56:22-57:13]--the support of any professors, except of course Petitioner's own counsel, Prof. Eric Brunstad).  They cover the landscape well.

***

The inset cartoon is from the Law Cartoon Collection of Shannon Burns, to whom special thanks is owed for granting me permission to post it here.

© Steve Jakubowski 2007