Insights

Business_Restructuring_SOCIAL

From the Top in Brief

The U.S. Supreme Court recently handed down three rulings potentially impacting bankruptcy cases.

Nunc Pro Tunc Relief

In Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, No. 18-921, 2020 WL 871715 (U.S. Feb. 24, 2020), the Court circumscribed the use of nunc pro tunc ("now for then") orders that make relief ordered by a court apply retroactively to an earlier point in time.

The Catholic Church in Puerto Rico terminated a pension plan for employees of its school. A commonwealth trial court entered a judgment directing the church to pay $4.7 million and ordered seizure of its assets to satisfy the judgment. The Puerto Rico Supreme Court affirmed the trial court, and the Catholic Church appealed that decision to the U.S. Supreme Court. The problem was that, before the trial court entered its orders, the church had removed the litigation to federal district court, arguing that the case was related to a bankruptcy case that had been filed by the schools' pension trust. And a state court loses jurisdiction once a notice of removal is filed. The bankruptcy court did dismiss the bankruptcy case shortly before the trial court issued its orders in March 2018. However, the federal district court did not remand the removed litigation to the trial court until nearly five months later. It sought to address this lag with a nunc pro tunc judgment stating that the order "shall be effective" as of the date that the bankruptcy court dismissed the trust's bankruptcy case.

The U.S. Supreme Court ruled in its per curiam opinion that the trial court had no jurisdiction until the litigation was remanded and that its orders were therefore void. The nunc pro tunc order was not effective to cure the jurisdictional defect of the trial court's orders. The Court acknowledged that a federal court may issue a nunc pro tunc order to "reflect the reality of what has already occurred," but emphasized that such an order "presupposes a decree allowed, or ordered, but not entered, through inadvertence or error." This was not the case here. The Court accordingly vacated the Puerto Rico Supreme Court's judgment without considering the merits of the appeal and remanded for further proceedings. Justice Alito, joined by Justice Thomas, filed a concurring opinion in which he agreed with the Court's jurisdictional ruling but highlighted certain of the important issues that might arise on remand regarding the liabilities of affiliated church entities.

Bankruptcy courts often grant certain relief nunc pro tunc, such as an order approving the retention of a professional retroactive to the date the retention application was filed or granting retroactive relief from the automatic stay. At least one bankruptcy court has already held that, under Archdiocese of San Juan, "utilizing nunc pro tunc orders to approve the retention of estate professionals retroactive to some date prior to the actual date of court approval is inappropriate." See In re Benitez, 2020 WL 1244109 (Bankr. E.D.N.Y. Mar. 13, 2020). According to the court, the "retroactive approval of the retention of an estate professional, whether it be nunc pro tunc, post-facto or any similar nomenclature, is not mandated under the Code or Rules." Nevertheless, the court concluded that "neither the Code nor the Rules preclude an award of 'reasonable compensation' or reimbursement for 'actual, necessary expenses' pursuant to section 330 for services rendered prior to an order approving retention of the professional." The court wrote, "Simply stated, a professional must be retained as required by the statute, but once having been retained, the bankruptcy court is free to compensate him for services rendered to the estate at any time, pre and post-court approval, in accordance with section 330 of the Code." In addition, in In re Telles, No. 8-20-70325-reg (Bankr. E.D.N.Y. Apr. 30, 2020), the court cited Archdiocese of San Juan in denying a motion for a nunc pro tunc order vacating the automatic stay prior to a state court-authorized foreclosure sale because "there was never a determination by this Court vacating the stay prior to the foreclosure sale." In so ruling, the court wrote that "a nunc pro tunc order cannot bless a state court authorized foreclosure sale where the automatic stay has deprived the state court of such jurisdiction."

Property of the Bankruptcy Estate

In Rodriguez v. FDIC, No. 18-1269, 2020 WL 889191 (U.S. Feb. 25, 2020), the Court held that state law (together with any applicable federal rules), rather than federal common law, determines which member of a corporate group is entitled to a tax refund, in the absence of an unambiguous tax allocation agreement.

Writing for the Court, Justice Gorsuch concluded that the U.S. Court of Appeals for the Tenth Circuit should not have applied the "Bob Richards rule," a federal common-law rule based on the Ninth Circuit's decision in In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262 (9th Cir. 1973). As initially articulated, that rule provided that, in the absence of a tax allocation agreement between the members of a corporate group, "a refund belongs to the group member responsible for the losses that led to it" (citing Bob Richards, 473 F.2d at 265). However, Justice Gorsuch explained, the rule has evolved in some jurisdictions beyond a "stopgap rule" applying to cases without a tax allocation agreement to become "a general rule always to be followed unless the parties' tax allocation agreement unambiguously specifies a different result."

According to Justice Gorsuch, "[T]here is no federal general common law," and "only limited areas exist in which federal judges may appropriately craft the rule of decision," such as admiralty disputes and certain disputes between states. A new area for federal common lawmaking, Justice Gorsuch explained, may be claimed only if strict conditions are satisfied, including the requirement that such common lawmaking is necessary to protect uniquely federal interests. "Nothing like that exists here," he wrote, noting that the federal government does not have a unique interest in determining how a consolidated corporate tax refund, once paid to a designated agent, is distributed among group members.

The fact that the case involved corporate property rights in the context of a federal bankruptcy case and a tax dispute did not alter this conclusion. Justice Gorsuch noted that state law generally determines property rights in bankruptcy cases and that the Internal Revenue Code generally creates no property rights.

The Court vacated a $4.1 million tax refund given to the Federal Deposit Insurance Corporation (the "FDIC"), as receiver for a failed bank, rather than to the chapter 7 trustee for the bank's corporate parent, and remanded to the Tenth Circuit for further proceedings. On remand, the Tenth Circuit, applying Colorado law, held that the FDIC, as receiver for the failed bank, owned the federal tax refund. See In re United W. Bancorp, Inc., 2020 WL 2702425 (10th Cir. May 26, 2020). It accordingly affirmed the judgment of the district court and remanded the case to the bankruptcy court for further proceedings.

State Sovereign Immunity

In Allen v. Cooper, No. 18-877, 2020 WL 1325815 (U.S. Mar. 23, 2020), the Court held that state sovereign immunity applies to copyrights as it does to patents. In reaching that conclusion, the Court explained its reasoning in Central Virginia Community College v. Katz, 546 U.S. 356 (2006), which held that the U.S. Constitution's Bankruptcy Clause (Art. 1, § 8, cl. 4) abrogated states' sovereign immunity, and limited the case to that clause.

In a seminal decision that preceded KatzSeminole Tribe of Florida v. Florida, 517 U.S. 44 (1996)—a 5-4 majority of the Court held that congressional abrogation of a state's sovereign immunity requires "unequivocal statutory language" and a provision in the U.S. Constitution permitting Congress to encroach on a state's sovereign immunity. The ruling led to concerns that sovereign immunity would prevent a bankruptcy court from disallowing a claim filed by a state or permit a state to disregard the discharge of a debt in bankruptcy. In Katz, the Court ameliorated these concerns by holding that an action to avoid a preferential transfer is not barred by sovereign immunity because, in ratifying the Bankruptcy Clause, the states acquiesced in the subordination of whatever sovereign immunity they might otherwise have asserted in proceedings, such as preference avoidance litigation, brought to enforce a bankruptcy court's in rem jurisdiction (jurisdiction over property rights rather than individuals).

In Allen, a videographer copyrighted videos and photographs of a shipwreck that belonged to the state of North Carolina. The videographer sued for copyright infringement after the state later published some of the videos and photographs. A federal district court ruled that the videographer's cause of action was not barred by state sovereign immunity because Congress abrogated such immunity for copyright infringement in the Copyright Remedy Clarification Act of 1990 (the "CRCA"). The U.S. Court of Appeals for the Fourth Circuit reversed, ruling that the CRCA was invalid with respect to copyrights.

The Supreme Court upheld the Fourth Circuit's ruling. Writing for the Court, Justice Kagan initially noted that in Florida Prepaid Postsecondary Ed. Expense Bd. v. College Savings Bank, 527 U.S. 627 (1999), the Court ruled that a statute with the same language as the CRCA did not validly extinguish sovereign immunity with regard to patents because Congress could not use its power over patents in Article I of the Constitution to abrogate sovereign immunity. She wrote that "[w]e find that our decision in Florida Prepaid compels the same conclusion" with respect to copyrights.

Justice Kagan rejected the argument that Katz compelled a different result because Katz does not apply to copyrights. She explained that, in Katz, the Court ruled that "Article I's Bankruptcy Clause enables Congress to subject nonconsenting States to bankruptcy proceedings (there, to recover a preferential transfer). We thus exempted the Bankruptcy Clause from Seminole Tribe's general rule that Article I cannot justify haling a State into federal court." Justice Kagan also wrote that "[i]n bankruptcy, we decided, sovereign immunity has no place" and everything in Katz "is about and limited to the Bankruptcy Clause; the opinion reflects what might be called bankruptcy exceptionalism." The Bankruptcy Clause, she explained, "was sui generis . . . among Article I's grants of authority," and the states waived sovereign immunity in bankruptcy cases by having adopted the Constitution.

Finding no meaningful distinction between patents and copyrights, Justice Kagan concluded that the Court could reach no other result in light of Florida Prepaid and the principle of stare decisis, under which there must be "'special justification,' over and above the belief 'that the precedent was wrongly decided'" to reverse one of the Court's own precedents.

In his concurring opinion, Justice Thomas agreed that Florida Prepaid is binding precedent, but he disagreed with Justice Kagan's discussion of stare decisis. He also wrote that he continues to believe Katz was "wrongly decided." In his own concurring opinion, Justice Breyer, joined by Justice Ginsburg, reiterated his "longstanding view" that Seminole Tribe was wrongly decided.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

 
We use cookies to deliver our online services. Details of the cookies and other tracking technologies we use and instructions on how to disable them are set out in our Cookies Policy. By using this website you consent to our use of cookies.