Supreme Court Update: Harris v. Viegelahn (14-400), Tibble v. Edison International (13-550), Henderson v. United States (13-1487) and Coleman-Bey v. Tollefson (13-1333)

May 20, 2015 Supreme Court Update

Greetings, Court fans!

As we approach June, the Court is attempting to clear out its docket, issuing six decisions Monday. We'll cover four short ones—all unanimous—here: Harris v. Viegelahn (14-400), holding that a debtor who converts from Chapter 13 to Chapter 7 is entitled to the return of any undistributed post-petition wages; Tibble v. Edison International (13-550), on an ERISA fiduciary's continuing duty to monitor trust investments; Henderson v. United States (13-1487), finding that a convicted felon generally can determine to whom his guns should be sold; and Coleman-Bey v. Tollefson (13-1333), finding that a prisoner who has had three cases dismissed as frivolous or for failure to state a claim cannot proceed in forma pauperis on a fourth even if one of the prior three is on appeal. We'll be back soon with the remaining two decisions and whatever else the spring thaw may bring.

Harris v. Viegelahn (14-400) grappled with how a Chapter 13 bankruptcy trustee must deal with undistributed post-petition income earned by the debtor when the debtor converts to a Chapter 7 bankruptcy midstream. Chapter 13 and Chapter 7 provide two different vehicles for a debtor to wipe the slate clean. With a Chapter 7 bankruptcy, the debtor immediately loses control over his existing assets. Those pre-petition assets are transferred to the bankruptcy estate and promptly liquidated by a Chapter 7 trustee. The result is harsh, but the debtor immediately starts afresh: Any assets or earnings the debtor acquires after filing the bankruptcy petition belong to the debtor. By contrast, when a debtor files a Chapter 13 bankruptcy, the debtor retains his assets subject to a court-approved payment plan to pay back his debts. Thus, the debtor uses post-petition income to make payments in a Chapter 13 bankruptcy and this post-petition income is property of the Chapter 13 bankruptcy estate. When things go well, the result can be a win-win, where the debtor gets to keep his assets and the creditors get back a higher percentage of the amounts owed. However, many debtors default. When that happens, they are entitled to convert a Chapter 13 bankruptcy to a Chapter 7 "at any time." 11 U.S.C. § 1307(a). With this background, we turn to petitioner Harris.

Harris got behind on his mortgage payments and some other debts. To retain his home, he filed for bankruptcy under Chapter 13, and the court approved a plan requiring him to pay his current mortgage payments to Chase and also to pay part of his current income to the Chapter 13 trustee—Viegelahn. Viegelahn would then make payments toward the mortgage arrearage to Chase as well as to Harris's other creditors. Unfortunately, Harris couldn't keep up with his end of the bargain and once again began missing mortgage payments. After Chase foreclosed on his house, Harris converted his bankruptcy to a Chapter 7. Viegelahn, who was holding more than $5,000 of Harris's post-petition income that she had collected but not yet distributed, promptly paid out those funds to Harris's creditors. Harris sought an order directing creditors to refund his post-petition wages. The bankruptcy court granted his motion and the district court affirmed, but the Fifth Circuit reversed, finding that Viegelahn properly distributed this accumulated income.

Led by Justice Ginsburg, the Court unanimously reversed. The Bankruptcy Code allows a debtor to convert from Chapter 13 to Chapter 7 "at any time." This conversion does not "effect a change in the date of the filing of the petition." Further, the Code explicitly states that the converted estate "shall consist of property of the estate, as of the date of filing of the [initial Chapter 13] petition, that remains in the possession of ... the debtor on the date of conversion." Only where the debtor has converted in bad faith does the estate include all property as of the date of conversion. Further, the Chapter 13 trustee's services are "terminated" upon conversion. A terminated trustee cannot, Justice Ginsburg observed, continue to make distributions to creditors. All of these textual cues added up to one easy result for the Court: Post-petition income accumulated by a Chapter 13 trustee must be distributed back to the debtor upon conversion. The Court "acknowledge[d] the ‘fortuity'" of this result – i.e., that a debtor might receive substantial funds if their Chapter 13 trustee made infrequent distributions to creditors (and thus had substantial accumulated income) while a debtor with a more diligent trustee might receive little or nothing back. "These outcomes, however, follow directly from Congress's decision to shield postpetition wages from creditors in a converted Chapter 7 case... and to give Chapter 13 debtors a right to convert to Chapter 7 ‘at any time.'" Creditors can protect against this result by requesting a plan providing for regular distributions by the trustee.

Next, in Tibble v. Edison International (13-550), the once-again unanimous Court stressed the importance of considering the common law of trusts in resolving claims against ERISA fiduciaries. The respondents were the fiduciaries of a 401(k) plan for Edison employees. In 2007, several beneficiaries sued, alleging that respondents had violated their fiduciary duties under ERISA with respect to three mutual funds added to the plan in 1999 and three mutual funds added in 2002. Specifically, they alleged that respondents acted imprudently by offering these six retail-class mutual funds as plan investments when materially identical institution-class funds were available at a lower cost. The district court agreed as to the funds added in 2002. But the District Court and the Ninth Circuit found the beneficiaries' claims regarding the funds added in 1999 untimely under ERISA's six-year statute of limitations. The funds had been added to the plan more than six years before the petitioners' suit, and the petitioners had not demonstrated that these funds underwent significant changes within the six-year period that should have prompted respondents to undertake a full-scale due diligence review regarding their continued inclusion in the plan.

Justice Breyer penned the Court's brief opinion vacating the Ninth Circuit's decision. 29 U.S.C. § 1113 bars actions based on an ERISA fiduciary's breach of "any responsibility, duty, or obligation" filed more than six years "after the last action which constituted a part of the breach or violation" or, in the case of an omission, after "the latest date on which the fiduciary could have cured the breach or violation." The Court vacated the Ninth Circuit's judgment because it did not analyze these provisions in light of ERISA fiduciaries' duties. These duties are derived from the common law of trusts, which requires a trustee not only to use the requisite skill and prudence in selecting investments in the first place, but to re-examine the trust's investments at regular intervals to ensure that they remain appropriate. Thus, an ERISA plaintiff could allege that a fiduciary breached the duty of prudence by failing to monitor investments and remove imprudent ones during the six-year limitations period, even if the investments were initially added to a plan long before then. Although the Court did not explicitly say so, this presumably was a less-demanding standard than the lower courts' conclusion that respondents would have had a fiduciary duty to review the continued inclusion of the funds in the plan only if these funds underwent significant changes during the limitations period that were sufficient to prompt a full due diligence review. The Court did not, however, resolve in the first instance whether the petitioners' allegations were timely, instead remanding to the lower courts to resolve that question based on the nature of ERISA fiduciaries' duties.

Turning from civil to criminal law, in Henderson v. United States (13-1487), the Court addressed the degree of control a convicted felon lawfully can exert over his firearms. The appellant, Tony Henderson, was a Border Patrol Agent when he was caught distributing marijuana. He surrendered his firearms to the FBI as a condition of bail. Henderson pled guilty and served a prison sentence. After his release, he asked the FBI to give his firearms to his friend, who had agreed to buy them. The FBI refused, citing 18 U.S.C. § 922(g), which prohibits a felon from possessing a firearm. Henderson then filed a motion in the District Court to order the firearms transfer. The District Court refused and the Eleventh Circuit affirmed, holding that allowing Henderson to sell his guns to his friend would amount to "constructive possession" of the firearms in violation of § 922(g).

The Court unanimously reversed in a decision by Justice Kagan. While § 922(g) prohibits a felon from possessing a firearm, the Court explained, it does not prohibit ownership. Possession, according to Justice Kagan, is merely one of the "sticks in the bundle of property rights." Still, that "stick is a thick one" since both actual and constructive possession are prohibited under § 922(g). Justice Kagan agreed with the Government that under this prohibition, a court may not order the transfer of a felon's firearms to someone who would allow the felon to use or control them. However, she rejected the Government's theory that the only control a felon may exert over his or her former guns is to transfer them to a licensed dealer or someone else who will sell them on the open market. Instead, according the Court, § 922(g) allows a court to order the transfer of a felon's firearms to a person of his or her choice as long as that person will not allow the felon to control the firearms.

Finally, in Coleman-Bey v. Tollefson (13-1333), the Court resolved a very narrow, but surprisingly thorny, issue involving the "three strikes" rule in 28 U.S.C. § 1915, which bars federal courts from granting in forma pauperis status to a prisoner who "on 3 or more prior occasions" has brought a federal suit that was dismissed as frivolous, malicious, or failing to state a cause of action. The issue in Coleman-Bey was whether the rule applies if one of the three prior dismissals is still pending on appeal. The Sixth Circuit concluded that it does. The Seventh Circuit agreed, but as the Supreme Court explained, the "vast majority" of the other circuits (eight of them, to be exact) had come out the other way.

Writing for the Court, Justice Breyer relied heavily on what "the statute literally says," emphasizing that the three strikes provision refers only to a suit that "was dismissed" on a "prior occasion"; it does not refer to an "affirmed dismissal" or use any other language that would "transform a dismissal into a dismissal-plus-appellate-review." He noted that other provisions in the in forma pauperis statute distinguish between trial and appellate stages of litigation, rather than conflating them. Justice Breyer also found his construction of the statute consistent with the general treatment of trial court judgments – which, absent a stay, take effect immediately and also have immediate res judicata effect, even if the judgment is being challenged on appeal. Refusing to count a prior dismissal because of a pending appeal would also undermine the statutory purpose of filtering out bad prisoner suits, by producing "a leaky filter." The Court minimized the risk of relying on an erroneous trial court dismissal of a prior suit, noting that the Solicitor General had identified only two instances in which an appellate court had ever reversed a "third strike" dismissal of a prisoner suit. Finally, the Court ducked one issue on which the SG supported Coleman-Bey. The SG argued that the three strikes statute should not preclude a prisoner from pursuing, in forma pauperis, an appeal of a third-strike dismissal even though it would bar him from filing a new suit. The Court left that problem for another day.

Four cases and four opinions. Would that every Update were so simple. But as June approaches, we'll be seeing more deeply divided decisions, including the remaining two from Monday, Comptroller v. Wynne (13-485) and City and County of San Francisco v. Sheehan (13-1412). We'll bring you summaries of those cases in short order.