Supreme Court Update: Kindred Nursing Centers L.P. v. Clark (16-32); Midland Funding, LLC v. Johnson (16-348) and Howell v. Howell (15-1031)

May 23, 2017 Supreme Court Update

Greetings, Court Fans!

The Court rang in the week with three more decisions—Cooper v. Harris (No. 15-1262), an important ruling clarifying the test for racial gerrymandering claims; TC Heartland v. Kraft Foods Group Brands LLC (No. 16-1341), an important ruling clarifying the scope of the patent venue statue; and Water Splash, Inc. v. Menon (No. 16-254), a . . . ruling clarifying that the Hague Service Convention permits service of process by mail. We'll have more on those cases forthwith, but first a few words on last week's decisions…

First up, the Court's decision in Kindred Nursing Centers L.P. v. Clark (No. 16-32) is another testament to the Court's fondness for arbitration. Two individuals holding broad powers of attorney for their respective loved ones completed the paperwork necessary for them to move into nursing homes operated by Kindred. Among the papers they signed was an agreement to arbitrate all claims arising out of their relatives' stay at the facility. After each of the relatives died, their estates attempted to bring suits alleging substandard care by Kindred. Kindred argued that the cases should be dismissed in favor of arbitration, but the Kentucky courts disagreed. According to the Kentucky Supreme Court, because the right to trial by jury is fundamental under the State's constitution, it cannot be waived absent a specific grant of authority in the power of attorney, which was absent here.

Justice Kagan led the Court in reversing. Kentucky's clear statement rule, under which a power of attorney ("POA") only permits entering into an arbitration clause if it explicitly says so, simply doesn't square with the mandate of the Federal Arbitration Act ("FAA") that agreements to arbitrate be on equal footing with other contracts. Kentucky doesn't require any special statement in a POA for an agent to enter into other types of contracts, so its rule that POAs must specifically call out the ability to enter into an arbitration clause plainly singles out arbitration for disfavored treatment in violation of the FAA. The Court easily rejected the hypothetical argument that the clear statement rule might not only to arbitration but might also apply to other agreements implicating constitutional rights (e.g., an agreement by the agent to enter the principal into an arranged marriage), reasoning that no Kentucky court had ever previously demanded that a POA explicitly confer authority to enter into any contract implicating constitutional guarantees. For example, the Kentucky Constitution protects the right to "acquire[] and protect[] property" and to "freely communicate ideas," by Kentucky courts have never required specific authority for a POA to sell her principal's furniture or commit to a nondisclosure agreement. And, in classic Kagan fashion, the Court noted that, "were we in the business of giving legal advice, we would tell the agent not to worry" about entering into such agreements. The fact that the only hypotheticals respondents could come up with that as to which this rule might apply (e.g., the arranged marriage example) were "utterly fanciful" only underscored that the "kind of hostility" to arbitration that led Congress to enact the FAA.

The Court also rejected the suggestion that the FAA did not apply because the Kentucky rule went to "contract" formation and not "contract enforcement." Such a distinction is unsupported by the text of the FAA, which says, for example, that arbitration agreements shall be "valid, irrevocable, and enforceable" on the same grounds as other agreements—clearly encompassing formation issues. Moreover, adopting this distinction would make it "trivially easy" for states to avoid the Act.

Justice Thomas dissented, reiterating his long-held view that the FAA applies only in federal courts and therefore has no application to a state court case like this one.

Meanwhile, consumer debt collectors are breathing a collective sigh of relief after a 5-3 majority gave them the upper hand in Midland Funding, LLC, v. Johnson (No. 16-348). Justice Breyer—whose pen has been particularly busy these last few weeks—was joined by the Chief, Alito, Thomas, and Kennedy in a short opinion holding that the Fair Debt Collection Practices Act (FDCPA) does not preclude creditors from filing a claim known to be time-barred.

Like the opinion, the case is straightforward: Aleida Johnson filed for Chapter 13 in March 2014, and Midland responded with a proof of claim for $1,879.71. In doing so, it noted that Johnson's last credit-card charge was from May 2003, meaning the relevant six-year statute of limitations had run on the debt. Johnson objected and the Bankruptcy Court disallowed the claim. However, she later sued Midland for violating the FDCPA. The District Court dismissed, finding that the FDCPA did not apply, but the Eleventh Circuit reversed.

The question for the Court was whether filing a time-barred claim falls within the operative language of the FDCPA—that is, whether it is "false," "deceptive," "misleading," "unconscionable," or "unfair." The Court had little difficulty disposing of the first three adjectives, refuting Johnson's contention that a "claim" under the Bankruptcy Code means an "enforceable claim." Since unenforceability is treated by the Code as an affirmative defense, Breyer explained, "we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code's similar system." In any case, the majority was confident that a bankruptcy trustee would play goalie to ensure untimely claims do not slip by. The Court's faith in the bankruptcy court process and the bankruptcy trustee—unshaken by the fact that both the United States and the National Association of Chapter Thirteen Trustees filed amicus briefs on Johnson's behalf—continued with its examination of whether filing a stale claim is either "unfair" or "unconscionable." Although it found this to be a closer call, the Court arrived at the same conclusion: "The bankruptcy system, as we have already noted, treats untimeliness as an affirmative defense. The trustee normally bears the burden of investigating claims and pointing out that a claim is stale. Moreover, protections available in a Chapter 13 bankruptcy proceeding minimize the risk to the debtor. And, at least on occasion, the assertion of even a stale claim can benefit a debtor." Unlike several lower courts, the majority was unpersuaded by the risk of a consumer paying stale claims, even partially, in order to avoid court. And it was reluctant to create a "new significant bankruptcy-related remedy" and thus "upset" the structural equilibrium between the FDCPA, which "seeks to help consumers . . . by preventing consumer bankruptcies in the first place," and the Bankruptcy Code, which "creates and maintains what we have called the ‘delicate balance of a debtor's protections and obligations.'"

In dissent, the Court's female members challenged their colleagues' rosy portrait of bankruptcy court. Justice Sotomayor, joined by Kagan and Ginsburg, faulted the majority for failing to acknowledge that "[d]ebt collectors do not file these claims in good faith; they file them hoping and expecting the bankruptcy system will fail." Explaining that the "trillion dollar" debt collection industry correctly assumes consumers will lack the resources or attention to respond to stale claims, and that trustees are too overburdened to notice them, Sotomayor concluded that the practice was both "unfair" and "unconscionable" under the FDCPA. "It does not take a sophisticated attorney to understand why [this practice] is unfair. It takes only the common sense to conclude that one should not be able to profit from the inadvertent inattention of others. It is said that the law should not be a trap for the unwary. Today's decision sets just such a trap." Justice Sotomayor called on Congress to amend the FDCPA to expressly prohibit the practice of knowingly filing stale claims.

Breyer had the pen once more in our next case, Howell v. Howell (No. 15-1031), concerning the Uniformed Services Former Spouses' Protection Act (USFSPA). It's not too often that a simple divorce case makes its way to the Supreme Court, but when it does, chances are it involves the USFSPA, which allows states to treat a military veteran's retirement pay as a community property, which may be divided upon divorce. The statute does not, however, apply to any amount of retirement pay that is deducted as a result of a waiver that a veteran must make in order to receive disability benefits. (Disabled veterans typically choose to waive an equivalent amount of retirement pay in order to receive disability benefits because, unlike retirement pay, disability benefits are nontaxable.) In Mansell v. Mansell (1989), the Court held that states cannot treat the waived portion of retirement payments as community property. In Howell, a nearly unanimous Court held that this is so even when the divorce is finalized before the veteran waives retirement payments.

John Howell is the veteran in question. In 1991, he and his wife Sandra were divorced. Anticipating John's eventual retirement from the Air Force, the divorce decree treated his future retirement pay as community property and awarded 50% to Sandra. John retired the following year and began receiving retirement pay, half of which went to Sandra. But 13 years later, John began receiving disability benefits after the Department of Veterans Affairs found that he had been disabled due to a service-related shoulder injury. By electing to receive disability benefits, John had to waive about $250 per month of the retirement pay he shared with Sandra. Sandra, seeing her monthly entitlement reduced by about $125, asked an Arizona family court to enforce the original decree. The court held that the divorce decree gave Sandra a "vested" interest in the prewaiver amount and ordered John to make up the difference. The Arizona Supreme Court affirmed, concluding that Mansell did not control because John had made his waiver after, rather than before, the family court divided his military retirement pay.

The U.S. Supreme Court (almost) unanimously reversed, holding that Mansell decided the issue. Mansell held that federal law completely preempts states from treating waived military retirement pay as divisible community property. "Yet that which federal law pre-empts is just what the Arizona family court did here," observed Justice Breyer, in typically strained syntax. The fact that the waiver in this case came after the divorce decree is irrelevant. It just meant that, at the time of the divorce, Sandra's interest was worth less than she might have thought because it was based on a future contingency (i.e., John not exercising a waiver to receive disability benefits). That's no different than a property being worth less if it's subject to defeasance upon the occurrence of a later event. Though the Court recognized "the hardship that congressional pre-emption can sometimes work on divorcing spouses," it suggested that this could be mitigated if family courts take account of the possibility of a future waiver when determining the value of a family's assets and adjust other spousal support accordingly.

Justice Thomas joined all of the majority opinion "except its brief discussion of ‘purposes and objectives' preemption," which he has previously argued is "an illegitimate basis for finding preemption of state law" and was, in any case, not necessary to decide this case.

In addition to the three decisions handed down yesterday, the Court also granted cert in one new case, SAS Institute, Inc. v. Lee (No. 16-969), which asks whether 35 U.S.C. § 318(a), which provides that the Patent Trial and Appeal Board in an inter partes review "shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner," requires the Board to issue a final written decision as to every claim challenged by the petitioner, or instead allows the Board to issue a final written decision with respect to the patentability of only some of the patent claims challenged by the petitioner, as the Federal Circuit held below.

That wraps up this edition. We'll be back ASAP with summaries of yesterday's decisions.