Bankruptcy of Caterer at Heart of High Court Case

     (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.

Class Certification at Issue in Supreme Court

     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.