In its first bankruptcy decision of 2014 (October Term, 2013), the U.S. Supreme Court held on March 4, 2014, in Law v. Siegel, 134 S. Ct. 1188 (2014), that a bankruptcy court cannot impose a surcharge on exempt property due to a chapter 7 debtor’s misconduct. In reversing a ruling by the Ninth Circuit, Law v. Siegel (In re Law), 2011 BL 148411 (9th Cir. June 6, 2011), cert. granted, 133 S. Ct. 2824 (2013), the Supreme Court concluded that the bankruptcy court overstepped the bounds of its statutory authority (under section 105(a) of the Bankruptcy Code) and inherent authority when it imposed on the debtor a $75,000 surcharge—the amount of the California “homestead exemption.” The debtor engaged in litigation misconduct by falsely claiming, in an effort to defraud creditors, that his California homestead was encumbered by a lien securing a $168,000 purchase money loan provided by a personal friend. Litigation concerning the fabricated lien and the debtor’s “egregious misconduct” caused the bankruptcy estate to incur $450,000 in legal fees and related expenses.
Writing for a unanimous Court, Justice Antonin Scalia reasoned that “[a ] bankruptcy court may not exercise its authority to ‘carry out’ the provisions of the Code, or its ‘inherent power . . . to sanction abusive litigation practices,’ by taking action prohibited elsewhere in the Code.” According to Justice Scalia, the bankruptcy court’s surcharge contravened section 522 of the Bankruptcy Code, which gave the debtor the right to use California’s “homestead exemption” to exempt $75,000 of equity in his home from the bankruptcy estate.
On March 25, 2014, the Supreme Court ruled in U.S. v. Quality Stores, Inc., 134 S. Ct. 1395 (2014), that severance payments made to employees who were involuntarily terminated prior to and during an agricultural retailer’s chapter 11 case pursuant to plans which did not tie payments to the receipt of state unemployment insurance are taxable under the Federal Insurance Contributions Act (“FICA”). Writing for a unanimous Court (with Justice Kagan taking no part in the Court’s consideration or decision), Justice Kennedy explained that: (i) “[a]s a matter of plain meaning,” severance payments fit the definition of “wages” under FICA because “[t]hey are a form of remuneration made only to employees in consideration for employment”; and (ii) the provisions of the Internal Revenue Code (see 26 U.S.C. §§ 3401(a) and 3402(o)) governing income-tax withholding do not limit the meaning of “wages” for FICA purposes.
On June 9, 2014, the Court handed down its unanimous ruling in Executive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014), taking a small step forward in clarifying the contours of a bankruptcy judge’s jurisdictional authority in the aftermath of the Court’s groundbreaking and controversial 201 1 ruling in Stern v. Marshall, 31 S. Ct. 2594 (201 1). The Court held in Arkison that when a bankruptcy court is confronted with a claim which is statutorily denominated as “core” but is not constitutionally determinable by a bankruptcy judge under Article III of the U.S. Constitution, the bankruptcy judge should treat such a claim as a non-core “related to” matter that the district court reviews anew. The ruling eliminates any supposed “statutory gap” created by Stern, but it nonetheless left many potentially larger jurisdictional and constitutional questions unanswered.
For example, Arkison did nothing to help explain which claims, as a constitutional matter, can be finally determined by a bankruptcy judge. In addition, the Arkison Court expressly “reserve[d] … for another day” the question of “whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim.”
In its fourth and final bankruptcy-related ruling of the 2013– 14 term, the Court handed down its decision on June 12 in Clark v. Ramaker, 2014 BL 162980 (June 12, 2014). In Clark, a unanimous Court held that an inherited individual retirement account is not exempt from a bankruptcy estate under section 522(b)(3)(C) of the Bankruptcy Code, 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.
On July 1, 2014, the Court granted certiorari in Wellness Int’l Network Ltd. v. Sharif, 134 S. Ct. 2901 (2014), where it will be asked once again to decide whether Article III of the U.S. Constitution permits the exercise of the judicial power of the U.S. by a bankruptcy court on the basis of litigant consent. Specifically, the Court will consider: (i) whether the presence of a state property law issue means that an action does not “stem from the bankruptcy itself,” in the parlance of Stern; and (ii) whether under Article III bankruptcy courts can enter final judgments on the basis of litigant consent and, if so, whether consent can be implied.
On November 17, 2014, the court granted certiorari in a pair of cases—Bank of Am., N.A. v. Caulkett, No. 13-421, 190 L. Ed. 2d 388 (2014), and Bank of America, N.A. v. Toledo-Cardona, No. 14-163, 190 L. Ed. 2d 388 (2014), where it will consider whether, under section 506(d) of the Bankruptcy Code, a chapter 7 debtor may “strip off” a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. Section 506(d) provides that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In Bank of Am., N.A. v. Caulkett (In re Caulkett), 566 Fed. App’x 879 (1 1th Cir. 2014), and in Bank of Am., N.A. v. Toledo-Cardona, 556 Fed. App’x 911 (11th Cir. 2014), the Eleventh Circuit ruled that a wholly unsecured junior lien is voidable under section 506(d).
On October 1, 2014, the Court agreed to review a Fifth Circuit ruling concerning a bankruptcy court’s power to award fees to a law firm for defending its “core” fee application for services performed on behalf of a debtor. See ASARCO LLC v. Jordan Hyden Womble Culbreth & Holzer, P.C. (In re ASARCO LLC), 751 F.3d 291 (5th Cir. 2014), cert. granted sub nom. Baker Botts LLP v. ASARCO LLC, No. 14-103, 2014 BL 276138 (Oct. 2, 2014). The dispute concerns a $120 million base fee award for a law firm’s work on mining giant ASARCO LLC’s bankruptcy. The firm also received a $4 million merit enhancement for “rare and extraordinary” work. The Fifth Circuit upheld the enhancement bonuses but reversed the fees awarded for the cost of defending the core fee, ruling that the Bankruptcy Code “does not authorize compensation for the costs counsel or professionals bear to defend their fee applications.”
On December 12, 2014, the Court agreed to review a ruling by the First Circuit that an order of a bankruptcy appellate panel affirming a bankruptcy court’s denial of confirmation of a chapter 13 plan is not a final order (and therefore appealable under 28 U.S.C. § 158(d)) so long as the debtor remains free to propose an amended plan. See Bullard v. Hyde Park Sav. Bank (In re Bullard), 752 F.3d 483 (1st Cir. 2014), cert. granted, No. 14-1 16, 2014 BL 349325 (Dec. 12, 2014). The Second, Sixth, Eighth, Ninth, and Tenth Circuits have also held that such an order is not final so long as the debtor is still free to propose another plan. The Third, Fourth, and Fifth Circuits have adopted the minority approach that such an order can be final.
The Court also granted certiorari on December 12, 2014, in Harris v. Viegelahn, No. 14-400, 2014 BL 349342 (Dec. 12, 2014), in which it will consider whether undistributed funds held by a chapter 13 trustee must be distributed to creditors or revert to the debtor, a question that has divided courts for 30 years. The appeal stems from a Fifth Circuit decision holding that the undistributed payments held by a chapter 13 trustee at the time a debtor’s case is converted to a chapter 7 liquidation must be distributed to creditors rather than returned to the debtor, on the basis of considerations of equity and policy. See Viegelahn v. Harris (In re Harris), 757 F.3d 468 (5th Cir. 2014). The Fifth Circuit’s decision created a split with the Third Circuit’s ruling in In re Michael, 699 F.3d 305 (3d Cir. 2012).