Category Archives: bankruptcy

Norwest Bank Worthington v. Ahlers

485 U. S. 197

March 7, 1988

This is a sad case.

A farm in Minnesota ended up more than a million dollars in debt, most of it owed to a bank. The farm tried to declare bankruptcy, but the bank objected under the ‘absolute priority’ rule, which gives creditors with unsecured debt the power to halt a bankruptcy reorganization. The farm tried to get around the absolute priority rule in several ways.

Unanimously, the Court rejected all of farm’s arguments (Kennedy did not participate). White said the farm could not secure the bank’s debt through promises of future labor and payments. Although a 1939 Court case allowed for some more creative ways to secure debtors, future labor was too speculative to qualify for this exception. Congressional debates bolstered this conclusion. White also shot down, as obviously false, a wacky argument that the farmland had no property value to the bank (and that somehow this meant the absolute priority rule did not apply).

Finally, White addressed the elephant in the room: that not allowing the farmers to reorganize and try to give the farm new life was… well, cruel. Cruel or not, the Court felt constrained to obey the provisions of the bankruptcy code. It’s cases like this that really sour me on the entire concept of legal positivism. A truly Biblically minded nation would not have its highest Court rule in such a way. No, a Christian nation would remember the seventh year debt forgiveness in ancient Israel (Deuteronomy 15:1-11), or the parable of the unforgiving debtor (Matthew 18:21-35). My heart goes out the the Ahlers family, who had the misfortune of living in a country that loved money more than mercy.

United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd.

484 U. S. 365

January 20, 1988

An apartment landlord was given a loan of over $4 million, and the apartment complex he owned was to be used as collateral, even though it’s total value was somewhat less than the loan. A few years later, the landlord filed for bankruptcy, which automatically prevents any loaner from foreclosing on the collateral (i.e. the apartment). Under a provision in the bankruptcy code, the loaner asked the apartment owner to pay large sums of interest for the duration of the bankruptcy proceedings. The question was whether the code allowed for this when the collateral was less than loan amount.

In a mercifully unanimous decision, Scalia said the code did not allow for the imposition of interest payments in that situation. In all honesty, I could barely make heads or tails of the opinion, so if you want a better summary you’ll have to read it yourself. Basically, he thought the creditor’s reading of the code was inconsistent with other code provisions, and that the provisions the creditor relied upon for the support weren’t very strong. Finally, Scalia tried to demonstrate that the ruling was in line with the intent of Congress. As I’ve noted before, decisions involving securities, banking, and high finance are absolutely brutal for me. I just hope that I don’t run into too many cases like this as I continue through the Rehnquist Court.

Pennzoil Co. v. Texaco Inc.

481 U. S. 1

April 6, 1987

A jury in a Texas court ordered Texaco to pay Pennzoil the utterly appalling penalty of eleven billion dollars. Worse yet, Texas law said that Pennzoil could collect on that money before Texas appeals courts even had an opportunity to review the verdict. Texaco panicked, and sought an emergency injunction from a District Court in New York (where Texaco is headquartered). The District Court granted the injunction against collection of the 11 billion. Pennzoil claimed that the District Court had no right to interfere in the operation of the Texas Court system.

The Supreme Court, not quite knowing what to do, unanimously declared that the injunction should not have issued, but came up with a bewildering array of reasons why. Powell was able to cobble together a 5-4 majority to simply say that the District Court should have declined to get involved due to the Younger abstention doctrine. In Younger, the Court held that federal courts must not interfere with criminal proceedings in state courts as a matter of federalism. A state’s interest in seeing its civil judgments enforced, Powell wrote, is of enough importance that the Younger doctrine reached this case as well. He also pointed out that Texas law had an “open courts” provision in its constitution, which meant that Texaco could have found redress for its problem without going to federal court.

The four more liberal justices all came up with different reasons for holding that Texaco lost. Brennan, joined by Marshall, wrote that the interests of Texas in the suit were slight, and that Younger deference shouldn’t have applied, especially since Texaco was filing a section 1983 claim. Nonetheless, he felt that the injunction wasn’t necessary since Texaco could still appeal to Texas courts, even if they might be temporarily bankrupted before getting the verdict overturned. Marshall wrote that the District Court simply lacked jurisdiction to have even taken the case. Federal courts could not review pure state judgments under the Rooker-Feldman doctrine, and Marshall felt that there was no way the penalty collection process could be isolated from the state judgment in this case. He also felt that the New York District Court was an improper venue.

Blackmun thought that the District Court should have abstained under Pullman deference, which called for abstention when a state court had the opportunity to settle a disputed Constitutional point. Despite this, Blackmun was actually perturbed by Brennan’s contention that bankruptcy would be no big deal for Texaco, and hinted that absent Pullman deference an injunction might have been appropriate. Stevens, joined by Marshall, had no problem with the District Court taking the case, but found that an injunction should not issue because there was quite simply no Constitutional right to have an execution of financial judgment stayed during an appeals process. To top it off, Scalia wrote a concurrence joined by O’Connor to state his view that the Rooker-Feldman doctrine should not bar federal jurisdiction in the litigation.

As a mater of civil procedure, I think the Court got it right. Nonetheless, I find the penalty of $11 billion appalling, and emblematic of everything that is wrong in civil litigation. There’s no possible business dispute that can possibly be worth that much. Fortune magazine had this to say back in 1987: “Strange events indeed, and tragic. Not only does America lose, but so do Texaco’s employees, suppliers, and stockholders — at least temporarily. And so do the stockholders of Pennzoil, Texaco’s adversary in the huge lawsuit that created the whole mess. Why must everybody lose? What constructive purpose is served?” This is exactly why the Bible counsels Christians to avoid lawsuits, and resolve disputes quickly.

Justice Marshall, keeping it real: “The District Court did not explain how Texaco’s claims, which challenged a Texas state law bonding provision limiting Texaco’s opportunity to stay execution of a Texas judgment against property located in Texas, could be said to arise in the Southern District of New York.” No joke – I actually thought Marshall had the most persuasive opinion in this case.

Kelly v. Robinson

479 U. S. 36

November 12, 1986

In a 7-2 decision, Justice Powell held that restitution orders imposed by state courts cannot be discharged under federal bankruptcy law. For years, Carolyn Robinson defrauded Connecticut of welfare money. When caught, she was ordered to pay restitution over a five year period. Shortly afterward, she tried to get this restitution order discharged under US bankruptcy law. At the time, Connecticut offered no objection, and the discharge was granted. Years later, Connecticut contacted Robinson, and told her that the restitution order was non-dischargeable.

For decades, courts had almost uniformly held that penalties imposed by state courts were not dischargeable in bankruptcy. Robinson turned on the effect that a new bankruptcy law passed in 1978 had on that settled judicial rule. The 1978 act said that an obligation could not be discharged if it was “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.” Robinson argued that a restitution order was clearly “compensation for actual pecuniary loss.” Powell disagreed, noting that restitution imposed as a criminal penalty is primarily meant not to compensate a victim, but punish and rehabilitate the perpetrator. He also argued that it would be unwise to subject state punishments to review in bankruptcy courts.

Justice Marshall dissented, and Justice Stevens joined him. His basic contention was that the very essence of restitution is “compensation for actual pecuniary loss,” and that the restitution was thus not automatically non-dischargeable. Frankly, I think Marshall makes a darn good argument. Looking at the relevant texts, and taking them at face value, the judgment levied on Robinson sure looks like a dischargeable debt. It’s odd to see Marshall, the Court’s most liberal Justice, making such a textualist argument, ignoring longstanding precedent, and passing over the probable real world outcomes of the ruling. Powell had the better policy argument, but Marshall had the better legal argument. Sometimes you never know what decision-making methods a Justice will use.