Law in Plain English: Wellness International Network, Limited v. Sharif

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblog: Wellness International Network, Limited v. Sharif

Argument: Jan 14 2015 (Aud.)

Background: Richard Shariff was slapped with a judgment in excess of $650,000 as a sanction for his failure to engage in discovery. As a result, Sharif filed for Chapter 7 bankruptcy. Wellness International Network (WIN), one of his bankruptcy creditors, sought to prevent discharge of Sharif’s debts under 11 U.S.C. § 727, and sought a declaratory judgment that a trust of which Sharif was trustee was in fact Sharif’s alter ego. Sharif continued his evasive and dilatory tactics, failing to respond to WIN’s and the bankruptcy trustee’s discovery requests. The bankruptcy court ordered Sharif to comply with the discovery requests and warned him that failure to do so would result in a default judgment. Sharif tendered some discovery but his responses fell far short of full compliance. After a hearing, the bankruptcy judge issued an opinion and order entering default judgment in WIN’s favor and subsequently awarded attorney’s fees to WIN. On appeal, Shariff filed a supplementary motion based on the claim that a bankruptcy judge did not have the authority to enter final judgment under Stern v. Marshall, but had failed to make this argument in his earlier motions. The district judge denied both motions as untimely, holding that a Stern objection to a bankruptcy judge’s authority to enter final judgment is waivable and that Sharif’s failure to raise it earlier constituted waiver. The Seventh Circuit reversed on the Stern objection, finding that a constitutional objection based on Stern is not waivable because it implicates separation‐of‐powers principles. Additionally, the court held that that the bankruptcy judge lacked constitutional authority to enter a final judgment on the alter‐ego claim. The court affirmed the remainder of the judgment, holding that the bankruptcy judge had constitutional authority to enter final judgment on the first four counts of the adversary complaint, each of which were objections to the discharge of Sharif’s debts. Additionally, the court held that that the entry of default judgment and awarding of fees were proper sanctions under the circumstances.

Issue: The questions before the Court are (1) whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor’s possession is property of the bankruptcy estate means that such action does not “stem[] from the bankruptcy itself” and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and (2) whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III.

Holding: In a 6-3 decision, the Supreme Court ruled that Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent. Consent to adjudication by a bankruptcy court need not be express, but must be knowing and voluntary. The Court stated that the Seventh Circuit should decide on remand whether Sharif’s actions evinced the requisite knowing and voluntary consent and whether Sharif forfeited his Stern argument below. 

Law in Plain English: Clark v. Rameker

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblog: Clark v. Rameker

Argument: Mar 24 2014 (Aud.)

Why did the Supreme Court take this case? In this case, the Seventh Circuit held that individual retirement account that a debtor has inherited are exempt from the debtor's bankruptcy estate. On the other hand, the Fifth Circuit ruled in an earlier case that such payments are subject to taxation. So-called "circuit splits" are perhaps the most common way cases make it to the Supreme Court.

Discussion: At her death, Ruth Heffron owned an IRA worth approximately $300,000. Ruth's daughter Heidi Heffron-Clark was the designated beneficiary. Ruth's account passed to Heidi. When Heidi and her husband Brandon initiated bankruptcy proceedings, they sought to protect the inherited IRA pursuant to 11 U.S.C. § 522(b)(3)(C) and (d)(12), which exempt retirement funds from creditors' claims in bankruptcy. The bankruptcy judge held that an inherited IRA does not represent "retirement funds" in the hands of the current owner and so is not exempt. The District Court reversed, adopting the view that any money representing "retirement funds" in the decedent's hands must be treated the same way in successors' hands. The Seventh Circuit reversed the District Court, finding that inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings.

Issue: The question before the Court is whether an individual retirement account that a debtor has inherited is exempt from the debtor's bankruptcy estate under Section 522 of the Bankruptcy Code, 11 U.S.C. § 522, which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under certain provisions of the Internal Revenue Code.

Holding: In a unanimous decision, the Supreme Court ruled that funds held in an inherited IRA account are not "retirement funds" within the meaning of the Bankruptcy Code.

Law in Plain English: Executive Benefits Insurance Agency v. Arkison

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblog: Executive Benefits Insurance Agency v. Arkison

Argument: Jan 14 2013 (Aud.)

Discussion: Nicholas Paleveda and his wife, Marjorie Ewing, operated Aegis Retirement Income Services, Inc. ("ARIS") and the Bellingham Insurance Agency, Inc. ("BIA"). ARIS designed and administered defined-benefit pension plans, and BIA sold insurance and annuity products that funded those plans. BIA became insolvent, and Paleveda used BIA funds to incorporate the Executive Benefits Insurance Agency, Inc. ("EBIA"). In the meantime, BIA filed a voluntary Chapter 7 bankruptcy petition. The Trustee, Peter Arkison, filed a complaint against EBIA and ARIS to recover the commissions deposited into the EBIA/ARIS account, which the Trustee alleged to be property of the estate. The complaint alleged fraudulent transfer claims and a claim that EBIA was a successor corporation of BIA and therefore liable for its debts. The bankruptcy court granted summary judgment in favor of the Trustee, concluding that the deposits into the EBIA/ARIS account were fraudulent conveyances of BIA assets and that EBIA was a "mere successor" of BIA. The bankruptcy court entered a final judgment for $373,291.28. EBIA appealed to the federal district court, which affirmed the judgment. EBIA appealed again, and now for the first time claimed that the bankruptcy judge was constitutionally proscribed from entering final judgment on the Trustee's claims. The Ninth Circuit concluded Article III bars bankruptcy courts from entering final judgments in actions brought by a noncreditor absent the parties' consent, but that EBIA consented to the bankruptcy court's jurisdiction. As a result, that court's entry of summarj' judgment in favor of the Trustee was acceptable.

Issue: The questions before the Court are  (1) whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether "implied consent" based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III; and (2) whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b).

Holding: In a unanimous decision, the Supreme Court ruled that under Stern v. Marshall, a bankruptcy court may not enter final judgment but may issue findings of fact and conclusions of law to be reviewed de novo by a district court.

Law in Plain English: United States v. Quality Stores, Inc.

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblog: United States v. Quality Stores, Inc.

Argument: Jan 14 2014 (Aud.)

Why did the Supreme Court take this case? In this case, the Sixth Circuit held that payments Quality Stores made to its employees upon terminating their employment involuntarily due to business cessation constituted supplemental unemployment compensation benefits that are not taxable as wages under FICA. On the other hand, the Federal Circuit ruled in an earlier case that such payments are subject to taxation. So-called "circuit splits" are perhaps the most common way cases make it to the Supreme Court.

Background: Quality Stores was the largest agricultural-specialty retailer in the country serving farmers, hobby gardeners, skilled trade persons, and do-it-yourself customers. Following an involuntary Chapter 11 bankruptcy petition, Quality Stores closed sixty-three stores and nine distribution centers and terminated the employment of approximately seventy-five employees in the corporate office. Quality Stores made severance payments to those employees whose employment was involuntarily terminated. Because the severance payments constituted gross income to the employees for federal income tax purposes, Quality Stores reported the payments as wages on W-2 forms and withheld federal income tax. Although Quality Stores collected and paid the FICA tax, it did not agree with the Internal Revenue Service (IRS) that the severance payments constituted wages for FICA purposes. Quality Stores filed with the IRS seeking the refund of $1,000,125 in FICA tax. When the IRS did not allow or deny the refund claims, Quality Stores filed an adversary action in the bankruptcy court. The bankruptcy court ordered a full refund, holding that payments Quality Stores made to its employees upon terminating their employment involuntarily due to business cessation constituted supplemental unemployment compensation benefits that are not taxable as wages under FICA. The District Court and the Sixth Circuit both affirmed.

Issue: The question before the Court is whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act.

Holding: In a unanimous decision (with Justice Kagan not participating), the Supreme Court ruled that the severance payments at issue are taxable wages for FICA purposes.

Law in Plain English: Law v. Siegel

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblog: Law v. Siegel

Argument: Jan 13 2014 (Aud.)

Did you know? The plaintiff, Stephen Law, filed a pro se (by himself), in forma pauperis petition to the Supreme Court. Based on recent statistics, such a petition has less than two tenths of one percent chance of being accepted.

Background: Law filed for Chapter 7 bankruptcy. He indicated two liens on his house and a homestead exemption of $75,000. While the homestead exemption would ordinarily be protected in bankruptcy, Siegel (the bankruptcy trustee) sought to compensate the estate for the monetary costs imposed by Law's misconduct by imposing a surcharge on the homestead exemption (effectively eliminating it). The Bankruptcy Court allowed Siegel's surcharge motion, and both the Bankruptcy Appellate Panel and the Ninth Circuit affirmed.

Issue: The question before the Court is whether the Ninth Circuit erred in allowing the bankruptcy trustee to surcharge the debtor’s constitutionally protected homestead property.

Holding: In a unanimous decision, the Supreme Court ruled that the Bankruptcy Court exceeded the limits of its authority when it ordered that the $75,000 protected by Law’s homestead exemption be made available to pay Siegel’s attorney’s fees. As a result, Law's homestead exemption was protected even despite his egregious misconduct.

"So you're saying there's a chance!"

The Supreme Court's jurisdiction is largely discretionary. This means that it gets to pick and choose which cases it accepts. Over the past ten years, an average of more than 8,000 petitions are filed; yet the Court only accepts about 80 cases per term (or, ~1%). Less likely are in forma pauperis (IFP) petitions, which comprise nearly 80% of all petitions. Yet only about 11 IFP cases are granted of the 80 cases per term , which means that the likelihood of an IFP petition being granted is less than two tenths of one percent. Many of these IFP petitioners are also pro se (advocating on one's own behalf before a court, rather than being represented by a lawyer).

With all that being said, you might be reminded of this scene:

Yes, Lloyd, there's a chance. But it's not a very good one.

But every once in a while, the Supreme Court gives you that chance. And it did just that on Monday as it granted certiorari in the case of Law v. Siegel. The question in the case is whether the Ninth Circuit erred in allowing the bankruptcy trustee to surcharge Law’s constitutionally protected homestead property.

Stephen Law beats the odds. He filed a pro se, in forma pauperis petition that was granted by the Court (by the time Law's reply brief was filed in November, he had counsel).

Lawyers, legal practitioners, and law students used to reading highly polished appellate briefs will not want to take any notes from Law's petition. The errors start on the cover page and keep coming, fast and furious. But this post isn't intended to criticize the petition. It is to highlight that the highly improbable does happen. And sometimes the Court reads past all the errors and says "yes."

I'll have more on this case as we approach oral argument sometime next fall.

A Supreme Court case about raisins--in pictures

There once was a raisin...

Actually, there were a bunch of raisins...

In fact, there were so many raisins that prices plummeted. The government stepped in...

It established the Raisin Marketing Order, which removed surplus

raisins from the open market in order to control prices...

Marvin and Laura Horne of Raisin Valley Farms were not to0

 thrilled with this arrangement. They wrote to the USDA:

“[W]e are growers that will pack and market our raisins. We reserve our rights under the Constitution of the United States . . . [T]he Marketing Order Regulating Raisins has become a tool for grower bankruptcy, poverty, and involuntary servitude. The Marketing Order Regulating Raisins is a complete failure for growers, handlers, and the USDA . . . [W]e will not relinquish ownership of our crop. We put forth the money and effort to grow it, not the Raisin Administrative Committee. This is America, not a communist state.”

Disillusioned with a regulatory scheme they deemed "outdated" and exploitive of farmers, the Hornes looked for ways to avoid the Raisin Marketing Order's requirements, particularly its mandatory raisin reserve program. Because those requirements apply only to handlers, the Hornes implemented a plan to bring their raisins to market without going through a traditional middle-man packer. As part of their plan, the Hornes purchased their own equipment and facilities to clean, stem, sort, and package raisins...

The United States Department of Agriculture was not amused...

An Administrative Law Judge found the Hornes liable for nearly $500,000

of withheld reserve raisins, and the District Court agreed...

The Hornes argued that the reserve requirement was a taking in violation of the 5th Amendment...

The Ninth Circuit ruled that that the Hornes were handlers subject to the Raisin Marketing 

Order, but said that their takings claim should have been brought in a different court...

This would have required the Hornes to take the case to a different court and start over...

Fortunately, the Supreme Court stepped in and decided to hear the case...

The Supreme Court decided that the Ninth Circuit has 

jurisdiction to decide petitioners’ takings claim...

The Court also decided that the Hornes may raise their takings-based defense in the context

of the enforcement proceeding initiated by the USDA under the raisin program...

As a result of this decision, the case will return to the Ninth Circuit, where the

court will determine if the USDA’s imposition of fines and civil penalties on the Hornes,

in their capacity as handlers, violated the Fifth Amendment.

“We are growers that will pack and market our raisins...This is America, not a communist state.”

The Hornes, owners of Raisin Valley Farms, wrote to the Secretary of Agriculture in 2002 to protest the Agricultural Marketing Agreement Act of 1937 (AMAA) and the California Raisin Marketing Order:

“[W]e are growers that will pack and market our raisins. We reserve our rights under the Constitution of the United States . . . [T]he Marketing Order Regulating Raisins has become a tool for grower bankruptcy, poverty, and involuntary servitude. The Marketing Order Regulating Raisins is a complete failure for growers, handlers, and the USDA . . . [W]e will not relinquish ownership of our crop. We put forth the money and effort to grow it, not the Raisin Administrative Committee. This is America, not a communist state.”

Today, the Supreme Court ruled that the Ninth Circuit had jurisdiction to hear the case, and the Hornes may raise a takings-based defense in the context of an enforcement proceeding initiated by the USDA under the raisin program.

Law in Plain English: Bullock v. BankChampaign, N.A.

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

Bullock v. BankChampaign, N.A.

Randy Bullock's father established a trust (based on his insurance policy) for the benefit of his children and made Randy the trustee. Bullock then borrowed money from the insurance company against the policy's value on three occasions (once at his father's request, and consistent with the trust's borrowing policy). His brothers then sued him, alleging a breach of fiduciary duty. The court found for the brothers and ordered Bullock to pay the trust the benefits he received from the breach of fiduciary duty by means of a constructive trust (to be administered by BankChampaign). He then filed for bankruptcy after being unable to obtain the funds to make the payment. BankChampaign opposed the bankruptcy discharge on the grounds that the debts fell under the "defalcation" exception and thus not dischargeable. The Bankruptcy Court agreed and ruled for Bank BankChampaign. The District Court and the 11th Circuit Court of Appeals affirmed. The question before the Court was whether “defalcation” applies in the absence of any specific finding of ill intent or evidence of an ultimate loss of trust principal. In a unanimous decision, the Supreme Court ruled “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. As a result, Bullock's debt is dischargeable under bankruptcy law. The practical impact of this decision is that a finding of defalcation will require knowledge or gross reckless as it relates to the trustee's fiduciary duty.