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Greetings, Court Fans!

Yesterday, the Court issued three decisions that, while not likely to get a lot of media attention, were closely watched by lawyers in the insurance, bankruptcy, trusts and estates, and Indian law sectors:

• In Truck Insurance Exchange v. Kaiser Gypsum Co. (No. 22-1079), a unanimous Court held that an insurer with financial responsibility for bankruptcy claims is a “party in interest” with standing to object to its insured’s bankruptcy plan. In doing so, the Court rejected the “insurance neutrality” doctrine followed by some lower courts, under which an insurer has standing to object to a bankruptcy plan only if the plan altered the insurer’s contractual rights or obligations;
• In Connelly v. United States (No. 23-146), a unanimous Court held that a closely held corporation’s contractual obligation to redeem one of its shareholders’ shares at fair market value was not a liability that reduced the value of the corporation—and hence the value of those shares for the purposes of the federal estate tax; and
• In Becerra v. San Carlos Apache Tribe (No. 23-250), a 5-4 Court—with Chief Justice Roberts joining the liberal justices and Justice Gorsuch—held that the Indian Health Service is required to reimburse Tribes for the contract support costs they incur supporting tribal programs funded by Medicare, Medicaid, and other third-parties.

Read on for a fuller recap of Connelly as well as two decisions the Court issued last week:

• Cantero v. Bank of America (No. 22-529), where the Court unanimously held that the standard for determining whether a state law that regulates national banks is preempted is whether the law “prevents or significant interferes with the exercise of the national bank of its powers,” but declined to decide just how that standard applied to a New York law requiring national banks to pay interest on escrow accounts; and
• Thornell v. Jones (No. 22-982), where a 6-3 Court reversed the Ninth Circuit’s grant of habeas relief to an Arizona death row inmate, concluding that the inmate’s attorney was not constitutionally ineffective at the sentencing phase because the mitigating evidence that attorney failed to present would likely have made no difference to the sentence.

Connelly v. United States (No. 23-146) deals with the two inevitables: death and taxes. The question presented was whether a corporation that receives life insurance proceeds following the death of one of its (two) shareholders must count that benefit in valuing the business for estate-tax purposes even when the corporation has a contractual obligation to use the policy’s proceeds to redeem the deceased shareholder’s shares. Justice Thomas, writing for a unanimous Court, upheld the Eighth Circuit’s conclusion that the life insurance proceeds must be counted in the corporation’s (and hence the estate’s) value, and the obligation to buy the shares should not be treated as an offsetting liability.

The background of the case is straightforward. Two brothers, Michael and Thomas, were the sole shareholders in a building supply corporation called Crown C Supply. They wanted to make sure Crown stayed in the family if one brother died, so they entered into a two-phase contract with Crown: First, if either brother died, the surviving brother would have the option to buy the deceased brother’s shares. Second, if the surviving brother declined that option, Crown would be contractually obligated to redeem the deceased brother’s shares. The only problem was making sure that Crown would have enough cash available to redeem the shares in the event of one brother’s death. To address that, Crown took out a $3.5M life insurance policy on each brother, the proceeds of which would be enough (or so they thought) to purchase the dead brother’s shares.

The plan worked as far as keeping the business in the family goes. When Michael died, Thomas declined to buy Michael’s shares. Crown then used $3M of the proceeds from Michael’s life insurance policy to redeem his shares, a price that Thomas and Michael’s estate agreed was the shares’ fair market value. The only hiccup occurred when Michael’s estate attempted to value the estate’s shares in Crown for purposes of paying the estate tax: It first provided a fair-market valuation of Crown’s normal assets and liabilities, including the $3.5M in life insurance proceeds. But it then reduced that total amount by the $3M used to redeem Michael’s shares, relying on an Eleventh Circuit decision holding that in such circumstances, the policy proceeds are “offset” by the obligation to redeem the shares and so should be deduced from the value of the company. The estate thus came to a total value of Crown of $3.86M, and because Michael owned about 77% of the company, his estate valued his shares at $3M (77% of $3.86M). But the IRS disagreed, reasoning that the full insurance proceeds (including the $3M used to redeem the shares) should be included in the value of the company, leading to a total fair market value of $6.86M for Crown and $5.3M for Michael’s part of it. That resulted in a tax deficiency of roughly $900K. The estate paid the deficiency under protest and sued the Government for a refund. But the District Court and then the Eighth Circuit sided with the IRS. The Court granted cert to resolve this split between the Eighth Circuit and several other courts, like the Eleventh.

In a short opinion for a unanimous Court, Justice Thomas affirmed the Eighth Circuit. As he saw it, Crown’s obligation to redeem Michael’s shares did not decrease the value of shares in Crown, so it wouldn’t have impacted the value of the company to someone interested in purchasing the shares. “Because a fair-market-value redemption has no effect on any shareholder’s economic interest, no willing buyer purchasing Michael’s shares would have treated Crown’s obligation to redeem Michael’s shares at fair market value as a factor that reduced the value of those shares.”

Justice Thomas quickly disposed of the estate’s efforts to counter this straight-forward analysis. In the estate’s view, because the proceeds of the life-insurance policy would leave the company as soon as they arrived in order to complete the redemption, no buyer would consider those proceeds in valuing the company. But that approach, Thomas countered, looks to what a buyer would pay for the shares that make up the same percentage of the (less-valuable) corporation that exists after the redemption. The “whole point” of the estate tax, by contrast, is to assess how much Michael’s shares were worth at the time he died, a time before Crown had spent this $3M. At that time, the $3M would be treated as a net asset, so it has to be factored into the value of the shares. Thomas also observed that the estate’s argument resulted in a logical problem: The transaction that “cashed out” the value of Michael’s shares should have reduced Crown’s total value, while at the same time reducing the number of outstanding shares (so the remaining shareholder, Thomas, would have a larger proportional interest, 100%, in a less-valuable corporation). But under the estate’s calculation, Crown was worth $3.86M before the redemption and it was worth $3.86M after it. That makes no sense: If Crown was truly worth $3.86M after the buyout, then it should have been worth $3M more before that $3M was taken out of the company.

Last, for all the trusts and estates lawyers out there, Justice Thomas addressed the estate’s argument that the Eighth Circuit’s (and IRS’s) approach would make succession planning more difficult for closely held corporations, because it would require them to purchase even more in insurance to cover the cost of a redemption like this one. But Thomas disposed of that too: The Court’s decision was simply the result of how these brothers chose to structure their agreement. Other approaches, like a cross-purchase agreement, could have avoided the risk that the insurance proceeds would increase the value of Michael’s shares (though, to be sure, this approach too might have tax drawbacks). Finally, in a short footnote, Thomas noted that the Court was not holding that a redemption obligation can never decrease a corporation’s fair market value. All the Court was saying that this particular redemption obligation did not do so for this particular corporation.

Next up is Cantero v. Bank of America (No. 22-529), in which the Court identified the standard lower courts should use for determining when certain state laws regulating national banks are preempted. Under that standard, which derives from the Dodd-Frank Act of 2010 and the Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson (1996), a state law that “prevents or significantly interferes with the exercise by the national bank of its powers” is preempted. But the unanimous Court didn’t do much to explain how that standard would apply to the state law at issue in this case, a New York law requiring national banks to pay interest on mortgage-escrow accounts, leaving the Second Circuit to answer that question for itself.

Just as the United States maintains a dual system of government, it maintains a dual system of banking: National banks obtain charters from the federal government under the National Bank Act, while state banks obtain charters from their states under state law. With a federal charter comes enumerated and incidental powers, which include both powers banks need to organize and operate and “banking-specific powers,” among which is the power to administer home mortgage loans. Many national banks exercising this authority employ escrow accounts, under which a borrower’s monthly mortgage payment partially funds an escrow account operated by the bank, which the bank then uses to pay the borrower’s insurance premium and property taxes when due at annual or biannual intervals. This is often easier for borrowers, because it spares them from having to make (and save up for) large lump-sum insurance and tax payments. And it’s better for banks, because it protects them against the risks to their collateral if the homeowner should fail to pay insurance or taxes.

In this case, borrowers in New York obtained mortgage loans from Bank of America, a federally chartered bank. Their mortgage contracts required them to pay insurance premiums and property taxes through escrow accounts the Bank maintained. But New York law provides that banks “shall” pay borrowers interest on the balance of mortgage-escrow accounts. The National Bank Act, by contrast, imposes no similar requirement. So Bank of America refused to pay interest on its borrowers’ escrow accounts, arguing the New York law was preempted. Several classes of borrowers sued, and after their cases were consolidated, the District Court concluded that New York’s interest law was not preempted by the National Bank Act (or any other federal statute). But the Second Circuit then reversed. Relying on “an unbroken line of case law” dating back to McCulloch v. Maryland (1819), it concluded that any state law is preempted if it “purports to exercise control over a federally granted banking power,” regardless of “the magnitude of its effects.”

Justice Kavanaugh, writing for a unanimous Court, concluded that the Second Circuit’s reliance on this line of authority was misplaced. Instead, that court should have looked to the Dodd-Frank Act, in which Congress established the “controlling legal standard” for when a “State consumer financial law,” like the New York law at issue here, is preempted with respect to national banks. Under this standard, a state consumer finance law is preempted only if it “(i) discriminates against national banks as compared to state banks; or (ii) prevents or significantly interferes with the exercise by the national bank of its powers, as determined in accordance with the legal standard for preemption in” Barnett Bank.

Because the New York law applied to all banks, it clearly did not discriminate against national banks. So the only question was whether it was preempted under the Barnett Bank standard. But Barnett Bank’s “legal standard for preemption” doesn’t provide a “clear line to demarcate” when a state law “significantly interferes” with a national bank’s exercise of its powers and when it does not. Rather, it requires courts to answer the question by looking to the details of prior cases. In a somewhat breezy discussion, Kavanaugh then discussed seven of those cases. In those cases where the Court has found that a state law “significantly interfered” with a national bank’s exercise of its powers, it had often observed that state laws cannot interfere with national banks’ ability to efficiently operate or the flexibility given to national banks by federal laws. By contrast, the Court has found no preemption of state laws that have no “deterrent effect” on national banks and produce “no greater interference with the functions of the bank than any other law governing businesses.”

Having discussed some of these principles and precedents, however, the Court declined to apply them to the case at hand. Despite recognizing “the desire by both parties for a clearer preemption line one way or the other,” Kavanaugh concluded the better approach was to remand so lower courts could make the “practical assessment of the nature and degree of the interference caused by” the New York law. That result is a bit unsatisfying in one sense: Congress purportedly established a standard in Dodd-Frank for deciding when a state consumer financial law is preempted. But in reality, that standard amounts to little more than telling courts to keep on keepin’ on. On the other hand, this sort of minimalism may be welcome to those wary of a Court that often seems happy (as our next case demonstrates) to not just decide what the law is but to then do all the work of combing through the record to apply that standard to the facts of an individual case.

Finally, we have Thornell v. Jones (No. 22-982), where a 6-3 Court held that the Ninth Circuit misapplied Strickland v. Washington in granting habeas relief to an Arizona death row inmate over his counsel’s failure to present certain mitigating evidence at sentencing. But rather than remanding to the Ninth Circuit to reexamine the habeas petitioner’s claim under the right standard, the Court went further and directed the lower courts to deny habeas relief, concluding that the evidence in question wouldn’t have made a difference at sentencing, so it wasn’t “material” for purposes of Strickland. This second holding prompted short dissents from the Court’s three liberal justices, who (mostly) agreed with the majority that the Ninth Circuit’s opinion made some legal errors but would have let that court reexamine the case under the correct legal framework in the first instance.

As is commonly the case for Supreme Court opinions denying habeas relief, the Court’s majority opinion begins with a detailed recounting of Danny Lee Jones’s crimes, though to be fair, those facts are a bit more relevant to the analysis here than in some other cases. Sparing you some of the gruesome details, Jones murdered a man, the man’s seven-year-old daughter, and his grandmother with a baseball bat in the course of stealing the man’s gun collection. He was promptly caught, charged, and convicted of premediated first-degree murder, and the case proceeded to sentencing. Under Arizona law at the time, the court was required to impose a sentence of death if it found one or more statutorily enumerated aggravating circumstances and no “mitigating circumstances sufficiently substantial to call for leniency.” Because there were at least three aggravating circumstances, much of the sentencing hearing focused on mitigating evidence, with the court hearing testimony that Jones had been abused as a child, likely had sustained a serious head injury, suffered from mental illness, and had a substance-abuse problem. The trial court concluded this evidence was insufficiently mitigating to outweigh the aggravating circumstances, so it sentenced him to death.

Jones then sought habeas relief, starting in the Arizona courts. There, he argued that his counsel was effective at sentencing because he had not retained an independent neuropsychologist and had failed to request neurological or neuropsychological testing to evaluate the extent of Jones’s mental impairments. The Arizona courts denied relief. And when Jones sought federal habeas review, the District Court did the same, reasoning that even if Jones’s counsel’s performance was deficient, his errors were not prejudicial because the additional information that would have been elicited from taking these steps would have had no real impact on the sentencing judge’s analysis. The Ninth Circuit then reversed, but the Court vacated its opinion so it could be reconsidered in light of Cullen v. Pinholster (2011). On remand, the Ninth Circuit granted habeas relief once again, concluding that there was a ”reasonable probability” that Jones would not have been sentenced to death had this missing mitigating evidence been presented. The Ninth Circuit later denied en banc review, over the dissent of ten (!) judges, who criticized the panel for ignoring the significant aggravating factors of Jones’s crimes and not adequately considering whether the mitigating evidence would have truly changed the result given those circumstances. The Court soon granted certiorari.

Writing for the Court’s six conservative justices, Justice Alito reversed in a relatively short and straightforward opinion (at least by habeas opinion standards). He started with a brief recap of Strickland v. Washington (1984), which established the two-part standard for ineffective assistance claims. First, a habeas petitioner alleging ineffective assistance must show that his or her counsel provided a “deficient” performance. And second, the petitioner must show that deficient performance “prejudiced” him, which in the death-penalty-sentencing context means that there is a reasonable possibility that but for counsel’s errors, the sentencer “would have concluded that the balance of aggravating and mitigating circumstances did not warrant death.” That leads straight to the Ninth Circuit panel’s first error: It failed to adequately consider the aggravating circumstances of Jones’s offense or to analyze what impact the mitigating evidence would have had in comparison with the egregious nature of Jones’s crime. But Alito didn’t stop there: He also found error in the Ninth Circuit’s application of a “strange” and “clearly unsound” Circuit rule that prohibits courts in Strickland cases from evaluating the relative strength of expert witness testimony. And it erred by concluding that Jones’s mental health conditions should have been given significant mitigating weight notwithstanding the absence of any clear connection between those conditions and Jones’s conduct on the day of the crime.

Had Justice Alito stopped here, this might have been unanimous (or nearly so) decision. But rather than remanding to the Ninth Circuit to re-examine Jones’s claims free from these legal errors, the majority proceeded to itself weigh the evidence and conclude that under a proper Strickland analysis, Jones could not show prejudice from his counsel’s performance. First, much of his mitigating evidence wasn’t that new—similar evidence had been presented to the sentencing court—it was just that Jones wished his counsel had provided a bit more detail. But those details didn’t add much, and some of them the majority thought weren’t that credible. Second, this relatively weak mitigating evidence did little to offset the significant aggravating circumstances of Jones’s crime, namely the commission of multiple homicides, cruelty, the murder of a child, and a pecuniary motivation. While it is true that the failure to present mitigating evidence can be prejudicial even in the context of heinous crimes, prior cases finding counsel ineffective at sentencing have generally involved much stronger mitigating evidence and weaker aggravating factors. For these reasons, the majority concluded there was no need to remand to the Ninth Circuit; it could deny Jones’s petition itself.

Justice Sotomayor and Justice Jackson each penned short dissents. In the first, Sotomayor (joined by Justice Kagan) agreed that the Ninth Circuit’s approach to Strickland’s prejudice prong was erroneous, as it failed to take into account Jones’s aggravating factors in evaluating the potential impact of mitigating evidence. But she would have stopped there: “It is not the Court’s usual practice to adjudicate either legal or predicate factual questions in the first instance,” so it would be better to let the Ninth Circuit review the lengthy record and decide the merits of Jones’s petition under the correct legal standard.

Justice Jackson, by contrast, took a slightly stronger line, taking issue with the Court’s repeated statements that the Ninth Circuit panel’s opinion essentially ignored the aggravating circumstances of Jones’s crime. True, its discussion of those factors was “concise.” But there’s no minimum length requirement for a judicial opinion. In her view, the majority’s real critique was that the Ninth Circuit gave too much weight to particular factors, an issue that was better left with the Ninth Circuit itself in the first instance.