An After-Fourth of July Lesson by the Supreme Court

One woman’s trip through the bankruptcy appeals process, with a total of 21 judges or justices giving her more than her day in court.

We just celebrated our two hundred and thirty-ninth 4^th of July, counting the first one in 1776 when the Declaration of Independence was adopted.

In our blog post on the 4^th of July we celebrated “the rule of law” as something to be grateful for. This is particularly appropriate because as much as anything the Declaration of Independence was a demand for the rule of law!

More than half of the Declaration is comprised of a list of the “repeated injuries and usurpations” made by “the present king of Great Britain.” Every single one of the first nine on that list are about the absence of the rule of law, referring to the king’s abuses regarding “Laws,” “Legislative Powers,” or “Judges.” The Founders clearly had the rule of law very much in mind, the principle that everyone—those governing and those governed—must work within laws that are applied equally and justly.

The Latest U.S. Supreme Court Bankruptcy Ruling

The Court’s bankruptcy decision issued last month, Clark v. Rameker, gives us a nice lesson in the rule of law in two ways. The first—how courts interpret the laws created by the other two branches of government—we covered in our last blog post. The second we cover today—how the right to appeal a judge’s decision makes the laws and the legal system more just.

The Appeals Process Gives the Loser the Opportunity for More Fairness

A major check on arbitrariness in a legal system is the opportunity to go to a higher court if you disagree with what one judge or court decides. This Clark v. Rameker opinion demonstrates this especially well.

In October 2010, Heidi Heffron-Clark, a woman living near Madison, Wisconsin, filed a Chapter 7 bankruptcy case with her husband. They had opened a pizza parlor, but it failed during the recent recession, resulting in their bankruptcy.

Heidi had an Individual Retirement Account (IRA) worth about $293,000 at the time, which she had received when her mother died, Heidi being the sole beneficiary on her mother’s IRA.  Since most kinds of retirement accounts are exempt, or protected from the reach of the bankruptcy trustee and the creditors, Heidi claimed her inherited IRA as exempt.  But the trustee objected, arguing that an inherited IRA is not an exempt “retirement fund.”

Their bankruptcy judge, Robert Martin, one of only two judges in bankruptcy court for the federal Western District of Wisconsin, and the only one assigned cases in its Madison Division, agreed with the trustee. Judge Martin decided, in May, 2011, as he laid out in his 8-page opinion, that the inherited IRA of the debtor, Heidi Heffron-Clark, was not exempt.

The Appeals Process

Heidi and her husband appealed to the U.S. District Court for the Western District of Wisconsin, also in Madison, and in January 2012 Judge Barbara Crabb overturned Bankruptcy Judge Martin’s decision, with her own 7-page opinion, concluding that the inherited IRA was exempt.

William Rameker, the Chapter 7 trustee, then appealed to the U.S. Court of Appeals for the Seventh Circuit, which hears appeals from the federal courts in Illinois, Indiana and Wisconsin.  At the time there were ten judges on the Seventh Circuit, and as usual the appeal was heard and decided by a panel of three of them, Judges Frank Easterbrook, Joel Flaum, and Ann Williams. They overturned District Judge Crabb’s decision, deciding in April 2013, in an 8-page opinion, that inherited IRAs are not exempt.

Heidi and her husband filed a petition for the entire set of 10 Seventh Circuit judges to rehear the appeal. But none of those 10 judges asked for a vote on that petition, so it was denied.

Heidi and her husband then asked the U.S. Supreme Court to hear an appeal of the Seventh Circuit’s decision by filing a “writ of certiorari,” on the basis that the Seventh Circuit’s decision directly conflicted with a published opinion by the Fifth Circuit in Texas. The Supreme Court agreed to accept the case to resolve this conflict between federal circuit courts.

Beyond the arguments of the parties to the case, the Supreme Court accepted friend-of-the-court (“amicus curiae”) written briefs from two law professors, a retirement savings plan administrator, the National Association of Bankruptcy Trustees, and the National Association of Consumer Bankruptcy Attorneys.

After all this, the Supreme Court heard oral arguments in March of this year, and on June 12, 2014, Justice Sonya Sotomayor delivered the opinion for the unanimous Court, agreeing with the Seventh Circuit in favor of the trustee that inherited IRAs are not exempt in bankruptcy.

Conclusion

Now that the highest court has spoken, that doesn’t mean that everybody is happy. Many people—beyond Heidi and her husband—are quite unhappy with this result and think it was wrongly decided. Folks with IRAs, and their estate planning attorneys and accountants, may be thinking twice about who to name as beneficiaries in their IRAs and other retirement funds. State legislators may be figuring out ways around this result for people in their state.

But nobody is picking up pitchforks. Or plotting insurrection. On this issue, the Supreme Court has spoken. It is the law of the land. That is how the Rule of Law works.

Related posts:

A Fourth of July Lesson in “The Rule of Law” Presented by the Supreme Court A Lesson in Property Exemptions from the Recent Supreme Court Decision about Inherited IRAs A Lesson in Retirement Exemptions from the Most Recent Bankruptcy Decision by the Supreme Court Supreme Court Decides that an Inherited IRA Is Not Protected from Creditors in Bankruptcy The U.S. Supreme Court’s Health Care Decision