US Supreme Court to Rule on Whether Code Section 1146's Transfer Tax Exemption May Ever Apply to Pre-Confirmation 363 Sales
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 of bankruptcy decision-making. Thankfully, the Court on Friday granted the State of
Does Code section 1146, which exempts sales under a confirmed plan from state and transfer taxes, apply to pre-confirmation sales of assets under Section 363?
At first blush, the answer seems obvious given that Section 1146 on its face is limited to transfers "under a plan confirmed under section 1129 of this title." But just to show you how creative bankruptcy lawyers—and judges—can get, the Eleventh Circuit agreed with the argument that the Section 1146 exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan." State of
One small problem for the respondents, and Bingham McCutcheon's Eric Brunstad, who represents the respondent-debtor; that is, Hechinger was decided by none other than then-Judge, now-Justice Alito, the author of the two latest bankruptcy opinions decided by the Supreme Court (i.e., Travelers & Marrama). I think that it's fair to say that reversal of the Eleventh Circuit's decision is about as safe a bet as you'll find.
Note: The inset picture is a famous pre-Revolutionary War political cartoon depicting "Bostonians paying the excise-man by tarring and feathering." Ahh, the good ol' days!
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US Supreme Court Expresses Supreme Displeasure at PG&E's "Ambush and a Smuggling"
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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
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:
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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 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:
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None Too Pleased With The "Bad Faith" Debtor: US Supreme Court Rules There's No Unqualified Right to Convert from Chapter 7 to Chapter 13
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 in order only when clearly authorized by Congress."
Yesterday, as summarized in this post by Scott Riddle at the Georgia Bankruptcy Blog, the US Supreme Court ruled that provisions of the Bankruptcy Code that seemingly provide a debtor with an absolute right to do something (i.e., convert its case from chapter 7 to chapter 13) should be filtered through a lens that screens for the absence of "bad faith." Marrama v. Citizens Bank of Massachusetts, No. 05-996 (2/21/07) (pdf/WL) (previewed here).
The decision isn't surprising given bankruptcy's equitable roots and the lack of sympathy one can muster for a "bad faith" debtor like Marrama. More on the case later, as today I'm delivering the following two presentations for this scheduled event at the Licensing Executive Society Winter 2007 Meeting in San Francisco, and thus have neither the time nor the background briefs and transcripts at hand to provide much more insight into the case:
- IP Licensing & Bankruptcy: An Issue Spotting Checklist for Analyzing Questions Regarding Assumption, Rejection, and/or Assignment of IP Licenses in Bankruptcy
- From Bankruptcy to Success through Licensing: The Cytomedix Story (with CRA International's Jeff Snell)
Those wanting an insightful and controversial early look at the case, be sure to check out Professor Todd Zywicki's lengthy post at the Volokh Conspiracy.
2/27/07 Update: Here's my follow up post on the Marrama decision, entitled 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.
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May It Please the Court? The US Supreme Court to Soon Decide Whether a "Bad Faith" Debtor "May" Do as the Bankruptcy Code Pleases
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:
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"Plain Meaning" Through Bankruptcy Bifocals: A Surprising Coalition Joins Justice Ginsburg in Narrowing the Bankruptcy Code's "Plain Meaning" in Howard Delivery v. Zurich
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:
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The "Courtship" of Anna Nicole Smith - Part II: Pierce Marshall's Appellate Arguments Reviewed
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":
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Pierce Marshall Readies for Another Assault on Anna Nicole Smith After the US Supreme Court Throws Her a Lifeline - Part I
After today's widely reported win by Anna Nicole Smith before the US Supreme Court (stories here and here), Pierce Marshall vowed that the only thing "Anna and her lawyers can take to the bank" from this win is a "continue[d] fight to clear [his] name in California federal court." His lawyer, Eric Brunstad, echoing arguments he advanced to the Supreme Court, remarked that Anna will lose Round 2 before the 9th Circuit because she "can't get a second bite at the apple" (a quote that reminded me, given the circumstances, of this great movie). Anna's lawyer, Kent Richland, retorted: "We are confident that the 9th Circuit will have no problem in ruling in our favor on the issues that remain." Round 2 of appellate review sure is shaping into another good ole'-fashioned Texas-style "hully-gully slopfest."
Now to the decision, Marshall v. Marshall, 2006 WL 1131904, where Justice Ruth Bader Ginsberg, writing for a unanimous Court, swept aside "misty understandings of English legal history" and held, in no uncertain terms, that "the Ninth Circuit had no warrant from Congress, or from decisions of this Court, for its sweeping extension of the probate exception." (p.2) Notably, Justice Ginsberg did not wipe away the "probate exception," as Anna's lawyers had urged and as Justice Stevens advocated in his concurring opinion (extolled here). Instead, she ruled narrowly, holding "that the instant case does not fall within the ambit of the narrow exception recognized by our decisions." (p.8) (However, in marked contrast to Pierce's portrayal of Anna here, the Court's framing of events leading to the marriage as a "courtship" (p.2) suggests that Anna's front-row teardrops during oral argument were not perceived by the Court as quite the crocodile tears some would have us believe.) [NB: But see here]
So what, then, is the "ambit of the narrow exception recognized by our decisions"? To Justice Ginsberg, the answer is found in the Court's decision in Markham v. Allen, 326 U.S. 490 (1946), which she described as "the Court's most recent and pathmarking pronouncement on the probate exception." (p.11) This decision stated, in a quite "misty" and "mythograph[ic]" way (pp. 1-2), that "the equity jurisdiction conferred by the Judiciary Act of 1789..., which is that of the English Court of Chancery in 1789, did not extend to probate matters." (p.11)
Justice Ginsberg noted that Markham is "enigmatic," to be sure, but it remains good law. She wrote:
[I]t has been established by a long series of decisions of this Court that federal courts of equity have jurisdiction to entertain suits 'in favor of creditors, legatees and heirs' and other claimants against a decedent's estate 'to establish their claims' so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court." 326 U.S., at 494. (Emphasis in original). (pp. 13-14)
As regards how the term "interfere" should be construed, Justice Ginsberg wrote:
[W]e comprehend the "interference" language in Markham as essentially a reiteration of the general principle that, when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res. (Citations omitted). Thus, the probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction. (p.14)
In analyzing Anna's case in light of the foregoing principles, Justice Ginsberg concluded that Anna wins because her claim does not -- quoting Markham -- "involve the administration of an estate, the probate of a will, or any other purely probate matter." (p.15) Rather, Justice Ginsberg wrote:
Provoked by Pierce's claim in the bankruptcy proceedings, Vickie's claim ... alleges a widely recognized tort. Vickie seeks an in personam judgment against Pierce, not the probate or annulment of a will. Nor does she seek to reach a res in the custody of a state court. Furthermore, no "sound policy considerations" militate in favor of extending the probate exception to cover the case at hand. Trial courts, both federal and state, often address conduct of the kind Vickie alleges. State probate courts possess no "special proficiency *** in handling [such] issues." (Citations omitted). (p.15)
So Anna wins, and the judgment of the 9th Circuit is reversed, with instructions "for futher proceedings consistent with this opinion."
Part II, coming soon, will focus on the two issues that the 9th Circuit hoped to avoid having to wrestle with by dismissing the case on jurisdictional grounds, but now will have to address head on. (So don't be surprised to see this case back in Justice Ginsberg's lap a year or two from now.)
The first issue is whether Anna's counterclaim against Pierce (who clearly never should have submitted to the jurisdiction of the bankruptcy court by filing a proof of claim in Anna's bankruptcy case) was a "core" or "non-core" proceeding. Given that the bankruptcy court found Pierce liable for almost $500 million, whereas the district court tagged Pierce for just under $100 million, Pierce's fortune (or misfortune) may well hinge on the answer to this seemingly innocuous question, as the following very telling exchange at oral argument illustrates:
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Anna Nicole Smith Case Roundup - Vol. 2
In the movie business, the success of a movie is often defined by how good its "legs" are. One thing you have to say about Anna Nicole Smith's case before the US Supreme Court, "It sure has great legs!"
Here's more postings that caught my eye, in addition to the ones previously reported here:
- Arianna Huffington reports on her blog here that "bombshells" beat "bombs" for airtime coverage on the CBS Evening News, with Anna's story going for 1 minute, 56 seconds, compared with the story on deadly suicide bombs in Iraq, which lasted 1 minute, 39 seconds.
- The Houston Chronicle's Nick Anderson draws this political cartoon.
- Houston's Clear Thinkers' Tom Kirkendall joins Althouse in predicting Anna wins.
- SCOTUSblog's Tom Goldstein, co-counsel to Pierce Marshall, wrote this extended analysis on the oral argument, in which he summarized the four things that struck him about the oral argument "from the inside-baseball perspective of Supreme Court advocacy." His final observation (about Judge Alito): Watch out for that new reliever in the bullpen. He may not say a lot, but he's gotta heck of a sinker!
- The WSJ Law Blog reminds us that J. Howard Marshall was a T&E professor at Yale. This, however, is challenged here at the Wills, Trusts & Estates Prof Blog. I think the WSJ Law Blog wins this dispute, since Pierce Marshall's response brief (found here) says on page 3 that J. Howard Marshall was a former T&E professor at Yale. [NB: I guess that answers the question of what do Yale T&E professors do after they retire? Become T&A professors, of course!].
Even French blogs have picked up on the craze, with one saying: "Anna fera tout pour récupérer les 1,6 milliard de dollars de son ancien grabataire de mari". [NB: Even if it doesn't translate out that way, the French version sure sounds like it echos Anna's argument that "the son grabbed the old man's money."]
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Anna Nicole Smith Case Roundup
With MSM focused on Anna Nicole Smith's case before the Supreme Court, there's lots of enlightening reading to be found. Here's some that have caught my eye [NB: vol. 2 here]:
- Althouse reports on the oral argument and predicts Anna will win on the merits.
- Broadsheet quotes Univ. of Chicago Law School's Doug Baird as saying: "I'd suspect some justices haven't the slightest idea who Anna Nicole is." [NB: I suppose they'd have a far better idea if the issues had been more "prurient" in nature.]
- How Appealing! provides links to photos and to news reports from Newsweek, NPR (here and here), the AP (here and here), the Houston Chronicle, and USA Today.
- SCOTUSblog, whose founders at Goldstein & Howe represent Anna's adversary, recaps the oral argument.
- The Volokh Conspiracy links here to Dahlia Lithwick's "Supreme Court dispatches" on Slate.com (including a link to her story on NPR). Volokh's Jim Lindgren also separately provides this solid analysis of the case from a "T&E" (trusts and estates) perspective (though some may prefer the "T&A" perspective here).
- Wonkette! offers some color commentary on the oral argument and the circus atmosphere outside (with links).
- The WSJ Law Blog offers good background reading, updates, and links here, here, and here.
You can also find more background reading on the case at my posts here, here, here, and here.
Finally, Anna's reply brief, filed last week, can be found here (courtesy of SCOTUSblog). It provides the following two short -- but significant -- retorts:
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The Empire Strikes Back: Pierce Marshall and His Amici File Fiery Responses to Anna Nicole Smith's Claim to a Big Chunk of Her Erstwhile Hubby's Trust
With Bingham McCutcheon's Eric Brunstad and SCOTUSblog's Tom Goldstein the lead attorneys on a 50 page brief filed on behalf of E. Pierce Marshall, the son of Anna Nicole Smith's former hubby, J. Howard Marshall, you can bet that Anna Nicole's legal team will be burning the midnight oil through oral argument on February 28.
More on Pierce's arguments later, but suffice it to say for now that Anna Nicole's not exactly being portrayed as a modern-day Jane Eyre. The brief begins with the following bit of contextual background:
J. Howard met Vickie in 1991 at a club where she danced. They were married in 1994, when he was eighty-nine and she was twenty-six. The marriage lasted fourteen months, ending with J. Howard's death on August 4, 1995.
One unanticipated wrinkle here that the Respondent didn't have a chance to consider or address, but which clearly affects the dynamic of the entire case, is the Court's opinion (issued the next business day after the Respondent's brief was filed) in Central Virginia Comm. College v. Katz (discussed here). One has to wonder whether the Court will look at Anna Nicole's tortious interference claim as one being "asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy court." Since a tortious interference claim probably does not fit that bill, and since (as the Respondent notes) "Congress has not seen fit to displace" (or abrogate) the long-standing judicially established "probate exception" to federal bankruptcy jurisdiction (which bars the exercise of bankruptcy jurisdiction over a decedent's property), then perhaps the Court will agree with the Respondent that "there is no basis for abandoning the probate exception that Congress has not seen fit to displace" (or abrogate).
Maybe Anna Nicole's not going to have such a good year after all!
Thanks to Tom Goldstein and his staff at SCOTUSblog for providing us with early access to the briefs filed by and in support of the petitioner and the respondent.
Previous posts on this case of Marshall v. Marshall can be found here, here, and here.
Pierce's lengthy "Summary of Argument" follows:
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US Supreme Court Rules in Central Virginia v. Katz That States Are Not Immune from Preference Actions
As reported here (SCOTUS blog), here (PrawfsBlawg), here (Volokh), here (Crime & Federalism), and here (Althouse), the US Supreme Court today ruled, in a 5-4 decision (pdf) authored by Justice Stevens, that states are not immune from bankruptcy preference actions. Central Virginia Community College v. Katz, No. 04-885, 2006 WL 151985. Here, I'll try and expand upon, not repeat, the above posts.
I think most would agree that the result in this case is a surprising one given the ample precedent that pointed to a contrary result. As noted here, the oral argument left many believing that the Court had again "dodged a bullet" and would not tackle the question directly, but instead would decide on the "lesser ground" of waiver (as suggested at oral argument by Justice Ginsburg, who ultimately sided with the majority). Indeed, Justice Souter, who also sided with the majority, himself signaled his deep reservation with the bankruptcy trustee's entire abrogation argument when he told the trustee's counsel at oral argument:
I'm not a big fan of sovereign immunity in these circumstances, but I'm not quite sure how to get around it, based on the fact that there is no alternative remedy here.... [B]asically, you're making the argument from the uniformity phrase - uniform bankruptcy laws.... And you're saying, in this case, that that trumps the sovereign immunity, and that gets you out of Seminole Tribe.
Looking back at the oral argument, we find the kernel of today's opinion in the following seemingly innocuous penultimate question posed by Justice Stevens himself, when he asked the state's counsel about "this argument out there" that had not yet been discussed during the entire preceding 59 minutes of argument:
May I ask if you think, within the text of the question presented, we could decide whether the sovereign immunity was abrogated by the convention itself, not by Congress? There is that argument out there, you know.
In response, the petitioner's counsel perhaps sealed his client's fate by conceding that "if you decided that the convention itself had intended for the States not to have sovereign immunity in bankruptcy, then you would conclude that the Article I Bankruptcy Clause includes the abrogation power." [Practice reminder: Be careful about those last couple of seemingly innocuous questions thrown at you at the end of oral argument; they're often not as simple as they sound.]
Well, to the sure chagrin of petitioner's counsel (and many Supreme Court watchers), that's exactly what the majority decided! Indeed, virtually the entire opinion focuses on this historical argument as to whether sovereign immunity was both considered and abrogated at the Constitutional Convention. As noted here, Professor Bruce Mann believed it had been, and Justice Stevens significantly amplified upon Professor Mann's historical review with an impressive, though selective, array of supporting historical sources, all pointing to a final, "ineluctable conclusion":
[T]ext aside, the Framers, in adopting the Bankruptcy Clause, plainly intended to give Congress the power to redress the rampant injustice resulting from States' refusal to respect one another's discharge orders. As demonstrated by the First Congress' immediate consideration and the Sixth Congress' enactment of a provision granting federal courts the authority to release debtors from state prisons, the power to enact bankruptcy legislation was understood to carry with it the power to subordinate state sovereignty, albeit within a limited sphere.
The ineluctable conclusion, then, is that States agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to "Laws on the subject of Bankruptcies." See Blatchford, 501 U.S. at 779 (observing that a State is not "subject to suit in federal court unless it has consented to suit, either expressly or in the 'plan of the convention' "); Alden v. Maine, 527 U.S. at 713 (same). The scope of this consent was limited; the jurisdiction exercised in bankruptcy proceedings was chiefly in rem--a narrow jurisdiction that does not implicate state sovereignty to nearly the same degree as other kinds of jurisdiction. But while the principal focus of the bankruptcy proceedings is and was always the res, some exercises of bankruptcy courts' powers--issuance of writs of habeas corpus included--unquestionably involved more than mere adjudication of rights in a res. In ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts. (Emphasis added)
In the end, the legacy of this opinion for future lower court cases grappling with this momentous decision may well be found in the last bolded sentence quoted above. States defending themselves in bankruptcy litigation are sure to question whether the suit against them involves "proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts." In applying this murky test, perhaps these lower courts will frame the question in the more traditional manner in which they're used to speaking: that is, whether -- for sovereign immunity purposes -- the proceeding is "core" or "non-core." The Supreme Court first posed this question regarding the "core" jurisdiction of federal bankruptcy courts in Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), when it turned the bankruptcy world upside-down by deciding that the broad statutory grant of jurisdiction to bankruptcy courts over "related to" (i.e., "non-core") proceedings violates Article III of the Constitution.
Adopting this approach, "proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts" would be equated with those traditionally designated as "core" proceedings (like preference actions), whereas "proceedings [not] necessary to effectuate [such] in rem jurisdiction" would be equated with "non-core" proceedings (like breach of contract actions).
Either way, guess who benefits most from this decision?
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Posted By Steve Jakubowski In US Supreme Court Cases
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US Supreme Court Asked to Interpret Scope of 1978 Bankruptcy Code Amendment that Was Designed to Overrule Two Prior Supreme Court's Holdings on Wage Priorities in Bankruptcy
The latest revelation regarding Judge Alito's past is that he wrote a memo in 1986, while a lawyer for the Reagan administration, in which he advised the president to expressly declare the president's understanding of a bill at the time it was signed because "[t]he president's understanding of the bill should be just as important as that of Congress."
In a similar vein, Judge Alito may soon be asked as a member of the Supreme Court in Howard Delivery Service, Inc., v. Zurich Am. Ins. Co., No. 05-128, to provide his understanding of statutory provisions that themselves were designed to overrule two long-standing Supreme Court cases (here and here). Those cases, decided under the Bankruptcy Act of 1898 (as amended), held that wage priorities in bankruptcy would not be extended to cover various fringe benefits that technically were not "wages." The obvious difference between the Court's and the president's interpretive views, of course, is that (President Andrew Jackson and the Archidiocese of Portland aside) the Court's interpretation of the meaning of such legislation is dispositive, whereas the president's interpretation is not.
In Howard Delivery Service, the debtor/petitioner recently submitted its opening brief, which presents the following straight-forward question for the Court to answer:
In a bankruptcy case, is an unsecured claim for unpaid premiums owing for a debtor's statutory workers' compensation liability insurance policy entitled to priority under Section 507(a)(4) of the Bankruptcy Code as a "contribution to an employee benefit plan arising from services rendered," as held by the Fourth and Ninth Circuits, or is such a claim not entitled to Section 507(a)(4) priority, as held by the Sixth, Eighth and Tenth Circuits? [NB: BAPCPA had the effect of renumbering Section 507(a)(4) so that now it is numbered Section 507(a)(5).]
The Fourth Circuit, unable to deliver a majority or pluraity opinion, looked here more like the "gang that couldn't shoot straight" in answering this question. The petitioner summarized the Fourth Circuit's "fractured per curiam" ruling as follows:
Judge King wrote an opinion concurring in the judgment in which he found that the language of § 507(a)(4) is plain and unambiguous and that the unpaid premiums constituted "contributions to an employee benefits plan arising from services rendered." 403 F.3d at 232. By contrast, Judge Shedd, in his concurring opinion, found the language of § 507(a)(4) to be ambiguous. 403 F.3d at 239. Nevertheless, Judge Shedd ultimately agreed with Judge King that Zurich's claim was entitled to priority, but relied instead upon a provision of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.S. § 1001-1461, that referred to the term "employee benefit plan." Id. Judge Niemeyer issued a dissenting opinion in which he found that:[t]he plain language of § 507(a)(4), which gives priority to claims for unpaid contributions to an employee benefit plan arising from services rendered, does not cover claims for unpaid insurance premiums charged to cover the statutory liability of the employer to its employees. The unpaid insurance premium is not an unpaid contribution; it is not an unpaid contribution to an employee benefit plan; and it does not arise out of an employee's services rendered in that it is not a wage surrogate.403 F.3d at 244 (emphasis in original). Judge Niemeyer further found that the opinions of Judge King and Judge Shedd violated the underlying rule that priorities under the Bankruptcy Code are to be narrowly construed. 403 F.3d at 244 (Niemeyer, J., dissenting).
Though the Petitioner will likely win given the fractured ruling of the Fourth Circuit compared to the strong, consistent rulings of the Sixth, Eighth, and Tenth Circuits, it will be interesting to see how the Court will handle statutory interpretation questions such as:
- It is an oft-stated principle of statutory construction that a court must consider the specific language itself, the context of that language, and the broader context of the statute as a whole. To what extent will the decision be shaped by an "overriding objective of providing to creditors equal distribution of a debtor's limited resources"? (Pet. Brief at *10.)
- Will the Court agree that the plain meaning of the 1978 Bankruptcy Code amendment that extended wage priorities to "contributions to an employee benefit plan" should be limited to the situations addressed in the prior Supreme Court holdings that the legislation is said to have been designed to overturn?
- To what extent should the Court rely upon legislative history to determine whether the priorities of Section 507(a)(4) should be extended beyond fringe benefits and comparable "wage substitutes"?
- To what extent should courts look to contemporaneous editions of Merriam Webster's or Random House dictionaries in defining simple words like "contribution," "benefit," and "plan", and to what extent must there be consistency between their plain meaning and their "usage within the broader context of the Bankruptcy Code"? (Pet. Brief at *15.)
- Is it appropriate for the Court to "incorporate characterizations of a term in another statute absent some congressional indication that this was intended"? (Pet. Brief at *15-*16.)
The debtor/petitioner's "Summary of Argument" follows:
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Bankruptcy Professors Hop on Anna Nicole Smith Bandwagon in Amicus Brief Filed with the US Supreme Court
Add an all-star lineup of bankruptcy gurus to the chorus of voices (including our own government) lining up in support of Anna Nicole Smith's position before the US Supreme Court in her continuing efforts to wrestle money from the flush estate of her late husband, the oil tycoon J. Howard Marshall II (at least she got half his ashes!).
The list of bankruptcy luminaries signing on to the brief (thus insuring their invitation to Anna's victory celebration) are: Richard Aaron, Jagdeep S. Bhandari, Susan Block-Lieb, Ralph Brubaker, Erwin Chemerinsky, Robert D'Agostino, S. Elizabeth Gibson, Robert M. Lawless, Charles Mooney, C. Scott Pryor, Nancy Rapoport, Robert K. Rasmussen, Keith Sharfman, Ettie Ward and Robert M. Zinman.
They say they submit this amicus brief (pdf), pro bono, because of their deep concern that the Court get it right (though the real reason could be a concern that she have enough money so that she doesn't feel a need to produce shows like these). They write:
The Amici Curiae are law professors who have devoted their careers to the study and teaching of bankruptcy law and bankruptcy jurisdiction. They are deeply interested in this case because of the important effect its outcome could have on the scope of bankruptcy jurisdiction. The Amici file this pro bono brief to offer what assistance they can to the Court as it considers and decides whether the broad and unqualified jurisdiction specially conferred by Congress on the courts of bankruptcy is cut down by the judicially-created probate exception so as to exclude from their jurisdiction any matter that might affect a decedent's legatees or heirs.
In supporting Petitioner and seeking reversal of the decision of the Circuit Court, the Amici urge the Court to hold that the probate exception does not limit the bankruptcy jurisdiction broadly conferred by 28 U.S.C. § 1334, and that the bankruptcy-related abstention provisions in 28 U.S.C. § 1334(c), which include the role of state courts and state law among its relevant abstention considerations, govern the circumstances in which bankruptcy jurisdiction shall not be exercised. This brief focuses on the issue by emphasizing the special nature of the bankruptcy jurisdiction and abstention statutes, whereas the Circuit Court viewed this bankruptcy case from the vantage point of a decedent's heirs and legatees and state probate courts.
Their "Summary of Argument," in true professorial style, is long, but compelling. It states:
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Anna Nicole Smith Position Revealed in an Opening Brief to the US Supreme Court
We finally obtained copies of a host of filings with the Supreme Court in the case of Anna Nicole Smith (besides the US Amicus brief noted here) (pdf), including the opening brief filed by Anna's lawyers (pdf).
The respondent's brief is due to be filed on January 20, 2006. Oral argument is scheduled for February 28, 2006.
Four questions are presented:
1. What is the scope of the probate exception to federal jurisdiction?
2. Did Congress intend the probate exception to apply where a federal court is not asked to probate a will, administer an estate, or otherwise assume control of property in the custody of a state probate court?3. Did Congress intend the probate exception to apply to cases arising under the Constitution, laws, or treaties of the United States (28 U.S.C. § 1331), including the Bankruptcy Code (28 U.S.C. § 1334), or is it limited to cases in which jurisdiction is based on diversity of citizenship?
4. Did Congress intend the probate exception to apply to cases arising out of trusts, or is it limited to cases involving wills?
An amicus brief in support (further discussed here) was also submitted by an all-star lineup of bankruptcy academicians (Richard Aaron, Jagdeep S. Bhandari, Susan Block-Lieb, Ralph Brubaker, Erwin Chemerinsky, Robert D'Agostino, S. Elizabeth Gibson, Robert M. Lawless, Charles Mooney, C. Scott Pryor, Nancy Rapoport, Robert K. Rasmussen, Keith Sharfman, Ettie Ward and Robert M. Zinman) (pdf).
Additionally, counsel for both petitioner and respondent submitted an approximately 250 page joint appendix containing excerpts from various relevant judgments, answers, opinions, briefs, jury instructions, and transcripts.
Anna's lawyers summarize her position before the Court on these questions as follows:
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US Supports Position of Anna Nicole Smith in Amicus Brief Filed with the US Supreme Court
Here's a link to the amicus brief filed on 11/21/05 by the US in support of Anna Nicole Smith in her case before the US Supreme Court, Marshall v. Marshall, No. 04-1454 (referenced here) (pdf). Looks like this is the first brief filed since the Court granted Anna's petition for certiorari last September.
The "Question Presented" is:
Whether a claim that falls within the scope of the jurisdiction conferred upon the federal courts and that seeks neither to probate a will nor to administer or assume control over the property in a decedent's estate is nevertheless excepted from federal jurisdiction if it involves the adjudication of rights related to property that is the subject of an ongoing state probate proceeding.
The "Interest of the United States" is described as follows:
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More Tricks Than Treats in a Light-Popping Halloween Performance at the US Supreme Court in Central Va. v. Katz
Anyone's who's experienced the spectacle of an oral argument at the US Supreme Court will surely appreciate the scare, laughter, and tricks served up at oral argument on Halloween Day in Central Va. Community College v. Katz. In the end, however, I expect that Judge Goldgar's prediction at the National Conference of Bankruptcy Judges in early November that the Supreme Court "dodged another bullet" on the sovereign immunity question will likely prove correct, and that the litigants will find at the end of the day that their bags contain few treats.
A good summary of the case going into oral argument is found here, courtesy of our friends at SCOTUSblog, which also alerted us to the availability of the 49 page transcript.
At oral argument, William E. Thro argued on behalf of the petitioner-claimants from Virginia, and Kim Martin Lewis argued for Katz, the respondent-bankruptcy trustee. All Justices, except Justice Thomas, actively engaged counsel in discussion and debate, with Justice Scalia overtly supporting Mr. Thro's arguments, and Chief Justice Roberts showing good-natured exasperation at the respondent's own bag of tricks (p.44, and see below).
Still, the argument was interrupted by no fewer than six good-hearted chuckles of record from the Justices and the gallery, including (p.37) from a loud, sudden "pop" and "flash" that clearly startled the Justices on this ghoulish day and led to the following amusing rapid-fire sequence of comments, starting with--
Justice O'Connor, who proclaimed, in Paul Revere-like fashion, "A light bulb exploded. A light bulb exploded."
Followed by Chief Justice Roberts signaling the "all clear": "I think it's safe."Followed by the dry Justice Breyer: "A light bulb went out."
Then again by a relieved Chief Justice Roberts: "It's a trick they play on new Chief Justices all the time."
Then by Justice Scalia, who wished everyone "Happy Halloween".
Meanwhile, the unflappable Justice Ginsburg stayed on track with her line of questioning, not missing a beat: "Let me ask this--".
While Justice Kennedy tried to allay Katz's shaken counsel, who was already having difficulties of her own on the merits: "Take your time. We're interested--".
Only to be thrown off yet again by Chief Justice Roberts, who reminded counsel of the noticeably shaky ground on which she was treading: "Yeah, we're even more in the dark now than before."
Thro's arguments for the Petitioners were workmanlike, and--most importantly--he didn't stray from his two main arguments (Seminole Tribe controls; and sovereign immunity bars monetary judgment claims) despite attempts by four of the nine Justices to trip him up within the first few minutes of his argument, including:
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Solve this Brainteaser: How Can the Bankruptcy Code Best Be Amended to Forever Bury the Holding of Moore v. Bay?
The strong feedback to recent posts (here and here) (including by our friends at The Volkoh Conspiracy) regarding the unjust windfall to bankruptcy estates from Moore v. Bay, 284 U.S. 1 (1931), led us internally to discuss which would more likely occur first: hell freezing over or the US Supreme Court overturning Moore v. Bay?
The answer being painfully apparent, we searched for a better mousetrap, and seized upon Congressional action as the preferred solution to the problem of Moore v. Bay. Just as Congress in 1994 enacted the much-heralded "Deprezio Amendment" to address the inequities of a much reviled (though correctly decided) Seventh Circuit decision, Congress should enact a "Moore v. Bay Amendment" to bury this widely-criticized, but universally followed, opinion.
We at The Bankruptcy Litigation Blog, therefore, posit for your consideration the following brainteaser:
HOW CAN THE BANKRUPTCY CODE BEST BE AMENDED TO FOREVER BURY THE HOLDING OF MOORE v. BAY?
The NCBJ (National Conference of Bankruptcy Judges) begins tomorrow in San Antonio, Texas, and I hope to get some good ideas down there on how to best solve this brainteaser. Meanwhile, any suggested concepts to consider, pitfalls to avoid, or language to employ would be most appreciated and duly recognized.
Stay tuned. Much more to follow (no pun intended).
Finally, thanks to all 2,100 visitors to the site in the first three weeks of the blog's existence. Knowing you're out there spurs us on (no pun intended, San Antonio)! Hopefully, this blog will continue to exceed our wildest expectations, and yours.
Thanks again for your support!
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Posted By Steve Jakubowski In US Supreme Court Cases
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If the White Sox Can Win the World Series, the Supreme Court Can Overturn Moore v. Bay
Last night, the Chicago White Sox swept the World Series, bringing great joy to much of Chicago (except for Cub fans, whose Cubbie blue is turning a shade of pale-green from all the jealousy). Even the most dogged Cub fan has to admit that the White Sox played incredible baseball. Congratulations to the entire organization and to all the long-suffering White Sox fans!
Speaking of long-suffering... In a recent post, I noted the inequity of the "all or nothing" rule of Moore v. Bay, 284 U.S. 4 (1931), which provides that a transfer avoidable by a bankruptcy trustee as to a single creditor (even as to just a nickel), is avoidable to the entire extent of the transaction (even if the transaction is worth millions). Unlike today's weighty US Supreme Court opinions, Moore v. Bay is only one page. It's author was none other than Justice Oliver Wendell Holmes, Jr., who wrote the opinion at the end of his rich life, while in his last term on the bench. You can't say much in one page; and Justice Holmes didn't, to be sure. Still, the rule of Moore v. Bay staunchly remains the law of the land.
Having brought up the case only in passing in my previous post, I said that my discussion of Moore v. Bay will have to await another day. With the Bankruptcy Court from the Northern District of Illinois in In re Unglaub, (2005 WL 2740595) (Bankr. N.D. Ill., 10/24/05), reminding us recently that the rule of Moore v. Bay remains the law of the land, it looks like today is that day. In Unglaub, the Bankruptcy Court stated matter of factly:
In a case under § 544(b)(1), the trustee has the rights of an unsecured creditor to avoid transactions that can be avoided by such creditor under state law. In re Image Worldwide, Ltd., 139 F.3d 574, 576-77 (7th Cir. 1998). The trustee need not identify the creditor, so long as an unsecured creditor exists. Id. at 577; In re Leonard, 125 F.3d 543, 544 (7th Cir. 1997). The transaction can be avoided completely even if the trustee cannot produce creditors whose liens total more than the value of the property. Leonard, 125 F.3d at 544-45.
Though the Bankruptcy Court did not expressly cite Moore v. Bay, it effectively did so by citing to Leonard, where the Seventh Circuit said this about Moore v. Bay:
Section 544(b) of the Bankruptcy Code of 1978 gives the Trustee the power to "avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by [an unsecured creditor]". 11 U.S.C. § 544(b). In other words, if any unsecured creditor could reach an asset of the debtor outside bankruptcy, the Trustee can use § 544(b) to obtain that asset for the estate. As part of the estate, that asset is then divided among all the unsecured creditors, not just the creditor who could have reached the asset outside bankruptcy. Barker and Lieblich complain that the Trustee has not articulated the specific creditor who could set aside Zach's gift, but a trustee need not do so. Thirteen unsecured claims have been filed; the Trustee can assume the position of any one of them. Unless the claims of Barker and Lieblich are secured, any unsecured creditor may pursue a fraudulent-conveyance action under Illinois law. Even if he cannot point to creditors whose claims total more than the value of the land, the Trustee can avoid the transaction entirely. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931). The whole value of the asset then is distributed among creditors of the estate. 11 U.S.C. § 551. The wisdom of this approach has been questioned, see Douglas G. Baird, The Elements of Bankruptcy 104 (2d ed. 1993); Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 79-83 (1986), but this entrenched rule is the source of the dilution that Barker and Lieblich want to escape.
While the application of Moore v. Bay didn't appear to affect the outcome of the case before the Bankruptcy Court in Unglaub, it surely could have. Which leads to a simple question, why should a transaction that is not voidable as to certain creditors become avoidable in its entirety merely because the debtor happens to be in bankruptcy?
It's always easier to follow a rule then to work to change it, but this law needs to be changed. Perhaps someday the rule of Moore v. Bay will become a relic of the past, just as the "no-World-Series-win-in-my-lifetime" is now, happily, a thing of the past on Chicago's south side. Go Sox!
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Posted By Steve Jakubowski In US Supreme Court Cases
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