Judge Neil Gorsuch on Bankruptcy

24 Feb Judge Neil Gorsuch on Bankruptcy

The following is taken from a lecture given by the author on February 22, 2017 to the Maryland Bankruptcy Bar Association.

Judge Neil Gorsuch

On February 1, 2017, the President nominated Neil McGill Gorsuch to be an associate justice on the Supreme Court. Tonight, I’m going to review his biography, discuss some of his major bankruptcy opinions, and talk about what his presence on the Supreme Court might mean for our bankruptcy practices.

Neil Gorsuch is a bit young for appointment—age 49, although the average age of appointment for justices is 53 (which includes John Jay, who was 32 when he was appointed in 1812). His mom was Anne Gorsuch Buford, who was the Administrator of EPA, and resigned after 22 months, having been held in contempt of Congress.

Judge Gorsuch attended Georgetown Prep, got a BA in 3 years from Columbia, and graduated cum laude from Harvard Law School in 1991. He was an editor of the Harvard Journal of Law and Public Policy. You may have heard of one of his law school classmates—Barrack Obama, who also graduated in 1991. After graduation, Judge Gorsuch clerked for David B. Sentelle on the U.S. Court of Appeals for the DC Circuit, and then for Justices Byron White and Anthony Kennedy on the Supreme Court.

Instead of joining a “white shoe” lawfirm, he chose to work for a new litigation firm, Kellogg, Huber. He was an associate there from 1995 to 1997 and named partner in 1998. While at Kellog Huber, he was on a team that obtained a $1.05 billion jury verdict in an antitrust case against U.S. Tobacco Co., which was upheld by the Sixth Circuit. In 2004, he received a Doctor of Philosophy degree in Law from Oxford for his thesis on assisted suicide and euthanasia (he opposes it). In 2005, he became Principal Deputy Associate Attorney General of the Civil Litigation Division at the Department of Justice, and in 2006 was appointed by President Bush to the U.S. Court of Appeals for the 10th Circuit. He was confirmed unanimously by the Senate. Hearings are scheduled to begin on his Supreme Court nomination on March 20,02017.

Since his appointment to the 10th Circuit, Judge Gorsuch has authored 212 published opinions. He sat on 30 bankruptcy appeals, and wrote opinions in 13. Interestingly, most of those opinions are in Chapter 7 and Chapter 13 cases, rather than Chapter 11 cases. Tonight, I’m going to focus on three of these opinions: In re Ardese, No. 09-7069 (10th Cir. 2008)(Unreported); In re Woolsey, 696 F.3d 1266 (10th Cir. 2012); and In re Renewable Energy Development Corporation, 792 F.3d 1274 (10th Cir. 2015).

Ardese dealt with the impact of a Chapter 7 debtor’s failure to disclose an employment discrimination claim on her schedules. The same day she received her discharge, she filed a pro se employment discrimination case in the District Court. After the defendant filed a motion to dismiss, alleging judicial estoppel and lack of a proper party (the Chapter 7 trustee), Ms. Ardese reopened her bankruptcy case, disclosed the claim, and added the Chapter 7 trustee as a party in the District Court case. She then settled with the Chapter 7 Trustee, paying all of her creditors in full and purchasing all rights to the lawsuit. Even after she did these things, the District Court found that judicial estoppel barred the suit, and granted summary judgment to the defendant. Ms. Ardese appealed.

On appeal, Judge Gorsuch found that there was little difference between Ms. Ardese’s case and a prior 10th Circuit case, Eastman v. Union Pacific Railroad Co., 493 F.3d 1151 (10th Cir. 2007), which also dealt with judicial estoppel and the failure to disclose a claim. That she subsequently reopened the case, added the claim, and paid her creditors in full was irrelevant. He stated, “Simply put, the initial favorable Chapter 7 discharge Ms. Ardese received was ‘sufficient to establish a basis for judicial estoppel, even if the discharge [was] later vacated.’” He did note that, had the debtor amended her schedules voluntarily, rather than in response to the defendant’s motion, it might present a “different equitable scenario”. The District Court’s ruling was affirmed.

The second case is In re Woolsey, a Chapter 13 case involving an underwater home with two mortgages. Judge Gorsuch starts out with a rather engaging summary of the Woolsey’s situation:

Like so many these days, Stephanie and Kenneth Woolsey owe more money on their home than it’s worth. In fact, the value of their home doesn’t come close to covering the balance due on their first mortgage, much less the amount they owe on a second. And it’s that second mortgage, held by Citibank, at the center of our case. After the Woolseys sought shelter in bankruptcy, they prepared a Chapter 13 repayment plan. In their plan, they took the position that the bankruptcy code voids Citibank’s lien because it is unsupported by any current value in the home. Naturally, Citibank didn’t take well to the Woolseys’ intentions. The bank objected to the Woolseys’ plan and eventually persuaded the bankruptcy court to reject it. Later the district court, too, sided with Citibank and now the question has found its way to us.

Before us, though, the Woolseys don’t just shrink from, they repudiate the only possible winning argument they may have had. They choose to pursue instead and exclusively a line of attack long foreclosed by Supreme Court precedent. To be sure, the Woolseys argue vigorously and with some support that the Supreme Court has it wrong. But, as Justice Jackson reminds us, whether or not the Supreme Court is infallible, it is final. See Brown v. Allen, 344 U.S. 443, 540, 73 S.Ct. 397, 97 L.Ed. 469 (1953) (Jackson, J., concurring in the result).

Judge Gorsuch first pushed deeply into the thorny issue of whether the Bankruptcy Court’s denial of the Woolsey’s Plan constituted a “final order” for the purposes of appeal (he found that the subsequent approval of an amended plan “cured” the premature notice of appeal, and that the Court had the power to hear what he called “the interlocutory appeal of an interlocutory appeal”).

Turning to the merits, he parses the interaction of §§ 502(b)(1), 506(a) and 506(d), noting that, “Because Citibank’s junior lien isn’t backed by any value in the home, Citibank holds only an allowed unsecured claim and so its lien would appear to be voidable, just as the Woolseys argue.” However, he goes on to state, “But the law in this corner of bankruptcy practice doesn’t follow such a straight path. It doesn’t because of Dewsnup [v. Timm, 502 U.S. 410 (1992)].” Judge Gorsuch, to put it mildly, is not a big fan of Dewsnup. He said, “[T]he Court felt free to strike out to interpret § 506(d) on its own, unchained by § 506(a)’s plain language.” He quoted with approval Justice Thomas’ concurrence in Bank of America Nat’l Trust v. 203 N. LaSalle Street Partnership that, “Dewsnup has created more than a little ‘methodological confusion,’ confusion ‘enshroud[ing] both the Courts of Appeals and, even more tellingly, Bankruptcy Courts, which must interpret the Code on a daily basis.’” He then cited Justice Scalia’s “powerful” dissent in Dewsnup, Justice Thomas’ concurrence in 203 N. LaSalle, and 4 law review articles critical of Dewsnup, before closing with these words, “But this much still is clear. Right or wrong, the Dewsnuppian departure from the statute’s plain language is the law. It may have warped the bankruptcy code’s seemingly straight path into a crooked one. It may not be infallible. But until and unless the Court chooses to revisit it, it is final.”

Unfortunately for the Woolseys, they chose not to pursue a strip off under Nobelman v. American Sav. Bank, 508 U.S. 324 (1993) (which Judge Gorsuch likes, and which the amicus NACBA argued), and, in fact, repudiated any argument other than their § 506(d) one. Judge Gorsuch closed with this criticism of the Woolseys (and a suggestion for future litigants):

And that leaves us in an awkward place. There’s a potentially promising argument for the Woolseys, one suggested by their own amicus, but one they want no part of. Whatever our power to tackle the § 1322(b)(2) question in these circumstances, nothing requires us to do so, to foist on litigants arms they so avidly refuse to take up in the adversarial arena. So in deference to their wishes, we opt today against forcing a § 1322(b)(2) argument onto the unwilling Woolseys and leave that statute and its meaning for another day when a bankruptcy petitioner actually wants to pursue the question.

The last of Judge Gorsuch’s cases that I’ll be discussing tonight is In re Renewable Energy Development Corp., a 2015 decision that wades into the mires of Stern v. Marshall. In Renewable Energy, the Chapter 7 trustee sued certain defendants in the bankruptcy court on various core bankruptcy claims. They countered with state law claims against the trustee for malpractice and breach of fiduciary duty, and sought to withdraw the reference. The District Court denied the motion, concluding that the Bankruptcy Court could decide the state law claims. Judge Gorsuch cut to the chase at the very beginning of this decision, summarizing both the facts and the basis for his decision:

This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court. The bankruptcy court may offer a report and recommendation. It may even decide the dispute if the parties consent. But the parties are entitled by the Constitution to have an Article III judge make the final call. So the district court’s ruling otherwise — its decision to send the dispute to an Article I bankruptcy court for final resolution without their consent — violates the Constitution’s commands and must be corrected.

He rejected the ex-Trustee’s argument that proceedings that were “factually intertwined” with a bankruptcy case could be resolved by an Article I judge, stating, “What if a trustee and creditor came to blows in the courthouse parking lot over the terms of a proposed reorganization plan? What if a trustee stole from a third person and gave the money to the bankruptcy estate? Couldn’t someone plausibly describe disputes like these as at least as “factually intertwined” with bankruptcy as our own?”

Judge Gorsuch rejects the argument that the case should be heard in state court, in a very important discussion of Stern:

[S]aying (as we do) that a bankruptcy court may not decide this case without the parties’ consent under Stern doesn’t necessarily mean it cannot hear the case and offer a report and recommendation about its disposition to a district court. Indeed, as the Supreme Court has recently explained, where (as here) we are faced with a “Stern claim”— a claim the bankruptcy court is statutorily but not constitutionally authorized to decide and for which it has not received the parties’ consent to proceed — it’s still possible under 28 U.S.C. § 157(c)(1) and consistent with Article III for a bankruptcy court to “hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” Arkison, 134 S. Ct. at 2173. In cases like this, the bankruptcy court may act as a sort of magistrate or special master, an adjunct to the decisionmaker, not the decisionmaker itself — and in this way honor both statutory and constitutional commands. Id. So while [the appellant] is right and the district court erred in sending Mr. Hofmann’s case to bankruptcy court for final decision, the district court remains free on remand to refer the case to a bankruptcy court for a report and recommendation.

This ruling states that 28 USC § 157(a) is not jurisdictional, which suggests that diversity jurisdiction alone—the sole basis for District Court jurisdiction not waived below—is sufficient to allow the District Court to refer a matter to the Bankruptcy Court for a report and recommendation. As Steve Sather captioned his article about this decision in “A Texas Bankruptcy Lawyer’s Blog” (which I highly recommend), “Did Gorsuch Expand Bankruptcy Court Referral Power?” Could the District Court, for example, treat bankruptcy judges as magistrate judges, and refer them non-bankruptcy-related cases outside of their § 1334 jurisdiction? Strictly applied, Judge Gorsuch’s opinion would seem to allow this.

These three cases provide a broad cross-section of Judge Gorsuch’s opinions on bankruptcy issues. What do they tell us about how he might be likely to rule on the High Court? In terms of constitutional philosophy, Judge Gorsuch is an originalist. In a 2005 speech at Case Western Reserve University, he said that judges should strive, “to apply the law as it is, focusing backward, not forward, and looking to text, structure, and history to decide what a reasonable reader at the time of the events in question would have understood the law to be—not to decide cases based on their own moral convictions or the policy consequences they believe might serve society best.”

A number of legal commentators have noted that Judge Gorsuch is much in the model of Justice Scalia—very conservative, an excellent writer, and a keen legal thinker. The New York Times said that Judge Gorsuch not only admires Justice Scalia, “but also in many ways resembles him. He shares Justice Scalia’s legal philosophy, talent for vivid writing and love of the outdoors.” Mark Citron of Scotusblog said: Gorsuch’s opinions are exceptionally clear and routinely entertaining; he is an unusual pleasure to read, and it is always plain exactly what he thinks and why. Like Scalia, Gorsuch also seems to have a set of judicial/ideological commitments apart from his personal policy preferences that drive his decision-making. He is an ardent textualist (like Scalia); he believes criminal laws should be clear and interpreted in favor of defendants even if that hurts government prosecutions (like Scalia); he is skeptical of efforts to purge religious expression from public spaces (like Scalia); he is highly dubious of legislative history (like Scalia); and he is less than enamored of the dormant commerce clause (like Scalia). In fact, some of the parallels can be downright eerie.

Mr. Citron goes on to state, “Finally, our review of Judge Gosuch’s bankruptcy cases reveals an attitude towards bankruptcy that’s less condescending than Justice Scalia’s attitude and, for that matter, the attitudes of other Justices (save, perhaps, Justice Thomas, who claims to like bankruptcy). Or, using Yury Kapgan’s dichotomy, Judge Gorsuch is less a ‘scolding pedagogue’ than Justice Scalia.”

It seems to me that, if confirmed, Justice Gorsuch, as did Justice Scalia, would likely interpret the Bankruptcy Code based only on its words, rather than those words’ intent. He is unlikely to look behind those words to intent, or to apply them in a manner that makes more sense than what Congress wrote. This will often result in non-doctrinaire rulings that are strictly Code-based. This textualism makes the circumstances of the debtor less relevant than they otherwise might be; if the outcome is determined by, in effect, holding up the words of the Code against the facts and see what shines through, there seems to be little room for consideration of why the debtor needed to file. However, if you are a supporter of Dewsnup, I’d watch out.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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