Legal Docket: A complicated bankruptcy case

MARY REICHARD, HOST: It’s Monday, January 2nd! Glad to have you along for the first edition of The World and Everything in It of 2023. Good morning and happy new year. I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. Happy new year to you! It’s time for Legal Docket. And for that, we turn to legal reporter Jenny Rough, reporting from Washington.

JENNY ROUGH, REPORTER: Our first case, appropriately enough coming out of the holidays, involves shopping malls.

And specifically the biggest mall in the country, The Mall of America in Minnesota.

To understand the case, we have to go back three decades and mention another retailer: Sears, Roebuck, and Company.

Sears leased space in the Mall of America for just the token amount of $10 per year. But in 2018, Sears filed for Chapter 11 bankruptcy, that’s known as a reorganization bankruptcy.

And as part of the restructuring, Sears assigned its lease to another company called Transform Holdco.

The Mall’s parent company—MOAC Mall Holdings—objected to the lease assignment. And now it’s up to the Supreme Court to decide whether a provision in the bankruptcy code bars the court of appeals from hearing the case.

At oral argument, Eric Brunstad argued on behalf of Transform. He went all the way back to that time in 1991, when Sears and Mall of America first partnered up.

BRUNSTAD: Sears built the building, not MOAC. Decades later, in 2018, when Sears filed for bankruptcy, the building that Sears built with this ground lease became property of the bankruptcy estate of Sears' bankruptcy estate. Sears moved for authority to sell by private contract this property to Transform. After the necessary approvals from the bankruptcy court were obtained, that sale transaction closed on October 4, 2019, three years ago.

After the sales transaction closed, the lease was no longer within the bankruptcy estate. So Transform argues the appellate court no longer has jurisdiction to review a case about that property.

This is a technical case. Even the justices admitted to their confusion. And oral arguments wandered all over the place. But the court granted certiorari only on one narrow question: Do appellate courts have jurisdiction here, that means the power to hear and determine a case. Justice Elena Kagan focused on that narrow question.

KAGAN: Mr. Brunstad, do you have anything to say about the question presented? [Laughter.]

BRUNSTAD: I do, your Honor. I do, your Honor.

Transform’s lawyer said the section of the bankruptcy code at issue does have a jurisdictional bar. Congress intended that. Just look at the overall framework.

BRUNSTAD: The context is really critical.

KAGAN: Well, context, boy, jumping to context in a place where we've always said you need a clear statement in the text, where is your clear statement.

Justice Kagan wanted Transform’s lawyer to point to explicit words in the statute. Something like—

KAGAN: Something that says something like, “The court has no jurisdiction.” [Laughter.]

BRUNSTAD: That would be wonderful if it were here, but it’s not. But the intent was exactly that.

There’s a circuit split here. So at a minimum, the court should resolve whether the bankruptcy code bars appellate courts from deciding in these situations.

The second case today also involves a bankruptcy, but not the kind we’ve been discussing, a reorganization bankruptcy. This one is Chapter 7 bankruptcy. Chapter 7 allows individuals to clear certain debts.

The facts revolve around a husband and wife, David and Kate Bartenwerfer. Kate is a real estate agent. David is a contractor. Together they bought a house in San Francisco and planned to fix it and flip it.

In the spring of 2007, they began renovations and moved out.

David took care of the renovations and that’s where the conflict lies.

In March 2008, they sold the home and represented legally that it was free of defects.

But the buyer said it did have defects and sued: problems with the windows, water leaks in the house, legal issues with the renovation permits.

So the case went to trial and the jury found in favor of the buyer.

But instead of paying the money they owed, Kate and David filed for bankruptcy to try to erase debts. But the problem is, under the bankruptcy code if the debt is the result of fraud, you can’t erase it.

Kate says David is the one who committed fraud, not her. He’s the one with actual knowledge of the defects. But a lower court held her vicariously liable because they both owned and sold the property.

That’s the background that brings us to the Supreme Court.

Sarah Harris is Kate’s lawyer. She warns against unduly harsh results:

HARRIS: Bankruptcy is the last place to read in vicarious liability. That financial death sentence would fall mostly on unsophisticated spouses who do not realize routine transactions in marriage, like selling homes, create business partnerships in the eyes of the law.

But Justice Clarence Thomas said the words of the statute talk about the debt. You can’t erase debt obtained by fraud. The text of the statute doesn’t focus on the debtor, the individual.

THOMAS: It focuses on the debt. It's talking about money or debt that's obtained by fraud. How do you convert that into a statute that is focusing on the debtor?

Zachary Tripp argued on behalf of the buyer. And he picked right up on that. The language of the statute is clear.

TRIPP: Once it is established that specific money is obtained by fraud, then "any debt arising therefrom is not discharged." Full stop. The text stops there. There are no more words.

But Justice Sonia Sotomayor asked about those harsh results his opposition brought up. Any debt obtained by fraud, no matter the circumstances?

SOTOMAYOR: I obtain a loan fraudulently. Later, I sell that debt to my friend, Justice Thomas, who has no idea about the fraud. Justice Thomas then struggles to pay the debt and he files for bankruptcy. He wants to discharge the debt. Can he?

That’s a harder case. Justices aren’t partners like spouses or joint homeowners are. Still, Tripp argued Justice Thomas might very well be liable. That’s the consequence of the plain language Congress enacted.

Fraud is on the rise in this country, so it’s important to clarify the law.

The final dispute today involves a federal statute called the False Claims Act. Jesse Polansky worked for a medical billing company that he thought was committing fraud. Specifically, Polansky believed his employer was miscoding Medicare patients in order to bill Medicare at a higher rate. Polansky brought what’s known in the law as a qui tam action. That allows a whistleblower to sue on behalf of the government and receive a portion of the reward.

The government here investigated the fraud claims and decided not to intervene, meaning, not to take over the litigation. But whistleblower Polansky went forward with it.

But then five years later, the government wanted to dismiss the case.

At the Supreme Court, Justice Ketanji Brown Jackson wanted an explanation of how the government has authority to dismiss a case it chose to stay out of. She questioned Frederick Liu, who argued on behalf of the United States.

JACKSON: That seems odd. I mean, the statute is very clear that the government has a period of time at the beginning to make a determination about whether or not it's going to take over the action. So I'm curious as to the government's repeated representations that they can do all sorts of things related to this suit without even intervening.

LIU: Well, I think it goes to the purpose of intervention under the structure of the statute. The purpose of intervention under the statute is for the government to become a plaintiff in the case. The only reason intervention matters is if we want to proceed with the case, and it matters what our rights are, what our burdens are going forward. But, if the whole point of our motion is to end the case, then there simply is no reason to put us through the hurdle of intervening beforehand.

Litigating qui tam cases is expensive. Whistleblowers might be discouraged from bringing fraud claims if the government can just step in and dismiss it at the last moment. On the other hand, giving the government that authority can help prevent aggressive whistleblowers with frivolous claims.

And that’s this week’s Legal Docket. I’m Jenny Rough.

MARY REICHARD, HOST: It’s Monday, January 2nd! Glad to have you along for the first edition of The World and Everything in It of 2023. Good morning and happy new year. I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. Happy new year to you! It’s time for Legal Docket. And for that, we turn to legal reporter Jenny Rough, reporting from Washington.

JENNY ROUGH, REPORTER: Our first case, appropriately enough coming out of the holidays, involves shopping malls.

And specifically the biggest mall in the country, The Mall of America in Minnesota.

To understand the case, we have to go back three decades and mention another retailer: Sears, Roebuck, and Company.

Sears leased space in the Mall of America for just the token amount of $10 per year. But in 2018, Sears filed for Chapter 11 bankruptcy, that’s known as a reorganization bankruptcy.

And as part of the restructuring, Sears assigned its lease to another company called Transform Holdco.

The Mall’s parent company—MOAC Mall Holdings—objected to the lease assignment. And now it’s up to the Supreme Court to decide whether a provision in the bankruptcy code bars the court of appeals from hearing the case.

At oral argument, Eric Brunstad argued on behalf of Transform. He went all the way back to that time in 1991, when Sears and Mall of America first partnered up.

BRUNSTAD: Sears built the building, not MOAC. Decades later, in 2018, when Sears filed for bankruptcy, the building that Sears built with this ground lease became property of the bankruptcy estate of Sears' bankruptcy estate. Sears moved for authority to sell by private contract this property to Transform. After the necessary approvals from the bankruptcy court were obtained, that sale transaction closed on October 4, 2019, three years ago.

After the sales transaction closed, the lease was no longer within the bankruptcy estate. So Transform argues the appellate court no longer has jurisdiction to review a case about that property.

This is a technical case. Even the justices admitted to their confusion. And oral arguments wandered all over the place. But the court granted certiorari only on one narrow question: Do appellate courts have jurisdiction here, that means the power to hear and determine a case. Justice Elena Kagan focused on that narrow question.

KAGAN: Mr. Brunstad, do you have anything to say about the question presented? [Laughter.]

BRUNSTAD: I do, your Honor. I do, your Honor.

Transform’s lawyer said the section of the bankruptcy code at issue does have a jurisdictional bar. Congress intended that. Just look at the overall framework.

BRUNSTAD: The context is really critical.

KAGAN: Well, context, boy, jumping to context in a place where we've always said you need a clear statement in the text, where is your clear statement.

Justice Kagan wanted Transform’s lawyer to point to explicit words in the statute. Something like—

KAGAN: Something that says something like, “The court has no jurisdiction.” [Laughter.]

BRUNSTAD: That would be wonderful if it were here, but it’s not. But the intent was exactly that.

There’s a circuit split here. So at a minimum, the court should resolve whether the bankruptcy code bars appellate courts from deciding in these situations.

The second case today also involves a bankruptcy, but not the kind we’ve been discussing, a reorganization bankruptcy. This one is Chapter 7 bankruptcy. Chapter 7 allows individuals to clear certain debts.

The facts revolve around a husband and wife, David and Kate Bartenwerfer. Kate is a real estate agent. David is a contractor. Together they bought a house in San Francisco and planned to fix it and flip it.

In the spring of 2007, they began renovations and moved out.

David took care of the renovations and that’s where the conflict lies.

In March 2008, they sold the home and represented legally that it was free of defects.

But the buyer said it did have defects and sued: problems with the windows, water leaks in the house, legal issues with the renovation permits.

So the case went to trial and the jury found in favor of the buyer.

But instead of paying the money they owed, Kate and David filed for bankruptcy to try to erase debts. But the problem is, under the bankruptcy code if the debt is the result of fraud, you can’t erase it.

Kate says David is the one who committed fraud, not her. He’s the one with actual knowledge of the defects. But a lower court held her vicariously liable because they both owned and sold the property.

That’s the background that brings us to the Supreme Court.

Sarah Harris is Kate’s lawyer. She warns against unduly harsh results:

HARRIS: Bankruptcy is the last place to read in vicarious liability. That financial death sentence would fall mostly on unsophisticated spouses who do not realize routine transactions in marriage, like selling homes, create business partnerships in the eyes of the law.

But Justice Clarence Thomas said the words of the statute talk about the debt. You can’t erase debt obtained by fraud. The text of the statute doesn’t focus on the debtor, the individual.

THOMAS: It focuses on the debt. It's talking about money or debt that's obtained by fraud. How do you convert that into a statute that is focusing on the debtor?

Zachary Tripp argued on behalf of the buyer. And he picked right up on that. The language of the statute is clear.

TRIPP: Once it is established that specific money is obtained by fraud, then "any debt arising therefrom is not discharged." Full stop. The text stops there. There are no more words.

But Justice Sonia Sotomayor asked about those harsh results his opposition brought up. Any debt obtained by fraud, no matter the circumstances?

SOTOMAYOR: I obtain a loan fraudulently. Later, I sell that debt to my friend, Justice Thomas, who has no idea about the fraud. Justice Thomas then struggles to pay the debt and he files for bankruptcy. He wants to discharge the debt. Can he?

That’s a harder case. Justices aren’t partners like spouses or joint homeowners are. Still, Tripp argued Justice Thomas might very well be liable. That’s the consequence of the plain language Congress enacted.

Fraud is on the rise in this country, so it’s important to clarify the law.

The final dispute today involves a federal statute called the False Claims Act. Jesse Polansky worked for a medical billing company that he thought was committing fraud. Specifically, Polansky believed his employer was miscoding Medicare patients in order to bill Medicare at a higher rate. Polansky brought what’s known in the law as a qui tam action. That allows a whistleblower to sue on behalf of the government and receive a portion of the reward.

The government here investigated the fraud claims and decided not to intervene, meaning, not to take over the litigation. But whistleblower Polansky went forward with it.

But then five years later, the government wanted to dismiss the case.

At the Supreme Court, Justice Ketanji Brown Jackson wanted an explanation of how the government has authority to dismiss a case it chose to stay out of. She questioned Frederick Liu, who argued on behalf of the United States.

JACKSON: That seems odd. I mean, the statute is very clear that the government has a period of time at the beginning to make a determination about whether or not it's going to take over the action. So I'm curious as to the government's repeated representations that they can do all sorts of things related to this suit without even intervening.

LIU: Well, I think it goes to the purpose of intervention under the structure of the statute. The purpose of intervention under the statute is for the government to become a plaintiff in the case. The only reason intervention matters is if we want to proceed with the case, and it matters what our rights are, what our burdens are going forward. But, if the whole point of our motion is to end the case, then there simply is no reason to put us through the hurdle of intervening beforehand.

Litigating qui tam cases is expensive. Whistleblowers might be discouraged from bringing fraud claims if the government can just step in and dismiss it at the last moment. On the other hand, giving the government that authority can help prevent aggressive whistleblowers with frivolous claims.

And that’s this week’s Legal Docket. I’m Jenny Rough.

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