Two cases the Supreme Court will decide this term, combined with pending appeals in the circuit courts, will shape consumer and chapter 11 bankruptcy law for years to come. Today, we review questions the high court may decide in this term or the next.

Tomorrow, we will look at significant appeals pending in the circuit courts.

Already Up for Grabs in the Supreme Court

In the winter of 2017, the high court will rule on Czyzewski v. Jevic Holding Corp., in the process resolving a split of circuits and deciding whether bankruptcy courts can employ so-called structured dismissals to make distributions in violation of the priorities contained in Section 507 of the Bankruptcy Code. The upcoming decision will likely decide the fate of structured dismissals’ first cousin: so-called gift plans that similarly ignore statutory priorities.

Later in the current term, in another case arising from a circuit split, the justices will tackle Midland Funding LLC v. Johnson, a multifaceted appeal involving the federal Fair Debt Collection Practices Act. From the viewpoint of Supreme Court jurisprudence, Johnson will allow the Court to shape the law on implied repeal of one federal statute by another. The outcome will either license or abolish a business where purchasers of defaulted debt file thousands of time-barred claims, knowing that some debtors or trustees will lack the incentive or resources to object.

If, by chance, the court does not decide Johnson on the merits, other certiorari petitions are pending that raise the same issue, such as Nelson v. Midland Credit Management Inc. from the Eighth Circuit. Likely as not, the Supreme Court will not be able to duck the circuit split on the FDCPA. Some circuits believe that the later-adopted Bankruptcy Code impliedly repealed the FDCPA. Whereas the Eleventh Circuit believes that filing stale claims violates the FDCPA, other circuits do not.

Around the Corner in the Supreme Court

Reorganization:

            The Supreme Court in recent years has shown a proclivity for deciding more cases on consumer law than those affecting major corporate reorganizations, perhaps from a sense that the bankruptcy courts’ constant exposure to the issues makes them best suited for shaping chapter 11 in the 21st century. As with Jevic and the 2015 decision in Baker Botts LLP v. Asarco LLC, the Supreme Court seems to step in when the circuits violate fundamental principles of constitutional law or statutory interpretation.

            An appeal from the mammoth reorganization of Tribune Co. raises an issue the Supreme Court should not duck. In March, the Second Circuit ruled on the safe harbor for “settlement payments” under Section 546(e) and barred virtually any theory individual creditors might use to sue selling shareholders in a leveraged buyout. In Deutsche Bank Trust Co. Americas v. McCormick, the creditors filed a certiorari petition in September.

The creditors spotlight splits among the courts of appeals, where the Seventh Circuit, for instance, held in July in FTI Consulting Inc. v. Merit Management Group LP that employing a bank as a “mere conduit” does not invoke the safe harbor. If the high court ducks Deutsche Bank, the losing side in FTI still has time to file a petition for certiorari.

Deutsche Bank or FTI would enable the Supreme Court, for the first time, to say whether the safe harbor should be interpreted so broadly that it preempts state fraudulent transfer laws, as the Second Circuit held.

A good candidate for a grant of certiorari is U.S. Bank NA v. The Village at Lakeridge LLC, where the justices on Oct. 3 sought the opinion of the Acting Solicitor General. In Lakeridge, the Ninth Circuit held in February that a “person does not become a statutory insider solely by acquiring a claim from a statutory insider.” Asking for the government’s opinion indicates a higher probably of Supreme Court review. The case is attractive for the justices because they could interpret the statute without making big waves that would affect large chapter 11 reorganizations.

Also high on the list for Supreme Court review is Southwest Securities FSB v. Segner, where the Solicitor General likewise will give his view about granting certiorari. Segner deals with surcharging a secured lender for the costs of maintaining collateral under Section 506(c).

The Fifth Circuit in Segner declined to follow the Seventh Circuit’s Trim-X decision, which disallows surcharge “when the trustee is trying to realize value for the estate.” Surcharging collateral may be an issue for the circuit courts to develop more fully before the Supreme Court steps in.

A ruling one way or the other will not much affect major reorganizations, where debtors ordinarily waive the right to surcharge collateral on the first day of the case. A Supreme Court decision would have major impact only if the Court implies that debtors cannot waive the right to surcharge.

Consumer:

In the consumer sphere, the courts of appeals are hopelessly split on the so-called one-day-late rule, where a tax debt never can be discharged if the underlying tax return was filed even one day late under Section 523(a)(1)(B)(i) and the so-called hanging paragraph.

The First, Fifth and Tenth Circuits employ the one-day-late rule. The Fourth, Sixth, Seventh, Eighth and Eleventh Circuits follow the four-part test resulting from a 1984 Tax Court decision known as Beard.

If the high court takes the case, the vehicle is Smith v. IRS, where the response to the certiorari petition is due in mid-November. The petitioner’s counsel is Prof. John A.E. Pottow from the University of Michigan Law School.

Last year, Columbia University Law Professor Ronald J. Mann attempted to take a one-day-late case to the Supreme Court in 2015 in In re Mallo. The Court denied certiorari. This time, perhaps the justices will see the question as an issue they cannot avoid forever.

Not This Term

This term, the Supreme Court will not resolve a circuit split and decide whether selling a tax lien can ever be a fraudulent transfer. The justices denied certiorari on Oct. 3 in Smith v. Sipi, where the Seventh Circuit held in January that a tax sale under Illinois law could be a fraudulent transfer.

The issue does not seem ripe for the high court because the Fifth and Tenth Circuits, which seemingly held to the contrary, were construing state laws with different procedures calling for auctions where the prices could rise toward fair market value.

Tomorrow, we explore important issues to be decided in the next year by the courts of appeals.

The cases in the order in which they are discussed are below. The dockets or opinions are linked to the case names.

Czyzewski v. Jevic Holding Corp., 15-649 (Sup. Ct.). For ABI’s discussion, click here.

Midland Funding LLC v. Johnson, 16-348 (Sup. Ct.). For ABI’s discussion, click here.

Nelson v. Midland Credit Management Inc., 15-2984 (8th Cir. July 11, 2016). For ABI’s discussion, click here.

Baker Botts LLP v. Asarco LLC, 14-103 (Sup. Ct. June 15, 2015).

Deutsche Bank Trust Co. Americas v. McCormick, 16-317 (Sup. Ct.). For ABI’s discussion, click here.

FTI Consulting Inc. v. Merit Management Group LP, 15-3388 (7th Cir. July 28, 2016). For ABI’s discussion, click here.

U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.). For ABI’s discussion, click here and here.

Southwest Securities FSB v. Segner, 15-1223 (Sup. Ct.). For ABI’s discussion, click here.

Smith v. IRS, 16-497 (Sup. Ct.). For ABI’s discussion, click here.

Smith v. Sipi, 15-1475 (Sup. Ct.). For ABI’s discussion, click here.