Over the years, the United States Supreme Court has had to interpret ambiguous, imprecise, and otherwise puzzling language in the Bankruptcy Code, including the phrases “claim,” “interest in property,” “ordinary course of business,” “applicable nonbankruptcy law,” “allowed secured claim,” “willful and malicious injury,” “on account of,” “value, as of the effective date of the plan,” “projected disposable income,” “defalcation,” and “retirement funds.” The interpretive principles employed by the Court in interpreting the peculiarities of the Bankruptcy Code were in full view when the Court recently addressed another complex statute that affects millions of Americans each year—the Patient Protection and Affordable Care Act (“PPACA”). Both the majority opinion of Chief Justice Roberts and the dissent of Justice Scalia relied heavily on bankruptcy precedents in support of their interpretations of the PPACA.
In King v. Burwell, No. 14-114 (June 25, 2015), the Supreme Court had to decide whether tax credits critical to the operation of the PPACA are available nationwide or only in certain states. In particular, the parties advanced two possible interpretations of the statutory language “an Exchange established by the State” in 26 U.S.C. § 36B(b)(2)(A). The government argued that “Exchange established by the State” refers to an insurance exchange operating in a particular state, whether the exchange was set up by the state government or, alternatively, by the federal government after the state refused to establish one. The petitioners argued that “Exchange established by the State” refers only to a state-created exchange and excludes a federal exchange. (The petitioners did not want to purchase insurance, and they would not have been required to purchase it if their interpretation had prevailed, because, if they did not receive tax credits, the cost of the insurance would have exceeded 8% of their income.)
The Chief Justice’s first bankruptcy citation was to Lamie v. United States Trustee, 540 U.S. 526 (2004). Bankruptcy practitioners may recall Lamie as the case that established that a debtor’s attorney is not entitled to compensation from the bankruptcy estate in a Chapter 7 case. Id. at 538. The Bankruptcy Reform Act of 1994 amended Section 330(a)(1) of the Bankruptcy Code so that it read as follows:
After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103—
- reasonable compensation for actual, necessary services rendered by the trustee, examiner, professional person, or attorney and by any paraprofessional person employed by any such person; and
- reimbursement for actual, necessary expenses.
Before the 1994 amendment, the introductory sentence above ended with “or to the debtor’s attorney—”. The parties’ arguments in Lamie turned on Congress’ failure to insert an “or” in the remaining list of eligible awardees after deleting the reference to the debtor’s attorney, as well as its inexplicable retention of the words “or attorney” in subsection (A). The Court described Section 330(a) as “awkward, and even ungrammatical,” Lamie, 540 U.S. at 534, which is not so different from its description of the PPACA as containing “more than a few examples of inartful drafting.” King, slip op. at 14.
In Lamie, the Court had to address the fee applicant’s argument that the language “or attorney” in subsection (A) would be meaningless unless the statute permitted a debtor’s attorney to apply for compensation. The Court acknowledged that “or attorney” might be surplusage under the government’s interpretation, but it said that “[s]urplusage does not always produce ambiguity and our preference for avoiding surplusage constructions is not absolute.” Id. at 536. Chief Justice Roberts applied the same principle in rejecting the petitioners’ argument that the phrase “established by the State” would be unnecessary if the PPACA’s tax credits applied on both state and federal exchanges. King, slip op. at 14.
After concluding that the phrase “established by the State” was ambiguous, the Chief Justice looked to the rest of the PPACA for clues to the meaning of Section 36B. In this portion of his opinion, he turned for support to United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365 (1988). Timbers was a Chapter 11 case in which the parties disputed the meaning of the phrase “interest in property” in Section 362(d)(1) of the Bankruptcy Code, which requires the court to grant relief from the automatic stay if such an interest is not adequately protected. In particular, the secured lender sought compensation because the debtor’s bankruptcy filing prevented the lender from proceeding to foreclosure, while the debtor argued that the right to foreclose immediately was not a protected “interest in property.” The Court acknowledged that both interpretations were possible but recognized that “[a] provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme . . . because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” Id. at 371. A lengthy review of other provisions of the Bankruptcy Code convinced the Court that the right to immediate foreclosure was not one of the interests in property that must be adequately protected. See id. at 371–79.
The majority took a similar approach in King, recognizing that the elimination of tax credits under the petitioners’ interpretation “would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.” King, slip op. at 15.
Justice Scalia’s dissent in King also relied on several bankruptcy cases, and it echoed another without directly citing it. After a lengthy discussion of the plain meaning of the PPACA—which, he contended, should preclude any recourse to the general purpose of the statute—Justice Scalia turned to the venerable precedent of Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122 (1819). Sturges preceded the modern Bankruptcy Code by more than 150 years, and in fact the case arose during a period in which Congress had not exercised its power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8. But New York had passed a law that “liberates the person of the debtor, and discharges him from all liability for any debt previously contracted, on his surrendering his property in the manner it prescribes.” Sturges, 17 U.S. at 197. The Court avoided the question whether this law was preempted by the Bankruptcy Clause and instead focused on whether it was a “Law impairing the Obligation of Contracts,” which also is prohibited by the Constitution. U.S. Const. art. I, § 10. The creditor argued that the New York discharge statute was not within the spirit of the constitutional prohibition because colonial and state legislatures had enacted similar legislation without controversy, and the framers of the Constitution intended to bar different types of laws. In response, Chief Justice Marshall wrote that “although the spirit of an instrument, especially of a constitution, is to be respected not less than its letter, yet the spirit is to be collected chiefly from its words” rather than from “extrinsic circumstances.” Sturges, 17 U.S. at 202. Justice Scalia argued for the application of this approach in King, arguing that “[o]nly by concentrating on the law’s terms can a judge hope to uncover the scheme of the statute, rather than some other scheme that the judge thinks desirable.” King, slip op. at 13 (Scalia, J., dissenting).
Justice Scalia returned to Sturges in his response to the majority’s argument that the phrase “established by the State” was inartfully drafted. Chief Justice Marshall had allowed that the plain meaning of a provision might be disregarded if “the absurdity and injustice of applying the provision to the case, would be so monstrous, that all mankind would, without hesitation, unite in rejecting the application.” Sturges, 17 U.S. at 203. He did not find the application of the Contracts Clause to the New York discharge statute to be quite that monstrous, and Justice Scalia argued that interpreting “established by the State” to exclude federal exchanges did not meet the monstrosity standard either. See King, slip op. at 17 (Scalia, J., dissenting).
Justice Scalia also relied on Lamie to support his argument. In the Sturges discussion mentioned just above, he argued that the Court did not have the power “‘to rescue Congress from its drafting errors.’” Id. (quoting Lamie, 540 U.S. at 542). And in the following section of the dissent, he sounded a similar note: “‘If Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent.’” Id. (quoting Lamie, 540 U.S. at 542).
The final paragraph of Justice Scalia’s dissent echoed a theme he developed decades earlier. In King, he wrote this:
Perhaps the Patient Protection and Affordable Care Act will attain the enduring status of the Social Security Act or the Taft-Hartley Act; perhaps not. But this Court’s two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation they have performed (“penalty” means tax, “further [Medicaid] payments to the State” means only incremental Medicaid payments to the State, “established by the State” means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence. And the cases will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites.
King, slip op. at 21 (Scalia, J., dissenting). His discouragement at the result and the potential consequences for future litigation are consistent with those he expressed in Dewsnup v. Timm, 502 U.S. 410, 435-36 (1992) (Scalia, J., dissenting):
The principal harm caused by today’s decision is not the misinterpretation of § 506(d) of the Bankruptcy Code…. The greater and more enduring damage of today’s opinion consists in its destruction of predictability, in the Bankruptcy Code and elsewhere. By disregarding well-established and oft-repeated principles of statutory construction, it renders those principles less secure and the certainty the are designed to achieve less attainable. When a seemingly clear provision can be pronounced “ambiguous” sans textual and structural analysis, and when the assumption of uniform meaning is replaced by “one-subsection-at-a-time” interpretation, innumerable statutory texts become worth litigating…. Having taken this case to resolve uncertainty regarding one provision, we end by spawning confusion regarding scores of others.
So, did the Bankruptcy Code save Obamacare? No, not really. The multiple citations to bankruptcy cases in King are interesting, but both sides employed them effectively in support of their positions. The interpretative principles that emerge from the Supreme Court’s bankruptcy cases are important, but they are hardly unique. For example, Chief Justice Roberts may have relied on Timbers because it contained just the sort of phrasing he was looking for, and no case involving RICO or the Carmack Amendment would have served his purpose quite as well. But it’s also possible that he used Timbers because it was authored by Justice Scalia.