Supreme Court Update: Merrill Lynch v. Manning (14-1132), Husky Int'l Electronics v. Ritz (15-145), Sheriff v. Gillie (15-338) and Ocasio v. United States (14-361)

May 20, 2016 Supreme Court Update

Greetings, Court Fans!

It's that time of year! Fresh on the heels of the six decisions handed down Monday, the Court issued another three yesterday, with more to come on the other side of the weekend. This Update will cover the remaining three cases from earlier in the week, as well as one that fell through the cracks a few weeks ago. You can expect to hear from us pretty regularly from here on out as we wind down OT15.

First up, in Merrill Lynch v. Manning (14-1132), the Court made it a bit easier for securities plaintiffs to keep their lawsuits out of federal court (where heightened pleading standards often spell their demise). Greg Manning and six buddies sued Merrill Lynch in New Jersey state court, alleging that it drove down the price of stock they held in Escala Group, a company traded on the NASDAQ, by facilitating and engaging in naked short sales of Escala stock in violation of New Jersey state law. Although the plaintiffs raised no federal claims, Merrill Lynch removed the case to federal court, asserting that federal-question jurisdiction existed under 28 U.S.C. § 1331 and § 27 of the Exchange Act, which grants district courts exclusive jurisdiction over "all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder." The District Court accepted jurisdiction and denied Manning's motion to remand to state court, but the Third Circuit reversed, holding that there was no federal-question jurisdiction because § 27 of the Exchange Act covered only those cases that could independently satisfy § 1331 by posing a federal question.

The Supreme Court, in an opinion by Justice Kagan (joined by the Chief, Kennedy, Ginsberg, Breyer, and Alito) affirmed the Third Circuit's understanding of the meaning of § 27, resolving a three-way Circuit split on this issue. The Court rejected Merrill Lynch's broad reading of § 27 as conferring federal jurisdiction whenever a plaintiff's complaint "either explicitly or implicitly" asserts that a defendant breached a duty created by the Exchange Act. The language of the provision, "stops short of embracing any complaint that happens to mention a duty established by the Exchange Act." But the Court also rejected a more restrictive interpretation advanced by Manning—that a claim confers federal jurisdiction under § 27 only if it is brought directly under the Exchange Act, itself. As Justice Kagan observed, there are instances where a state-law action "necessarily depends on a showing that the defendant breached the Exchange Act," and in those cases the claim would fall within the jurisdictional reach of § 27 even though it was not brought directly under the Exchange Act.

The Court found a comfortable middle ground in the jurisdictional test of 28 U.S.C. § 1331, which provides federal jurisdiction in all civil actions "arising under" federal law. Justice Kagan explained that the "arising under" test allows § 27 to cover claims that are brought directly under the Exchange Act, as well as state-law causes of action that are "brought to enforce a duty created by the Exchange Act because the claim[s'] very success depends on giving effect to a federal requirement." The Court did not interpret Congress's failure to include the term "arising under" in § 27 as an explicit rejection of the arising-under test, since at the time the Exchange Act was passed, the term "arising under" had no settled meaning that Congress could reject. Finally, the Court was satisfied that its understanding of § 27 achieves "the goals we have consistently underscored in interpreting jurisdictional statutes," namely, the preservation of "the constitutional balance between state and federal judiciaries" and a "straightforward and administrable" approach for courts and litigants. Because the Third Circuit had already held that Manning's claims did not satisfy the "arising under" test for purposes of general federal jurisdiction, the Court remanded the case back to New Jersey state court.

Justice Thomas, joined by Justice Sotomayor (first time for everything!), concurred in the judgment but disagreed with the majority's interpretation of § 27. Because § 27 does not use the phrase "arising under," the concurring justices saw no reason to adopt the "arising under" standard for the Exchange Act's jurisdictional test. Rather, Justice Thomas interpreted the language actually employed by § 27, providing federal jurisdiction where a suit is "brought to enforce" Exchange Act requirements, to mean that jurisdiction is conferred where "a complaint alleges a claim that necessarily depends on a breach of a requirement created by the [Exchange] Act." In other words, Thomas adopted the strict interpretation advanced by Manning. His opinion went on to analyze each of Manning's claims under this test and concluded that none of them depended on a breach of a requirement created by the Exchange Act. Accordingly, he agreed with the majority that there was no basis for federal jurisdiction under § 27.

Next, in Husky Int'l Electronics v. Ritz (15-145), the Court gave creditors a new tool for fighting a debtor's attempt to discharge debts in bankruptcy. It reversed the Fifth Circuit, instead agreeing with other Circuits that the statutory bar to discharging debts obtained by actual fraud extends to fraudulent conveyances. Husky had sold goods to Chrysalis Manufacturing Corp., but Chrysalis's director and 30% shareholder (Daniel Ritz) made numerous transfers of Chrysalis's assets to other entities he controlled. Ritz was held personally liable for Chrysalis's debt to Husky under Texas law, but he filed for Chapter 7 bankruptcy and sought to discharge that debt. Husky was not pleased, took the case to the Supreme Court, and got the ruling it sought: a fraudulent conveyance can fall within the term "actual fraud" within 11 U.S.C. § 523(a)(2)(A)'s bar to discharging a debt "obtained by … false pretenses, a false representation, or actual fraud."

Justice Sotomayor wrote for the entire Court except for Justice Thomas. She noted that a fraudulent conveyance fits within the common-law meaning of "actual fraud" and that the common law supplies the meaning of terms in § 523(a)(2)(A). This line of reasoning gave Sotomayor the opportunity to research and cite ancient English bankruptcy laws like the Statute of 13 Elizabeth, better known (or maybe not) as the Fraudulent Conveyances Act of 1571. She rejected the argument that the statutory language can be construed to cover only debts fraudulently induced by a debtor's misrepresentation to a creditor, which would omit fraudulent conveyances where the sin is not inducement but concealment and hindrance. Ritz made numerous statutory construction arguments to try to limit the meaning of "actual fraud" when viewed in context with other provisions of the Bankruptcy Code, but to no avail.

Justice Thomas disagreed, relying on his reading of the "plain language" of the statute. He wrote that giving statutory terms their common-law meaning works until it doesn't work—when that meaning "does not fit" the words surrounding the term in the statute. He focused on the words "obtained by," i.e., the discharge bar applies only if the debt is "obtained by" the actual fraud. Thomas read that prohibition as applying only if a misrepresentation induced the transaction that created the debt, and argued that it is "nonsensical" to say that the fraudulent conveyance created the debt. It may be, as the majority holds, that Ritz's debt to Husky is "traceable" to the fraudulent conveyances, but that does not translate to the debt being "obtained by" the conveyances. He felt that Congress could have easily included fraudulent conveyances in the statutory language, but it did not. End of story.

Debts were also at issue in Sheriff v. Gillie (15-338), where the Court held that the use of official state letterhead by outside lawyers seeking to collect on debts owed to state agencies is not "unfair and deceptive" under the Fair Debt Collection Practices Act ("FDCPA").

The FDCPA aims to eliminate "abusive debt collection practices" by imposing various procedural and substantive obligations on debt collectors, most relevantly a bar on using "false, deceptive, or misleading" practices. The statute enumerates sixteen categories of conduct that qualify as false or misleading, including "the use or distribution of any written communication which simulates or is falsely represented to be a document authorized, issued, or approved by any court, official, or agency of . . . any State, or which creates a false impression as to its source, authorization, or approval," and "the use of any business, company, or organization name other than the true name of the debt collector's business, company, or organization." However, the Act excludes from the definition of "debt collector" "any officer or employee of the United States or any State to the extent that collecting . . . any debt is in the performance of his official duties." This case concerned the State of Ohio's practice of appointing private attorneys as "special counsel to represent the state" in collecting overdue debts owed to state agencies and instrumentalities (e.g. past-due tuition to state universities or unpaid medical bills from state-run hospitals). The Ohio Attorney General requires these special counsel to use AG letterhead when contacting debtors.

Two debtors who received communications from outside lawyers seeking to collect debts owed to the State filed a putative class action asserting that the lawyers violated the FDCPA by using the Attorney General's letterhead instead of the letterhead of their respective private law firms. The Ohio Attorney General intervened, arguing not only that the use of his letterhead was not false or misleading, but also that the private attorneys should be exempt from the FDCPA because they qualify as "officer[s] or employee[s]" of the State for the purpose of collecting debts owed to the State. Though the District Court agreed, the Sixth Circuit reversed, holding that the attorneys are independent contractors, not state officers, and that there was a genuine issue of fact as to whether their use of the Attorney General's letterhead would mislead an unsophisticated consumer into believing that it is the Attorney General, himself, who is seeking to collect.

The Supreme Court unanimously reversed, in an opinion by Justice Ginsburg. The Court accepted, for the sake of argument, that the outside lawyers were not exempt from the FDCPA, but held that their use of the Attorney General's letterhead was not false, deceptive, or misleading. "The letterhead identifies the principal—Ohio's Attorney General—and the signature block names the agent—a private lawyer hired as outside counsel to the Attorney General." There is nothing false or misleading about that. The FDCPA's proscription on a communication's "falsely represent[ing]" that it is authorized by a State is not offended here, where the State did in fact authorize the communications and, indeed, required that the communications be made on state letterhead. A contrary conclusion, Justice Ginsburg noted, would raise federalism concerns, for Ohio's Attorney General has chosen to appoint special counsel to assist him in fulfilling his obligation to collect the State's debts and has instructed his appointees to use official letterhead. There is no reason to construe federal law to interfere with the State's arrangement for conducting its own affairs.

Finally, a decision from a few weeks back, which managed to slip through the cracks. In Ocasio v. United States (14-361), the Court held that a defendant may be convicted of conspiring to violate the Hobbs Act—which prohibits obtaining property "from another" under color of official right—even if the person the defendant obtains property from is a member of the conspiracy.

Samuel Ocasio was a crooked cop who entered into a scheme with the owners of an auto repair shop to route damaged vehicles to the shop in exchange for payments from the owners. He was charged with obtaining money from the shopowners under color of official right, in violation of the Hobbs Act, and with conspiracy to violate the Hobbs Act in violation of the federal conspiracy statute, 18 U.S.C. § 371. Ocasio argued that he could not be convicted of conspiracy to obtain property "from another" under color of official right, when the other was itself a member of the conspiracy. And yet he was convicted, and the Fourth Circuit affirmed.

The Supreme Court also affirmed, in a 5-3 decision authored by Justice Alito. In the majority's view, "basic principles of conspiracy law" resolved the case. Under these longstanding principles, the fundamental characteristic of a conspiracy is a joint commitment to an endeavor which, if completed, would satisfy all of the elements of the underlying substantive criminal offense. A conspirator need not agree to commit the substantive offense himself, as long as the conspirator agreed that the underlying crime would be committed by a member of the conspiracy capable of committing it. Justice Alito alluded at length to early 20th-century decisions construing conspiracy to violate the Mann Act, which prohibited the transportation across state lines of "any woman or girl for the purpose of prostitution or debauchery." In those early decisions, the Court held that even when a "woman or girl" was ostensibly the victim of a Mann Act violation, she could be liable for conspiracy to violate the Mann Act because a person may conspire for the commission of a crime by another, even if that person is incapable of committing the crime herself. Here, in order to establish the alleged Hobbs Act conspiracy, the Government only needed to prove an agreement that some member of the conspiracy commit each element of the substantive offense. Ocasio and the shopowners did reach such an agreement: They shared a common purpose that Ocasio would obtain property "from another," i.e. the shopowners, under color of official right.

The majority's opinion depended in large part on the Court's decision in Evans v. United States (1992), which held that Hobbs Act extortion "under color of official right" includes the "rough equivalent of what we would now describe as ‘taking a bribe.'" (Evans is a key in the federal prosecutor's arsenal because the federal bribery statute generally does not apply to state and local officials; in order to prosecute them for taking bribes, federal prosecutors must charge them with extortion under color of official right.) Justice Breyer wrote separately to express his view that Evans may have been wrongly decided, but he joined the majority's opinion in full because Ocasio did not ask the Court to revisit Evans.

That didn't stop Justice Thomas, who dissented in Evans, from calling for its demise once again. Writing a solo dissent here, Justice Thomas argued that Evans wrongly equated extortion with bribery and, in so doing, "wrenche[d] from the States the presumptive control that they should have over their own officials' wrongdoing." By ignoring federalism concerns and equating extortion with bribery, Evans "made it seem plausible that an extortionist could conspire with his victim." The majority's opinion compounds that error and "further expands federal criminal liability in a way that conflicts with principles of federalism."

Justice Sotomayor also filed a dissenting opinion, joined by Chief Justice Roberts. (This is the second time this month that this odd couple has dissented together.) In her view, "the most natural reading of ‘conspiring' to obtain property ‘from another,' . . . is a collective agreement to obtain property from an entity different or distinct from the conspiracy. Here, the shopowners from whom the property was obtained were themselves part of the conspiracy; the conspirators "did not agree, and could not have agreed, to obtain property from ‘another' when no other person was involved." Justice Sotomayor dismissed the majority's reliance on the Mann Act cases, pointing out that those decisions turned on the text of that statute (which referred to "any woman or girl," not "another person"). And she raised policy concerns about "the Court's atextual interpretation of the Hobbs Act expos[ing] innocent victims of extortion to charges that they ‘conspired' with their extorter whenever they agree to pay a bribe."

At the end of the day, Ocasio neither substantially clarifies nor unsettles federal conspiracy or extortion law. The Court's lineup, however, suggests that the issue may return before long. With three dissenters and a fourth justice (Breyer) who would have considered overruling Evans had he been asked to do so, one can surmise that there is a 4-4 split on whether federal extortion law should reach situations where property is obtained from a co-conspirator and perhaps even whether garden-variety bribery should be considered extortion under the Hobbs Act in the first place.

That's about enough for one sitting. As mentioned up top, the Court also issued three more decisions Thursday—Luna Torres v. Lynch (14-1096), on when a state offense qualifies as an "aggravated felony" for purposes of removal under the Immigration and Nationality Act; Betterman v. Montana (14-1457), on whether the Sixth Amendment speedy trial guarantee applies to post-conviction delays; and CRST Van Expedited v. EEOC (14-1375), on whether a ruling on the merits is a necessary predicate to finding that a defendant is a prevailing party for purposes of getting attorneys fees under Title VII. We'll be back next week with summaries of those decisions, and whatever the Eight have in store for us Monday.