Supreme Court Action: Whistle-blowers and Sanctions for Fraudulent Litigation in Bankruptcy

The Supreme Court issued two opinions this morning.  They deal with whistleblower suits in the context of the Sarbanes-Oxley Act of 2002 and the power of a court to sanction a debtor under the Bankruptcy Code for inducing fraudulent litigation in an attempt to shield some of his debts.

The whistleblower case is Lawson v. FMR LLC (12-3).  The Sarbanes-Oxley Act of 2002 was passed as a reaction to the collapse of the Enron Corporation.  Lawson and Zang filed separate actions alleging adverse actions after reporting or questioning accounting methods (Lawson) or statements in draft reports to the SEC (Zang).  The both worked for private contractors related to the Fidelity family of mutual funds.  Fidelity is a publicly owned company without any employees.  It conducts business through its contractors.  The relevant portion of the Act reads:

“No [public] company . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” §1514A(a) (2006 ed.).

The First Circuit ruled that the Act applied only to employees of public companies.  The Supreme Court reversed holding that the Act applied to a public company’s private contractors.  The Court stated that the plain language of the statute supports this interpretation.  It rejected arguments that this holding would allow employees of company officers and employees as remote as housekeepers and gardeners to be covered by the Act as theoretical.  The Court further analyzed the legislative history of the Act as well as precedent related to comparable provisions in the U.S. Code to support its conclusion.  It noted that most funds are structured as public companies without employees.  A contrary result would create a big hole in the enforcement scheme enacted by Congress.

Justice Ginsburg delivered the opinion of the Court and was joined by Chief Justice Roberts and Justices Breyer and Kagan.  Justices Scalia and Thomas joined as well in principal part.  Justice Scalia filed an opinion concurring in principal part and concurring in the judgment and was joined by Justice Thomas.  Justice Scalia believed that the Court’s invocation of legislative history was unnecessary for the result.  Justice Sotomayor filed a dissenting opinion and was joined by Justices Kennedy and Alito.

The bankruptcy case is Law v. Siegel (12-5196).  Law filed for Chapter 7 bankruptcy.  He claimed $75,000 as a homestead exemption under California law for the home which he valued at $363,348.  This is allowed by §522(b)(3)(A) of the Bankruptcy Code.  He also claimed that the sum of two voluntary liens on the house exceeded its value.  Siegel, the bankruptcy estate trustee, challenged these successfully as a fiction and incurred some $500,000 in legal fees to that end.  The Court allowed Siegel to assess Law’s $75,000 homestead exemption to cover some of the fees.  The Ninth Circuit affirmed.

The Supreme Court reversed, essentially stating that the Bankruptcy Court could not invoke inherent powers to sanction abusive litigation practices when prohibited by other parts of the Code.  §522 bars administrative expenses on the allowable homestead exemption.  The Court noted that no one had timely objected to the homestead exemption.  As such it became final before the surcharge was imposed.  The Court rejected other precedent as not controlling the case.  In spite of the burden to the bankruptcy trustee, the Court said there were other monetary sanctions the Bankruptcy Court could impose.  Justice Scalia delivered the opinion for a unanimous Court.  – Mark

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