Tuesday, November 03, 2009Last Update: 2:06 PM PT

     (CN) - In a case that affects a great number of Americans, lawyers argued Tuesday before the Supreme Court over whether a creditor still has a right to challenge a bankrupt woman's claim that her belongings were worth exactly what she's allowed to keep under law. A skeptical Chief Justice John Roberts said that such a match would be a "remarkable coincidence."
     "If her claim is improper, then the trustee has an obligation to object to it," Justice Ruth Bader Ginsburg countered, suggesting responsibility lay with the trustee.
     Ginsberg was unique among the justices in emanating a clear sympathy for the caterer at the center of the case. She said the trustee should have been able to tell from the paperwork that the woman was exempting all her possessions, suggesting that she had given fair notice.
     Justice Antonin Scalia appeared less sympathetic. "She wanted to have her cake and eat it too," he said. "Nobody thinks that's an honest valuation of the equipment. It's simply adding up the exemption she was entitled to."
     Chief Justice Roberts echoed Scalia's skepticism. "Well, that would be a remarkable coincidence if her equipment happened to be worth exactly what Congress said she could exempt," Roberts said.
     "In her inventory, she gives figures, and they add up to the amount that she's claiming," Ginsburg countered, "so she evidently thinks that those numbers will cover all of her business equipment."
     Nadejda Reilly, who owned a catering business, filed for Chapter 7 bankruptcy in 2005, which allowed her to keep $10,718 worth of property. On the forms, she said that the value of her kitchen equipment totaled the same amount as the exemption.
     An auctioneer chosen by William Schwab, the appointed trustee in the bankruptcy, appraised Reilly's cooking equipment at $17,000. But Schwab failed to file an objection to Reilly's assessment before the 30-day deadline.
     Schwab moved in bankruptcy court to sell all Reilly's equipment and pay back $10,718, but Reilly argued that Schwab couldn't sell her tools because of the missed deadline.
     "This is really my concern," Ginsberg said. 'It seems what she wants is her cooking equipment, not the money equivalent."
     Craig Goldblatt, from WilmerHale, represented trustee Schwab. He said it was not clear in the forms that Reilly was exempting all of her equipment and argued that Schwab had no reason to object to Reilly keeping $10,718 worth of property.
     G. Eric Brunstad, from Dechert, represented the bankrupted Reilly. He maintained that Reilly had accurately assessed the value of her kitchen equipment, and that she had clearly marked a box on the form saying she had no non-exempted assets. He added that it is up to the trustee to object to any appraisals that are questionable.
     "You're requiring the trustee to object to everything, lest he lose the $100,000 that it turns out this is worth," Roberts said to Brunstad
     "One of my concerns is that the trustees simply don't have time in every case to have a creditors' meeting and go through every asset," Justice Anthony Kennedy said.
     Justice Sonia Sotomayor, who has extensive experience in financial law from her days on the 2nd Circuit bench -- that has jurisdiction over federal cases involving Wall Street -- addressed Brunstad in pointing out a potential weakness in his argument. "It is an inducement to undervalue your property for a debtor," she said, "in the hopes that an overly worked trustee won't have either the time or opportunity or wherewithal to understand that the value is off."
     Justice Stephen Breyer asked why the issue had even come before the Supreme Court, saying the trustee and Reilly should have been able to work out any disagreement, but appeared to give more blame to the trustee. "And if in fact 30 days thereafter and you don't need any more time, so you don't ask the judge for more time, file an objection," he said. "What's the problem?"
     I think both sides have an argument," Kennedy said diplomatically to Brunstad. "I don't think it's at all clear-cut."
But he added, "I am concerned that in every case, under your rule, the trustee is at risk unless he makes an objection, and I think that's just going to make bankruptcy proceedings much more protracted and much more complex."
     The bankruptcy court sustained Reilly's objection to the sale in an unreported opinion. The district court and the 3rd Circuit affirmed.

     WASHINGTON (CN) - Lawyers argued before the Supreme Court Monday over whether federal courts should follow state or federal law when certifying class actions. The debate largely surrounded the obscure classification of a policy as either procedural or substantive, and serves as a fresh reminder of the Court's role in unwinding the sometimes daunting ambiguities in the law.
     A New York woman and her health provider brought a suit against the woman's car insurance company for compensation after she was treated for injuries from a car accident in 2006.
     Shady Grove Orthopedic Associates, the group that treated Sonia Galvez, brought the suit before the Supreme Court as a class action that sought damages for the interest payment Allstate had allegedly failed to pay to those it insured.
     Christopher Landau, representing Allstate, argued that under New York law, the case did not qualify for a federal class action and the district court and Second Circuit agreed, dismissing the class action.
     Scott Nelson, representing Shady Grove Orthopedic Associates, argued that the New York laws do not apply because members of the class came from various other states. He said that in such a case, federal procedural rules apply.
     The arguments predictably swung into a debate over how to distinguish procedural standards from substantive law.
     Procedural laws dictate how the court hears and determines cases. For example, a procedural law might limit the amount of time someone has to file a complaint in the courts. Substantive laws govern more broadly the actions of the citizens.
     Nelson argued that the New York rules surrounding class action were procedural because they dealt with policy.
     Justice Sonia Sotomayor proposed a situation where the state only allows a statutory penalty only if an individual files, and that no statutory penalty is awarded if the case is filed as a class action. She asked whether that policy would be strictly procedural.
     Nelson replied that it would.
     "You get $100 or you don't get $100. How can you be any less substantive than getting the $100 or not getting the $100?" Sotomayor asked.
     "Can the statute be both?" Justice Antonin Scalia asked. "Can a statute both establish a substantive limitation and also establish a rule of procedure for New York courts?"
     Nelson replied that a statute could be both procedural and substantive, but that this one was strictly procedural.
     "There was always recognition that a so-called built-in statute of limitations was substantive," Justice Ruth Bader Ginsburg said.
     The New York is more restrictive than federal law in allowing class actions. The state's law provides that, "Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes recovery thereof in a class action, an action to recover a penalty, or a minimum measure of recovery created or imposed by the statute may not be maintained as a class action."
      "This Court in its recent decisions has been sensitive to not overriding State limitations, and so has read the Federal rule to avoid the conflict," Ginsburg said.
     Ginsburg noted that the class action isn't necessarily addressed by federal rules. "If New York wants to say this kind of claim can be brought only as an individual action, not as a class action," Justice Ruth Bader Ginsburg asked, "why shouldn't the Federal court say that's perfectly fine, we respect the State's position on that?"
     Nelson argued that the federal rules do cover the issue and said that the rules apply in all federal courts.
     Landau stepped up to the podium to argue on behalf of Allstate. He said federal courts should accept New York's decision not to accept suit as a class action, arguing that the New York policy has a substantive side.
     "You don't want to create incentives that will bring people like a magnet to Federal court," he added.
     Landau said that if a state only limits particular causes of action or particular penalties - like if the state is concerned about penalties that are too large- then the state is doing it for a substantive reason
     "Your position depends upon a characterization of the ban, and the restriction on class actions is either substantive or procedural," Roberts said.
     Landau replied essentially that it does.
     "Under your theory, any State could pass a law that says no cause of action under State law can be brought as a class action ever," Sotomayor said.
     Landau said that could be the case.
     

     (CN) - The U.S. Supreme Court on Monday agreed to settle contradictory appellate rulings over whether hundreds of opinions issued by two members of the National Labor Relations Board are valid or whether they lacked the three-member quorum.
     On May 1, the 7th Circuit and the D.C. Circuit handed down contradictory rulings on the issue, with the D.C. Circuit deciding the board lacked the quorum set by the National Labor Standards Practices Act.
     The Chicago-based 7th Circuit found the opposite, ruling that the board can operate with two members if there's a resignation or vacancy in the three-member panel.
     The board should have five members, but had been operating with three since 2008, after Democrats in Congress rejected former President George W. Bush's nominations.
     When one member's term expired in December 2007, the remaining four members prepared for two more vacancies by delegating their powers to a three-member panel.
     The terms of two other members expired, leaving just Chair Wilma Liebman and Peter Schaumber.
     In New Process Steel v. NLRB, the high court will decide the validity of opinions issued by the two-member board since Jan. 1, 2008.

     WASHINGTON (CN) - In a case followed closely on Wall Street, the Supreme Court on Monday heard arguments on whether an investment adviser violated his fiduciary duty by charging exhorbitant fees. Chief Justice John Roberts asked, "It makes a lot more sense to have the Securities and Exchange Commission regulate rates than to have courts do it, doesn't it?"      Assistant Solicitor General Curtis Gannon answered that the SEC had not acted on such a case in just under 30 years.
     David Frederic, from Kellogg, Huber, Hansen, Todd, Evans & Figel, argued on behalf of investors in Oakmark Mutual Funds, and said the investors had to pay double what others paid for the same service. Noting that the investment adviser had appointed the members of the board of trustees, Frederic also suggested a conflict of interest.
     John Donovan, from Ropes & Gray, argued on behalf of Harris Associates, a financial advisory firm. He agreed that the other side might have a case if there was a flaw in the process of negotiating fees or if the fee fell too far from normal. He said the price negotiations were not tainted because a majority of the fund's independent trustees consented, and argued that the fees are difficult to compare.
     "These days all you have to do is push a button and you find out exactly what the management fees are," Roberts said, suggesting the agreement was transparent. "As an investor, you can make whatever determination you'd like."
     "He can go look at another fund. It takes 30 seconds," Roberts added.
     Frederic, in arguing against the high fees, estimated that 26 to 35 percent of mutual fund investments are from 401(K) plans, which are essentially locked into the funds. He said that this, along with tax penalties, keeps investors from switching funds.
     "Using the word 'fair fee' in my mind is meaningless because it has to be fair in relationship to something," Justice Sonia Sotomayor said. "As long as there has been full disclosure as required, that's the market, so that's fair."
     Frederick said the fees should be compared to those that the adviser charged for similar work, but were negotiated by people without a conflict of interest. He said that unfair fees would constitute a breach of fiduciary duty.
     The board of trustees had approved the fees by a majority vote as mandated by the Investment Company Act of 1940.
     The justices debated the role of the court in deciding such a case, with Roberts proposing that the SEC handle the problem.
     The 1940 law allows the courts to give the financial agreements "such consideration that the court considers due under the circumstances."
     "Wow," Justice Antonin Scalia said to laughter. "It's utterly meaningless to me."
     When Donovan took the podium to argue that the fees were acceptable, Roberts asked why charging double doesn't fall far enough out of the normal price range.
     Donovan replied that every mutual fund is different and that they can't be compared, adding that the funds the shareholders had compared were "very different."
     "Well, then you say, 'look to see if it's outside the bounds,' and now you tell me there is no way to look to see if it's outside the bounds," Roberts said.
     Sotomayor put forward a scenario where all the board members voted in favor of a fee in following the advice of a tainted insider. "Is that a process that would guarantee an arm's-length transaction in the sense that Congress intended in this act?" she asked.
     Donovan replied that the situation would be in violation of Congress' specifications limiting conflicts of interest.
     The 7th Circuit affirmed the district court's decision in favor of Harris Associates, the adviser. The appellate court held that unless the adviser somehow misled the trustees who voted to accept the fee, it could not rule against the adviser.
     It also ruled that in comparing fees, the court should compare captive funds to other captive funds, not to easily moved funds that might have lower costs.
     Towards the end, Justice Stephen Breyer made a potentially telling Freudian slip, but blamed it on his laryngitis. "I think we are reviewing the district court opinion, I think we are reversing, we are reviewing, sorry," he said in a scratchy voice to laughter among the audience.