By Donald L. Swanson

In a few months, Justice Stephen G. Breyer is set to retire from the U.S. Supreme Court.

The bankruptcy world will miss him.

The reason for discussing this subject now (instead of waiting for the retirement to actually happen) is this:

• The triumph of Justice Breyer’s Footnote 2 in Merit Management, as accomplished by a denial of certiorari on 2/22/2022.

What follows is a summary of four important Supreme Court bankruptcy opinions in which Justice Breyer played a significant role—starting with the Footnote 2 opinion.

Merit Management’s Footnote 2

In Merit Management Group, LP v. FTI Consulting, Inc. (decided 02/27/2018), a unanimous Supreme Court allows the avoidance of a fraudulent transfer to stand, while reserving an issue in Footnote 2 as follows:

• “The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under §101(22)(A). . . . We therefore do not address” that issue (emphasis added).

During Merit Management‘s oral arguments, Justice Breyer expresses frustration over the failure of the parties to raise a specific defense that would be dispositive of the case—and achieve a result exactly-opposite from what actually occurred.  That frustration results in Footnote 2.

–Oral Arguments

Here is a sampling of Justice Breyer’s comments during oral arguments that resulted in the Footnote 2.

JUSTICE BREYER: “Well, why doesn’t that cover it? Why are we . . . deciding all kinds of things,” when “this is absolutely dealt with in a statute, . . . under another provision.”  “[N]obody refers us to that provision, and I can’t understand why they didn’t — what’s going on?”

ANSWER: “Your Honor, we did — we did refer to that provision in — in both of our briefs, if I remember correctly.”

JUSTICE BREYER: “You may have put it in your briefs, but, I mean, why in the lower courts wasn’t this just said . . . Judge, this involves a customer of a financial institution, namely VVD, and, therefore, it’s in the exempt area?”  “And I want to know why that didn’t happen.”

ANSWER: “That I don’t —“

JUSTICE BREYER: “It’s your case. You can do it.” Instead, “we’re asked to decide a question that I think is fraught with difficulty.”  “I would like to know the answer.

ANSWER: “I’m afraid I don’t have a good answer for why that did not come up earlier.”

–Fallout

The resulting fallout from Footnote 2, and Justice Breyer’s comments, is that lower courts have begun following and applying the defense highlighted by Justice Breyer—and reaching exactly-opposite results from that in Merit Management. 

The 2/22/2022 denial of certiorari for an issue that’s based on the Footnote 2 defense will, no doubt, hasten and harden the existing momentum toward following and applying the Footnote 2 defense. 

In other words, the 2/22/2022 denial of certiorari is a triumph of Justice Breyer’s Footnote 2.

Stern v. Marshall

Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594 (2011), rules on the constitutionality of “counterclaim” language in this statutory provision:

“Bankruptcy judges may hear and determine . . . all core proceedings arising under title 11,” and “Core proceedings include . . . counterclaims by the estate against persons filing claims against the estate” (28 U.S.C. § 157(b)(2)(C) (emphasis added)).

In Stern v. Marshall, a five-justice majority (excluding Justice Breyer) declares the highlighted language to be unconstitutional—like this:

• Article III of the U.S. Constitution vests “the judicial power of the United States” in only those courts whose judges have Article III protections;
• Bankruptcy judges do not have Article III protections and, therefore, cannot resolve counterclaims against the filers of bankruptcy claims; and
• By including counterclaims in the list of “core” proceedings that bankruptcy judges can decide, Congress “exceeded” its constitutional authority.

–Breyer’s Dissent

Justice Breyer writes a dissenting opinion, joined by three other justices.  Nearly the entire bankruptcy world (this is not much of an exaggeration) wishes his dissent had prevailed—it would have saved us all a lot of grief.

–Facts

Creditor files a defamation claim in bankruptcy court, alleging Debtor had accused him of trying to prevent Debtor from obtaining money Creditor’s father wanted Debtor to have.

Debtor files a compulsory counterclaim in Bankruptcy Court, alleging Creditor had unlawfully interfered with her husband’s efforts to grant her an inter vivos gift.

The Bankruptcy Court decides both the claim and the counterclaim, based upon Congress’s inclusion of “counterclaim” in the § 157(b)’s list of “core” proceedings.

–Question

“The question before us is whether the Bankruptcy Court possessed jurisdiction to adjudicate [Debtor’s] counterclaim,” writes Justice Breyer.

–Breyer’s Conclusion & Rationale

Here’s Justice Breyer’s summary of his conclusion and rationale.

• “I agree with the Court that the bankruptcy statute, §157(b)(2)(C), authorizes a bankruptcy court to adjudicate the counterclaim.”
• “I believe [§ 157(b)(2)(C)] is consistent with the Constitution’s delegation of the ‘judicial Power of the United States’ to the Judicial Branch of Government. Art. III, §1. Consequently, it is constitutional.”
• “In my view, the majority overstates the current relevance of statements this Court made in an 1856 case,” and “it overstates the importance of an analysis that did not command a Court majority in Northern Pipeline,” which analysis “was subsequently disavowed.”
• “At the same time, I fear the Court”:
  • “understates the importance of a watershed opinion widely thought to demonstrate the constitutional basis for the current authority of administrative agencies to adjudicate private disputes”; and
  • “fails to follow the analysis that this Court more recently has held applicable to the evaluation of claims of a kind before us here.”

It’s unfortunate that Justice Breyer’s dissent failed to get one more vote—and prevail.  Our bankruptcy world would have been in a much better place, in following years, if it had.

Hall v. United States

Hall v. United States, 566 U.S. 506 (2012), is a family farmer’s Chapter 12 bankruptcy case.  It deals with this question: does tax relief Congress granted in Chapter 12 apply only to pre-petition sales—or does it apply to post-petition sales as well? 

–Majority Opinion

The majority opinion (excluding Justice Breyer) finds against the farmer on a grammatical technicality—that Chapter 12 tax benefits apply only to pre-petition sales.  The majority summarizes its decision like this:

• “Under Chapter 12 of the Bankruptcy Code, farmer debtors may treat certain claims owed to a governmental unit resulting from the disposition of farm assets as dischargeable, unsecured liabilities.”
• “One such claim is for ‘any tax . . . incurred by the estate.’”
• “The question presented is whether a federal income tax liability resulting from individual debtors’ sale of a farm during the pendency of a Chapter 12 bankruptcy is ‘incurred by the estate’ and thus dischargeable.”
• “We hold that it is not.”

–Breyer’s Dissent

Here’s how Justice Breyer responds:

• “Chapter 12 of the Bankruptcy Code helps family farmers in economic difficulty reorganize their debts without losing their farms.”
• “Consistent with the chapter’s purposes, Congress amended §1222(a) . . . to enable the debtor to treat certain capital gains tax claims as ordinary unsecured claims.”
• “The Court’s holding prevents the Amendment from carrying out this basic objective.”
• “It seems to me unlikely that Congress . . . would have made the drafting mistake that the Government and the majority necessarily imply that it made.”
• “I believe it important that courts interpreting statutes make significant efforts to allow the provisions of congressional statutes to function in the ways that that the elected branch of Government likely intended and for which it can be held democratically accountable.”

–Breyer was Right!

In a Congressional slap-down of the majority opinion, Congress promptly amended the statute in question to cover both pre-petition and post-petition sales.  11 U.S.C. § 1232(a) now specifies that the tax benefit for family farmers applies to sales that arise both:

• “before the filing of the petition”; and
• “after the filing of the petition and before the debtor’s discharge under section 1228.”

So, there.  Congress has the final say . . . and it sides with Justice Breyer!

Central Virginia v. Katz

 In Central Virginia Community College v. Katz, 645 U.S. 356 (2006), the Supreme Court assesses the relative significance between two competing provisions of the U.S. Constitution:

• the Bankruptcy Clause; and
• sovereign immunity in the Eleventh Amendment.

–Competing Constitutional Provisions

The Bankruptcy Clause says:

“The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”

The Eleventh Amendment says:

“The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.”

–Significance

The significance of the Katz opinion is this:

• it finds the Bankruptcy Clause to be supreme over the Eleventh Amendment in a bankruptcy context. 

Accordingly, I describe Katz as the most-important opinion of the U.S. Supreme Court on the subject of bankruptcy—ever!   That’s because the U.S. Supreme Court rarely even mentions the Bankruptcy Clause in its bankruptcy opinions, let alone give it primacy.

Justice Breyer is part of the five-justice Katz majority that declares:

• The Constitution’s Bankruptcy Clause “provides that Congress shall have the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States”;
• “In this case we consider whether a proceeding initiated by a bankruptcy trustee to set aside preferential transfers by the debtor to state agencies is barred by sovereign immunity” under the Eleventh Amendment;
• “we reject the sovereign immunity defense advanced by the state agencies” because:
  • “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”;
  • “In ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted” in bankruptcy proceedings; and
  • “Congress may, at its option, either treat States in the same way as other creditors”—it’s power to do so “arises from the Bankruptcy Clause itself.”

Justice Breyer’s Katz opinion is a rarity: it actually mentions—and even applies—the Constitution’s Bankruptcy Clause.  And on top of that, it gives the Bankruptcy Clause primacy over another provision in the Constitution. And that’s amazing!

Conclusion

Justice Stephen G. Breyer has served well for many years on the U.S. Supreme Court.

His contributions to the world of bankruptcy jurisprudence have been important and impactful.  His presence and bankruptcy wisdom on the U.S. Supreme Court will be missed, by all bankruptcy practitioners everywhere, in the years to come.

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