Portland Bankruptcy Law Group

In June, a bankruptcy court in Los Angeles emphatically declared that a legally married gay couple could file their bankruptcy case jointly, even if doing so was in direct violation of the controversial federal Defense of Marriage Act (“DOMA”).

The Bankruptcy Code allows a “joint case” to be filed by “an individual . . . and such individual’s spouse.”  DOMA defines the term “spouse” as “a person of the opposite sex who is a husband or a wife.” thus disallowing same-sex person to be a “spouse.”  However, the bankruptcy court determined that DOMA was unconstitutional because “no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple. “  Under their constitutionally derived equal protection rights, the legally married gay debtors were entitled to be treated the same as married heterosexuals because preventing them from doing so advanced no “important governmental interest.”

A single bankruptcy court opinion such as this one usually has a limited effect—it is only legally binding on bankruptcies filed within that federal district.  Granted, the bankruptcy court in that Southern California federal district has more consumer bankruptcy cases filed each year than in any of the other 93 federal districts in the country.  But still, this same issue was being simultaneously fought out in bankruptcy courts in other parts of the country, with the definite possibility that other bankruptcy judges could have reached opposite results.  So normally it would be years before a definite answer came out of the appeals process, perhaps even needing an eventual decision by the U. S. Supreme Court.

But because of an extremely unusual combination of legal and political events, this one bankruptcy court’s opinion IS for practical purposes the law of the land.  How could that be?

1. The opinion of the bankruptcy court, which is virtually always signed by a single bankruptcy judge, was also signed by 19 other bankruptcy judges, presumably all from that bankruptcy court (where they have many more judges than usual because the huge population and the number of bankruptcy filings).  This is an almost unheard of emphatic showing of support for a judge’s decision by his local colleagues.

2. The federal government, through the U.S. Trustee, filed an appeal of the bankruptcy court’s opinion in late June.  But then shortly after, in early July, the U.S. Trustee cancelled that appeal.  It did so because earlier in the year, President Obama had announced that his Administration would not enforce DOMA, for the same reason as the Los Angeles bankruptcy judge, that it was unconstitutional.  In this unusual situation the U.S. House of Representatives had the option of enforcing the law, and in this very case it had signaled that it would do so.  But then the House changed its mind and informed the U.S. Trustee that it would not try to enforce DOMA in this context of joint-filed bankruptcies.

3. As a result, not only did the U.S. Trustee dismiss its appeal in the California bankruptcy court case, it immediately also stopped fighting the issue in other bankruptcy courts throughout the country.

So it sounds like this one bankruptcy court opinion allowing legally married gay couples to file bankruptcy jointly is functionally the law throughout the country.  That’s even though the Los Angeles opinion was never reviewed or decided by a higher court, nor were any other bankruptcy court opinions.  Technically, that opinion’s ruling is legally binding only for the bankruptcies filed in the seven counties in that federal district.  But practically, its ruling is applicable everywhere. Unless the House of Representatives changes its mind.  Or if some bankruptcy judge raises an objection even without the U.S. Trustee doing so.

In the American legal system, when there are hundreds of millions of dollars at stake, and both sides ready to fight to the death, litigation can drag out for many years. In Anna Nicole Smith’s extreme case, it dragged on for 16 years, and finally got resolved in the United States Supreme Court a few weeks ago, more than four years AFTER her death. She fought to the death and way beyond.

After all that, the deciding Supreme Court opinion was 100% about bankruptcy–the power of the federal bankruptcy courts over state courts.

It came down to a fight between a Texas probate court and a California bankruptcy court. The Texas court had ruled in favor of the heirs of Anna Nicole Smith’s deceased husband, J. Howard Marshall II, shutting Anna Nicole out of any inheritance. The bankruptcy court in California had ruled in favor of Anna Nicole, at one point awarding her $474 million, later reduced to $89 million. (Apparently this was still enough to keep fighting about!) The Supreme Court decided in favor of the Texas court and against the bankruptcy court. Anna Nicole’s heirs lost and get nothing. Her long-deceased husband’s heirs get his whole estate. About $1.6 billion.

But in the long run, the real losers might well be the bankruptcy courts, and the people who file bankruptcy. At least those relatively few of them who end up in litigation in the midst of their bankruptcies.

That’s because in its 5-to-4 split decision, the Supreme Court decided that the bankruptcy court had accurately followed the statute which effectively gave it power over the state probate court, BUT that statute was unconstitutional—it gave the bankruptcy court more power than the Constitution allowed.

In doing so the Supreme Court upset a very careful balancing act that Congress had created and the courts have been following for several decades. Simply put, some cases that would have been resolved in bankruptcy court, now no longer will be. Why this matters for some of our clients is that bankruptcy court is usually the most efficient—meaning least expensive—place to resolve legal disputes with their creditors. It can take two or three times as much attorney time—so, that much more in attorney fees—if we need to jump out of bankruptcy court into state court or federal district court. If our clients have a strong argument—a “counterclaim”—why they don’t owe a debt, it may well become much harder to raise that argument, and so in practical terms, raising that counterclaim may just not be worth it. When justice is just too expensive, justice is denied.

But the Supreme Court, at least the narrow majority that decided this case, doesn’t think it needs to think in practical terms. It paid no attention to this argument by the dissenting justices:

[U]nder the majority’s holding, the federal district judge, not the bankruptcy judge, would have to hear and resolve the counterclaim. Why is that a problem? . . .  . Because under these circumstances, a constitutionally required game of jurisdictional ping-pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy.

Think what you will about the sad story of Anna Nicole Smith. It is maddening that her epic legal battle for a share of her deceased husband’s estate slapped down by the highest court in the land deciding to make it that much harder for the already oppressed to find justice.