US Supreme Court Deciphers "Defalcation" in Bullock: A Canonical Exercise in "Reading Law" (Scalia/Garner)
The US Supreme Court has long taught the importance of certain canons of interpretation unique to bankruptcy law, the more significant ones being:
- The Fresh-Start Policy: A primary purpose of bankruptcy is to relieve the debtor "from the weight of oppressive indebtedness and permit him to start afresh...." (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
- Equality of Distribution: "[H]istorically one of the prime purposes of the bankruptcy law has been to bring about a ratable distribution among creditors of a bankrupt's assets...." Young v. Higbee Co., 324 U.S. 204, 210 (1945); Union Bank v. Wolas, 502 U.S. 151, 161 (1991). "Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code's equal distribution aim." Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 547 U.S. 651, 667 (2006) (discussed at length in this blog post).
- Narrow Construction of Priority Provisions: Canon favoring equality of distribution gives rise to a "corollary principle that provisions allowing preferences must be tightly construed." Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 547 U.S. 651, 667 (2006).
- Narrow Construction of Exceptions to Discharge: "[E]xceptions to the operation of a discharge ... should be confined to those plainly expressed." Gleason v. Thaw, 236 U.S. 558, 562 (1915). This furthers bankruptcy's policy of achieving a "fresh start." Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998).
Significance of Past Bankruptcy Practice: "[Do] not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure." Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563 (1990).
Property Rights in Estate Assets Dependent on State Law: "Property interests are created and defined by state law.... Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 57 (1979).
Creditors' Rights Dependent on State Law: "What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law." Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161 (1946).
Last year, Justice Scalia and Professor Bryan Garner published a phenomenal book, Reading Law: The Interpretation of Legal Texts. Many know of Justice Scalia, though he's probably at the low end of the already (unfairly) historically low favorability rating for the Supreme Court. Many fewer know of Professor Garner, but if you're not his fan, you should be. He's prolific beyond words, which are his specialty (and as to which he has no modern equivalent). His writings include: Garner's Modern American Usage, Legal Writing in Plain English, Garner's Dictionary of Legal Usage, and The Winning Brief, each one of which should be on your bookshelf. He also has been the Editor-in-Chief of Black's Law Dictionary since 1995. Follow Professor Garner on Twitter and learn, among other things, of the latest smiling antiquarian bookseller whose shelves he recently raided. Before Reading Law, Justice Scalia and Professor Garner published an invaluable guide to litigators entitled, Making Your Case: The Art of Persuading Judges (2008).
In the book's introduction, Chief Judge Easterbrook called Reading Law "a great event in American legal culture." Judge Posner, however, wasn't quite as enamored with it, which apparently got a bit under Justice Scalia's skin, prompting this retort from Judge Posner. (All seems well now, however, as Judge Posner was placed at the same table as Justice Scalia at last month's Chicago Lawyers' Club luncheon event promoting the book, though as fate would have it Justice Scalia's plane was late, so we'll never know how that seating arrangement would have worked out.)
The book cites to 57 interpretive canons (split among 5 "fundamental principles," 11 "semantic" canons, 7 "syntactic" canons, 14 "contextual" canons, 7 "expected-meaning" canons, 3 "government-structuring" canons, 4 "private right" canons, and 6 "stability" canons) and concludes by "exposing" 13 far more controversial "falsities" (such as "the false notion that committee reports and floor speeches are worthwhile aids in statutory construction"). It also contains the best bibliography imaginable of over 1,500 books and articles on legal interpretation dating back as early as 1621 (Coke's First Part of the Institutes of the Laws of England) and 1677 (Hatton's Treatise Concerning Statutes).
The Supreme Court's recent unanimous decision in Bullock v. BankChampaign, N.A., No. 11-1518 (May 13, 2013) (pdf), which was decided primarily based on the book's Canon No. 31, the "Associated-Words Canon" (better known as noscitur a sociis--"it is known by its associates"), highlights the importance of keeping Justice Scalia's and Professor Garner's book close at hand. In describing how this canon works, Justice Scalia and Professor Garner call it "a classical version, applied to textual explanation, of the observed phenomenon that birds of a feather flock together." They further explain:
When several nouns or verbs or adjectives or adverbs--any words--are associated in a context suggesting that the words have something in common, they should be assigned a permissible meaning that makes them similar. The canon especially holds that "words grouped in a list should be given related meanings." (p.195) (citing Third Nat'l Bank in Nashville v. Impac Ltd., 432 U.S. 312, 322 (1977)).
The issue faced by the Supreme Court in Bullock was what mental state would be required under Bankruptcy Code section 523(a)(4) for a debt owed by an individual debtor to be excepted from discharge because of the debtor's "defalcation while acting in a fiduciary capacity." (Section 523(a)(4) in its entirety excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.")
The Court granted certiorari because the cases interpreting this statutory provision were split regarding where on the spectrum from negligence to actual intent one's state of mind must fall so that the debt arising from defalcation of one's fiduciary duty should be nondischargeable in bankruptcy. The First and Second Circuits required a minimum of "extreme recklessness." The Fifth, Sixth, and Seventh Circuits required a minimum of "objective recklessness." Mere negligence or innocent mistake was sufficient for the Fourth, Eighth, and Ninth Circuits.
The Court ultimately sided with the First and Second Circuits and adopted a scienter that embraces an "extreme recklessness" standard. (Op. at 9). The Court agreed with the Second Circuit that adopting the scienter standard "has the virtue of ease of application since the courts and litigants have reference to a robust body of securities law examining what these terms mean." (Op. at 9) (quoting In re Hyman, 502 F.3d 61, 69 (2d Cir. 2007)). The Court also specifically included within actionable recklessness "the kind set forth in the Model Penal Code ... [where] the fiduciary 'consciously disregards' (or is willfully blind to) 'a substantial and unjustifiable risk' that his conduct will turn out to violate a fiduciary duty." (Op. at 6). "That risk," the Court held, " 'must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation.' " (Op. at 6) (quoting ALI, Model Penal Code §2.02(2)(c)) (emphasis in opinion).
As with all Supreme Court cases, however, it's not the answer that's of greatest import, but how the Court got there. In Bullock, the Court arrived at its conclusion, first and foremost, by applying the noscitur a sociis canon and holding that the mental state required for "defalcation" by a fiduciary under Code section 523(a)(4) is on par with the other fraudulent or felonious intentions characteristic of its statutory neighbors "fraud," "embezzlement," and "larceny". (Op. at 7) ("And here, the additional neighbors ('larceny' and, as defined in Neal, 'fraud'), mean that the canon noscitur a sociis argues even more strongly for similarly interpreting the similar statutory term 'defalcation'.")
Also important to the Court's decision was the bankruptcy-specific canon that "exceptions to discharge should be confined to those plainly expressed." (Op. at 8). Applying a heightened intent standard for a fiduciary's "defalcation," the Court held, was "consistent with a set of statutory exceptions [in Code section 523 generally] that Congress normally confines to circumstances where strong, special policy considerations, such as the presence of fault, argue for preserving the debt." (Id.). "In the absence of fault," the Court continued, "it is difficult to find strong policy reasons favoring a broader exception here...." (Id.)
Notably, the Respondent had the support of 13 professors (including Ken Klee), whose amicus brief rejected the noscitur a sociis canon as inapplicable on the basis that the words "fraud," "embezzlement," and "larceny" were "remote companions" to the term "defalcation." They also criticized the focus of the inquiry being on the "fresh start" of the debtor "rather than on the injury to trust beneficiaries, to whom Congress granted special protection under clause (4)." (Profs. Amicus Brief at 20, 34). The Respondent's position was also supported by the Office of the United States Trustee, which (as noted by Professor Mann in this post on SCOTUS Blog) hadn't lost an argument before the Court in the last 15 years in which it called for interpretations that more broadly enforce the exceptions to an individual's bankruptcy discharge.
The Petitioner, conversely, could muster just one professor to support him, Eric Brunstad, who Professor Mann calls "the most noted of Supreme Court bankruptcy advocates, [who] has argued, briefed, and won more bankruptcy cases in the Supreme Court than any other attorney in history." Eric argued that (i) the Court "routinely" applies the noscitur a sociis canon in circumstances like these and (ii) the canons equally applicable here in favor of the Petitioner are those that (A) require "narrow construction of the exceptions to discharge relief" and (B) "[do] not ... erode past bankruptcy practice absent a clear indication that Congress intended such a departure." (Brunstad Amicus Brief at 18-26).
Thus far, Reading Law has been cited since its publication last year in 12 merits briefs in eight different cases before the Court. Professor Mann warned in another SCOTUS Blog post that Bullock's "noscitur a sociis argument is presented replete with risky citations to the discussion of that topic in Justice Scalia’s recent book (with Bryan Garner) on Reading Law – risky because of the likelihood the citations will irritate Justice Scalia’s colleagues." That risk factor seems overblown given the 9-0 decision. Naturally, the Court didn't cite Reading Law as authority for its result; and why should it? If the Court can't cite to a prior one of its cases that employs the canon in question (as it did in Bullock to Justice Harlan's opinion for the Court in Neal v. Clark, 95 U.S. 704, 709 (1878)), then that canon is not likely to see the light of day for the first time in a 21st century opinion!
In the end, we are left with another short, satisfying bankruptcy opinion from the Court that confirms the importance of canonical thinking in interpreting the Bankruptcy Code's thornier provisions. My next blog post, shortly forthcoming, will discuss the significance of the holding in Bullock beyond just the narrow context of nondischargeability cases in bankruptcy.
Meanwhile, we wish Justice Breyer, Bullock's author, a speedy recovery from his shoulder replacement surgery, but his issuance of Bullock less than three weeks later seems a good sign that all is proceeding well for him!
Thanks for reading!
© Steve Jakubowski 2013