Cases by Issue - Comity

Jefferson County v. Acker - Oral Argument

Fri, 09 Jan 2009 14:50:13 +0000

Case:

Jefferson County v. Acker

Media File:

98-10_19990329-argument.mp3

Related Transcript:

1998_98_10_argument.xml

Transcript:

Argument of Jeffrey M. Sewell

Chief Justice Rehnquist: We'll hear argument first this morning in No. 98-10, Jefferson County, Alabama v. William Acker.

Mr. Sewell.

Mr. Sewell: Mr. Chief Justice, and may it please the Court:

I want to speak to you first this morning about the jurisdiction issues in this case.

This case presents the question of how, not whether, but how the Tax Injunction Act applies to a tax collection case removed to Federal court.

That, in turn, depends on whether the act is interpreted and applied as a broad jurisdictional barrier or simply as a limitation on a court's remedial power.

We say that the... the act should be applied broadly to keep collection cases out of Federal court altogether because any lesser approach, any more narrow approach is just... is unworkable.

Chief Justice Rehnquist: Well, in this case, Mr. Sewell, the... the county brought the action in State court, didn't it, to collect the taxes?

Mr. Sewell: Yes, sir.

Chief Justice Rehnquist: And then the defendants... the judges removed it to Federal court.

Mr. Sewell: That's right.

Chief Justice Rehnquist: And so, it... you say at that point the Tax Injunction Act applied to prevent the State from... from collecting a tax?

Mr. Sewell: I say that the Tax Injunction Act ought to apply to a tax collection case whether it's removed by a defendant by a taxpayer to Federal court or whether we had brought the case ourself in Federal court.

I think the Tax Injunction Act should bar... should keep these cases out of Federal court for a number of reasons.

The...

Chief Justice Rehnquist: Go ahead.

Mr. Sewell: The reason is, is because if you have some lesser approach, it's just not workable.

The Tax Injunction Act is going to apply in some form or fashion if a case is removed, a collection case is removed.

For... for example, if you go into Federal court in a tax collection case, the... it seems to me that that would allow the taxing authority, me in this case, the government, to use the Tax Injunction Act as both a sword and a shield to whipsaw a taxpayer.

Chief Justice Rehnquist: Well, what... what if this action had been brought in State court to collect taxes on the basis, say, of diversity of citizenship, and it was removed on that basis to the Federal court and there was no claim that the tax was unconstitutional?

Maybe there was just a claim that it had been paid and the county said, no, it hasn't been paid.

You think the Tax Injunction Act would still apply?

Mr. Sewell: Yes, Your Honor, I do.

I believe... and I look to footnote 22 partially of the Grace Brethren Church opinion.

Chief Justice Rehnquist: Well, that's not the greatest place to look for controlling law.

Mr. Jones: [Laughter]

Mr. Sewell: I thought it was a good place to look.

[Laughter]

And... and when I went back and read that footnote, that footnote gives a very thorough history and analysis of the Tax Injunction Act, and it quotes the Senators and the Members of Congress that were responsible for enacting that act.

And that footnote demonstrates... demonstrated to me conclusively that the purpose of the Tax Injunction Act, the central purpose, was to keep a Federal court from interfering in any manner in a State tax if there's an adequate State remedy.

That seems to me to be the... the clear purpose.

Justice Ginsburg: Well, then why didn't the act simply say the Federal courts have no jurisdiction in State tax cases?

Mr. Sewell: I think that the act... I wish that the act had... had said that, and I think that that's... you know, the act talks in terms of Federal courts not having the jurisdiction to... to enjoin, suspend or restrain a levy, assessment, or collection of a State tax.

But, in effect, Your Honor, that's what happened here.

Justice Ginsburg: I don't understand that because the... the suit didn't change its shape from being a suit to collect, not a suit to enjoin, but a suit to collect.

That's what it was.

Mr. Sewell: That's right.

Justice Ginsburg: And that was what was removed, and it remains a suit to collect.

Mr. Sewell: It does, and the... I'm assuming that the purpose of the Tax Injunction Act, the overreaching purpose, is to prevent a Federal court from interfering with the collection or the administration of State tax, and I believe that's what the Court's Grace Brethren Church opinion, specifically footnote 22... that's exactly what it said.

Now, the... the way I see this, the... in this case, the Federal court did interfere with the collection, not only of our tax.

In this case... this case has stopped us from collecting the tax not only from the respondents, but from all the Federal judges in the Northern District.

It's exposed us to refund suits from the other judges who paid the tax other... other than these two respondents.

It's resulted now in hundreds of Federal employees that work in Jefferson County refusing now to pay the tax, demanding explanations from us as to... as to why they have to pay if the judges don't have to pay.

We're having now to respond to all of that, and it looks as though we may... we may have to...

Justice Kennedy: Well, why would that be any different as if it were just in State court and a State court judge said, well, I have real problems with this?

I'm going to take it under submission, and the word gets out.

Justice Breyer: It's the same thing.

Mr. Sewell: I think that there would... we may have some... some of the same results, but I think again the purpose of the Tax Injunction Act is to keep the Federal court from doing that.

Chief Justice Rehnquist: But the purpose of diversity jurisdiction is to provide a... basically a more neutral forum perhaps than the State court but to resolve the case in exactly the same way that the State court would have resolved it.

So, if... if there had been a decision of the Alabama court saying that this was... couldn't be applied to... you'd have the same claims, wouldn't you, on the part of Federal employees?

Mr. Sewell: I think that you may have some of the same results and you may have some of the same displeasure from the Federal employees, certainly.

Certainly.

Justice Scalia: What if the Alabama Supreme Court finally decides that the tax can be collected and then certiorari is sought here?

I mean, it stays in the Alabama court.

Justice Kennedy: It goes all the way...

Mr. Sewell: This case.

Justice Scalia: Yes.

It goes all the way to the supreme court, and the supreme court says the tax can be collected.

And then the judges seek certiorari.

We grant certiorari.

If we reverse the Alabama Supreme Court, would we be enjoining a State tax?

Mr. Sewell: Well, Your Honor, I think that...

Justice Scalia: Under your analysis, we would I suppose.

Mr. Sewell: I think this Court would certainly have appellate jurisdiction to review the decision of the Alabama Supreme Court.

Justice Scalia: Yes, but under your broad definition of what constitutes the... the... enjoining of a State tax... namely, to give a judgment against a person who is resisting the collection of a State tax... we would be violating the Anti-Injunction Act.

Mr. Sewell: I think that your jurisdictional... and I understand your point and you're correct, but your... your basis for an appellate review of a State court decision is different from what I'm suggesting to you.

I'm talking about jurisdiction at the trial level, the initial Federal jurisdiction.

Perhaps I'm using... I'm painting with too broad of a brush.

Maybe I am.

Justice O'Connor: Do you plan to argue that removal was improper under section 1442(a)(3)?

Mr. Sewell: Yes, ma'am.

Justice O'Connor: I'm not sure you're going to win on your tax injunction argument.

I wondered if you wanted to pursue that other inquiry.

Mr. Sewell: Yes, ma'am.

I had planned to argue that.

We feel that under 1442 that... that neither test is met because refusing to pay taxes is not an act done under the color of a judge's office, and it's not done in the performance of any judicial duty.

I know of no Federal statute, I know of no act of Congress that... that instructs a judge to not pay his or her taxes.

Justice O'Connor: I guess the inquiry under 1442 is pretty much tied up with the merits of whether the tax can be imposed.

Mr. Sewell: I think that... that perhaps it is, and I certainly... and I don't suggest to you that... that... that the judge would have to win on the merits to... to have jurisdiction.

But I... I do suggest to you that there has to be something colorable about the defense that's pled, and to me if... if... if the people in Mesa v. California couldn't convince the Court that... that when they ran over somebody in their... in their postal buggies that they were engaged in their official function, I don't see how not paying a tax would satisfy that.

Certainly if these judges didn't pay Alabama's income tax...

Justice Kennedy: But... but this tax says that it's unlawful to perform the function, i.e., it's unlawful to be a judge if you don't pay the tax.

Mr. Sewell: No, sir.

I disagree with that.

The tax... the ordinance says that it's unlawful to work in the county without paying the tax.

The court of appeals seized on that language, but that... what they failed to do... they failed to do two things.

One of those things was they failed to recognize the difference between a license tax which is for revenue purposes, which is what ours is, which stems from our taxing power, versus a license tax for regulatory purposes which stems from the police power.

Justice O'Connor: Let me ask you this.

Does the county have any authority to impose an income tax?

Mr. Sewell: No, ma'am.

We're prohibited from doing that by the Alabama constitution.

Justice O'Connor: And yet, for you to prevail, you have to persuade us that this is in fact an income tax.

Mr. Sewell: Under Federal law it clearly is an income tax.

Justice O'Connor: Even though the county lacks the power to...

Mr. Sewell: Under State law.

Justice Breyer: impose an income...

Mr. Sewell: Just as in Howard v. Commissioners, yes, ma'am.

Justice Breyer: Why is it clearly an income tax?

It doesn't say it's an income tax.

Mr. Sewell: No, sir.

It is clearly under Alabama law a license tax.

Justice Souter: Yes, fine.

Justice Breyer: So, you said, to win, which I think you're right, that you'd have to persuade us it's an income tax.

Justice Kennedy: All right.

Justice Breyer: Why is it an income tax?

Persuade us or me.

Mr. Sewell: I will persuade you, Your Honor.

I'll try to persuade you with the... with the Howard v. Commissioners decision where you all persuaded me...

[Laughter]

that a... that a license...

Justice Souter: I must not have written that.

Mr. Jones: [Laughter]

Mr. Sewell: that a license tax in Louisville, Kentucky that is indistinguishable from our tax was an income tax under the Buck Act.

Justice Breyer: And why... why is it... I mean, this... why is it basically an income tax?

Mr. Sewell: Because the Buck Act makes it an income tax.

Congress... Congress converted all State and local license taxes to be income taxes under Federal law.

Justice Breyer: So... so, if you pass a tax that says anybody who... anybody... take an unpopular matter.

Anyone who applies the Federal sentencing guidelines will pay a tax measured by their income.

Is that an income tax?

Mr. Sewell: That is a... I would think, a discriminatory tax that would violate the...

Justice Breyer: Yes, but is it an income tax?

Mr. Sewell: I don't know.

Justice O'Connor: All right.

Justice Breyer: Now, here they're... we read the opposition's brief and they say, first, it doesn't say it's an income tax, and second, there are vast numbers of employees who don't pay it measured by their income.

They pay it measured by $50 a year.

They include... we just have the A's I guess... architects, attorneys, auctioneers, automobile dealers, automobile accessory dealers, and that's only the A's and I'm only halfway through.

All right?

So... so, vast numbers of people pay $50 a year, $125 a year.

Some people pay it measured on their income, and it's also not called an income tax and it would be illegal to... to have one under State law.

Okay, now, why is it an income tax?

Mr. Sewell: Your Honor, in answer to your question, I disagree first with the word vast.

92 percent of the people who earn wages in our county pay our tax.

92 percent.

8 percent pay license fees to the State of Alabama, and those are predominantly Federal employees.

Justice Breyer: Where does that number come from?

Mr. Sewell: It comes... that is... that number is not in the record because this issue was never raised until we got to this Court.

Justice Breyer: Well, how would I find out whether... you know, I see a big list of occupations.

How do I know... how am I supposed to find that out?

Mr. Sewell: Well, this... this information is not in the record, nor is the fact that 1,209 of the 12,000 Federal employees in Jefferson County... 1,209 of them... pay State license fees and do not pay our tax.

Justice Kennedy: In the Howard case that you rely on, were there categories by business as... as your ordinance has it?

Mr. Sewell: Exemptions.

Some, yes, there are some.

Some of them were.

Some were, of course, domestic servants...

Justice Kennedy: So, you could be either an employee in sort of a catchall group or a person with a specific business and you had to pay different rates according...

Mr. Sewell: As I understand it, yes.

Justice Scalia: to your business?

Justice Kennedy: That... that was... that was the... the pattern of ordinance in Howard?

Mr. Sewell: There was... there was... yes, sir.

There was a separate law, and whether it was a State law or whether it was a city law, that I don't know.

But it... but when you read it carefully, you see that it applies to insurance companies and then other corporations, persons that are taxed by these other sections of Louisville law or by Kentucky law.

So, the Louisville occupational tax had exemptions.

I don't know how broad they were.

I don't know how narrow they were.

I know how narrow ours are.

It's only 8 percent of the people.

I don't know how... how broad or narrow Louisville's was.

Justice Kennedy: Yours... yours doesn't look like an income tax because it's... it's on gross receipts.

There are no deductions.

But that was also true of the Howard case.

Mr. Sewell: That's right.

Chief Justice Rehnquist: And the Buck Act defines income tax very broadly, doesn't it?

Mr. Sewell: It does.

Chief Justice Rehnquist: It's any tax levied on with respect to or measured by net income, gross income, or gross receipts.

Mr. Sewell: And ours is, yes, sir.

There's no dispute about that.

Justice Stevens: But don't you have the additional problem, your license fee or tax or whatever it is is arguably discriminatory under Davis against Michigan?

Mr. Sewell: No, sir.

No, sir.

Our tax does not... our tax does not discriminate against any person, Federal or otherwise.

Justice Stevens: All the people... all the people on the list that Justice Breyer referred to don't pay it.

Mr. Sewell: The... I understand.

Justice Stevens: The architects, barbers, hair dressers, all that list.

Mr. Sewell: As I understand...

Justice Souter: And they do not pay it.

Mr. Sewell: Well, I think that there is... I think that there is factual discrimination because we have... our tax applies to this group and the State levies its license fee on the others.

And what that is is just a simple division of taxing authority.

Justice Stevens: Yes, but the... but the amount that is paid by the respective people in the different jobs is quite different from the amount the judges have to pay.

Mr. Sewell: Some.

Some are and... and some are not.

Justice Scalia: Well, they all are, aren't they?

Mr. Sewell: It depends on how...

Justice Stevens: They're all flat fees, aren't they?

Mr. Sewell: It depends on how much... how much money a person makes.

Justice Stevens: Are there any of those which the license fee is as high as the income tax on the judges?

Mr. Sewell: Well, if... if a... yes.

Depending on... depending on a... how much a person would make, they could pay more instead of less...

Justice Stevens: Well, you know what Federal judges make and you know what the license fees are.

I was under the impression that none of the license fees were as high as the tax on the judge.

Mr. Sewell: Okay, I'm with you, and I don't... I don't know if it is.

I really don't.

I doubt that it is, but...

Justice Stevens: But assuming that's true, why... how then do you get around Davis against Michigan?

Mr. Sewell: Because I read Davis v. Michigan as... as the problem with that tax was that it discriminated against Federal employees by favoring State employees...

Justice Breyer: Right.

Mr. Sewell: because of the source of the compensation, which is what the Public Salary Tax Act says.

There may be other forms of factual discrimination.

Chief Justice Rehnquist: That wasn't the basis, though, of the Eleventh Circuit's decision here, was it, that it discriminated?

Mr. Sewell: The Eleventh Circuit said... noted that the trial court found that the tax did not discriminate and went on to say the judges didn't appeal it, and so they were not going to address it.

Justice Ginsburg: And is it true, Mr. Sewell... Mr. Sewell, is it true that this tax would apply to State court judges in the same way it applies to Federal judges?

Mr. Sewell: It applies to all constitutional officers of the State of Alabama.

Justice Ginsburg: And the same with prosecutors.

Mr. Sewell: Yes, ma'am, who work in Jefferson County, Alabama.

Justice Souter: So, the State court judges are taxed on their income in the same...

Mr. Sewell: Just like the Federal judges, and the Alabama Supreme Court Justices, three of those who have offices in our county, satellite offices, pay the...

Justice Breyer: Prosecutors are not.

The prosecutors are not.

Mr. Sewell: Prosecutors may be... I think prosecutors are required to have a State law license.

Justice Breyer: So, they pay... they don't pay one-half of 1 percent of their income.

Mr. Sewell: They pay the State law license.

Justice Breyer: They pay $200 a year flat or something like that.

Justice Ginsburg: That would be the same for the U.S. Attorney, though, wouldn't it?

Mr. Sewell: Yes, ma'am.

That's very important.

It's also true for the doctors who work at the VA hospital.

We have a large VA hospital.

All of the doctors and all of the nurses are required by their Federal job descriptions to have a State physician's license to practice medicine and the nurses are required to have a State nursing license to be a nurse for the Federal Government.

Justice Scalia: Mr. Sewell...

Mr. Sewell: Yes, sir.

Justice Scalia: I want to erase a... a stupid question I asked.

The answer to my question about the supreme court in deciding this case would be violating the Tax Injunction Act.

Unfortunately, the act was not reproduced in your brief.

Having dug it out, I find it only applies to district courts, doesn't it?

Mr. Sewell: Yes.

Justice Scalia: That's the right answer.

Mr. Sewell: Yes, sir.

Thank you.

I wish I had thought of that.

[Laughter]

I would like to reserve the rest of my time, please, if there's no more questions.

Argument of Kent L. Jones

Chief Justice Rehnquist: Very well, Mr. Sewell.

Mr. Jones, we'll hear from you.

Mr. Jones: Mr. Chief Justice, and may it please the Court:

The Tax Injunction Act bars only anticipatory relief against State taxation in Federal courts.

As Justice Stone said for this Court in Matthews v. Rodgers, which is cited in the legislative history of the Tax Injunction Act, although injunctions against State taxes should not be heard in Federal courts, Federal courts remain competent to decide questions of State law, and therefore can adjudicate collection and refund cases brought in Federal court so long as the essential elements of Federal jurisdiction are present.

It's our position that in this case, the essential elements of Federal jurisdiction are not present.

The only asserted basis for Federal jurisdiction is the Federal removal statute which does not apply here because the action of the judge in refusing to pay a tax on his private income is not an act taken under color of authority or pursuant to his duties as a Federal officer.

In the removal petition, respondents incorrectly stated that the tax was imposed on the act of performing their official duties.

That's not correct.

The tax is imposed on, it's calculated on and assessed on their earnings.

And this Court made clear in the O'Malley v. Woodrough case that the responsibility of Federal judges to pay taxes on their earnings derives from their private responsibilities as citizens and that they have the same responsibility as everyone else to share in the costs of paying for the benefits the government provides.

Justice Kennedy: But the way the tax is designed is that you are... it is illegal to engage in the duties unless you pay the tax.

You don't have simply a financial liability for the tax.

Mr. Jones: I don't...

Justice Kennedy: There... there is a prohibition to... against engaging on the duties themselves.

Mr. Jones: What it really says is it's unlawful to do it without paying the tax, and then you have to see what that means.

What that means is if you don't pay the tax, you have to pay interest and penalties.

There are no other enforcement mechanisms in this case.

We would have a vastly...

Justice O'Connor: Does it matter at all that under State law the county is prohibited from imposing an income tax?

Do we care about that?

Mr. Jones: Not on...

Justice Kennedy: They can't do it.

Justice O'Connor: It's ultra vires.

Mr. Jones: Well, let's go right to the merits.

I've just been talking about jurisdiction.

But on the merits, no.

The income...

Justice O'Connor: I think the removal argument is tangled up a little bit with...

Mr. Jones: Well, it shouldn't be because the... there is no question that they... they need to show a colorable Federal defense.

But the existence of a colorable Federal defense doesn't dispose of the requirement that the act for which they were sued be one that they took in their official capacities.

And it's our position that... that any Federal officer who doesn't pay his Federal... his State or local taxes is acting in a private capacity.

Justice Scalia: Some judges in this jurisdiction have paid the tax.

Justice Stevens: Right?

Justice Scalia: And... and presumably would have been violating their duties if... if resisting the tax was part of the Federal responsibilities of these people.

Mr. Jones: I just don't think Federal duties apply in any direction on... on the private decision about paying your tax on your personal income.

The Supreme Court in... in O'Malley seems to me to have made that point.

Justice Souter: It seems to me a Federal judge could have taken the position that it is simply unlawful to condition under State law my performance of my Federal powers and exercise of my Federal responsibility.

And... and if the case is looked at that way, then the... the removal I suppose is in a different posture.

Mr. Jones: If... we have... in deciding whether removal is proper, you have to look at what case was brought in State court.

If there were a case brought in State court that said that this judge should be enjoined or should be prevented from performing his official functions, then the judge could remove the case and say that what's at issue is my official acts, whether I can perform my official function.

Justice Souter: Well, here the judges I suppose could have taken the position that the... that the disposition of the case that was brought was simply a... a predicate to what could have been an injunction against their performance of their... their Federal responsibilities.

Mr. Jones: Well, I don't think it is a predicate to an injunction.

I don't think and none of the courts below thought that an injunction could possibly be issued.

Justice Kennedy: Why not?

Mr. Jones: Well, if for no other reasons, inequity wouldn't... the legal remedy of collecting the tax is sufficient, but beyond that, what this tax says is what's unlawful... what happens when it's unlawful and the tax isn't paid is interest and penalties.

It doesn't say anything beyond that.

Justice Souter: Well, it provides for interest and penalties, but I suppose if there is arguably a prohibition against the exercise of the... of the professional responsibilities, State equity would... would enforce it.

Mr. Jones: If this... again, if the State... if the suit in State court arose in connection with that act, that would be the act at issue in the removal.

The act at issue in this case was paying the tax and that was a private act, not an official act.

On the merits...

Justice Kennedy: Well, just... just... on... on that point, in... this district has multiple locations.

If the chief judge of the district says you must come to Birmingham and try this class action for a year and a half, the judge has no choice.

That's... he's exercising his official duty.

Mr. Jones: That may well be and it may well be true too that when a Federal judge goes to different States... I mean, an appellate judge goes to different States, he might become subject to their taxes also.

On the merits...

Justice Breyer: Doesn't it say on... the language of it is it is called a license fee for the privilege of engaging in or following such vocation or occupation.

It doesn't... it says in the statute that it's for the privilege of engaging in the vocation.

Mr. Jones: The... this issue is already well plowed in this Court's cases.

In Howard v. County Commissioner, the Court upheld a similar business privilege tax against the very objection that the tax was an improper license fee on Federal workers.

Justice Scalia: No.

Justice Breyer: The objection here is it isn't income tax.

They don't even measure it by income.

They measure it by gross receipts.

Mr. Jones: Well, the tax doesn't have to be an income tax to be valid.

The Public Salary Tax Act authorizes a tax on pay or compensation.

The Buck Act authorizes a tax on... authorizes an income tax but defines that by statute to mean any tax on income.

Chief Justice Rehnquist: Or gross receipts.

Mr. Jones: Yes, and... well, income as used in the broadest sense, as near as we can tell from looking at that statute.

And this Court has defined that term to mean any accretion to wealth.

So, this tax doesn't have to be a Federal income tax or a State income tax.

It has to be a tax on income, which it is.

And in... in Howard v. Commissioner, the Court said the fact that the tax is described is in the form of or labeled as a license fee doesn't make it invalid.

What is... what matters is that it's practical operation is to tax the income of Federal officers.

If in its practical operation it taxes their income, it is valid regardless of the form or label applied.

Justice Scalia: Do you have any thoughts on the merits?

Mr. Jones: That's what I was kind of working on there, Justice Scalia.

[Laughter]

The only other thought I have on the merits is that their contention that discrimination prohibits this tax is simply wrong.

In Davis v. Michigan, the kind of discrimination the Public Salary Tax Act prohibits is discrimination based on the sovereignty of the employees.

This is not like the pension discrimination involved in Davis v. Michigan where State workers were treated better than Federal workers.

Under this tax scheme, it appears that regardless of whether you're a Federal worker, a State worker, a private worker, the tax applies the same way to you.

It's true that there are exemptions in the State... in the county tax provision for undertakers and barbers, for people who are already licensed under the State licensing scheme, and the evident purpose of those objections is to avoid a double tax on these previously licensed professions.

Those kinds of equalizing adjustments don't discriminate on the basis of sovereignty.

They apply equally and this case does not present any question about equal protection issues whether these kinds of discriminations satisfy the rational basis standard because those issues weren't raised below.

The only discrimination issue involved under the Buck Act is... under the Public Salary Tax Act is whether the statute discriminates because these are Federal workers, and the answer to that is not.

Justice Ginsburg: Mr. Jones, if we should agree with you about that issue on the merits, what about the issue that the Eleventh Circuit didn't decide and that is the diminution of compensation?

Would we...

Mr. Jones: Well, the O'Malley v. Woodrough, the Court held that... that a tax on the incomes of Federal judges would not be a diminishment of their compensation for Article III purposes.

Justice Stevens: Mr. Jones, I don't think the tax in Michigan discriminated against the Federal workers because they were Federal workers.

It just treated them like every other citizen in the State, discriminated in favor of a very small group of State workers.

Mr. Jones: It did discriminate on the basis of sovereignty, though, and I believe you dissented in this case.

Justice O'Connor: I did.

Mr. Jones: [Laughter]

Justice Stevens: I think the cases are quite similar.

Mr. Jones: It's the majority's view is what I was trying to describe.

[Laughter]

Justice O'Connor: Yes.

Justice Stevens: You're not asking us to reexamine Davis, though.

Chief Justice Rehnquist: Mr. Jones, you've repeated several times about your reliance on O'Malley against Woodrough, and yet it isn't cited in the government's brief.

Could you file a citation to that with the clerk?

Mr. Jones: It's certainly cited, if not in our brief, in one of the briefs.

But I will... I'll provide you with the citation, and... and perhaps Mr. Sewell can give it to you in his reply.

Argument of Alan B. Morrison

Chief Justice Rehnquist: Thank you, Mr. Jones.

Mr. Morrison, we'll hear from you.

Mr. Morrison: Mr. Chief Justice, and may it please the Court:

Before turning to the merits, I want to deal with the justiciability Tax Injunction Act issue and the removal which are all kind of tied together in our view.

This case was removed from the small claims division of the State court of Alabama by the respondents, two Article III Federal judges, and they alleged in their removal petition that the provision that the... both the Justice Kennedy and Justice Souter focused on about the unlawful... making it unlawful to engage in the occupation was tantamount to an imposition of a licensing requirement by the county upon Federal judges, which if carried out, would interfere with their Federal... carrying on the duties of Federal judges.

For purposes of removal, that is clearly a kind of Federal immunity defense, saying that the Constitution does not allow Jefferson County to do that.

If ultimately we are wrong on the merits... and I'll try to explain why we don't think we are... that would not have allowed us... that would not defeat the removal.

But significantly for removal I want to point out that at no time did Jefferson County in the district court or in the court of appeals suggest that removal was improper.

And the rules... the statute requires that removal be objected to within 30 days or at least by the... if you allege that this is subject matter jurisdiction, which I'm not sure whether it is or not, that has to be done by the time of final judgment.

So, even this Court's decision in the Caterpillar case... Mr. Chief Justice, I do not cite that in my brief, but it was a recent decision a couple of years ago... allowing these removal issues to be raised later...

Chief Justice Rehnquist: You do not cite decisions that are only 2 years old?

Mr. Jones: [Laughter]

Mr. Morrison: Your Honor, I... I didn't think of it until I saw what their reply brief said, and that... I wasn't sure that it was going to come up until I was actually preparing for my argument today.

In any event, I'm not sure whether it's jurisdictional or not, but in any event, it was never raised and we think it's...

Justice Ginsburg: If it is, it's pretty important because the Court would then have an obligation to remand on its own.

Mr. Morrison: That is correct.

Justice Ginsburg: And in Caterpillar, that was... going in, that was recognized that this Court should have remanded.

The problem was we were at the end of the line.

There was at that point complete diversity.

So, it was a very practical oriented decision.

It said that the district court did wrong in not remanding.

It should have done that in the beginning.

Mr. Morrison: But in this case they were never asked to remand on the grounds of 1442(a)(3).

The provision that allows officers of the courts of the United States to remove should not have been invoked.

The only basis for saying that the case was not properly in Federal court was the provision of the Tax Injunction Act, and that was what the petitioner relied upon.

In any event...

Justice Ginsburg: I don't follow that because I don't think the tax collector in Alabama could originally have brought this case in Federal court.

Not... he... he has no Federal question on the face of his complaint.

There is no diversity.

On what basis could it come into Federal court originally?

Mr. Morrison: I think that's correct, Your Honor.

It could not have come into Federal court originally.

But I believe that the... the... under 1442(a)(3), we must have a colorable Federal immunity claim.

As I've explained, we have a colorable Federal immunity claim in this case because we claim that the license fee is tantamount to a licensing requirement which would interfere with our Federal... our Federal duties as Article III judges, if that was imposed.

Justice Ginsburg: And even if you're wrong about that, there's enough... it's an arguable...

Mr. Morrison: Yes.

Justice Ginsburg: proposition...

Mr. Morrison: And as this Court has said on many occasions, the... one should not confuse the issue of jurisdiction with the issue of the merits, and that... and that so long as we have a colorable Federal immunity defense, we would... we would be able to be in court.

Now, if our only claim were, however, that the tax was unduly discriminatory... that is to say, it violated the... the Public Salary Tax Act... and that it was not a license of any kind, we might be in a different situation then.

In any event...

Justice Scalia: I... I don't think that's confusing jurisdiction with the merits.

I mean, the... the question of whether, in making this claim, your clients are acting pursuant to their official duties has nothing to do with the... with the merits of the case.

That is a question that just goes to the jurisdiction.

Mr. Morrison: Well, I agree with that, Your Honor.

I was... the... the Government has made a great deal of saying that we... that this is not in fact a license fee and therefore we lose.

And that may be right on the merits.

Justice O'Connor: Right.

Mr. Morrison: But... but it is... it doesn't defeat our jurisdiction.

And I think one ought to take a practical construction of the statute, and the question is did Congress intend to allow Article III judges, who are the principal persons covered by 1442(a)(3), when they are sued and they believe that the suit involves matters directly relating to their official functions.

They raise a claim of Federal immunity, whether they have the right to have that case heard in the Federal courts or, nonetheless, have to have it heard in the State courts.

Justice Souter: Well, is a colorable claim enough?

Mr. Morrison: Yes, it is, Your Honor.

Chief Justice Rehnquist: What's the authority for that?

Mr. Morrison: Willingham and I believe that Mesa against California also is.

The Willingham case is... is...

Chief Justice Rehnquist: Well, if you don't have it handy, you have it covered...

Mr. Morrison: I have...

Chief Justice Rehnquist: You cover it in your brief.

Mr. Morrison: Yes, on page 25.

Also, Jamison... Jamison against Willy from the Fourth Circuit, Mesa against California, and Moe against the Salish and Kootenai Tribes, as well as the Willingham case, all stand for the proposition that on issues of... of removal, as long as the colorable Federal defense of a Federal immunity applies, it is... it is sufficient.

Justice Scalia: That's the merits question.

Justice O'Connor: Yes, I think...

Justice Scalia: That's not... that's not the question of... of whether the official is acting in official capacity in... in bringing the suit.

A purely jurisdictional...

Mr. Morrison: Well...

Justice Scalia: I understand the Chief Justice to be asking whether it is enough that you have merely a colorable claim under the jurisdictional provision.

Mr. Morrison: Oh, I'm sorry.

I did not understand your question, Mr. Chief Justice.

Justice Scalia: I thought that's what he was asking.

Mr. Morrison: The question is... as I understand it, there's no question that these persons are covered persons by 1442(a)(3).

Justice Breyer: Okay.

Justice Scalia: You have to establish...

Mr. Morrison: We have...

Justice Breyer: that, period.

Chief Justice Rehnquist: Not colorably but...

Mr. Morrison: Period and they are.

They are officers of... of the courts.

All right.

That's point number one.

Point two is, is the claim that they are raising... are they raising a Federal immunity defense and their claim of Federal immunity defense must not be proven but must be colorable.

And their Federal immunity defense is that the county is trying to license them.

It is not imposing an income tax.

It is trying to license them, and by trying to license them, just as much as if they tried to get an injunction against them, if the end in this case would say they must submit to the licensing scheme, which we contend is unconstitutional, then we have a Federal immunity not to be part of that licensing scheme.

And that is the basis of our Federal defense on which 1442(a)(3) says that we must have one in order to be able to get into the Federal... Federal courts.

And the Congress has said in those circumstances, Federal judges should be entitled to have Federal cases litigated in Federal courts before Article III judges instead of the State courts in which the action happens to be brought.

Now, I want to turn now to the merits of this case which I believe turns on the proper characterization of the ordinance.

Justice Kennedy: And in the course of your remarks, please present them as you wanted to, but the Howard case stumps me.

Mr. Morrison: Well, let me...

Justice Kennedy: I... I just don't know how to get around that.

Mr. Morrison: Well, let me... let me begin with Howard since it has taken up some attention.

The first thing I think we ought to recognize is that the Howard ordinance, insofar as it was before the Court, was only... the single footnote in note 2 in the Howard opinion quotes all of the ordinance that was actually in this Court.

I have gone and looked at the joint appendix, and there is nothing about exemptions in the Howard ordinance at all.

So that insofar as the Court was aware, and despite whatever may have been the actual state of the law at the time in terms of Louisville ordinance, there were no exemptions.

It now appears... and there has been several rounds of submissions on this, but it appears that the Louisville ordinance in effect at that time did have three exemptions.

One for domestic servants and the ordinance specifically says with respect to that that the... the exemption is because of the great costs of administration and difficulty of collection involved, domestic servants are excluded.

Second, there is an exclusion for ministers.

I don't want to get into another constitutional issue here today, but whatever that exclusion is and the questionable nature of it under First Amendment law, it was not a broad exclusion.

The other exclusion was for insurance companies who had other taxes, and there was another provision that said other businesses that had licenses.

They didn't lose their licenses, but they still had to pay the tax under the ordinance.

Stated another way, instead of the 140 exemptions across a broad range of issues that we have in this statutory scheme here, we had a very narrow set of exemptions, one for obvious administrative convenience reasons.

Chief Justice Rehnquist: Well, I think your problem isn't so much the Howard case as the definition in the Buck Act that says an income tax is any tax levied on, respect to, or measured by net income, gross income, or gross receipts, which the Court was simply interpreting in Howard.

Mr. Morrison: Well, I want to be clear.

The fact that this is not an income tax like the Federal income tax is not the reason that we say that this is not a tax covered by... by the statute.

Second point.

The Buck Act is principally a provision to remove the possibility that someone would claim, well, you cannot tax someone because you're working on a Federal enclave.

Chief Justice Rehnquist: Well, whatever it may be principally, do you dispute the fact that this... this tax was measured by either gross income or gross receipts?

Mr. Morrison: I do not, Your Honor.

Chief Justice Rehnquist: Then why... why doesn't the Buck Act cover it by its very terms?

Mr. Morrison: The Buck Act is not an enabling provision.

The Public Salary Tax Act is an enabling provision.

The Buck Act, which was passed 2 years subsequent to that, was a provision intended to close a possible loophole.

That the argument is that even though in this... in the case of Louisville, the ordinance there was physically within the confines of the City of Louisville.

It was actually... the property was actually owned by the United States, and the concern was that someone would say, as someone did in that case... and that was the principal focus of the issue.

In that case, the... the United States Government has right to the property and therefore no locality may impose the tax.

The Buck Act didn't impose any tax or authorize it.

It removed an impediment.

Indeed, those are I think the words in the... in the Howard opinion itself.

But even if this is an... and then that gets me to my next question which is while one might think of this as a... as a tax on pay or compensation, that we believe that the fact that there are these massive exemptions, exemptions which are totally unrelated to income...

Justice Ginsburg: But they're also totally unrelated to the source.

You're not... or maybe you are... making an equal protection case, that it's arbitrary to let the barbers pay less than the judges.

Mr. Morrison: I am not making an equal protection argument.

Justice Ginsburg: But here all the State judges are in the same boat.

The U.S. Attorney pays the... the other fee, and so does the district... local district attorney.

So, there's no discrimination between like groups.

Mr. Morrison: Well, I want to... I want to take on the... the direct thrust of your question, but first I want to make what I believe is a... is a... a clarification.

If you are a lawyer working for the Federal Government and you are assigned to go to Alabama to be an Assistant U.S. Attorney or work in the Small Business Administration of the Internal Revenue Service, you may have to be a lawyer, but you don't have to be admitted to the bar of the State of Alabama.

You must be a lawyer someplace, and the same I believe is true for doctors and others.

You must have a law license, but Alabama can't say that you must have an Alabama law license to engage in legal activities in Alabama.

That's up to the lawyers.

All right.

Leaving that aside, when one looks at the statute initially, the discrimination as to source, one could believe that since Federal judges pay and State judges pay, it's the same.

I do not believe that this Court's decision in Davis against Michigan allows that kind of construction.

That was the very argument that was made there, that there was only a narrow group of... of discrimination there.

The Court said... and Justice Stevens is perfectly aware of this because he wrote the dissent there.

He said the Court has adopted, in effect, a most favored nation provision under which if Federal employees are treated worse than State employees, then that is the proscribed discrimination, different from an equal protection discrimination.

And the Court, 8 to 1, said that that is entirely correct.

That is, in essence, what we have here, that there are 140 occupations in the State of Alabama who pay license fees which are not calculated on income.

Justice Kennedy: We... we began with the case being removed because you have a Federal defense, and now, all of a sudden, it's discrimination which is...

Chief Justice Rehnquist: Yes.

You didn't argue...

Mr. Morrison: We have two claims.

We have a first claim that it's a... there are two separate but related claims based on the exemption.

One is that the exemptions destroy the essential licensing aspect... destroy the income tax aspect.

That is, they turn it into a licensing scheme.

It is what it says it is.

It's an attempt to license, and it's not a tax on pay or compensation of the kind envisioned in the Public Salary Tax Act.

That is our first argument.

That is the argument that gets us into the Federal court under 1442(a)(3).

Our second argument... and I would agree this would not get us into the Federal court.

I believe I said that earlier... is if it is an income tax, there was no question about it being an income tax, there were none of the... of the evidences such as the language making it unlawful to engage in our profession, the language calling it a privilege tax, calling these license fees, we would still have a discrimination argument based on Davis.

Chief Justice Rehnquist: But was that... was that argument passed on by the Eleventh Circuit?

Mr. Morrison: They said there was no discrimination, Your Honor.

Chief Justice Rehnquist: Yes.

Mr. Morrison: The argument based on Davis was not.

I was not counsel of record then.

Chief Justice Rehnquist: Yes, and did you file a cross petition for certiorari?

Mr. Morrison: No.

I don't believe I have to, Your Honor.

I believe that so long as I'm asking for the same judgment, which is that the tax is declared unlawful, that I do not have to file a cross petition.

Chief Justice Rehnquist: So, you're asking us to reverse a holding.

The district court said there was no discrimination.

The court of appeals said they would not consider that.

Mr. Morrison: Your Honor, I'm asking you to affirm the judgment.

You could do it on either of two grounds: that it's a license, in which case we're affirming exactly what the district court and the court of appeals said; or in the alternative, that it's an unjust discrimination

And either of those grounds would result in the identical judgment of the district court and of the en banc court of appeals, although...

Justice Kennedy: If the basis for your removal under the Federal part of the removal statute fails, shouldn't the district court simply remand to the State court to hear the discrimination issue?

It's kind of like a pendent issue here.

Mr. Morrison: If the...

Justice Kennedy: In other... in other words, if your business privilege tax argument falls away, which was the...

Mr. Morrison: On the merits.

Justice Kennedy: on the merits, which was the basis for you to get into Federal court, the Federal court... you want it to go on and decide the discrimination issue on the grounds that it's pendent jurisdiction here at issue?

Mr. Morrison: Yes, I would say that would be correct, Your Honor.

And under 28 U.S.C. 1367, the supplemental jurisdiction provision, which... since this question had not been presented, I didn't... I didn't note it... allows for pendent jurisdiction for claims arising out of the same transaction or occurrence.

I believe it's case or controversy.

The terms actually are there.

So long as... as there are no additional facts.

And in the case of Federal questions, which this would be... this is not even... indeed, it's not even a different claim.

It's a different defense to the same claim raised by the State given the purpose to promote economy and the fact that we are here and everybody has briefed this issue.

There's no facts in dispute.

There's no...

Justice Ginsburg: Mr. Morrison, may I just interrupt you there because 1367, the supplemental jurisdiction provision, applies when the claim... there is a claim within the original jurisdiction of the Federal court.

This case, whatever, is not within the original jurisdiction.

You agreed with me there was no diversity.

The suit to collect is not based on Federal law.

It's in the removal... it's... it's removed based on a Federal defense.

And there's no provision for original entry into the Federal court based on a Federal defense.

So, supplemental jurisdiction I think would not apply because there is no claim here...

Mr. Morrison: Well...

Justice Ginsburg: over which the Federal court has original jurisdiction.

Mr. Morrison: I believe it attained original jurisdiction if the removal was proper in the first instance.

But in any event, 1367... and I was thinking on my feet a little bit... principally relates to additional claims, not to additional defenses.

And what we have here is an additional defense by the judges, the discrimination as opposed to the license defense.

And given that the common nucleus of the operative facts, there would be no reason not to decide this... this question.

Justice O'Connor: Mr. Morrison, we have held, I guess, that whether the tax should be characterized as an income tax is a matter to be determined on Federal law.

Mr. Morrison: That is correct.

Howard so held that.

Justice O'Connor: And in making the Federal law determination, do we look at all at State law which says that the county has no authority to levy an income tax?

Mr. Morrison: I...

Justice O'Connor: Is that part of the Federal law...

Mr. Morrison: It is certainly...

Justice O'Connor: calculus or not?

Mr. Morrison: It is part of it.

Justice O'Connor: And how have we dealt with that?

Mr. Morrison: Well, I think you've dealt with it in the context of looking at the statute as a whole which includes both the fact that the... the State forbids the collection of income tax, the fact that this is designated a license fee, that it's an occupational license tax for the privilege of engaging in the business.

But the Court has made it clear that the labels are certainly not controlling.

They are some... some assistance to the Court in trying to understand... and I think I would put it this way.

When Congress in 1937 passed the Public Salary Tax Act, it permitted States and localities to tax pay or compensation.

And what we are trying to do here is to understand the meaning of that term.

Obviously, the pay and compensation tax does not have to be a mirror image of the Federal income tax in whatever iteration we're talking about, 1937 or 1997.

It must be a tax related to... a tax, for instance, on wages alone that didn't tax passive income would be perfectly acceptable.

Or conversely, a tax on passive income would be... would be acceptable.

There could be deductions allowed.

They could be the same as Federal.

They could be different.

All of that would be a tax on pay and compensation.

The question is, does a scheme like this one in which there are massive exemptions for persons whose exemptions are not based on anything related to pay or compensation... they are based upon a fixed license fee paid to the State in an amounts that range from $2.50 in fixed amounts up to $250 or $500.

But regardless of what those amounts were...

Justice Kennedy: Was this not argued in... in the... the Howard case?

Mr. Morrison: No, Your Honor.

Justice Breyer: Because the Howard case applied simply to area discrimination.

Mr. Morrison: Yes.

It was a... it was a geographic fight.

The principal issue in Howard was whether a complicated annexation by the United States and then giving back to the City of Louisville had somehow made this no longer part of the City of Louisville, and that was the first issue the Court dealt with.

The opinion is only six pages.

The second part was whether the Buck Act applied and whether this was the kind of Federal enclave that permitted it.

There was no question in the majority opinion as to whether this was an income tax.

Mr. Justice Douglass, Mr. Justice Black in their dissent said, I find it hard to understand how there can be an income tax under Federal law that's not an income tax under State law.

And our answer to that is, all right, we accept that proposition.

The label alone doesn't control it, but with that plus all of the remaining indicia, we think that this is not the kind of tax that Congress said that Federal employees should have to pay when they cannot get an exemption.

Justice Breyer: Why does the Buck Act apply, or... or does it, or why does it not apply?

That is, the Buck Act, the Court said, says income tax, any tax measured by gross receipts.

Mr. Morrison: Well...

Justice Breyer: This is a tax...

Mr. Morrison: That definition...

Justice Breyer: measured by gross receipts.

Mr. Morrison: That definition, Justice Breyer, applies only to the Buck Act.

The Buck Act is sections 106 through 110 of title 4.

The Public Salary Tax Act, which is the authorizing provision for taxation here, is in section 111, and the definition does not apply to that.

Justice Breyer: Why does it not apply here?

The Buck Act.

Mr. Morrison: The Buck Act is not an authorizing provision.

Justice Breyer: The Buck Act says it applies only to Federal enclaves.

Mr. Morrison: It...

Justice Breyer: This is not a Federal enclave.

Am I right about that?

Mr. Morrison: Well, I don't know whether the Federal courthouse is a Federal enclave, Your Honor.

I think the Court has not decided that.

But what the Buck Act does... and I'll read the language, and this is in the appendix to the petition for certiorari at page 119.

It says, no person shall be relieved from liability on... by reason of his residing within a Federal area or... or receiving income from an area in a Federal enclave, to paraphrase.

It is a relieving... it's a loophole closing provision.

The Public Salary Tax Act is the imposition or the authorizing provision, the consent or, as the history of the act makes clear, it is confirming that which this Court had decided just a few years ago, just immediately preceding it in the Graves case, that the Constitution did not present any independent barriers.

And they wanted to be sure that there was never any backsliding.

So, the Buck Act in itself doesn't give them any authority to impose anything.

It simply says, by the way, these two possible exceptions do not apply in this case.

Justice Ginsburg: Well, couldn't one say even though it doesn't strictly apply, Congress gave a definition of a tax on income there and it didn't have a different one in the Public Salary Act?

So, one can assume that acting so close together, what they said about what constitutes a tax on income in the one case also applies in the other.

Mr. Morrison: They certainly could, Your Honor.

And we do not suggest that simply because this is a gross receipts tax in and of itself, it loses its character as an income tax, and the tax is impermissible.

It's the fact that it's a gross receipts tax and there are these massive exemptions and there are the provisions making it a license fee...

Justice Ginsburg: If it were called a professional income tax, would your argument be any different?

Mr. Morrison: Based on the exemptions, no, it wouldn't, Your Honor.

Justice Ginsburg: Everything is the same.

The label is different.

Mr. Morrison: It would be a little bit less of an indication that this is a licensing scheme which is, after all, what the State says it is, but it wouldn't be dispositive.

Justice Ginsburg: But the county has to say that because of an impediment under State law that it can't have a, quote, income tax.

Mr. Morrison: Well...

Justice Ginsburg: But you don't deny that something can be a tax on income for one purpose and not for another.

Mr. Morrison: I do not deny that at all, Your Honor, and I wanted to be clear.

I hope I was clear about that.

We recognize that the county and the State may properly take into account the fact that persons who are licensed by the State and pay fees... in the case of lawyers, a considerable fee; in case of most other professions, a quite modest fee in Alabama... that all of those persons have... the State could properly take the payment of those fees into account.

Chief Justice Rehnquist: Well, can't the... doesn't the State also speak of licensing people who engage in certain kinds of businesses and collect a sales tax from them based on gross receipts?

Most States do I think.

They call it a license tax, but it's simply measured by gross receipts and it's a sale tax.

Mr. Morrison: Well, that is in addition to all the taxes that are at issue here, and that I don't think... whatever the State sales tax is, it doesn't... as far as I am aware, doesn't distinguish between persons who are licensed under these 140...

Chief Justice Rehnquist: Just hypothetically, what if... what if a State said that, you know, in order to engage in the following businesses... and it names virtually every business... you need a license and the... you're going to have to pay a sales tax measured by gross receipts?

That would be an income tax under the Buck Act, would it not?

Mr. Morrison: It... I'm trying to think how it applies to Federal employees or Federal judges.

I assume that nobody is going to talk about them paying taxes on their opinions...

Justice Kennedy: No, no.

Mr. Morrison: that they issue.

Chief Justice Rehnquist: Just... just assume... assume it applies to... to anybody who engages in certain kinds of businesses that produce gross receipts.

Mr. Morrison: Well, the Buck Act, of course, doesn't talk about how States and localities can do it.

It only applies... the Buck Act only applies when there are Federal officers or employees involved.

Chief Justice Rehnquist: Yes, but... that's true of the Public Salary Act too, isn't it?

Mr. Morrison: Yes.

They're both limited to Federal employees, Your Honor.

Chief Justice Rehnquist: But it seems to me you're... you're trying to say that a license tax is something quite peculiar to just certain professions, and I don't... don't think it is at all.

I think...

Mr. Morrison: Oh, I didn't mean to say that.

Chief Justice Rehnquist: I think you have a license tax in most places to engage in any kind of business.

It's called a sales tax.

Mr. Morrison: Well, most of them are fixed fees.

Chief Justice Rehnquist: Certainly a sales tax is not a fixed fee.

Mr. Morrison: Of course, not.

Of course, not.

But the Public Salary Tax Act doesn't talk about sales taxes at all.

It's clear that that's measured on income.

Now, there...

Chief Justice Rehnquist: But under the Buck Act, a sales tax would be an income tax.

Mr. Morrison: A gross... a gross receipts tax.

For instance, the court reporter in the City of Pittsburgh case sold transcripts.

We have no question about the fact that the transcripts that were sold to the public are properly taxable under the Public Salary Tax Act, and that's in large part because it's not a licensing scheme in any way and also because there are no exemptions for other kinds of reporters and others in similar situations, no arguable discrimination.

In any event, we... we are confident that the State of Alabama can construct a licensing tax scheme, or whatever kind of scheme they want to call it, that takes into account the fact that persons pay licensing fees to the State, and they can do it in a number of ways.

They can give a credit against the payment.

They can allow it as a deduction.

But the one thing they cannot do, consistent with the Constitution and with the Public Salary Tax Act, is to give a total exemption to those who pay State licensing fees that are unrelated to income, while at the same time attempt to tax Federal employees, and in this case Federal judges.

Accordingly, for those reasons, the judgment should be...

Justice Kennedy: And why can't they do that?

Mr. Morrison: They cannot do that for two reasons.

One, because the scheme is no longer a scheme... a tax scheme based on pay or compensation, argument number one.

And argument number two, it is discriminatory against Federal employees under this Court's decision in Davis against Michigan.

Rebuttal of Jeffrey M. Sewell

Chief Justice Rehnquist: Thank you, Mr. Morrison.

Mr. Sewell, you have 4 minutes remaining.

Mr. Sewell: Yes, sir.

A couple things very quickly.

Our motion to remand does include 1442.

I'm holding a copy of it in my hand.

The Buck Act... Buck Act has to be as broad as the Public Salary Tax Act to accomplish the purpose of putting employees in a Federal area in the same posture as those who are not in a Federal area.

What Mr. Morrison is telling you is, is that the Public Salary Tax Act doesn't consent to a license tax.

And I say that it does, and I won't repeat what I've told you in my briefs because I think that it's very clear that it does.

And it... and it has to.

The O'Malley cite that you asked for is 307 U.S. 277.

Also another case on the issue, United States v. Will, W-i-l-l, 449 U.S. 200.

Final thing.

This case... where the trial court went wrong, where the court of appeals went wrong is by blurring the distinction between the Government, the United States, and its employees.

And I think it really is just that simple.

Certainly when you all sit on this Court and you're asking me questions, you're performing your duties, but when you all are paying your taxes, you're acting as citizens.

You're not... I just don't think that you're the United States Government when you pay your taxes any more than you're the United States Government when you pay your credit card bills.

Justice Ginsburg: Mr. Sewell...

Mr. Sewell: Yes, ma'am.

Justice Ginsburg: what about the argument that this discriminates against Federal employees?

Because if that were so, there would be a case here, wouldn't there?

Mr. Sewell: If that were so, there would be, but that's not so.

And this... that argument... every time we go to a different court, that argument changes, and it has changed now.

Now... now, for the first time, we're claiming that there's some discrimination, and Mr. Morrison told you that Federal employees can't get our exemptions.

I told you this morning, a while ago, that 1,209 of the 12,000 Federal employees in Jefferson County have our exemptions.

They can get them.

They have them.

That's 10 percent.

Justice Breyer: The point on discrimination I think is not... one point is that it's unlawful because of that, but the other is that it just... it helps to characterize the tax.

If it were really an income tax, they wouldn't charge lawyers $250 flat and judges depending on their salary.

If it were really an income tax, they'd run it like an income tax.

What's your response to that?

Mr. Sewell: My response is, is that Kentucky also prohibits its cities by State law from levying an income tax, and that all of the exemptions, the exemptions for insurance companies and the others, in... in the ordinance that this Court considered in Howard... those other exemptions... my understanding is, when you go back... you've got the ordinance.

You go back and look at it, you will see that they are flat fees.

It's the same situation.

Justice Stevens: Of course, Holloway was decided long before Davis against Michigan.

Mr. Sewell: You mean Howard?

Howard v. Michigan.

1953.

And you all... we struggled to get that ordinance.

You've got it now.

You've got the actual ordinance that was at issue in that Howard v. Commissioners case.

And it's just... it's virtually identical.

How did... how did the Court reach the conclusion in that case, which the Court reached and it had to reach, that there was any basis at all for a Federal employee to pay a license tax if Congress didn't consent to a license tax?

Justice Kennedy: Well, was Federal immunity argued other than the fact that it was a former enclave?

Mr. Sewell: I think that... that there...

Justice Kennedy: Maybe that question almost answers itself.

It's no longer an enclave.

Mr. Sewell: I think it answers.

I think it does answer itself.

I think that there... there's no... there has to be some... Mr. Morrison says the Buck Act doesn't consent to anything.

There has to be some consent for the Court to have reached its conclusion in the Howard case that Federal employees must pay a license tax, otherwise there's...

Chief Justice Rehnquist: Thank you, Mr. Sewell.

Mr. Sewell: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

Rivet v. Regions Bank of Louisiana - Oral Argument

Fri, 09 Jan 2009 14:50:04 +0000

Case:

Rivet v. Regions Bank of Louisiana

Media File:

96-1971_19980121-argument.mp3

Related Transcript:

1997_96_1971_argument.xml

Transcript:

Argument of John G. Odom

Chief Justice Rehnquist: We'll hear argument now in Number 96-1971, Mary Anna Rivet v. the Regions Bank of Louisiana.

Mr. Odom.

Mr. Odom: Mr. Chief Justice, and may it please the Court:

The issue in this case, Your Honors, is whether a novel res judicata exception should be engrafted into the settled rules of Federal removal jurisdiction.

Before we address these removal issues, I believe it would be helpful to set out in the nature of the action that we filed in State court below on behalf of these petitioners.

Your Honors, my clients loaned $1.3 million in 1984 to other sophisticated individuals in a transaction at a time of high interest rates, at an interest rate of 20 percent with a note and a subsequent mortgage up to an amount of $5 million.

We took a note and we took a mortgage on the real property, or the leasehold estate which is at issue in this case.

Basically our State action filed 10 years later is a standard mortgage foreclosure action seeking either to recognize our mortgage or to have our debt paid.

It's a hybrid in personam in rem action which is permissible under Louisiana law.

There's a second aspect of our claim which is similar but distinct.

That is, a prior bankruptcy proceeding, as the Court is aware, had authorized the respondents in this action or their predecessors in interest to procure cancellation of our lien, which was duly recorded in the conveyance records of Orleans Parish, and it empowered them to do that.

They left bankruptcy court one day in 1986 with the right to have our lien canceled according to the Louisiana lien cancellation procedure.

They never took advantage of that right.

The bankruptcy court acknowledged, we take the position, Your Honors, implicitly Louisiana's procedure to have liens cancelled.

It acknowledged a two step process, because it not only ordered the subject property to be sold free and clear of all liens, it also ordered that the recorder of mortgages erase the liens.

This was never done and now, in a footnote, if you will, to this argument, they've waited too long and since the filing of this lawsuit their right to execute on those liens has expired under Louisiana law.

Unknown Speaker: Am I correct in understanding you're explaining why res judicata won't bar your claim?

Mr. Odom: Your Honor, I'm just trying to give a little background to the facts, because I feel that... I feel that it would be important.

The facts are somewhat tangled and I thought it would be good to lay those out.

We don't feel it's... there are a variety of reasons why we don't believe res judicata would bar our claim and those we will all adjudicate below, assuming that it's remanded, of course.

Your Honors, it's important to remember in that connection that two of the four persons that we sued were not even present in the bankruptcy proceeding, and two of our four petitioners did not appear in the bankruptcy proceeding and received absolutely no notice of it.

We claim against these two--

Unknown Speaker: May I ask, does that have anything to do with any issue except whether there's estoppel here?

I'm just a little puzzled why we have to get into the facts in this case.

Mr. Odom: --Your Honor, it's important for us, we believe, to show the Court exactly how far this doctrine will go if a res judicata exception is carved out on the facts of this case and, that being so, you would have to see that this is not even a proper res judicata situation, because two of the four persons were not even... two of the four persons we sued were not even a part of the bankruptcy proceeding.

Therefore, my point in bringing these to the Court's attention, Your Honor, is, look at how far this goes.

Where it's going is, if you have any part of a claim that a bankruptcy procedure has affected in any way someone, or that person's privity and interest in any way, or that can be alleged, that's going to be brought up by defendants as a res judicata exception.

It doesn't have to be a complete res judicata exception.

Indeed, it wasn't in this case.

Unknown Speaker: But your point, as I understand your brief, is that even a narrow res judicata exception should not be recognized.

Mr. Odom: Absolutely, Your Honor.

Unknown Speaker: So you're just saying this is the parade of horribles.

If we take the first step, we go down the slippery slope.

Mr. Odom: Yes, sir.

That's exactly what I'm trying to suggest.

And Your Honor... well, we believe that the opinions below were not even internally consistent, if you will, in that connection, because they likened their new jurisdictional basis to... of complete preclusion to complete preemption, but complete preemption, as this Court has stated over and over again, really means complete preemption.

It means that Congress has so thoroughly occupied a whole field of the law that any State law claim is really a Federal claim, but here complete preclusion, as they use it, is not complete because this State action was not completely precluded by res judicata.

To show just how far it goes, Your Honor, not only did the district court below decide the case on the merits, decide that there was no claim there, that the plaintiffs were dead, if you will, and use that as a basis for removal jurisdiction, he then used that removal jurisdiction to get supplemental jurisdiction over the two parties who were not involved in the res judicata aspect, and so what we have is the decision on the merits that the claim was completely precluded being used as justification to assert supplemental jurisdiction over parties whose claim... against whose claims we did not have a completely precluded claim, so it really is not even internally consistent and it does show, if you will, the parade of horribles.

But fundamentally, Your Honors, as we've stated in our brief, res judicata is an affirmative defense and removal cannot be based on an affirmative defense.

It's codified in the statute, it's been reconfirmed many times by this Court, most recently by Franchise Tax Board, by Caterpillar, and by Oklahoma Tax Commission--

Unknown Speaker: And I take it if we adopted your position we could leave intact the doctrine that originated in Avco v. Aero Lodge, the preemptive... the preemption doctrine.

Mr. Odom: --Yes, Your Honor.

We don't urge an... that the preemption doctrine has to be overruled.

That is now so firmly in... fixed in the jurisprudence of this Court that we believe that it has worked well.

It's fine.

It doesn't have to be overruled.

But the Court has been very careful about articulating any further exceptions to the well pleaded complaint rule if the Avco doctrine be an exception.

I know there's academic dispute about that.

What is clear with respect to the facts of this case is that, even if the affirmative defense, the Federal affirmative defense is the only real issue in the case, even if it is absolutely dispositive of the merits and is the only thing that has to be decided below, it cannot be used as a basis for Federal removal jurisdiction.

Now, there is nothing special about the res judicata affirmative defense as opposed to any other affirmative defenses that might be raised by someone below as a justification for removing a case to Federal court.

Indeed, Your Honors--

Unknown Speaker: Well, they could be to the extent the Anti Injunction Act makes an exception, the relitigation exception.

That does show that there is something special about relitigating a case that was resolved in Federal court.

Mr. Odom: --Your Honor, that does show that Congress has recognized the relitigation situation, has addressed it in the appropriate way after full consideration, and has crafted the relitigation exception to section 2283.

That is a different remedy, though, than removal based upon res judicata, because, as this Court's ruling in Chick Kam Choo makes clear, the 2283 relitigation exception to the Anti Injunction Act is narrower than the full range of res judicata.

It also is an equitable proceeding, and the Court does not have to enjoin a State court from relitigating something that's previously been decided.

The Court can take full cognizance of all the facts and circumstances, the equitable arguments on both sides.

I dare say if that exception had been applied in this case there are equities on both sides of this case that would need to have been considered.

It's far different from enlarging the scope of Federal removal jurisdiction by making res judicata an affirmative defense, a permissible basis for removal jurisdiction.

Unknown Speaker: Your claim, leaving aside the bankruptcy, is wholly State in origin.

There's no Federal element to it, is there?

Mr. Odom: That's absolutely correct, Your Honor.

In fact, in trying to cast in my own mind as to whether there would be any conceivable way that our claim could be recharacterized as a Federal claim, I can't imagine how our claim could have been recharacterized on the face of the pleadings or any other way so as to state a Federal cause of action.

There is no general Federal law of mortgages that I'm aware of.

There's no Federal statute that deals with the issues that we're talking about.

We have a third party beneficiary claim against the Browns under Louisiana State law, under the Louisiana State law doctrine of stipulation pour entree, which is similar to the third party beneficiary doctrine.

All of those are third party claims.

Not a single one is a Federal claim.

That's why we feel so strongly that this cannot be cast as an artful pleading case.

There's no way that we could have artfully recast any of our pleadings.

There's nothing we could have artfully recast.

Even if the statute and the jurisprudence of the Court allowed us to plead on the face of our pleadings an affirmative defense to somehow get ourselves into Federal court, I don't see how it could have been recast in an artful way as a Federal affirmative defense, so it's an entirely State law cause of action, something that we could not have brought in Federal court.

The res judicata issue that they try to bring us in on removal is something that we did not bring... it's somebody else's bankruptcy.

It's a very far cry from the simple situation where A sues B in Federal court and loses and then A goes back down to Federal court, to State court and brings the identical claim in State court leaving out one or two words.

That's the situation that the Court had in the Moitie petition.

It's a very far cry from that.

It wasn't our bankruptcy.

Two of our petitioners weren't even there, had no notice of any of it.

Two of the defendants weren't even there, and the State courts... the Federal court had to acknowledge that they weren't bound by the res judicata that he used to remove the case and assumed supplemental jurisdiction over them and dismissed that claim as well.

I think that there is truly nothing special about res judicata.

If you were to allow the res judicata defense to establish removal of jurisdiction it's hard to see why other defenses, other affirmative defenses might not be as worthy, but the Court has already spoken to that.

Indeed, Your Honors, any given application of res judicata is likely to be less significant than any given application of the tribal immunity defense, because tribal immunity is the result of a solemn treaty between the Congress of the United States and a sovereign Indian nation.

It's hard to think of how something could be more completely extinguished than a claim of... based on... claim falling to the defense of tribal immunity, yet this Court in Oklahoma Tax Commission in 1989 said that that has to be decided by the State courts.

The State courts are presumed competent to decide these issues of Federal law.

They do it all the time.

The respondents say that our claim was completely extinguished by the res judicata effect of the bankruptcy court below, and that's what makes it so different.

But Your Honor, that's exactly what the defendants argued in Caterpillar.

They argued that the collective bargaining agreement governed by Federal law completely extinguished the State law contract claims in that case and in that case again this Court said, that kind of extinguishment doesn't mean anything.

You cannot use an affirmative defense to establish removal jurisdiction in this case.

Unknown Speaker: What do you do with the footnote in our Moitie case, Mr. Odom?

Mr. Odom: Your Honor, the more one reads Moitie, the more difficult it is to see how so many people became convinced that this Court was articulating a new theory of removal jurisdiction based on res judicata.

No such theory is mentioned in footnote 2 or anywhere else.

Justice Brennan's vigorous dissent which everyone cites doesn't even address that.

It doesn't mention anything about a res judicata defense.

It addresses only the preemption aspect of it and the antitrust aspects.

The... if you consider the language employed by the Court in the Moitie footnote, the Court defers to the factual findings by the district court below and notes that at least some of those claims were sufficiently Federal in character to support removal jurisdiction, at least some of the claims.

That's not the language of complete preclusion.

If it was completely precluded, we believe the Court would have said so.

And Your Honors, with all respect, the Moitie decision is virtually a treatise on the law of res judicata.

It goes into every aspect of it, from the history of it in our jurisprudence to the way it's used and the way it has to be used and we dare say that, if there had been some intention to highlight this aspect of the law of res judicata, it would have been mentioned.

And Your Honors, the Court in Moitie, this Court actually remanded the issue of res judicata to the court of appeals to decide, stating that it was

"unnecessary for the Court to reach that issue. "

But if the Court in Moitie had been using complete preclusion, res judicata as its ground for removal jurisdiction, then the res judicata issue would already have been decided.

There wouldn't have been anything to remand to the Ninth Circuit for consideration.

There would have been nothing to send back.

Unknown Speaker: Well, what made the case... what was the Federal character of the claim, as distinguished from the preclusion defense?

Mr. Odom: Your Honors, it's clear from reading the Moitie opinion and the opinions below that the sufficient Federal... sufficiently Federal character of the claims brought in State court was an intent to rely on Federal law, an intent to really state Federal claims in State law disguise.

This becomes crystal clear when one looks at the unreported district court opinion which, Your Honor, I confess I did not do until last week, when I came and looked at your archives upstairs, but it's in there on the third floor.

The district court's opinion below makes it absolutely clear that the second complaint, filed after the Federal complaint was dismissed, was identical in every respect to the Federal claim that had been there.

Indeed, in oral argument it was made plain that the only word that was changed in the second complaint was the word antitrust.

The Court... the discussion of that which makes it very clear, two paragraph discussion, is found at pages 16a and 17a of Judge Spencer Williams' June 30, 1977 opinion below.

The... the... and also makes it clear that the State law plaintiffs had pleaded identical words from the Government's civil claim and the Government's criminal claim, criminal action, two separate Federal actions.

They had initially... they had initially indicated their intent to be in Federal court by filing the case in Federal court.

I'm speaking of the Browns now.

Mrs. Moitie originally filed in State court.

She did not wind up before this Court.

It was the Browns' claim that wound up before this Court, even though the case is called Moitie.

The Browns had originally evinced their desire to be in Federal court by filing in Federal court.

Then they went back to State court, restated their complaint identically word for word, leaving out the word antitrust and copying the Federal pleadings of the Federal civil action and the Federal criminal action.

It is simply... it is simply an application of the artful pleading doctrine in the antitrust context, and there's every reason to believe, as we set out in our brief, that that's exactly what it was.

There is zero reason to believe, either in the opinion of the Ninth Circuit below, or in Judge Spencer Williams' opinion, or in the opinion of this Court, that there was an effort to involve some new exception to the removal jurisdiction doctrines articulated by the Court.

While--

Unknown Speaker: What did they... I'm somewhat curious.

I take it that the Browns' original Federal claim said the defendants had done something that violated the antitrust... the Federal antitrust laws.

Mr. Odom: --Yes, sir.

It's--

Unknown Speaker: Then they left out the word antitrust, so what were they claiming in the State court?

Mr. Odom: --In the State court below, Your Honor, they alleged unfair competition and breach of contract.

They may have alleged--

Unknown Speaker: All right, so they had a list of defendants' activities they said that violate Federal antitrust, then they leave out the word antitrust, they say the same thing violates State law.

Mr. Odom: --State law, various--

Unknown Speaker: State... unfair competition law--

Mr. Odom: --Yes, sir.

Unknown Speaker: --contract law, or something.

Mr. Odom: Yes, sir.

Unknown Speaker: Well... they'd say, well, different claim.

Mr. Odom: Well--

Unknown Speaker: A single activity can violate State law, it can also violate Federal law, and we said in Federal court it violated Federal law, and now we say the same thing violates State law, a different law.

Mr. Odom: --Well, the artful pleading doctrine, Your Honor, exists for situations where the claim can be recharacterized as a Federal claim and I believe, on a straightforward basis, that's what the judge in the Moitie case did and that is what this Court was doing in saying that at least some of those claims were sufficiently Federal in character to support removal jurisdiction.

But in any event, it had nothing to do with the law of res judicata or carving out a new exception whereby an affirmative defense itself could be the basis for jurisdiction.

What the district court did in that case was, in fact, accepted jurisdiction on the basis of the recharacterization of Federal claims and then, having acquired jurisdiction, dismissed those claims due to res judicata.

There was no linkage of res judicata to jurisdiction in the case anywhere along the line, including in this Court.

There was no effort to establish jurisdiction by reference to res judicata.

They did not accept jurisdiction because the claim was being dismissed on the basis of res judicata, and that's the odd conundrum that we articulated as issue 2 in our questions presented.

The Court in this case decided, made a decision on the merits and decided that the claim was completely destroyed and used that decision on the merits to justify having jurisdiction in the case.

Nothing like that occurred in the district court's analysis in Moitie.

He was simply applying a straightforward artful pleading doctrine case.

Your Honors--

Unknown Speaker: Can you explain that a little further, because there are many instances, for example, constitutional law, where the facts are the same and a claim may be brought under the Federal Constitution, and then the same claim is made in the State court saying the State constitution means something different, or more, so why is it different in the antitrust context?

Mr. Odom: --Well, Your Honors, if a claim is brought under... if we're assuming that a claim is originally brought in State court, and it also asserts violations of the Federal Constitution, I say that claim is immediately removable to Federal court on the--

Unknown Speaker: No, I'm supposing a case in Federal court first.

Mr. Odom: --Yes, ma'am.

Unknown Speaker: And the Federal court says, you don't have that Federal constitutional right.

Then you bring the same case over again in State court and say, but I have a State constitutional right based on those very same facts.

Mr. Odom: Well, in my view, Your Honor, that would be easily distinguished because the State constitution is a separate document and many of them are very, very different from the Federal Constitution.

The claims would be... if there were legitimate State constitutional claims they would possibly be vastly different from any Federal claims.

Unknown Speaker: Well, isn't that the same thing with Federal antitrust law and State Valentine acts?

The State antitrust laws remain in effect.

They're not totally preempted by the Federal antitrust law, are they?

Mr. Odom: No, sir, they're not.

They're not.

There's no complete preemption under antitrust--

Unknown Speaker: So then, how do you explain the consequence in Moitie?

Mr. Odom: --Your Honor, in that case--

Unknown Speaker: The outcome.

Mr. Odom: --In that case the judge literally drew a chart, which is also in the record upstairs, of the differences... of the differences in the claims.

I think it's... the way I explain it, Your Honor, is that it's a case by case analysis and, if there were a State law that were vastly different from the Federal law, perhaps that would mandate a different conclusion.

This Court was satisfied in the Moitie case that at least some of the factual findings by the district court supported jurisdiction.

That is a good example of why I think the word factual finding was used.

It is a comparison on a case by case basis to find out what is really going on and it seems to turn on, at least in part, on the intent of the parties to bring a Federal action, which was evinced very forcefully in the Moitie case.

Your Honors, our case essentially... our argument essentially is that there's... that there is no removal jurisdiction based on affirmative defense.

This is not a case of artful pleading, there is no way that it could have been recharacterized as a Federal complaint, and that Moitie does not dictate any kind of result of the type that my colleagues would like the Court to adopt, and we suggest that it would be a very bad idea for such claims to be... such a rule to be adopted.

It's hard to see where it would stop.

It's easy to see from the facts of this case, as I indicated in response to Justice Stevens--

Unknown Speaker: What if we were to say it stops with the first cases in which the answer turns on an interpretation of a Federal order, which here I guess one could... part of your argument would be the scope of the bankruptcy's court's order, just what it means, and maybe you... maybe we could say that's the scope of the doctrine.

Mr. Odom: --Well, Your Honor, if one does that, then it's easy to see that the courts below will get into all kinds of factual considerations, such as who were exactly the parties before the court?

Who were their privies?

Who were the... what part of the claim resolves what part of the State law claim?

Are we dealing with husband and wife, as you know was an issue in this case.

If we are, what are the State domestic relations laws?

Is there a separate property agreement if there's a community property State.

And you can see this turning into a mini trial on the basis... on the issue of removal jurisdiction so much without any reason for it, because there's no harm... any possible beneficial gain in efficiency or anything else that could be gained by making such a rule is far outweighed by the harm it would cause.

Unknown Speaker: Let me ask you this one other question.

Do you... is the res judicata issue a matter of Federal law or State law, in your view?

Mr. Odom: Federal res judicata law, Your Honor.

Unknown Speaker: Federal.

You think it's Federal.

Mr. Odom: Yes, sir, and I believe the State court would apply Federal res judicata law and Your Honors, there is... as Justice Ginsburg indicated, there is a remedy if anyone feels aggrieved by someone trying to relitigate something previously decided in Federal court.

Section 2283, the relitigation exception, provides that remedy and provides a far more sensitive means of application than any kind of removal, absolute removal rule would supply.

Furthermore, the most obvious remedy is that we've got a cadre of 50 States with very competent State judges, and this Court has repeatedly stated that State court judges are competent to decide issues of Federal law.

It's done on a routine basis.

They do it every day.

There simply is no harm here to fix, and the fix would require a terrible rupture of very subtle jurisprudence of this Court.

Your Honors, that concludes my argument.

If there are no further questions, I'd like to reserve the balance of my time for rebuttal.

Unknown Speaker: Very well, Mr. Odom.

Mr. Odom: Thank you.

Unknown Speaker: Mr. Stern, we'll hear from you.

Argument of Charles L. Stern, Jr.

Mr. Stern: Mr. Chief Justice, and may it please the Court:

Plaintiffs, in the guise of a State court foreclosure action, have launched a collateral attack on a prior order of the bankruptcy court, in this case the bankruptcy court sitting in the Eastern District of Louisiana.

I'd like to take issue initially with a couple of comments that Mr. Odom made concerning the import of the order and its application under State law.

What's not at issue is what the order says.

This is not a situation where we're arguing about does the order say X or does the order say Y. The order clearly states that a sale is going to be made under the auspices of the bankruptcy court free and clear of all liens, mortgages, claims, et cetera, and the mortgage that the petitioners seek to foreclose on is specifically listed in the order.

There's no question about that, and what petitioners are seeking to do is attack the validity of the order.

If you read their brief, I believe perhaps the clearest indication is on page 48 of the brief.

They want to attack the validity of the order in terms of, were the proper parties there, was the proper notice given, was the proper procedure used.

Unknown Speaker: Well, Mr. Stern, it was your client who removed the action, was it not?

Mr. Stern: That is correct.

Unknown Speaker: And in order to remove it, you have to comply with 1441(b), is that right?

Mr. Stern: No question.

Unknown Speaker: Any civil action in which the district courts have original jurisdiction, and how do you phrase your argument that a district court would have had original jurisdiction?

Mr. Stern: Well, the... that goes back to the question of how the artful pleading doctrine works in the first place.

It requires some recharacterization.

I believe Justice Breyer's question dealing with Moitie points that out.

On its face, Moitie had only State causes of action.

The argument here... in that instance the recharacterization was that there was a Federal cause of action stated, although in disguise.

Our position here is that the petitioners are in effect taking either an out of time appeal from the bankruptcy court order, or you could interpret what they're as a Rule 9024 motion, essentially a Rule 60 motion.

They are seeking to attack the bankruptcy court order.

The Fifth Circuit saw the case that way and made specific reference in several points during its opinion to the fact that this is a collateral attack.

This is, in disguise, an attempt to retry the bankruptcy case.

Unknown Speaker: And why does that make it a civil action in which the district court would have had original jurisdiction?

Mr. Stern: Well, if it's either an appeal or a Rule 60 motion the original court would have had... the district court would have had original jurisdiction, essentially ancillary to the bankruptcy jurisdiction that it had in the first place.

If you file a Rule 60 or a Rule 9024 motion in Federal court you don't need an independent basis for jurisdiction.

Unknown Speaker: Well, but this was filed in State court, wasn't it?

It seems extraordinarily unlikely that they would file what was really a 60(b) motion appended to an earlier Federal action and file that in the State court.

Mr. Stern: Well, but that's the whole point of the artful pleading doctrine, is that you try to disguise what is, in effect, a Federal claim.

If you look at what they say the State court should have reviewed, what the State court has to do is essentially sit in review on what the bankruptcy court did.

Unknown Speaker: But it seems to me you're expanding the artful pleading doctrine a good ways with your submission.

The artful pleading doctrine, as I had understood it, was that you cannot by artful pleading avoid the possibility of removal, but I don't think it's ever been construed quite as broadly as you construe it.

Mr. Stern: Well, the... I would agree that the procedural context here makes it unique, but it's a procedural context that occurs over and over in bankruptcy.

One of the things that makes this case a little bit different from Moitie on the surface but not, I believe, once you look underneath it, is the fact that in bankruptcy typically a creditor comes in objecting to something that's going to happen and what they're seeking to do is have a State court sit in review of the propriety of the order issued by the court simply by saying I'm going to foreclose on a mortgage that this order says no longer exists.

Unknown Speaker: But are you saying that any time a plaintiff in State court, perhaps without legal justification, files an action which would require the State court to review some previous proceeding in Federal court, that that is automatically removable?

Mr. Stern: There are two or three different arguments that we've made.

One of the arguments would suggest that.

The argument that speaks to the question of merger and bar and how you characterize a State court action that is precluded by a prior Federal judgment I think would lead to that result, but I think there are narrower ways that you can interpret Moitie if you so choose and Mr. Odom--

Unknown Speaker: Well, let me give you a very narrow way to interpret Moitie.

The Court had a substantive issue it took the case to reach and the parties... one of the parties brought up the problem that this... maybe this stuff doesn't belong in Federal court anyway, so there's no jurisdiction and you can't reach the substantive argument and the Court goes through this footnote, the conclusion of which footnote is, we will not question here that factual finding.

It seems to me the Court is simply saying, we accept the determination of the district court which we take as a factual determination.

I don't know that the Court itself endorsed it.

It said, we will not question here.

Mr. Stern: --Whether the Court was endorsing the finding, so to speak, Your Honor, I think, though, to some extent begs the question, because the Court had to consider whether the case was properly before it in the first place and--

Unknown Speaker: Ah, but we have a lot of jurisdiction that says... a lot of jurisprudence that says, where question of jurisdiction is just accepted or assumed by the Court and not considered and ruled on, it won't be considered precedential--

Mr. Stern: --Well--

Unknown Speaker: --and I don't know that this isn't that.

Mr. Stern: --Well--

Unknown Speaker: We will not question here that factual finding, is the bottom line.

Mr. Stern: --Well, with all due respect, first of all the jurisdictional issue was clearly brought to the Court's attention, because there is a dissent by Justice Brennan, 90 percent of which is devoted to the jurisdictional issues, and footnote 2 makes clear that the Court is considering the issue.

Secondly, there is the question of what factual finding means in that context.

It's not a factual finding that a jury could make.

This isn't the kind of issue that's going to go to the jury.

It's essentially a legal characterization of a claim.

Unknown Speaker: Well, if we take out the word factual in that last sentence, then Justice Scalia's explanation would be quite sufficient, would it not?

Mr. Stern: Well, it would be sufficient to this extent.

What it would be saying is that district courts have the authority to recharacterize claims if they believe that despite what... despite the characterization that the plaintiffs give to a claim it is, in fact, something else.

Unknown Speaker: Well, every single statement in a Supreme Court opinion isn't a pearl, so to speak.

[Laughter]

And I mean, I think if you find something in a footnote that is rather vague, you expand on it or put great weight on it kind of at your peril.

Mr. Stern: Well, I recognize I'm speaking to the author of that footnote, so--

[Laughter]

There is a danger in reading too much into Moitie, into the footnote, but I think at a minimum what it stands for is recognition by the Court that there is such a thing as artful pleading.

I mean, that much, it seems to me, is clear from the footnote and, secondly, that the doctrine of artful pleading is going to expand to some extent beyond the preemption cases.

Unknown Speaker: Well, if you're right about that and that artful pleading consists of bringing a cause of action to which there is a defense that a Federal... a prior Federal case gives a res judicata defense, then what would follow is not only you can remove it, but that State law claim to which there is a possible Federal res judicata defense can be brought originally in Federal court, so any State law claim, you know, how clear does the Federal bankruptcy defense or the other Federal res judicata defense have to be?

Mr. Stern: Let me suggest that in this case, if you want to view Moitie at its narrowest... and let's take your construction of Moitie, Justice Scalia.

There's a factual finding that, despite what someone purports to say, it in fact is really something else.

Unknown Speaker: Right.

Mr. Stern: And the Court on review doesn't need to disturb that.

That's what we have here.

I mean, if you look at the opinion of the Fifth Circuit--

Unknown Speaker: Okay... I'll... yeah.

Mr. Stern: --The joint appendix, page 81, and let me just read one sentence and then perhaps we can get to the core issue that you're speaking to.

It says, despite its intentionally deceitful garb, the core issue of the Miranne subsequent State court complaint was the efficacy of the final executory nonappealable order of the bankruptcy court that had freed the leased premises from, inter alia, the Mirannes' second mortgage.

Now--

Unknown Speaker: And I agree with you, if this were a case like Moitie where this question was just an obstacle to our reaching the issue for which we took the case, we could get rid of it with a footnote that said we're not inclined to question the, you know, the district court's factual finding on this inconvenient jurisdictional question that's been raised.

Unfortunately, we took this case for the jurisdictional question.

It's hard to write a footnote like that.

[Laughter]

There couldn't be any text to which the footnote would attach itself.

[Laughter]

Mr. Stern: --Is that why he's coming back?

Unknown Speaker: But--

--No, but why, if it's an open... if it's an open question--

Mr. Stern: Yes.

Unknown Speaker: --why should the law recognize any exception but for the possible preemption exemption?

It's a doctrine that is supposed to be clear, so people don't spend all their money litigating jurisdiction and, therefore, you have to be, if you're a district judge or a party you have to know what you're doing, what court you're supposed to be in and the rule is absolutely clear, read the complaint.

If the complaint states a Federal cause of action, you know where... you know it's possible to remove it.

If it doesn't, you know it's not going to be removable.

That helps the judges, it helps the parties.

Now, why wouldn't that be the rule, clear and simple, instead of having endless expenditure, as this case may illustrate?

Mr. Stern: Well, the rule as it had been stated in the Fifth Circuit was clear, and there was a ruling by the Ninth Circuit--

Unknown Speaker: Oh, clear, but they say--

Mr. Stern: --It was clear for purposes of what we were doing.

I mean, the fact is, of course, we're up here, and that makes it a whole different kind of case, but there was a very clear rule, and the rule that we have suggested in our brief is a clear rule.

Unknown Speaker: --What would be clearer that you... you look at the face of the complaint.

If it states... the complaint I think here must say... I couldn't find it in the documents, but I'm guessing the complaint must say there's a piece of paper called the Louisiana equivalent of a mortgage.

It's on file somewhere.

Go read that piece of paper.

That piece of paper as a matter of State law says we're entitled to the building, or some money, or something.

That's what it says, I take it.

You say, we have a defense.

The defense is that the bankruptcy court makes that... order makes that void.

That sounds to me a classic case: State law claim, Federal defense.

Now, if that's what's going on, why should you be able to remove?

How could we let you remove without eroding the basic doctrine, look at the face of the complaint?

Mr. Stern: Let me answer that in two stages, because to some extent the initial part of your question deals with whether the artful pleading should apply even in preemption cases.

I mean, in a preemption case there is a State law claim being asserted... Avco, Franchise Tax Board, and so forth... yet in two of the four preemption cases the Court has said, despite what it appears to be, it is, in fact, a Federal claim and that requires delving into what the substance of the action is, delving into Federal preemption law and getting into all sorts of--

Unknown Speaker: Mr. Stern, let's slice of one part of that, where there is no Federal law, where there's blanket preemption so State law effectively doesn't exist because Federal law covers the field entirely.

That's one set of circumstance.

Here you have what appears to be just a garden variety, wholly State law claim.

The Federal element comes into it only by way of a res judicata preclusion affirmative defense, which Rule 8 (c) says it... suppose you never raise that defense.

This wouldn't... it would still be a claim.

You're supposed to judge it from the pleading, from the complaint.

If... you're not obliged to raise res judicata.

It isn't the kind of defense that a court raises on its own motion, like subject matter jurisdiction, so it's not even in the case until the defendant puts it there and the Federal rule seems to say the way it's supposed to come in is as an affirmative defense.

Mr. Stern: --Let me answer that in part by reference to a decision that's cited in our brief but isn't emphasized perhaps to the extent that it should be and that's the Celotex v. Edwards.

Now, that is not a jurisdictional case in the State v. Federal jurisdictional setting, but it is a question of a collateral attack on a bankruptcy court order.

In that case, the bankruptcy court issues an injunction.

The injunction prohibits execution upon a supersedeas bond.

A plaintiff in another forum, in another State but still in Federal court, seeks to execute upon that judgment and using the supersedeas bond, and what the Court said is that you can't do that.

The only place you can go if you want to launch a collateral attack upon a bankruptcy court order, you have to go back to the original court and what this is, although it's filed in State court, it's the same thing.

It is a collateral attack on a bankruptcy court order.

It's an attempt to seek a State court review of that order.

Unknown Speaker: Do you think that's true even as to people who weren't parties to the bankruptcy proceeding?

Mr. Stern: Excuse me, Justice O'Connor, I'm not sure I--

Unknown Speaker: Do you think that your argument is true even as to people who were not parties and had no notice of the bankruptcy proceeding?

Mr. Stern: --Well, there are two sets of nonparties we're dealing with here.

There is the issue of two of Mr. Odom's clients who were wives of the two people who were clearly represented in the bankruptcy, according to the text of the bankruptcy court order, and the answer to that is, yes, I think they do if they are considered privies to the parties who were there.

Unknown Speaker: Well, answer my question in the abstract as to parties who were not privy to a prior bankruptcy proceeding in any way.

Mr. Stern: Then I think that under those circumstances the answer would probably be no.

At that point, you are far enough away from someone who is bound by what happened in bankruptcy court that you would have to stay in State court at that point.

That's not what we have and, frankly, in most settings like this, where someone seeks to collaterally attack an order of the Federal court you're not going to have that problem.

Unknown Speaker: Celotex v. Edwards didn't involve removal, as I recall.

Mr. Stern: No, I--

Unknown Speaker: It said you have to go back to the bankruptcy court.

And it may be that your defense would prevail on the merits, but that's a question that the State courts are entitled to decide in the first instance and it could be reviewed here if you think they decided wrongly.

Mr. Stern: --There's no question that if we had wanted to have the State court review it, the State court had the power to review it and I agree with Mr. Odom that that review would have had to be conducted pursuant to Federal law, Federal law of res judicata, because it's a Federal judgment that is being interpreted.

The issue before you, though, is whether that's the only way that you could go.

Celotex, while it's not a removal question, does have to do with whether the court that had the supersedeas bond in front of it had the power to ignore what the bankruptcy court to do... excuse me, had the power to ignore the order of the bankruptcy court and litigate, relitigate that issue.

Unknown Speaker: That's a res... that's res judicata law, but the kind of law we're dealing with here is removal law, which is based, as we say, on 1441(b) and the well pleaded complaint doctrine.

Mr. Stern: That's correct.

I didn't say that Celotex controlled by any means.

I simply wanted to use it as an analogy, the suspicion that this Court has, that any Court has when there is a collateral attack being made upon a bankruptcy court order.

And then let me go back to Moitie.

That may--

Unknown Speaker: You keep using collateral attack on bankruptcy court order and I keep thinking, res judicata defense, district court order, what--

Mr. Stern: --Well, let... I wanted to get back--

Unknown Speaker: --Do you get anything more out of it being in the bankruptcy court than in the district court?

Mr. Stern: --Well, I wanted to get back to Moitie, because I think that's the second part of the answer to your concern.

That very same argument was available in Moitie.

It convinced Justice Brennan that the case did not belong in the Federal court.

Moitie on its face stated only State causes of action, the second complaint in Moitie and, as you pointed out in the constitutional context, you can assert claims based upon State law and claims based upon Federal law based upon identical facts, so if there's not something more to Moitie than a factual finding, we're... the Court is essentially saying district courts are free to recharacterize claims almost at their discretion.

I mean, then there are no rules.

A court simply looks and says, well, this looks like the federal case I saw before.

It's only based on State law, but it looks like the Federal case, so I'm going to recharacterize it and authorize removal.

Unknown Speaker: Well, one question is whether the Federal court should take a footnote and run with it for all its worth or say, now, this was a footnote made en passant so we should be particularly careful about expanding it.

Mr. Stern: I recognize that and my suggestion then, and I believe I may have begun the answer in response to one of the Chief Justice's questions, is that if you want to interpret Moitie that narrowly, still the characterization of what the Fifth Circuit has said about this case, which is, this is an attempt to retry what happened in the bankruptcy court, would still carry the day.

Under the narrowest construction of Moitie there has been in effect a finding by the court below that this is the bankruptcy case, because--

Unknown Speaker: What work does that argument leave for 2283, where Congress thought about relitigating cases that already had run their course in the Federal court?

It seems to me that you'd never need... if you have a case going on in the State court you would never need to resort to 2283.

You'd simply remove it to the Federal court.

It's over.

Mr. Stern: --Well, there are a couple of distinctions between how 2283 would work and how the... Moitie--

Unknown Speaker: Well, give me a case where you could get relief under 2283 but not via this removal that you claim.

Mr. Stern: --If the judgment of the Federal court were based entirely on State law, that would be one difference.

The rules that all the lower courts have come up with have to do with whether the Federal court is adjudicating issues of Federal law, so that the subsequent claim is in effect a claim arising--

Unknown Speaker: Is that true about 2283, it has--

Mr. Stern: --No, 2283--

Unknown Speaker: --That it doesn't work in diversity cases?

Mr. Stern: --2283 does work in diversity cases.

Unknown Speaker: Yes.

Mr. Stern: So part of what I'm saying is that 2283 cuts more broadly in that sense.

2283 has also been applied in cases involving issue preclusion as opposed to claim preclusion.

That is, there is an issue that may arise in the subsequent State court case which the defendant says is now precluded as a result of something that happened in Federal court.

That would also be subject to a 2283 injunction.

We certainly don't contend that there would be any right to remove based upon the preclusion of a single issue in what is otherwise a State court case, so in both instances 2283 cuts differently and, to the extent that we're saying that what Mr. Odom has really filed is a Federal claim, there's already, in the case of a Federal cause of action filed in the State court in the event of a res judicata situation, the right either to remove or to seek an injunction.

If--

Unknown Speaker: If you didn't answer his complaint--

Mr. Stern: --That is correct.

Unknown Speaker: --he would get a default judgment under State law, pure and simple, right?

Mr. Stern: If we did not answer his complaint, assuming he could prove up his case, yes.

I mean, he still has to prove it up to the--

Unknown Speaker: Yes.

Mr. Stern: --To the State court.

Unknown Speaker: But there would be no Federal element in that at all--

Mr. Stern: In the--

Unknown Speaker: --because you didn't raise... because you didn't raise a defense.

Mr. Stern: --In the proof that he would offer, I am assuming that he would simply offer proof of debt, proof of mortgage, essentially, and you're correct.

Unknown Speaker: So you must come in defensively to assert this protection of the Federal judgment.

Mr. Stern: That's true.

That was also true in Moitie.

Unknown Speaker: But if... if you leave... I'd like to go back for a second, because I didn't get your answer to my particular question.

Normally, we look at the complaint and you, I think correctly, pointed out that there is one exception, namely, preemption.

Now, if... forgetting the footnote in Moitie, is there any reason that we should have two exceptions?

I mean, let us say, I'd start from the hypothetical position one exception is bad enough.

Now, I want to know if there's any reason--

Mr. Stern: Well--

Unknown Speaker: --why we should go into two--

Mr. Stern: --Let me--

Unknown Speaker: --and what it will be.

Of course, the concern is that if you have two, then there might be three, et cetera.

Mr. Stern: --Well--

Unknown Speaker: And what you are asking for is an exception for a defense.

We have a defense.

We want to go into Federal court on the basis of the defense.

Mr. Stern: --Let me suggest a couple of policy considerations that do not apply across the board but do apply in situations like this arising out of bankruptcy, free and clear sales orders.

This is part of the essence of what bankruptcy courts do.

Unlike the situation in Celotex, where there was a significant issue of bankruptcy jurisdiction, there's no issue of bankruptcy jurisdiction here.

The stability of titles is at issue.

In effect, what we would have here is a procedural avenue that someone dissatisfied with an order of the bankruptcy could use and run to State court and you also have, not withstanding the general competence of State courts and their ability to consider bankruptcy issues... courts rarely deal with bankruptcy issues and so what you would have, at least in the narrow type of situation that we have presented by this case, is a situation in which the stability of titles that are obtained through bankruptcy is at issue.

And that is exactly what we have here.

We have a third party who's purchased this property.

There are millions of dollars that have been put into a piece of property and now, 10 years after the bankruptcy court order, we have an attack in State court seeking to enforce the mortgage.

So in terms of policy considerations I would suggest those at a minimum might say that if someone is seeking to foreclose on a mortgage that is the subject of a free and clear sale order in bankruptcy court, that at least can be recharacterized as an attempt to appeal from or seek to modify the bankruptcy court order.

Unknown Speaker: Mr. Stern, could I ask you about Moitie again?

Why can't you explain the Moitie footnote... and I think this is somewhat the way the petitioner characterized it.

The Moitie footnote doesn't say anything about res judicata nor, for that matter, does Justice Brennan's dissent, to which you say the footnote must have been directed.

I don't believe he mentions res judicata even in the dissent, so we don't really know that the reason the Court is saying that this is an artful recasting of essential Federal law claims was because of the res judicata defense.

You're just assuming that.

It may well be that the Court was just saying, look, it was the same complaint filed.

We just crossed off antitrust and put in Valentine Act, or whatever the name of the California law was.

I really think that that's a more plausible reading of the footnote.

Now, maybe that... whether that was right or wrong, it has nothing to do with this case, whether crossing off antitrust and putting in the name of a similar State... that's what Brennan was addressing in his dissent.

He said, there are State antitrust causes of action as well as Federal and if you bring them, it's not a Federal claim.

Mr. Stern: Right, and that's the point.

Whether you want to go the distance that we have suggested in our brief you go, or just go the very short distance that I tried to outline for Justice Breyer a moment ago, at a minimum what Moitie says is that courts, trial courts, courts of appeal do have some limited discretion to recharacterize a purported State cause of action that has been filed if, in their view, considering all the circumstances, this is really an attempt to file a claim or redo something under Federal law, and we're suggesting that the Fifth Circuit at a minimum said this is an attempt--

Unknown Speaker: This is a collateral attack.

Mr. Stern: --Well... yes.

This is an attempt to seek State court review of what the bankruptcy court--

Unknown Speaker: But isn't there the large difference that Mr. Odom's clients weren't trying to do anything under Federal law?

In the Moitie situation you have people who brought a claim to Federal court and then they bring the same claim to State court.

Here, the... I forgot the names of the people involved... were not looking to be in Federal court at all.

They were dragged in there because there was a bankruptcy, so it's... are the cases distinguishable on that basis?

Mr. Stern: --On the surface, yes.

I think when you look below the surface, no.

In order for there to have been a contested proceeding in the bankruptcy court in the first place, they had to file an objection to the trustee's propsal that the property be sold free and clear.

If you look at the bankruptcy rules, the contested proceeding is triggered by their objection, so they, in fact, instigated the contested proceeding in bankruptcy court that forced the court to determine whether the property could be sold free and clear of their lien, and they lost.

Unknown Speaker: Well, but they didn't choose that court to walk into.

They had in the bankruptcy no other choice.

In the Moitie case, here's parties who go into a Federal court and then they do the same show over again in State court.

It was their choice.

They picked the Federal forum when they could have picked the State forum.

Once the bankruptcy is ongoing, these creditors have no place else to go.

Mr. Stern: Well, let me suggest that the distinction doesn't really hold water if you take it a step farther.

By that logic, if someone files a Federal constitutional claim in Federal court and a parallel State constitutional claim in State court, the State constitutional claim could be removed because it's nothing but the Federal constitutional claim and I don't think anyone believes that to be the law.

Unknown Speaker: Thank you, Mr. Stern.

Mr. Stern: Thank you, Your Honor.

Unknown Speaker: Mr. Odom, you have 6 minutes remaining.

Rebuttal of John G. Odom

Mr. Odom: Thank you, Your Honor.

May it please the Court:

I have just a couple of points to make in response to some of the questions that were directed to Mr. Stern.

As far as taking a footnote and running with it, I didn't make this obvious point in my argument, but we did make it in the brief.

Taking this particular footnote and running with it, if you're a district judge below, is even less appropriate than in other circumstances, because here we had three unanimous opinions of this Court following the date of the footnote that expressly reconfirmed all of the fundamental elements of removal jurisdiction in exactly the way that we've argued, so a clearer view than that would be hard to find.

I agree with Mr. Stern that stability of titles is important, but under his view the State recordation doctrine is of no moment at all and can be completely ignored when, if there is a bankruptcy, a two part bankruptcy judgment order, the first part where the judge snaps his fingers and says, poof, if you will, all liens... the property may be sold free and clear of all liens, and the second part of his order orders and directs and authorizes the erasure of all the liens.

The second part is not taken care of and is not fulfilled, then if you simply allow him to rely on the first part of it, then it says that the entire State record, State title recordation policy is of no moment at all, because a party in another State is entitled to rely on what's on file down at the New Orleans conveyance office and under Mr. Stern's theory would not be.

Stability of titles is important.

I will note that there was no adversary proceeding under Rule 7001 in the bankruptcy court below.

This is an argument that we made below to suggest that the matter was not in fact actually litigated.

We didn't even have a cause of action at the date of the bankruptcy.

Not only were two of our people not there, we didn't even have any cause of action because the Browns had not attempted to pass title in derogation of our mortgage at that time.

The bank had not let its right to enforce the erasure order expire of that time... at that time.

There was no... our loan was not in default at that time.

We were not claimants in the bankruptcy proceeding.

This was a balloon payment, a one time balloon payment that was not mature at the time of the bankruptcy.

In fact, the loan had been made on it shortly before the bankruptcy.

The obligation sued upon is, in fact, a new post bankruptcy obligation due to the written waiver of prescription which we say, under State law, constitutes a novation.

That's a--

Unknown Speaker: But that all goes to the merits--

Mr. Odom: --It does.

Unknown Speaker: --of your claim, and--

Mr. Odom: It does.

It does.

It's in the record, Your Honor.

The--

Unknown Speaker: --No acceleration for insolvency?

Mr. Odom: --No, sir.

Unknown Speaker: A balloon payment with no--

Mr. Odom: No, sir.

Unknown Speaker: --Who wrote that?

[Laughter]

Mr. Odom: I didn't write it, Your Honor.

I'm not sure.

But the novations are in the record at pages 138 and 139 of this matter.

Your Honors, as far as any particular concerns about bankruptcy, obviously Congress can address that if it wants to.

If it wants to pass a statute saying anything relating to bankruptcy is to be done a different way, then that's fine, it can.

If there are no further questions, Your Honor, I believe I have stated my argument as best as I can.

Chief Justice Rehnquist: Thank you, Mr. Odom.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until Monday next at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Quackenbush v. Allstate Insurance - Oral Argument

Fri, 09 Jan 2009 14:49:46 +0000

Case:

Quackenbush v. Allstate Insurance

Media File:

95-244_19960220-argument.mp3

Related Transcript:

1995_95_244_argument.xml

Transcript:

Argument of Karl L. Rubinstein

Chief Justice Rehnquist: We'll hear argument next in Number 95-244, Charles Quackenbush, California Insurance Commissioner, v. Allstate Insurance Company.

Mr. Rubinstein, you may proceed whenever you're ready.

Mr. Rubinstein: Mr. Chief Justice, may it please the Court:

Commissioner Quackenbush is the last of a line of several insurance commissioners who have struggled for going on 10 years to marshall the assets and to effectively administer one of the largest property and casualty insurance insolvencies in the history--

Unknown Speaker: Perhaps you should say the most recent, rather than the last.

[Laughter]

Mr. Rubinstein: --Exactly correct, Your Honor.

However, we have a final liquidation dividend plan which has been recently approved by the Superior Court in California, and we're hoping that during Commissioner Quackenbush's administration we'll be able to complete this case, and actually the issues before this Court are crucial to that issue.

What has happened, the Court is already aware because we have explained it in the briefs and you're aware of how we got here, it is Commissioner Quackenbush's position, and that he urges upon the Court, that the Ninth Circuit erred in improperly permitting an appeal based upon an antiquated and inappropriate standard distinguishing between equitable remedies and legal remedies and thereby prevented, or would forbid, this district court, and any district court in a similar case, from considering issues that legitimately relate to abstention, such as the failure to recognize the need for a consolidated proceeding in a State court, which can protect itself from being dissipated through dozens and in this case it could have been hundreds of Federal court litigations, would disturb, and in fact destroy, a fundamental interest of the State of California--

Unknown Speaker: What authority do you... you see, when you say it's a matter of discretion whether the court will provide relief or not, I don't care whether you call it equity or antiquated or anything else, the crux of the matter is, I can understand this abstention doctrine when the court below has discretion as to whether it wants to grant relief or not.

Then the case is brought before it and the court says, well, I don't have to grant relief even if you have a good case, and therefore I think I shouldn't even hear this case.

I'm going to send it back to State court.

That makes sense to me.

But where the court has no discretion, where the plaintiff is entitled to judgment from that Federal court, where does the Federal court get the power to send it back to State court?

It's a statute that says the case is removable.

Mr. Rubinstein: --Assuming--

Unknown Speaker: Where does the power come from?

Mr. Rubinstein: --Assuming the hypothetical, Justice Scalia, you're exactly correct, and... however, the question comes, is there a Federal... fundamentally the question is, is there now a Federal court of equity, and the fact is there is not a Federal court of equity.

There is a single district court which sits postmerger with equitable powers--

Unknown Speaker: Which has discretion to deny judgments that are... judgments for money, has discretion to say, well, you're entitled to this money, but I just think I'm not going to give it to you.

Do Federal courts now, under this new order of the world, have that power?

Mr. Rubinstein: --Of course not, Your Honor.

However--

Unknown Speaker: So I don't care whether you call it equity or not, the fact is, if the court must grant relief, it seems to me the court must entertain the case.

Mr. Rubinstein: --The question is, what is the power of the court to grant relief, and what is the relief requested of the court?

In this case, the relief requested of the court, the key relief requested, was the motion by the insurance commissioner to invoke the reasoned discretion of the district court to apply the abstention doctrines which have been long-established by this Court, and that is the reasoned discretion of the district court.

Unknown Speaker: Whose discretion doctrines have been long-established in cases where the court was able to say, yes, you have a good case but I'm not going to give you relief.

Those are the cases in which that's been well established.

Mr. Rubinstein: I don't agree with that, Your Honor.

I believe that under the principles of Burford and under the principles of Colorado River, for example, that the Federal district courts have been recognized to have a reasoned discretion.

Unknown Speaker: I'm not talking about deferral, I'm talking about dismissal.

I'm not talking about simply sitting on the case and waiting for a State court to act.

I'm talking about--

--Well, I think the Court's opinion in Fair Assessment supports your proposition.

Mr. Rubinstein: Precisely.

Unknown Speaker: That was not a request for an injunction.

It was a request for legal relief, and we said the court could turn it down.

Mr. Rubinstein: That's exactly correct, Mr. Chief Justice.

Unknown Speaker: What did the court do in that case?

Did it dismiss?

Mr. Rubinstein: In Fair Assessment?

Unknown Speaker: Yes.

Mr. Rubinstein: In Fair Assessment it dismissed, Your Honor.

Unknown Speaker: Are you sure it dismissed?

Mr. Rubinstein: I mean, it remanded, Your Honor.

What I'm seeking here is an affirmance that a court has the power--

Unknown Speaker: That's not my recollection.

Mr. Rubinstein: --That a court has the power to remand the case.

I would make this argument, Justice Scalia, that a Federal district court in a case such as this case, which is a State court proceeding which has been removed to the Federal district court, and on proper motion by the Commissioner of Insurance of California to invoke that court's jurisdiction to remand the same case back to the State court proceeding is completely within the jurisdiction and the discretion of the Federal district court.

Unknown Speaker: Was this case dismissed in the Federal court?

Mr. Rubinstein: No, Your Honor.

It was remanded back to the State court.

Unknown Speaker: Without any dismissal.

Mr. Rubinstein: That's correct, Justice O'Connor.

What happened was, the Federal district court remanded the case and took no further action other than to send it back to the same State court from which it came.

Unknown Speaker: Would we have to overrule Thermtron in order to make the appeal possible?

Mr. Rubinstein: Not in our opinion, Justice Breyer.

We're not opposed to this Court overruling Thermtron.

Unknown Speaker: Thermtron said no appeal would lie, that it could only be breached by mandamus--

Mr. Rubinstein: That's--

Unknown Speaker: --remand.

Mr. Rubinstein: --That's correct, Justice O'Connor.

In the broader sense we're not opposed to a reversal of Thermtron.

However, Thermtron squarely held that a remand, which does nothing other than remand the case, is not reviewable by appeal but only by mandamus.

Unknown Speaker: So... but don't... that poses the problem.

Doesn't that pose the problem?

This was... do I not understand this?

This was a case in which the district court remanded the case in light of the Burford abstention, is that right?

Mr. Rubinstein: Yes, Your Honor.

Unknown Speaker: All right.

So isn't this identical to Thermtron?

Mr. Rubinstein: Yes, Your Honor.

Unknown Speaker: All right.

So is there any way we can say that the... wouldn't we have to say, unless we overruled Thermtron, that the court of appeals was wrong to hear this case because it wasn't appealable?

Mr. Rubinstein: Yes, Your Honor, and--

Unknown Speaker: So we do have to overrule Thermtron.

Mr. Rubinstein: --In the sense as to that issue--

Unknown Speaker: Thermtron was mandamus.

Mr. Rubinstein: --Yes.

Unknown Speaker: Yes, so... but it said you could only review it through mandamus, so you couldn't review it through an appeal, and here they reviewed it through an appeal.

Mr. Rubinstein: What I meant by our not being opposed to overruling Thermtron is that we agreed with the dissent in Thermtron that the... a remand order should be totally barred from--

Unknown Speaker: Well--

Mr. Rubinstein: --being reviewed.

However--

Unknown Speaker: --You have the dissent in Thermtron, which did not prevail, you have the opinion in Thermtron, which did prevail, and then the Ninth Circuit, here, is even further over than the... because it said not only... we don't have to worry about mandamus because you can appeal this, and it seems to me the majority opinion in Thermtron makes that quite clearly wrong.

That's what I'm worried about, exactly.

Yes.

Mr. Rubinstein: --The majority opinion in Thermtron said that a remand order is not reviewable by appeal.

We understand that to be the law.

We're relying on that as the law, and the majority opinion said that it's only reviewable by mandamus.

The Ninth Circuit ruled other... ruled that it was reviewable under the Cohen collateral--

Unknown Speaker: But Mr. Rubinstein, if the Ninth Circuit didn't do that, wouldn't it have run smack against another decision of this Court, that is in the Moses H. Cone case, was, what sense would it make to say that if the Federal court stays the action, then the review is by appeal under the Cohen doctrine, but if it remands, then either there's no review at all, or only mandamus review?

Mr. Rubinstein: --That's... it is correct, Justice Ginsburg, that the two decisions have issues that are not exactly on all fours with one another.

However, there are distinctions between dismissals and remands as we understand the cases, and that's how we find that the cases work together.

Unknown Speaker: Mr. Rubinstein, suppose the case had come up this way.

Allstate sues in a diversity action for the reinsurance claims that it says are due it.

Mission then puts in a compulsory counterclaim and says, district judge, you should abstain, and the district judge says, I think you're right, and so I'm going to stay this action while the whole thing goes forward in a State court.

Mr. Rubinstein: Yes, Your Honor.

Unknown Speaker: And Allstate wants to take an appeal.

Wouldn't Allstate be squarely under Moses H. Cone in taking that appeal?

Mr. Rubinstein: An appeal from the dismissal, yes, Your Honor.

Unknown Speaker: Appeal from the stay.

Mr. Rubinstein: Yes, Your Honor, and part of the demonstration in this case as to the problems with the Ninth circuit decision is that in another case arising out of the State receivership court, the Morgan Stanley case, the Ninth Circuit in a similar situation where the suit was filed in Federal district court in the first instance, and we, on behalf of the Insurance Commissioner, moved to dismiss, the Ninth Circuit did dismiss based on the same considerations that... the same type of considerations that the district court remanded the instant case on.

And so it therefore seems, looking at the Ninth Circuit precedent, that had this particular case been brought in the first instance in the district court, the Ninth Circuit would have sustained a dismissal, whereas because it was a remand, the Ninth Circuit refused to sustain the remand but only, the only distinction being that the Ninth Circuit felt that the district court would not have the discretion to remand even though it would have had the discretion to dismiss, and the only underpinning being the perceived distinction between law and equity.

Unknown Speaker: Mr. Rubinstein, you've raised two questions in your certiorari petition.

One is whether a remand order based on abstention is appealable, and the second is whether the abstention powers of Federal courts are limited to actions in equity.

Now, if this couldn't be appealed at all, then I suppose you don't get to the second question.

Mr. Rubinstein: Well, Your Honor, I think we do get to the second question because it was reviewable by mandamus.

Unknown Speaker: But that's quite a different standard.

In an appeal, all you have to show was that there was error in the ruling below.

In mandamus, you have to show a clearly established right.

It seems to me that if the Ninth Circuit had known that it could only review this order by mandamus it might have come out quite differently than it did reviewing it by appeal.

Do you disagree with that?

Mr. Rubinstein: Your Honor, I agree with that.

Mr. Chief Justice, we would urge--

Unknown Speaker: Mr. Rubinstein, what do you do, then, with the Ninth Circuit saying to this Court, we're puzzled.

You have Moses H. Cone, which indicates it should be appealed.

You have Thermtron, which indicates it should be mandamus.

Please straighten us out.

Which should it be?

Mr. Rubinstein: --Justice Ginsburg, as I as going to say, I agree with the Chief Justice's characterization so far as it went.

However, we urge this Court to reach the second issue, because the second issue is an issue which permeates not only this case, but the second issue permeates all similarly situated insurance commissioners across this country.

Unknown Speaker: But Mr. Rubinstein, if it's not appealable we're not going to reach the second issue, so you have to persuade us that this is appealable, and to do that you have to overcome what the Court said in Thermtron, so I would think that would be your first line of attack here.

Mr. Rubinstein: Well, certainly we stand on Thermtron, and--

Unknown Speaker: You're saying its not appealable, are you not?

Mr. Rubinstein: --Yes.

We say it's not appealable.

Unknown Speaker: Well, if it's not appealable, then it never was in the court of appeals, and we certainly can't do anything more on the merits.

Mr. Rubinstein: I understand--

Unknown Speaker: What your--

Mr. Rubinstein: --Mr. Chief Justice, what you're saying, and Justice O'Connor, I understand what you're saying.

Unknown Speaker: --So you, to get to the point you really want to make, your opponent would have to prevail on the appealability question, and then you would have to prevail on the merits.

What do you want us to do, flip a coin between Thermtron and Moses Cone?

Mr. Rubinstein: No, Your Honor, I--

Unknown Speaker: I mean, they do go in different directions.

Why should we adopt one rather than the other?

Mr. Rubinstein: --I think that you should adopt the doctrine that this Court established in the Penn General case and Pennsylvania v. Williams, which says that... which we cite in our briefs, that in the case of an insurance insolvency, that the Federal district courts do have the reasoned discretion if it's appropriate in that given case to remand cases--

Unknown Speaker: --the appealability issue now.

Which--

Mr. Rubinstein: --or to dismiss cases in favor of the underlying procedures.

Unknown Speaker: --I'm talking about the appealability issue, the first issue.

Why should this be nonappealable as you say?

Why should we essentially repudiate Moses Cone?

Mr. Rubinstein: I don't believe that it's necessary to repudiate Moses Cone, but if you have a choice, if this Court sees itself as having that choice, then we strongly recommend that you stand with Thermtron.

Unknown Speaker: Because, as... that's what I... what are the merits... you're probably almost neutral on this issue, so you'd be quite helpful in looking--

[Laughter]

In looking this up... we had a case in the First Circuit called Garcia which raised this.

We looked--

Mr. Rubinstein: I know the case.

Unknown Speaker: --And it seemed as if Thermtron's statement, which was quite brief on this point, grew out of two 19th Century cases, one called Wiswall and one something else, which was making a very old-fashioned, since-discarded distinction between mandamus and appeal as a way of dismissing jurisdictional orders.

Almost as old as law and equity, really.

That's right.

Really old stuff.

And the difference being that it wasn't followed any more, except in the... and then we have the anomaly with Moses Cone, which if you stay it, you get an appeal.

If you don't know that, you don't ask for the stay, you can't get an appeal, so it seemed anomalous, plus, perhaps, overridden by events.

Now that was the argument for not following it, or for overturning it, and so I'm putting that to you to get what you felt were the strongest reasons for following it.

Simply stare decisis, is it, and... which is a powerful argument, of course.

Mr. Rubinstein: Well, stare decisis, of course, Your Honor, but beyond that there's a question of giving the... recognizing the fact that the district courts need to have the discretion to control their own dockets in part and also, from the position of this Court, you do have a massive judiciary to consider, and if all remand orders are going to be appealable, then the number of appeals in the Federal system will increase by 3,000 or more, if I understand the data.

Unknown Speaker: But that sounds like an argument to get rid of Thermtron, too, and to go back to... which I think was your very first position, everything comes under 1447(d).

There are no appeals of any kind from a remand order.

Mr. Rubinstein: Well, since you get to the same place with Thermtron, then Thermtron satisfies the need, but there's one other point I'd like to make, and that's it, that as a matter of substance, it seems to me that a remand order, which is dealing with a case that began other than in the Federal system, and sends that same case back to the system where it began, is qualitatively different, substantially different from a case that begins in the Federal system.

So in terms of wise judicial policy, I would simply rhetorically ask, what sense does it make for the Federal judiciary to burden the Federal appellate process with cases that really started somewhere else, and under abstention doctrine, should go back to where they started.

Unknown Speaker: Mr. Rubinstein, in your brief you make the point that in Moses H. Cone there were separate State and Federal proceedings, whereas here there's only one proceeding.

It was moved from State to Federal court.

Mr. Rubinstein: Yes, Your Honor.

Unknown Speaker: But there weren't two independent proceedings.

Mr. Rubinstein: That's the point that I'm... I just was trying to make, is that the remanding of a case that started in State court, and it's the only proceeding, sending that back to State court is significantly different than dealing with a case that starts in the Federal system, at least in terms of the judicial philosophy, it seems to me.

Unknown Speaker: Why?

Mr. Rubinstein: Why should we burden--

Unknown Speaker: I'm not getting it.

Why is it qualitatively different?

Mr. Rubinstein: --Because--

Unknown Speaker: They have a right to be in a Federal court.

What difference does it make whether they get that... whether they exercise that right by removal or by an action originally filed?

Or alternatively, if getting rid of the case at the Federal level is a final judgment for one purpose, why isn't it a final judgment for the other?

Yes.

Mr. Rubinstein: --Again, the... it's not final in a sense of remand, because the same case that started continues where it began.

Unknown Speaker: So far as the exercise of Federal jurisdiction is concerned, it is absolutely final.

Mr. Rubinstein: Well, not necessarily.

Unknown Speaker: You mean, they might remand again?

Mr. Rubinstein: No.

Unknown Speaker: Well, then, if you don't assume that it's because they can remand again, once it's out, it's out, and it's just... it's out just as finally as if it were dismissed as an action originally brought there.

Mr. Rubinstein: For the purposes of argument, Your Honor, I'll accept that.

I--

Unknown Speaker: Well, is there any argument about that?

But if--

--I mean, once... if the Federal court remands a case to the State court, the Federal court doesn't have any more jurisdiction over it as far as I--

Mr. Rubinstein: --Over that particular case.

However, the only reason that I say for purposes of argument in this case is because I didn't want to confuse our other argument, which is that if it... if this State court in determining issues such as arbitrability or contract law issues, if that State court in some way creates some Federal right, the same case in essence, not procedurally the precise same case, but in all... in substance, all the pieces of the case, if there's a Federal right, that Federal right is not extinguished by the remand.

Unknown Speaker: --Okay, but absent that speculative possibility, there doesn't seem to be a difference between the remand in the one kind of case and the dismissal in the other.

Why, therefore, should we treat them as qualitatively different, as you were saying?

Mr. Rubinstein: For the reason, Justice Souter, that I said, which is their--

Unknown Speaker: The speculation that a Federal issue may arise in the State case and get taken up?

Mr. Rubinstein: --No, Your Honor, because the one case begins as a Federal case in the Federal court.

The other case starts in State court.

Unknown Speaker: No, but the qualita... what you call a qualitative difference, which, you know, assumes a qualitative difference relevant to this issue, is simply a procedural difference.

Mr. Rubinstein: Well, no, because the intervening thing that has occurred is that a Federal district court, based on abstention doctrine, which is important to Federalism issues and comity issues, has determined, in the exercise of that discretion, that that case for those reasons should be in the State system.

If this Court--

Unknown Speaker: But the decision, the reasons for making that decision are going to be the same reasons whether the case got there by removal, or whether the case got there by being filed there in the first place.

They're the same reasons, aren't they?

Mr. Rubinstein: --Well, they're not precisely the same reasons, and in terms of... if... in the terms of asking me if there are any other differences, that's the only other difference, other than the ones I've already mentioned to Justice Breyer.

Unknown Speaker: Mr.--

Mr. Rubinstein: But I see... it may not be enough to swing the argument one way or the other.

It's only the last of the differences that I can discern.

Unknown Speaker: --Mr. Rubenstein, could I come back to Fair Assessment?

You really... I had not thought we had abstained in a case where there was a legal issue.

I don't read Fair Assessment as being an abstention case at all.

I read it as holding there is no 1983 cause of action, period.

The opinion says taxpayers must seek protection of their Federal rights by State remedies, provided, of course, that those remedies are plain, adequate, and complete, and they ultimately seek review of the State decisions in this court.

This wasn't saying, we're not going to decide the 1983 action, we're going to let the State courts decide it.

It said there's no cause of action under 1983.

Mr. Rubinstein: That's--

Unknown Speaker: That's quite a different issue.

Mr. Rubinstein: --That's not how I understand the case, Your Honor, and--

Unknown Speaker: Well, how do you explain the language I just read to you, remanding them to their State remedies provided, of course, that they're adequate?

Mr. Rubinstein: --Well, because the... the cause of action was cognizable in State court, and--

Unknown Speaker: That's a State remedy?

A Federal cause of action cognizable in State court is a State remedy?

Mr. Rubinstein: --Well, in some instances.

I'm not--

Unknown Speaker: I never heard language used that way.

I mean, you can--

Mr. Rubinstein: --Well, RICO is--

Unknown Speaker: --It might be anything you want.

Mr. Rubinstein: --RICO is cognizable in both systems, and is RICO a State remedy when it's in State court and a Federal remedy in Federal court, or--

Unknown Speaker: Well, I think it's a weak case for the point you're making.

Do you have another one?

Is that the only one you know of where we have... although the statute tells us to entertain a case... just told the Congress, well, you've told us to do that, but actually we think we shouldn't.

Thibodaux.

Except in areas where we have discretion not to give relief.

What about Thibodaux?

Mr. Rubinstein: --Well, Thibodaux's a case in point--

Unknown Speaker: Frankfurter says that.

Mr. Rubinstein: --Thibodaux's a case in point, but another case--

Unknown Speaker: Thibodaux.

Mr. Rubinstein: --that sounds similar to the point that you're making, Your Honor, is Colorado River.

After finding that none of the abstention doctrines applied, the Court then nevertheless found that there should be a deference to the State proceedings.

Unknown Speaker: Well, can you tell us, what is the source of this rule?

Is the rule that you're proposing that all Federal courts in all kinds of actions have a duty under a principle of comity not to interfere unnecessarily with State court proceedings?

I mean, is that the way the generalization plays out?

Mr. Rubinstein: Well, I'm not going to rely only on comity, but to further principles of Federalism and to promote "Our Federalism" as recognized in the Younger case and concepts of comity.

That is the source in the rationale, as I understand it, for the abstention doctrines.

Unknown Speaker: What would you say, just so you can get the main thing that I think interests you the most... that's what I'm trying to ask this for.

I take is somebody might say, this case here is a simple breach of contract case.

You have an insurer that has some reinsurance contracts with Allstate, and itself did some reinsurance with Allstate, and another person called Northbrook who may reinsure.

It's just breach of contract.

The contracts have an arbitration clause.

There's no reason here in deciding whether to go to arbitration or what the contracts read to go send this matter back to a State court.

It's run-of-the-mill, simple, every day.

Give us "Our Federalism" in Thibodaux and any other set of principles you want, you still don't have to send it back.

I'm only making this argument to get your response, because I think it's at the heart of what you want to say.

Mr. Rubinstein: Well, the response, Your Honor, first of all is it would subject this Commissioner, if that were the rule, and all commissioners similarly situated, to dozens, or even hundreds of litigations in various Federal courts across this country and possibly even to litigations in other countries.

It would defeat California's interest in an efficacious, orderly, consolidated rehabilitation or liquidation process in insurance insolvency such as this, and it's not just California but other cases, where billions of dollars and hundreds of thousands of policyholders are at stake.

Unknown Speaker: Did the court dismiss the case in Thibodaux?

Did the court... did the case remain in Federal court or not?

Mr. Rubinstein: I don't recall precisely at this moment--

Unknown Speaker: But that's crucial.

Mr. Rubinstein: --Your Honor, but I believe that the case--

Unknown Speaker: The court just sat on the case, waited for the State--

Mr. Rubinstein: --The case--

Unknown Speaker: --court to act.

Mr. Rubinstein: --The case went to State court, Your Honor, as I understand it.

Unknown Speaker: The State went... I don't think so.

Mr. Rubinstein: I think the--

Unknown Speaker: I'm not entirely clear on why there would be more litigation if you allow Federal courts to get into the act instead of just having the State tribunal do it, certainly not to be decided by the Commissioner of Insurance.

Mr. Rubinstein: --If the Commissioner cannot marshall the assets--

Unknown Speaker: Well, he can't marshall the assets till he knows what the merits of this very basic contractual issue is, and some court's going to have to decide it, and may have to decide it in several different forums.

Mr. Rubinstein: --But as this court recognized in Allied and Bendix, the issue of arbitrability is a matter for contract law, and the States are free, and in fact would have the duty to determine whether or not an arbitration clause should be enforced consistent--

Unknown Speaker: And they'd have to decide that by the same rules of law that the Federal judge would decide, wouldn't they?

Mr. Rubinstein: --No, because there are local issues involved, and particularly where we're dealing with a comprehensive and massive insurance insolvency, the issue of whether the arbitration clause stands shoulder to shoulder with the insolvency clause, and how it interrelates with the claims statutes of the State of California which require a certain procedure to occur with respect to these same claims in the State proceeding, that also would be shredded if all these cases could be moved to Federal courts, hither-thither, as opposed to being administered in this claims process.

Unknown Speaker: Yes, but each of these cases could have been brought, I suppose, in a State court.

Mr. Rubinstein: No, they couldn't, under the--

Unknown Speaker: In the court of another State other than California, couldn't they?

Mr. Rubinstein: --That's... that's incorrect as well, because--

Unknown Speaker: Well, isn't it true that, let's say if Allstate wants to sue on... as plaintiff in its reinsurance contracts and Allstate has a place of business in some other State, it's not... it doesn't have to go to California to sue, does it?

Mr. Rubinstein: --Yes, it does.

Unknown Speaker: Why?

Mr. Rubinstein: Because this is... under the Bank of New York case, this is an in rem or quasi in rem proceeding and, in addition to that, over 10 years ago this Court issued injunctions requiring exactly that.

Unknown Speaker: Thank you, Mr. Rubinstein.

Mr. Rubinstein: Thank you, Your Honor.

Unknown Speaker: Mr. Donovan, we'll hear from you.

Argument of Donald Francis Donovan

Mr. Donovan: Mr. Chief Justice, may it please the Court:

This case is about the obligation of Federal courts to exercise the jurisdiction conferred on them by Congress, both courts of appeals and district courts.

I'd like to address the holdings of the court of appeals in turn, first that the district court's remanding of this case on both the grounds was an appealable order under section 1291, and second that the Burford doctrine afforded the district court no discretion to enter that order.

With respect to appealability, the issue is whether there is an exception under section 1291 for reviewable remand orders.

That is, remand orders that do not fall within the bar of section 1447(d) and therefore are reviewable either by a mandamus or appeal.

The Court held in the Cohill case that district courts have authority to remand cases even when Congress has not expressly authorized remand on a particular ground if the court would otherwise have authority to dismiss that case in order to allow proceedings to go forward in the State court.

The district court here exercised its authority under Cohill.

It could have dismissed after deciding the Burford motion.

Instead, it chose to remand, and the question before the Court with respect to appealability is whether or not the district court's decision to remand rather than dismissing means that its order on the Burford motion, its decision on the Burford motion is reviewable only by mandamus rather than appeal, as it would be--

Unknown Speaker: Well, what do you make of the language in Thermtron on that point?

Mr. Donovan: --Well, the language in Thermtron, Your Honor, as we pointed out, is language which did assume that an appeal was not available and therefore mandamus would lie, but Thermtron has to be understood on the basis of the case that it, in turn, relied on, which is the Wiswall case, and Wiswall should be understood in light of the case that it in turn cited, the Comstock case.

Those cases--

Unknown Speaker: You mean we should repudiate language in Thermtron?

Mr. Donovan: --Well, I think that the--

Unknown Speaker: Are you?

Mr. Donovan: --Well, I think that the language in Thermtron poses a difficulty, yes, but I'm... but the language in Thermtron, the assumption in Thermtron that in fact appeal was not available was, if it was a holding, as close to dictum as a holding can come.

It was not argued in that case.

Unknown Speaker: Well--

Mr. Donovan: It was not discussed in the case.

It was not--

Unknown Speaker: --But it was necessary to the Court's reasoning--

Mr. Donovan: --In a technical sense, yes, it was a holding, but in fact--

Unknown Speaker: --So you're asking us to depart from the holding in Thermtron.

Mr. Donovan: --We're looking--

Unknown Speaker: Are you?

Mr. Donovan: --Yes.

We're asking that you at least go beyond the holding in Thermtron, that's correct.

That single sentence in Thermtron that relies on Wiswall suggests, at least as to finality in the traditional sense, as opposed to a final collateral order, that appeal would not be available.

As to--

Unknown Speaker: We've never held that any appeal will lie from an order remanding, have we?

Mr. Donovan: --So far as I'm aware, the appeal... you have held in the Waco case that there are elements of an appeal... excuse me, from a remand order that can be appealed.

The Waco case was a case in which there was an element, the holding prior, in logic and in fact, in fact made the remand available, but it's true that in that case the remand itself was held not reviewable, but the substantive--

Unknown Speaker: So--

Mr. Donovan: --decision that was incorporated in the remand order--

Unknown Speaker: --we have never held--

Mr. Donovan: --was.

Unknown Speaker: --then, that an appeal will lie from a remand order.

Mr. Donovan: So far as I'm aware, no, the Court has not--

Unknown Speaker: And you're asking us to do that here.

Mr. Donovan: --What we're asking is to apply basic and fundamental principles--

Unknown Speaker: You are asking us to hold that an appeal will lie from a remand.

Mr. Donovan: --That's correct.

That's correct, and the reason that we're asking that the Court hold that is because it's compelled by every notion of finality.

The question here is what... how do you treat section... reviewable remand orders that are not barred by section 1447(d)?

If you look to the Court's definition of finality under section 1291, that is the only source by which you can answer that question, because jurisdictional course is conferred by Congress, and if you're outside the bar of 1447(d), you must be within section 1291.

Section 1291, the traditional Catlin definition: are there any further proceedings in the district court, no, there are not going to be.

That's the very purpose.

The very definition of a remand order is to completely end the case in the district court.

If you look to the Moses H. Cone decision, they are effectively out of Federal court.

Again, the very purpose of a remand order is to move the parties out of Federal court fully, finally, expressly, literally.

Unknown Speaker: Yes, but... maybe it's technical, but there is the difference that in the remand situation the litigation goes on.

It's true it doesn't go on in the Federal court, but the case goes on, which wasn't true in Cone.

Mr. Donovan: That's... well, it is in fact... it's only technically not true in Cone, but the notion that the case continues in the State court really is a completely formalistic difference.

In fact, the purposes... we're talking here about jurisdiction under the diversity statute in the Federal district court and under section 1291 in the court of appeals.

What happens in the State court really doesn't matter.

For purposes of the district court's decision, there's nothing that's going to happen in the district court.

Unknown Speaker: Well--

Mr. Donovan: For purposes of the court of appeals, 1291, this is a final decision, because it is all the district court can do.

Unknown Speaker: --Isn't Justice Stevens right that the litigation goes on, but that this is the paradigm case of a final collateral order?

Mr. Donovan: That's right.

Unknown Speaker: And so it's really appealable under Cohen, if you were to be technical about it, but, of course, it's not more nor no less appealable than Thermtron itself.

Thermtron was an appealable collateral order, in your view.

Mr. Donovan: That's... Thermtron, if the case had... if the Court had looked at it in Thermtron I believe that is what it would have concluded.

For purposes... again, for purposes of finality, whether we're talking about the final collateral order doctrine or traditional finality, what is it that is final here?

What's final is the district court's decision on the Burford motion.

That is never going to be reviewed again.

For example, in the final collateral order cases it's generally a decision, do we review now, or do we review later?

Here, it's now or never.

For all purposes, that decision is final.

There will be no subsequent opportunity to review.

So it's clear that under the Court's cases again, Catlin, final collateral order, Moses H. Cone, this is as final as anything can be.

Unknown Speaker: If we agree with you on this and hinge it on the Cohen doctrine rather than saying it's a final decision within the strict meaning of 1291, it would not be the case, would it, that all remand orders would necessarily be appealable?

We could still apply the importance prong of our Cohen jurisprudence and not permit appeal of every remand where the only issue alleged is some factual issue, as opposed to the quite important legal question involved in this case.

Mr. Donovan: That may be the case.

I should say, however, though, that even applying finality in the traditional sense, it's not clear that all remand orders would be final.

It would suggest, however, that a remand order here, because all that's before the Court, a Burford-based remand order where a district court has exercised its exceedingly narrow, as I will describe in a moment, discretion to refrain from going forward in a particular case, those would generally be--

Unknown Speaker: What orders... what remand orders would not be final, if your views prevail?

Mr. Donovan: --Well, for example, it... I think it remains an open question whether or not a remand order under the court's discretion, district court's discretion with respect to the supplemental jurisdiction statute.

I don't think--

Unknown Speaker: Well--

Mr. Donovan: --that's before the case--

Unknown Speaker: --that's the end of the proceeding in Federal court, isn't it?

Mr. Donovan: --Well, it would depend on the circumstances in which that came up, Mr. Chief Justice.

If... for example, if it was a... the supplemental cases pose various fact circumstances.

Frequently, for example, the case, if the court declined to exercise supplemental jurisdiction after dismissing finally the Federal claims, that would be final in any event, and I think there's also a question with respect to the 1447(d) bar itself with respect to supplemental jurisdiction, because there's a mention actually in the statute not about remand, but there is a mention about, decline to exercise jurisdiction.

This Court has not yet decided whether or not supplemental jurisdiction remands would be subject to the 1447(d) bar, and that, again, is not before the Court.

Unknown Speaker: Right.

Mr. Donovan: But it's a question that may eliminate that class of cases.

What really is before the Court now, I believe, are cases based on a substantive determination that clearly would be a dismissal, for example, of Burford abstention motion, or perhaps a forum, a selection clause.

I'd like to go... return to the point about Thermtron, because Thermtron itself did state in a single sentence that appeal was not available.

It did so in reliance on Wiswall and Comstock.

In order to give effect to Wiswall and Comstock today--

Unknown Speaker: Well, it also relied primarily on the statement in the statute that they shouldn't be reviewed by appeal or otherwise, didn't it?

Mr. Donovan: --I don't think that was what Thermtron was talking about.

Thermtron... the discussion in the last part of the Thermtron decision about whether... how one reviews, having decided that this was clearly reviewable, did not rely on any congressional language.

In fact, it relied essentially on the single sentence from Wiswall, and what it relied on was the notion that a remand order, as Wiswall would have it, was a refusal to hear and decide.

That is the same kind of theory that was applied at that time to a whole host of orders, including the Comstock case, which Wiswall expressly relied on, demonstrates, because Comstock was a subject matter jurisdiction case.

And there are many cases of that era, in fact the other cases cited in the margin in Wiswall are all subject matter jurisdiction cases.

Unknown Speaker: Just a simple point.

You keep saying 1447(d).

I take it that, regardless of how this case comes out, there's a statute.

We had one in the bankruptcy area.

These statutes prevent most reviews of remand orders.

We're only talking about a small category where the statute doesn't apply, is that right?

Mr. Donovan: That's exactly right.

Unknown Speaker: All right.

Am I right in saying it's a small category?

Mr. Donovan: I think--

Unknown Speaker: Am I right in saying that the statute, irrespective of what we do, would bar most reviews, and we're only talking about a small category?

Mr. Donovan: --We're talking, by definition, about remand orders that are on extrastatutory grounds.

That is a very small category of cases.

The two principal areas in which I'm aware from reviewing the courts of appeals decisions are forum selection clauses and Burford grounds.

Those are decisions that, by definition, would otherwise be substantive decisions, and if incorporated, as the district court could have here, in a dismissal rather than a remand, would be generally appealable without question.

So again, back to Thermtron and Wiswall with respect to the function of mandamus and appeal.

Those cases stood for the proposition that a refusal to hear and decide, quote unquote, at the outset of the case, was reviewable only by mandamus, and that was the point.

That was the basis on which they held an appeal did not lie.

There's no question today that in fact a refusal to hear and decide on the grounds of subject matter jurisdiction or personal jurisdiction or Burford grounds themselves is, of course, a final order, and a quote-unquote final decision within section 1291, and clearly reviewable.

Mandamus, on the other hand, today, is generally regarded as an unusual means of interlocutory intervention in very unusual circumstances and, in fact, the kinds of standards that the Court mentioned earlier during the course of Mr. Rubinstein's arguments are specifically formulated in order to avoid allowing mandamus to become a means of evading the finality requirement of section 1291.

In light of Wiswall and Comstock, in general finality principles there's simply no need to apply that function of mandamus.

There's simply no need to put those kinds of straitjacket on mandamus.

In fact, if you look at the Thermtron decision itself, Thermtron did not refer to any of those formulations.

Thermtron said, of course mandamus is available here because the district court has improperly refused to go forward.

In other words, if--

Unknown Speaker: Is it going to make any difference, then, whether a remand order is reviewed by mandamus or reviewed by appeal?

Mr. Donovan: --If the Court were to hold, we think erroneously, but if the Court were to hold that mandamus was the proper remedy, we think the Court would have to make clear that mandamus would apply in the Wiswall-Comstock sense, which is whether we issue... whenever a district court does not go forward.

But it's that very point that makes it clear that there's no reason to allow 19th Century writs to interfere today with the basic understanding of appeal--

Unknown Speaker: Well, Thermtron is not a 19th Century case.

It was decided about 15 years ago.

Mr. Donovan: --That's true, and Thermtron did, in fact, recite the language from the earlier cases.

But Thermtron, again, was a case in which this point was not raised by the court, was not raised by the parties, was not discussed at any length at all.

It simply quoted Wiswall and Comstock, and I think it would be fair to look at that case in light of, for example, Moses Cone and the whole arena of finality decisions.

In fact, I think it is important to do so, because without looking at that sentence and examining it in light of other cases, what you would do is simply confuse the law.

You would have a mandamus standard that would essentially, would have to recognize that mandamus readily issued, as Wiswall and Comstock would have recognized, when a court improperly goes to go... improperly refuses to go forward.

But you don't need to resort to mandamus today, because it is well understood today that in that situation, appeal lies.

Section 1291 says a final decision, and that kind of determination, a substantive decision, is a final decision.

Unknown Speaker: You're going to get to the merits question.

Mr. Donovan: I'm going to get to the merits right now--

Unknown Speaker: I knew you were.

Mr. Donovan: --Justice Scalia.

With respect to the Burford doctrine, the court of appeals held that the Burford doctrine afforded the district courts no discretion to go forward.

That holding was correct for at least two fundamental reasons.

First of all, neither the liquidator nor Allstate sought any relief that the district court had discretion to withhold.

Secondly, Allstate's removal of this action to Federal court had no effect whatsoever on any administrative process, on any attempt by the State to formulate State policy on any distinctively local issue, and I'd like to address those two points in turn.

If you look at this Court's cases in Burford and Alabama Public Service Commission, and NOPSI, and also the brief treatment of the Burford doctrine in Lumbermen's Mutual, it becomes very clear what the purpose, the justification, and the scope of the Burford doctrine is, for the Court explained very clearly in NOPSI a Federal district court simply does not have discretion to abstain.

What a Federal court does have is discretion in determining whether or not to grant particular types of relief, whether or not to give a particular remedy.

In the Burford doctrine specifically, the Burford doctrine recognizes that a court may have discretion to withhold injunctive relief.

Unknown Speaker: Mr. Donovan, if you'd stay by the mike, you would not fade in and out and--

Mr. Donovan: My apologies.

Unknown Speaker: --I would not get seasick.

Mr. Donovan: My apologies.

What... the Burford doctrine recognizes a specific type of discretion in the district courts, and that is to withhold injunctive or other discretionary relief where that relief would interfere with State policymaking on distinctively local concerns.

I'd like to address those two points in turn.

First, it... there's some question, I believe, whether or not the... this point is one that can ever arise in a remand situation.

The rule of Burford, the Burford doctrine, this is not about labels.

The liquidator continually accuses the court of appeals of relying on a label, but the court of appeals clearly did not.

What the court of appeals did is look at the nature of the action before the district court, and the purpose of the Burford doctrine, and it held they didn't fit.

It cannot be a matter of labels, and it surely is not a matter of the formal merger of law and equity.

That did not change the substantive principles applicable to the grant of injunctive relief.

This is a matter... the issue here is the... balancing a Federal court's obligation, virtually unflagging as it's always described, to go forward to exercise its jurisdiction, and on the other hand, it's discretion, to determine whether or not to grant particular types of relief.

It's hard to see--

Unknown Speaker: Virtually unflagging duty, if you'll notice in Color... is attended by about half-a-dozen exceptions, which makes one think perhaps it is not a virtually unflagging duty.

[Laughter]

Mr. Donovan: --Well, I think the--

Unknown Speaker: They're like the warrant requirement, really.

Mr. Donovan: --They're not... but what they're not... however many exceptions there may be, what the teaching of NOPSI said, and what it clearly is not, is some kind of freewheeling authority on the part of the district court to weigh a little State law here and a little inconvenience to the liquidator there.

It is a requirement that the Court rigorously identify some source of discretion that will allow it not to go forward.

Unknown Speaker: Why should discretion, as such, make the difference?

Why shouldn't the difference be, should the discretion be exercised one way or the other, which is to say, no abstention at all?

Mr. Donovan: Well, discretion matters because it's only discretion that can legitimize a decision to go forward.

If the Court does not have discretion whether or not to grant the request of relief, then it has, pursuant to the diversity statute, an obligation to go forward and exercise its jurisdiction.

Unknown Speaker: But there's no categorical reason why a so-called unflagging responsibility should suddenly flag when we get to a discretionary judgment.

Mr. Donovan: Well, that's right, and that's why--

Unknown Speaker: So there's no reason, in principle, to say that discretion is the determinant here, is there?

Mr. Donovan: --Well, that's correct, and I think that's why in the first statement in the court's NOPSI decision is a flat statement that a district court simply does not have--

Unknown Speaker: Well, if that's the case, then, then it follows that it really isn't the discretionary nature of the act which justifies abstention at all, is it?

Mr. Donovan: --It is the--

Unknown Speaker: If you accept the so-called unflagging responsibility.

Mr. Donovan: --It is not the discretionary nature of the act.

It is whether or not a court has some element of discretion in affording a particular type of relief.

For example, one cannot--

Unknown Speaker: That's... I'm not getting your distinction.

Mr. Donovan: --Well, as I... for example, the liquidator has argued here that the court... the district court should be understood to be exercising equitable discretion whenever it abstains.

That's circular reasoning.

One can't characterize the act as discretionary and therefore justify the exercise of discretion.

What the Court has taught in NOPSI is that you need to identify discretion in withholding a particular type of relief.

Unknown Speaker: All right.

So they say... I'm just trying to get you right to the merits.

What they say, I take it, is that we have many contracts, many contracts of reinsurance.

They're not all necessarily worded the same way.

There are tens of thousands of policyholders.

There are questions of interpreting these words, not all of which are the same, and questions about whether we send the matter to arbitration.

The answer may differ in different cases.

In order to protect and get uniform answers, to protect the shareholders, the State of California has centralized judicial review in one court, just as the State of Texas had done in Burford.

And there is no difference between the State of Texas in Burford treating a claim about what State law requires in terms of how much oil you take out of a well.

We need central, uniform decisions, and the question of how we interpret 15 or 20 or 1,000 different contracts, whether we send them to arbitration or not.

If anything, it's more complicated here in Texas, not less.

I'm trying... those, as I see it, are the merits, and I'm trying to see what your response is to that.

Mr. Donovan: Well, the difficulty... first of all, the... as we've explained in the brief, California has not centralized.

They have not purported to do so.

Unknown Speaker: They said in their brief they had one court, one single court that reviews all the decisions coming out of this administrator.

Mr. Donovan: The... there is a court in California which is handling the liquidation proceedings.

That court does not have exclusive jurisdiction.

In fact, it's authorized the liquidator to sue elsewhere, and in fact it couldn't arrogate to itself exclusive jurisdiction to feeding Federal jurisdiction as a matter of constitutional authority.

This action was filed as a separate action, and is not part of the liquidation proceeding, but let's get past those points.

The reason why that argument fails under the Burford doctrine is, the Burford case was about a very specific circumstance.

The court held that a Federal district court would have discretion to withhold injunctive relief where the Federal plaintiff comes into court and asks the Federal court to interfere with State administrative processes that were ongoing.

Now, there was a specific circumstance as well in the State administrative processes.

That is, the nature of the oil wells were such that you couldn't grant a well... a permit to a well-holder here without affecting how much pressure there was in the well there.

They were necessarily interconnected, and that--

Unknown Speaker: Yes, like giving money to one policyholder will inevitably affect how much another one gets.

Mr. Donovan: --But that would affect only in the sense that any... that does not affect the absolute... the rights under a contract.

What happens here, it doesn't affect California's regulation.

If you step back, there are stark differences between what was going on in Burford.

First of all, as I said, what Burford involved was interference in NOPSI... was administrative process.

There is no administrative process here.

Allstate is not attempting to interfere with the liquidator's exercise of his regulatory responsibilities in any way.

It's not going to Federal court to ask the court to issue an injunction to enjoin the liquidator from doing something.

It's going to Federal court to ask the court to resolve a straightforward commercial action, and in that commercial action, Allstate will have to prove facts and argue law just like the liquidator.

They will be equal before them.

They're not... Allstate's not trying to interfere.

We're not, for example, going and saying, the liquidator can't go forward with his liquidation in State court.

We're not interfering in any way with the regulatory capacity.

Secondly, there isn't any administrative proceeding.

This is a civil action, pure and simple.

It's a civil action in State court, it's a civil action in Federal court.

Thirdly, there's nothing distinctively local.

Yes, Mission happens to be in California.

There's no record as to where its policyholders are, but the important point for NOPSI purposes is there's nothing distinctively local about it.

Unknown Speaker: Mr. Donovan, you seem to be making a very good outline for an opinion that Judge Norris might have written but, in fact, it seemed to me that he defused labels, and he says there's a bright line between law and equity and you can't have any kind of an abstention when you have a case for money damages.

Mr. Donovan: Well, I was trying to respond to Justice Breyer's question, and just to finish that up, the last point is, I don't think there's any policymaking here.

What the liquidator is doing is acting like trustee.

The money, if he recovers from Allstate, is not going to the public treasury, it's going to creditors of the Mission or the State.

But to respond to your question, Justice Ginsburg, I think the Ninth Circuit very carefully explained that it is the nature of the relief sought that justifies any exercise of discretion to go forward, and here, there is no relief that would permit the court not to have gone--

Unknown Speaker: I'll have to read the decision again, but I had the impression that the Ninth Circuit was telling district judges it's all very easy.

If it's at law, then there is no abstention.

Mr. Donovan: --I don't think that's the case, because it did point out, for example, citing Professor Shapiro's article, that the common law prerogative writs afforded some discretion, so I don't think it did make that sharp distinction.

Unknown Speaker: It's pretty true, though.

I mean, as a matter of fact--

Mr. Donovan: Well--

Unknown Speaker: --it's usually equitable relief in which courts have discretion to withhold or grant.

Mr. Donovan: --It's very hard to imagine circumstances--

Unknown Speaker: Nothing surprising about that, is there.

Mr. Donovan: --in which there would be discretion, witness this case.

Unknown Speaker: Yes, and you stand by the point that we've never done Burford abstention in a case involving legal relief.

Mr. Donovan: There's no case that I'm aware of.

Unknown Speaker: Never dismissed.

Mr. Donovan: I think the only... the only other--

Unknown Speaker: Thibodaux in fact did not involve a dismissal, did it?

Thibodaux involved--

Mr. Donovan: --Thibodaux is--

Unknown Speaker: --a deferral of action by the Federal--

Mr. Donovan: --And Thibodaux really is basically Pullmanlike reasoning.

It cited Pullman, it did not cite Burford, and as importantly as--

Unknown Speaker: --It's last line is, by retaining the case, the district court, of course, reserves power to take such steps as may be necessary for the justice--

Mr. Donovan: --That's--

Unknown Speaker: --It was a retention of jurisdiction.

Mr. Donovan: --That's correct.

There's also a line about postponing the exercise of that jurisdiction.

On the merits, as well, it's an entirely different case.

The court pointed out it was a peculiar and special circumstance of eminent domain.

But to go back to the question, in fact, if you look at the relief here, what do you have?

You have a straightforward commercial action, and you have a commercial action in which the defendant has moved to compel arbitration on virtually all of these contracts.

Where does the discretion lie?

Either we're right on the contract defenses or the liquidator is right, but the court doesn't have any exercise of discretion in that.

Furthermore, with respect to the motion to compel, which the liquidator in his reply has now suggested affords some element of discretion... the liquidator's argument is a stay is equitable and therefore there's an equitable element in the case... that's wrong for at least two reasons.

First of all, the Federal Arbitration Act cases of this Court have made it crystal clear that a district court has no discretion to stay in the face of a valid arbitration clause.

Section 3 of the Federal Arbitration Act says shall, and that's what it means.

Secondly, even if the district court had had some element of discretion in refusing to go forward on the motion to compel arbitration, that would not, in turn, confer discretion not to go forward with the entire case.

What the district court should have done here was decide the motion to compel.

With respect to the Burford motion itself, the first thing the district court should have looked at is, do I have any discretion to withhold the relief sought in the motion to compel arbitration?

Clearly, the district court did not.

There is also no other case that could possibly have supported the exercise of discretion here.

Mr. Chief Justice pointed out the Fair Assessment case, but that case, even if it is viewed as an abstention case, is reliant on a long line of comity cases in a very particular area, the tax administration area, and it specifically relied on a holding that in fact a declaration under section 1983 would effectively shut down the tax administration system, and there's nothing remotely comparable here.

What the district court's opinion really relies on is some notion that the--

Unknown Speaker: That goes to your other point.

I mean, it goes not to your appealability... not to your point of whether it's absolutely precluded if nondiscretionary relief is sought, it goes to the point of whether, assuming it isn't absolutely precluded, should it have been granted here.

But you acknowledge that Fair Assessment is contrary to your position?

Mr. Donovan: --No, we don't acknowledge that Fair Assessment is contrary to our position.

What the court in Fair Assessment did was looked at a series of cases in which the court... that arose out of the injunction and declaration area and hold that a particularized comity principle applicable when plaintiffs, Federal plaintiffs sought to in effect shut down State tax systems would justify a similar application with respect to a section 1983 action.

That has nothing to do with this case here, nor has the liquidator really ever suggested--

Unknown Speaker: Was the plaintiff remanded to a 1983 action in State court in that case?

Mr. Donovan: --The plaintiff was remanded to State court specifically, without regard to what his action was, but it was regarded... it was... the assumption was that he would have an adequate remedy in State court and was therefore referred to a State court remedy.

What the liquidator has asked--

Unknown Speaker: What do you say the respondent wants in Pennsylvania v. Williams?

Mr. Donovan: --I think the respondent was completely misunderstood, both that case and its exception.

The court made clear in Commonwealth Trust Company v. Bradford that it has no application to in personam actions.

The problem with the liquidator's argument here is that this is a classic in personam action.

This is an action by an individual on a contract for money damages against a legal person.

That is, the corporation.

That is classic in personam.

The rule of Pennsylvania v. Williams, Penn General and Pennsylvania v. Williams, is an exception to the general rule that in rem jurisdiction must be exclusive.

That rule arises from practical necessity only when the court can actually control assets, and therefore, that's a rule that by itself applies only to in rem actions.

The exception acknowledges that in some circumstances with respect to in rem actions a Federal court can cede control even though it acquired jurisdiction first to the State court.

That has... neither the exception nor the rule has anything to do with this case, which the Court has repeatedly said.

To the contrary, there is a long line of decisions in this Court which have repeatedly said that in liquidation contexts, business, insurance companies, trust administration, an in personam claim against a liquidator, or receiver, or whatever outside the liquidation or receivership court does not interfere with that court's control of the assets.

The liquidator argues here that this is in effect in rem.

He relies on Morgan Stanley.

That was a case to recover possession and control of mortgage notes that were specifically in rem.

It was a full faith and credit case as well.

But this clearly is not an in rem case and pulling a couple of phrases out of context about marshalling assets cannot turn it into one.

This is a classic in personam action.

It's a contract action against a corporation.

Clearly, this falls within the scope of the court's cases, but it said that that does not interfere with the case.

What this case amounts to is a simple, commercial contract action in which the defendant has asked to compel arbitration on virtually all of the contracts at issue.

The liquidator's argument amounts to an argument that because there are some State law issues here, or potentially State law issues, and because it's inconvenient for the liquidator to defend this, he is entitled to remove it... to defeat Allstate's removal to Federal court.

There is no authority that would support that proposition.

There is no exception in the diversity statute for State law issues, clearly not.

The very premise of diversity is that Federal courts are fully competent to decide State law issues.

Likewise there's no convenience exception in the removal statute.

Clearly, if Allstate has a right to remove, the liquidator's convenience cannot defeat that.

The case comes down to a simple contract action for money damages.

Chief Justice Rehnquist: Thank you, Mr. Donovan.

Your time has expired.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Matsushita Electric Industrial Co., Ltd. v. Epstein - Oral Argument

Fri, 09 Jan 2009 14:49:47 +0000

Case:

Matsushita Electric Industrial Co., Ltd. v. Epstein

Media File:

94-1809_19951127-argument.mp3

Related Transcript:

1995_94_1809_argument.xml

Transcript:

Argument of Barry R. Ostrager

Chief Justice Rehnquist: We'll hear argument now in Number 94-1809, Matsushita Electric Industrial Company v. Lawrence Epstein.

Mr. Ostrager, you may proceed.

Mr. Ostrager: Mr. Chief Justice and may it please the Court--

The issue in this case is whether the Ninth Circuit should have given a final judgment of the Delaware supreme court the same effect it would have been given in Delaware.

The Delaware judgment approved a class action settlement and incorporated a release of all claims arising out of the transaction at issue, including exclusively Federal claims.

This Court's decision in Marrese teaches that the Full Faith and Credit Act applies to all State court judgments, including State court judgments which have a preclusive effect on exclusively Federal claims.

Thus, we believe that section 1738 requires that a State court judgment incorporating a consensual release of exclusively Federal claims must be given full faith and credit.

The Ninth Circuit's decision does not cite Marrese at all, and ignores this Court's full faith and credit jurisprudence as reflected in this Court's decisions in Allen, Kremer, Migra, and Parsons Steel.

These cases all teach that if a State court judgment bars subsequent litigation under the law of the rendering court, that a Federal court must grant full faith and credit to that judgment--

Unknown Speaker: Subject to due process, though, is that not right?

No full faith and credit if there's been no due process in the rendition of the judgment.

Mr. Ostrager: --Yes, Your Honor, and in addition the Marrese test indicates that full faith and credit must be granted unless there is an express or implied repeal by the after enacted statute.

Unknown Speaker: So can you tell me how the due process adequate representation, which I think is the focal point of this case... how did the Delaware judgment satisfy the adequacy of representation essential to due process requirement?

Mr. Ostrager: The Delaware Rule 23 procedure, which is precisely the same as the Federal Rule 23 procedure, constituted a full and fair opportunity for the absent class members to contest the process which bound the class, and notice was sent to all class members which contained the outcome of the case.

Class members were told that a settlement had been reached and precisely what the class members were receiving and what they were giving up.

Each class member had the right to opt out.

Each class member had the right to appear and object.

This Court held in the Shutts case that failure to opt out constitutes consent to the jurisdiction--

Unknown Speaker: I'm still concerned--

Mr. Ostrager: --of the class action.

Unknown Speaker: --with the adequacy of the representation, because you said in your brief, I believe, that that was actually litigated and decided, and therefore would have issue preclusive effect, so can you describe... because I don't quite get from the briefs what was the record that was established on the adequacy of the representation.

I know there are these two boiler plate phrases in the chancery court's decision, but what was behind the determination that there was adequate representation of this class?

Mr. Ostrager: In this case, Your Honor, the objectors appeared and were heard.

The objectors had the opportunity to conduct discovery concerning the decision making process of the class representatives.

That appears in the record at Joint Appendix cites 255 and 256.

The objectors specifically raised the issue of the adequacy of representation.

The objectors contended that there was something collusive about the Delaware settlement.

That appears in the Joint Appendix at pages 242 to 244.

This is not a case where the--

Unknown Speaker: So what was the evidence... they made those charges, and then was there any kind of hearing on them?

What happened?

Mr. Ostrager: --There was a hearing before the Delaware chancery court.

The objectors raised their arguments that there was inadequate representation.

They raised arguments--

Unknown Speaker: But whose burden is it to show adequacy of representation?

Is it the objectors' burden to show inadequate representation?

What was the showing made of the adequacy of this representation?

Mr. Ostrager: --In this case, the class in Delaware was represented by 12 class representatives--

Unknown Speaker: Were they named?

Mr. Ostrager: --named class representatives, and they were represented by 20 sets of lawyers.

Four sets of the lawyers were named as co lead counsel, and 16 sets of lawyers were named as part of a committee of the whole.

Unknown Speaker: What do you do with the problem that the chancery court judge initially said, I'm not even going to... I'm not going to accept this first settlement because there's nothing in it for the shareholders, there's only something in it for the lawyers?

Wouldn't that create a special necessity to show the adequacy of this same representation?

Mr. Ostrager: Your Honor, our position is that if this settlement had been presented to the Federal court, which had dismissed the Federal claims, and the state of the record was the same record which was considered by the Delaware chancery court and the court was looking at the settlement ex ante, and looking at the settlement at the time it was entered into, the same result would have been reached.

Our position is that the Delaware chancery court and all State courts are equally capable, as Federal courts are, in considering the fairness and adequacy of the settlement.

Unknown Speaker: So you say that any court, looking at the record that was made on the adequacy of representation here, would conclude on that record that the representation was adequate.

You agree with me, do you not, that it is the representatives' burden to show the adequacy and not the objectors' burden to show the inadequacy?

Mr. Ostrager: We believe that it is for the court before whom the case is pending, consistent with Rule 23 procedure, to make a determination concerning the adequacy of representation.

Unknown Speaker: Who has the burden under Rule 23?

Mr. Ostrager: I believe it would be the class representatives, and I believe it important to know that in this case, in which the adequacy of representation was actually litigated, the respondents in this case were not the type of sideline sitters who were referred to by Justice Stevens in his dissent in Martin v. Wilks.

Unknown Speaker: There was an appeal to the Delaware supreme court.

Was the adequacy of representation one of the grounds for appeal, because I... the judgment of the Delaware supreme court is simply of straight out affirmance.

It doesn't indicate what issues were raised.

Mr. Ostrager: Yes.

This was challenged on appeal, and I think it--

Unknown Speaker: Who appealed?

Mr. Ostrager: --The objectors appealed.

Unknown Speaker: Who are the objectors?

Mr. Ostrager: The objectors in this case were a Mr. Krupman and two relatives of Mr. Minton, and significantly, and this goes to the point I made about sideline sitters, significantly the respondents in this case prepared a draft objection which was utilized by the objectors in the Delaware fairness hearing.

That appears in the record at the Joint Appendix at pages 250 to 251.

So we have a situation where there was full litigation on the issue of adequacy of representation.

Many of the due process issues that are asserted here but which were not considered by the Ninth Circuit at all in its opinion, were raised in the Delaware chancery court.

Unknown Speaker: But the full litigation is still what I don't have a clear picture of, and you told me that there were objections, and then I didn't... I wasn't clear on how the representative met its burden of showing that, despite those objections, its representation was indeed adequate.

Mr. Ostrager: The--

Unknown Speaker: What was the evidence of that?

Mr. Ostrager: --The representatives presented to the Delaware chancery court a full record of the totality of circumstances that preceded the settlement.

Unknown Speaker: Where would I find... if I wanted to look for what evidence the chancery court considered in making that determination, where would I find it?

Mr. Ostrager: The hearing before the chancery court appears beginning at page 222 of the Joint Appendix.

Unknown Speaker: Just tell me everything that's relevant to the adequacy of the representation.

Mr. Ostrager: What is relevant to the adequacy of the representation is that these class members were represented by--

Unknown Speaker: No, I mean where do I find it, because I don't want to detain you any more, just so I can check on my own.

Everything... the record on which the chancery court made the determination that the representation was adequate, the full record.

Mr. Ostrager: --The full record includes the submissions by the class representatives of all the proceedings in the court, and among the places where these are found are at the Joint Appendix at 269, 270, 271, and those pages reference exhibits that were included in the submissions to the Delaware chancery court which reflected the entire history of the litigation before the Delaware chancery court and the entire history of the litigation in the Federal court.

Unknown Speaker: Was it after that record had been assembled and reviewed at the trial level that the trial judge made the remark that there was perhaps a whiff of collusion but that was not proof of it?

Mr. Ostrager: Yes, Your Honor.

Unknown Speaker: So he had seen all of that, and he seemed to put the burden of proof on the other side.

Mr. Ostrager: I believe that--

Unknown Speaker: And express a suspicion.

Mr. Ostrager: --I believe that the issue of suspicions abounding was raised.

These types of suspicions unfortunately exist in every class action.

Unknown Speaker: Yes, but I guess my point is, he both expressed suspicion and, if I understand his remark correctly, assumed that the burden of proving inadequate representation was on those who objected to it, isn't that... is that correct?

Mr. Ostrager: Your Honor, I believe that what the Delaware chancery court found was that the representatives were adequate, and that the settlement was fair and reasonable, and that the suggestions--

Unknown Speaker: Well--

Mr. Ostrager: --that there was something inappropriate about the representations were not--

Unknown Speaker: --Help me out.

I don't want to put--

Mr. Ostrager: --established--

Unknown Speaker: --I don't want to put words in your mouth, but as I recall his remark, which I don't... his statement, which I don't have in front of me, he said there was something, a whiff or suspicion or what not, of collusion, and then he went on to say, as I recall, that that, however, is not enough.

That does not prove that it occurred.

And doesn't that further statement suggest that he thought the burden of proof on the issue of adequacy was upon those who objected, not upon the class representatives?

Mr. Ostrager: --I don't believe that to be the case, Your Honor.

I believe that--

Unknown Speaker: Am I... tell me where I'm wrong on my factual assumptions.

Mr. Ostrager: --I believe that his conclusion was that the representatives were adequate and had fairly represented the class, and that any suggestion to the contrary was unfounded.

Unknown Speaker: Mr. Ostrager, on what authority do you base your statement to Justice Ginsburg that the burden of proof was on the class members to prove the adequacy?

Mr. Ostrager: Well, I believe that the concept of representative action is such that the court must make a finding in order to bind class members that representation is adequate.

That is implicit in both the Shutts case and the Eisen case.

Unknown Speaker: Did either of those cases talk about the burden of proof?

Mr. Ostrager: I don't believe they explicitly referenced the burden of proof.

I believe in this case we can meet that burden of proof and have demonstrated that this issue was fully and fairly litigated before the Delaware chancery court, and as to that issue, there should be issue preclusion.

Unknown Speaker: Is there any case authority for who has the burden of proof on the adequacy of representation?

Do you know of any cases that decide that question?

I cannot cite the Court to a specific case on that issue.

Can I ask you a slightly... the Delaware court finds that the representation is adequate, let's say that's affirmed on appeal in Delaware, and that notice was adequate, and all the constitutional requisites are complied with.

Then is that finding itself binding upon a later Federal court for full faith and credit purposes, or can a person who believes to the contrary come into Federal court and ask them to relitigate that on the ground that they weren't fair.

I, says this person who's never been heard of before, you see, never have been to Delaware, know nothing about this, don't read my mail, and I would like to now litigate in Federal court whether that was a constitutionally adequate protection of my rights because I wasn't even in Delaware and the representation was so terrible that, of course, it violated the Due Process Clause of the Constitution to take property from me.

How does that work?

Is me now, the imaginary me, bound by this finding as to the constitutional due process adequacy of the representation in Delaware by the decision of the Delaware court, or can the Ninth Circuit or the Federal Circuit relitigate all that?

Mr. Ostrager: I believe this Court answered that precise question head on in the Shutts case.

Unknown Speaker: In Shutts.

Mr. Ostrager: In Shutts the Court, discussing an opt out settlement... and we are dealing in this case with an opt out settlement.

Any class member who wanted to pursue a Federal claim in a Federal forum could have merely by executing the opt out form, and in the Shutts case--

Unknown Speaker: And they said, by the way, in Delaware, Breyer got that piece of paper, and I say in the Ninth Circuit, no, Breyer never even got it.

They sent it to the wrong address.

Now, is Breyer bound by that finding in Delaware, and Shutts says he is... it is.

Mr. Ostrager: --Under Mullane and under Eisen the notice that should go out has to be the best notice practicable.

Unknown Speaker: Yes, and they said that it was, but what I want to show is, not only is it not the best notice, it's horrible.

It all went to the North Pole.

Of course Breyer didn't get his notice.

I'm bound?

Mr. Ostrager: I believe... I believe that you are bound.

I believe in this case the adequacy of notice is another issue that was specifically litigated--

Unknown Speaker: And Shutts--

Mr. Ostrager: --in the Delaware court.

Unknown Speaker: --is the case that says I'm bound.

Mr. Ostrager: Yes, and the Shutts case says that it is the rare absent class member whose claim is so important that he shouldn't be bound if he doesn't execute an opt out opportunity.

Unknown Speaker: Yes, because I never got it.

They sent it to the North Pole.

Mr. Ostrager: I believe if the... if the best notice practicable was used, then that is sufficient to bind absent class members.

Unknown Speaker: And I'm bound by the finding that it was the best notice practicable--

Mr. Ostrager: I believe that... even though--

Unknown Speaker: --I've never heard of this case before.

Mr. Ostrager: --I believe that is correct, Your Honor.

Unknown Speaker: Shutts says that.

Did the Ninth Circuit deal with these questions at all about adequacy of representation or due process?

Mr. Ostrager: No, it did not, Your Honor.

Unknown Speaker: Let me go back to Justice Breyer's question.

I suppose ultimately the justification for the conclusion that you press on him is that somehow there's got to be a way of managing class actions, and once in a while somebody's going to get hurt, possibly, but not hurt very much, and that's simply a price that we've got to pay.

One, I guess, objection to that line of argument is, is the argument that in fact when State courts are dealing with settlements of class actions which purport to cover exclusively Federal claims, they have no legal authority to authorize class representatives to make these ostensibly binding agreements with respect to the Federal claims at all.

What is your answer to that?

Mr. Ostrager: Other than the Ninth Circuit decision, we are aware of no decision in the Federal system which holds that a court cannot resolve consensually--

Unknown Speaker: Yes, but why shouldn't there be such a decision?

Mr. Ostrager: --There shouldn't be such a decision because in a long line of cases this Court has recognized the importance of finality in transactions and litigations.

If I may for one moment talk--

Unknown Speaker: May I ask you just... before you proceed on that line, we left one thing dangling, I think.

The question was, who has the burden, and you suggested to the Chief that that's not really clear.

As a matter of Delaware law, to say nothing of Rule 23(a)(4), isn't it absolutely clear since the Prezant case that the representative has that burden?

Mr. Ostrager: --We have accepted that burden, Your Honor.

Unknown Speaker: But doesn't... Justice O'Connor asked you for a case.

Doesn't that case, that State law case, subsequent to this decision, just stand out for making clear that there is a very strong burden on the representative to establish adequacy?

Mr. Ostrager: The Prezant case held specifically, I believe, that it is incumbent upon the reviewing court to make a finding of adequacy of representation, and I don't mean to quibble with Your Honor.

We are accepting the burden of proving that representation was adequate, and we believe it was met in this case.

And if I could come back a moment to the practical aspects of allowing the Ninth Circuit decision to stand, if a finding that a class action settlement is fair and is... and one which is entered with all due process can be the subject of collateral attack, it eliminates all finality with respect to the scores of other cases which are... have been concluded in the State court system and which involve a germ of a Federal claim.

It effectively forces all actions into Federal court, because it's impractical for any litigant to settle any case unless all claims arising out of a particular transaction, actual or potential, State or Federal, are concluded.

It allows class members to completely bypass the ordinary and regular State court class action procedures.

Unknown Speaker: Let me ask this about the power of the Delaware court to order release of the Federal claims.

Suppose the chancery court said, I think there's very little merit to this Federal claim, and therefore I am going to approve the settlement, I think this Federal claim is probably not destined to succeed, and in the course of his analysis, he makes a misstatement of Federal law.

Now, would his certification be reviewable on certiorari to this Court on the grounds that he made a mistake of Federal law?

Mr. Ostrager: Certainly, if anything that occurred in Delaware was violative of any Federal right, review would be available on certiorari after review in the Delaware supreme court, and--

Unknown Speaker: Do you think it would be reviewable if he didn't make an explicit statement but just made an assessment of the Federal claim that was arguably erroneous?

Mr. Ostrager: --I believe that Federal issues that are decided in a State court are properly reviewable on direct appeal to this Court pursuant to 1257 rather than collateral attack.

Unknown Speaker: Is an assessment of the likelihood of success of the Federal claim an issue of Federal law?

Mr. Ostrager: I believe that in this case, where the settlement court was looking at a situation where the Federal claims had previously been dismissed and was making an assessment of whether a settlement that was available to a class then and at that point in time is certainly something within the discretion of the State courts to resolve.

I might point out that--

Unknown Speaker: But you don't think that there was any Federal issue there for us to review, assuming that there had been a certiorari petition brought to us?

Mr. Ostrager: --I do not.

I do not.

I do not believe that any issue that arises in the context of a settlement impacts on Federal concerns.

There's no impact on the uniform enforcement of the Federal securities laws.

In this case, the opt out right assured the respondents of the right to pursue the Federal claims if they so chose.

The right to object enabled them... which was availed, enabled them to raise any Federal constitutional issues in this Court on direct review.

The SEC could have reviewed any Federal issues of consequence which arose out of this transaction wholly apart from the disposition of this case by settlement.

Indeed, in this case, the only Federal interest that was implicated by the settlement is the affirmative Federal interest in ensuring efficiency of settlements.

Unknown Speaker: Can you explain one thing about the way this case unfolded?

It was an initial determination that these State claims were weak at best, and that stayed at every stage.

When the chancery court said, the Federal... the State claims are of little or no value, there may be some Federal claim here, why did the class representative continue in the State forum when it appeared that the only viable claim was a Federal claim over which the State court had no jurisdiction?

Mr. Ostrager: I think we are dealing here with the proverbial fluid situation.

There was a State claim asserted.

The State claim certainly stated a claim upon which relief could be granted.

The State claim had issues in it which, if litigated--

Unknown Speaker: But you're a representative of a class, and the judge has just told you, I don't think these State claims are worth anything, maybe there's a Federal claim here, and that's the same judge you're going to be before.

The State claims didn't change.

They didn't become any stronger.

Mr. Ostrager: --The class representatives in this case most assuredly continued to monitor developments not only in the State case but in the Federal case as well, and there was ongoing discovery to which these class representatives had access, and they--

Unknown Speaker: Isn't there something strange, though, about a case being in State court when the only really viable issue is a Federal one?

Mr. Ostrager: --I don't believe that the only viable issue was a Federal issue, and I might point out that Matsushita didn't initiate an action in the Delaware chancery court.

Matsushita was sued by 12 people represented by 20 law firms in Delaware, and dealt with that case as it defended the Federal case.

Unknown Speaker: And probably could have gotten a dismissal if it asked for it on the State claims.

It didn't ask for it.

Mr. Ostrager: It was judgment of counsel that the Delaware claim stated a claim upon which could be granted.

With the permission of the Court, I would like to reserve the balance of my time for rebuttal.

Unknown Speaker: Very well, Mr. Ostrager.

Mr. Monaghan, we'll hear from you.

Argument of Henry P. Monaghan

Mr. Monaghan: Mr. Chief Justice, and may it please the Court--

My argument basically has two prongs.

First, I'd like to go into the issue of adequate representation and, secondly, I'd like to convince the Court that in fact, in view of the reply briefs, it's perfectly apparent that there's no Marrese issue involved at all in the case.

Unknown Speaker: Mr. Monaghan, the question presented in the petition for certiorari is whether a Federal court can withhold full faith and credit from a State court final judgment approving a class action settlement simply because the settlement included a release of exclusively Federal claims.

Respondents phrase the question, did the court below err in refusing to give preclusive effect to a Delaware settlement and release to the extent that the Federal claims were factually and legally unrelated to any State law claims.

No question of due process or adequacy is raised in the petition.

You didn't cross petition.

This would be a totally alternate ground for affirmance.

Mr. Monaghan: Your Honor, two points.

I think first of all, we are respondents, and we can defend the judgment on any ground consistent with the record.

This point was the central point of our argument below.

Secondly, even if we were in the petitioner's point of view, are in that position, this question is fairly included within the petition.

The real question in the case... and they've reframed their question, incidentally, from their brief to their reply brief.

The real question is, did the Ninth Circuit disregard erroneously what happened in Delaware?

Unknown Speaker: Well, that certainly isn't the question... it's a much narrower question presented by the petition, whether the State court can release Federal claims as well as State claims.

Mr. Monaghan: It can't release those claims, Your Honor, if in doing so it would violate the Due Process Clause.

They conceded that.

Unknown Speaker: Well, that wasn't... the Ninth Circuit... the Ninth Circuit said they couldn't do it simply because State courts didn't have that authority.

Mr. Monaghan: The Ninth--

Unknown Speaker: And so I think, fairly understood, that was the question presented on certiorari.

Mr. Monaghan: --Well, I think... well, all I can say is, Your Honor, that whether or not that's the question that they presented on certiorari, there was countless case law in this Court that we can defend a judgment--

Unknown Speaker: Well--

Mr. Monaghan: --on any ground consistent with the record.

Unknown Speaker: --Mr. Monaghan, I think you're at some risk here today if you are unwilling to even argue the question on which cert was granted.

Mr. Monaghan: Oh, I'm--

Unknown Speaker: It's a question that I intend to deal with when I get to work on the case, and I would assume you'd want to deal with it here--

Mr. Monaghan: --I--

Unknown Speaker: --and not go off on some peripheral issues that aren't here.

Mr. Monaghan: --Well--

Unknown Speaker: I'm quite amazed.

Mr. Monaghan: --I will go exactly to the question--

Unknown Speaker: You know, the Ninth Circuit seemed to take the view that if it were an individual lawsuit in State court, and there is a settlement in State court and a judgment that disposes of a release of any Federal claim as well, that the Federal court later would give full faith and credit--

Mr. Monaghan: --Yes, Your Honor.

Unknown Speaker: --to that judgment, but the Ninth Circuit said it would not follow that rule or practice if it's a class action, and I thought we were here to determine whether that is correct or not.

Mr. Monaghan: I'm perfectly... I will turn exactly to that point, Your Honor.

The... there's a wide difference between an individual releasing a claim within the exclusive jurisdiction of the Federal court and a class representative that's happy to do so.

When the individual releases his claim, the State court judgment is not what effectuates the release.

The individual could release his claim sitting in his rocking chair.

The fact that he does so as part of a proceeding before... as part of a judgment, the judgment isn't what effectuates the release.

The judgment in the State court has one advantage.

It converts him from what would otherwise be a simple contract creditor into a judgment creditor which may give him affirmative rights under the State lien law.

But when an individual releases his claim, as this Court has recognized in the Mitsubishi case, he's a) under no obligation to pursue it at all, and he can release it outside the legal framework, and there's no reason to believe he can't authorize it inside the framework.

In this case, what happened is the class representative gets his authority solely by virtue of his appointment.

The complaint is organized entirely around State law claims.

We cannot understand how it is that the State court, which could not adjudicate the claims, could license a representative to go out, value those claims, badger the defendant, value them, and then authorize a release of those claims.

This is directly inconsistent with section 27.

If you will take a look--

Unknown Speaker: Why isn't the answer to this, if there is an answer, that that is what the courts of Delaware, at least, understand Delaware State law to be?

Why is Delaware... why is it constitutionally impossible for Delaware State law to grant this authority subject always to a due process attack?

Mr. Monaghan: --Because the Supremacy Clause forbids it.

Section 27 forbids it.

Unknown Speaker: Well, if there were a Federal statute that expressly provided that no State court or no State law system could authorize class representatives to make this kind of an agreement in a way that would be binding in the Federal court, I would see the argument, but Federal law seems to be silent on it.

Mr. Monaghan: Federal law is not silent on it in our view, Your Honor.

Section 27 provides for exclusive jurisdiction to enforce these claims in the courts of the United States.

If I can... and the question is, what does that mean?

Unknown Speaker: And what's the inconsistency there with a State law saying, you are authorized to settle these Federal claims?

Mr. Monaghan: The question analytically is whether a settlement in these circumstances amounts to an enforcement of the claim.

If you think about the structure of this case, you had nonexistent State law claims.

They were revived at the last hour in a hope to extinguish a substantial Federal appeal.

All that occurred here in the chancery court was a valuation of the worth of the Federal claims.

When--

Unknown Speaker: Apart from this case, Mr. Monaghan, though, I take it to be your position... it's a rather broad position... that only a Federal court can approve a settlement of a class action that releases a claim over which the Federal courts would otherwise have exclusive jurisdiction.

Mr. Monaghan: --We are prepared to defend that position here.

We could adopt a narrower position, which is the Ninth Circuit's position, which the State court certainly can't do it with respect to claims which don't overlap, and there's no contention here that the claims overlap.

Delaware--

Unknown Speaker: But I take it from what you were just arguing that that is the terminal point that you're going to.

Mr. Monaghan: --I'm perfectly happy to reach that point, Your Honor.

That's the way to vindicate the congressional judgment.

Unknown Speaker: But then that would take all these class actions out of the State arena and leave them exclusively, if there's combined Federal and State claims and there's securities claims, antitrust claims over which there's exclusive jurisdiction, all of that has to be done in the Federal courts, not in the State courts.

Mr. Monaghan: There are a great many ways of coordinating... first of all, we should not exaggerate the significance of the problem.

There are no more than 300 securities class actions brought per year in the Federal court, 300.

There are presumably about 145 defendants being sued.

This information is collected in a recent article in the Columbia Law Review.

What would happen in those circumstances is that the State court... you could file simultaneous suits in both the State and Federal court.

You could file the suit in the Federal court alone.

If the argument ultimately is one of efficiency, I would say, Your Honor, you... it's... you shouldn't just focus on efficiency of litigation costs.

You ought to look at efficiency of outcomes.

If the State court cannot adjudicate the claims, it will systematically undervalue the Federal claims.

You can't be a good diplomat if you haven't got the power to wage war.

But I'd go a step further, and I would say this.

Even if the Court were convinced that this is an inefficient solution, this is the solution that expresses Congress' will, in our judgment.

Congress said enforcement is in the Federal... in the jurisdiction of the Federal courts.

If you will look at point 1 of their briefs, the heading of point 1--

Unknown Speaker: What page is it on, Mr. Monaghan?

Mr. Monaghan: --I'm sorry, Your Honor.

Page 15.

This is how they describe the question a grant of exclusively Federal jurisdiction to adjudicate claims.

This is not what the statute says, and they've underlined the word adjudicate.

We quote the statute on the opening page of our brief.

As a matter of fact, in the 70 pages of their brief, they never quote section 27.

You can't find it.

You can't find the text of it.

The... on the opening page of our brief, this is the statute, and my view is that I cannot understand how a court which cannot adjudicate claims somehow gets the authority to appoint a representative to do what Congress has forbidden the court to do.

Unknown Speaker: Suppose I have a divorce, and my divorce is in Delaware, and I give my wife the right to use the Malibu beach house as part of the settlement.

Mr. Monaghan: Mm hmm.

Unknown Speaker: I mean, can't I do that, and couldn't it be included in--

Mr. Monaghan: You've got personal--

Unknown Speaker: --the decree, and it all is in California, all this property.

Mr. Monaghan: --You've got personal jurisdiction over both of those defendants.

Unknown Speaker: Oh, but did... they don't have jurisdiction here over the parties.

Mr. Monaghan: They do not have... they have personal jurisdiction over the parties, but they do not have subject matter jurisdiction over the claims.

Unknown Speaker: And do they... all right.

My point is, I don't quite see... it seems to me you have three separate arguments.

The release argument I don't understand, because the word release is written right into the judgment.

We're talking about a judgment, not a contract.

I don't really understand the argument of... I mean, the Williams Act seems to be a separate argument.

The Williams Act... you have a lot of Federal statutes, like the antitrust statute and others, which are exclusive.

I mean, the State courts cannot approve any settlement that involves giving up any of these Federal claims?

Why?

I mean, why not?

They can approve my giving up my beach house.

They can approve my giving up all kinds of things in a settlement.

Why can't they approve my giving up a class action that's worth $300?

Mr. Monaghan: The beach house example is a case of intrastate Federal--

Unknown Speaker: I know there are conceptual--

Mr. Monaghan: --Right.

Unknown Speaker: --differences, but my point is simply--

Mr. Monaghan: When you're talking about--

Unknown Speaker: --but my point is simply that in settlements people give up all kinds of things--

Mr. Monaghan: --Individual--

Unknown Speaker: --that have nothing--

Mr. Monaghan: --Right.

Unknown Speaker: --to do with the case in front of the person.

Mr. Monaghan: That--

Unknown Speaker: Now, if, in fact, they can give up all kinds of things, including beach houses, including mineral rights somewhere, why, assuming the Due Process Clause is satisfied--

Mr. Monaghan: --Mm hmm.

Unknown Speaker: --can't they give up a class action right to some case, probably would never be broader, if it was it would be worth $300 to them?

I mean, I don't understand what in the law would allow you to give up thousands of things, like houses, et cetera, but you couldn't give up some kind of class action right that's not worth too much to you?

Mr. Monaghan: Your Honor, there's a fundamental difference between an individual giving up something and a class representative.

Unknown Speaker: Yes.

Yes, that's called the due process problem.

I'm leaving that out.

Mr. Monaghan: No, it's not the Due Process Clause.

No, Your Honor, it's not the Due Process Clause, with deference.

The Due Process Clause claim is involved, but if I'm an individual and I have an antitrust claim, and I have 10 State law claims against you, I can release them all by way of a general settlement.

It can be put into the decree in the State court, but the decree in the State court doesn't do anything with respect to releasing the Federal claim.

It's my contract release.

This is Newton v. Rumery, which we cite in our brief.

The judgment isn't what releases it.

It's the contract, the agreement that releases--

Unknown Speaker: Why?

Mr. Monaghan: --Because there are plenty of Federal claims, Your Honor, and we cite two cases, Dicey and Rumery, in which a release is effected without any kind of a judgment.

Unknown Speaker: Well, suppose in this hypothetical the contract says, this contract shall be enforceable only if it is entered into a judgment in the Federal court... in the State court?

Mr. Monaghan: That's a matter of State law.

Unknown Speaker: This is a part--

Mr. Monaghan: That's a condition on the contract.

That's a condition on the contract, but what is effecting your release from a Federal point of view is not the judgment, it is... although the person now becomes a judgment lienor, as I said, but what effects it is the fact that he made a contract.

He could make it... he could make that same contract without any reference to a court at all.

Unknown Speaker: --Of course that's--

--Mr. Monaghan, let's... I'm sorry.

No, please.

Just exactly the point.

You're right on the point that was worrying me when I asked that.

This is the part I don't understand.

Of course you can exercise a release to a contract without a judgment, but why couldn't you also put it in a judgment, and if you also put it in a judgment, why wouldn't the Full Faith and Credit Clause require that judgment to bind other States?

Mr. Monaghan: If you put it in a judgment, you get the status of a judgment lienor, to start with, as a matter of State law, but if it's exclusively within the... if the claim is exclusively within the jurisdiction of the Federal court, there can be no claim preclusion.

Unknown Speaker: All right, let me ask you this question just to modify the example.

Let's assume you're right so far as the inadequacy of State law to in effect to effect the result that Justice Breyer is talking about, is there any bar to a rule of Federal common law in courts that do have exclusive jurisdictions... jurisdiction over these matters that says, we will in fact recognize State court judgments which purport to do this, subject always to collateral attack for due process, so that now we're depending not on the efficacy of State law and the full faith statute, we're adding an element of Federal common law that says, it's okay so long as we can look into it.

Mr. Monaghan: I think--

Unknown Speaker: Is there any bar to that?

Mr. Monaghan: --Yes.

I think Marrese disposed of that problem negatively.

That's exactly the argument... that's exactly what Judge Posner did in the Seventh Circuit in Marrese.

Unknown Speaker: Did he... he made the Federal common law argument.

Mr. Monaghan: He made exactly that argument.

He conceded that section 1738 would not bar the Federal claim.

He then decided to fashion a preclusion rule broader than the State preclusion rule, and the opinion of the Court in that case he was reversed on.

Unknown Speaker: Okay.

Mr. Monaghan: The... but I would say that in this case I think it's very important, Your Honor, with respect to class actions particularly, to understand that the State class representative gets his authority from the complaint and from the complaint only.

The complaint is organized only around State law claims.

If that's all he has by way of... all the State can give him, I don't understand how he suddenly bootstraps himself up in--

Unknown Speaker: May I ask a question--

--I still don't understand.

It seems to me that based on your answers to me and to Justice Breyer that it would be, if you prevail on this case, quite an abuse of authority and an exercise of authority in excess of jurisdiction for a State court ever to approve a release of a patent claim, of an antitrust claim, of any claim where there is exclusive Federal jurisdiction, even in a private action with a private contractor.

I don't see how the class action is any different--

Mr. Monaghan: --Oh, I'm sorry.

Unknown Speaker: --if the private individual puts in the contract that the contract is conditional upon approval and incorporation into a State court judgment.

Mr. Monaghan: Individuals can do this, Your Honor.

You have... if I... there's a... I have to come back again, and I don't want to sound like a broken record.

Individuals can do this as a matter of contract law.

That's settled, because they can do it outside court, they can do it inside the court.

Unknown Speaker: Well, they can't... an individual can't confer jurisdiction on a court that it doesn't have.

Mr. Monaghan: It's not conferring jurisdiction on the State court, Your Honor.

What it's doing is, it's making a contract with the defendant, and the State court is approving it.

Unknown Speaker: You're saying a court can recognize a contract but it cannot provide authority to a third party to make a contract.

That's where you're drawing the line.

Mr. Monaghan: The representative must... I'm sorry.

Unknown Speaker: Can State law authorize as a principle of agency someone to represent an individual and do this in an individual suit by virtue of State agency law?

Mr. Monaghan: Yes, Your Honor.

There are... a guardian ad litem, for example.

Unknown Speaker: Yes, so why can't it be done in the class action context under State law, and why isn't the remedy of those who object, such as your clients, simply opting out?

Why don't they opt out if they don't like it?

Mr. Monaghan: Well, if we opted out, there were two consequences of opting out.

First of all, our own individual claim would be not viable.

We couldn't have prosecuted that claim even if the defendants had admitted liability.

Secondly, and more importantly, we were in the--

Unknown Speaker: Why?

Why do you say that?

Mr. Monaghan: --They didn't have enough money.

Unknown Speaker: Why do you say that?

Mr. Monaghan: It cost money.

This man had only 1,000 shares.

The second... and very few securities litigants would be in a position who opted out.

This is one of the points that the Chief Justice made in Shutts about the desirability of class actions when you need people with very--

The second point, and more important point is, we couldn't opt out the class, the Federal class.

We were in the position of being fiduciaries.

In the Federal proceeding, vindicating a Federal claim, there are 500 docket entries in that case.

Contrary to what was suggested here, there were no litigation entries in that... in the Delaware case for a period of 18 months.

Unknown Speaker: When you say 500 entries, that's in the Ninth Circuit, what became the Ninth Circuit case?

Mr. Monaghan: Three hundred in the Ninth... 300 in the... 300... there are a total of 500 docket entries, 300 from the point at which the Delaware settlement was rejected by the chancellor in our appeal in the Ninth Circuit.

Unknown Speaker: That would have been the district court of California.

Mr. Monaghan: Prior to the district court, yes.

The--

Unknown Speaker: Mr. Monaghan, why can a State court authorize a guardian to settle an individual claim arising under exclusively under Federal action but not a class?

Mr. Monaghan: --Well, the... in case I don't get enough time, the best treatment of that topic is in Restatement of Judgments, which is prepared by Delaware's... the reporter of which is their counsel.

The... there are various kinds of representative suits, and they're all described in section 7... in section 41 of the Restatement of Judgment, Seconds.

There are some representative suits that exist by virtue of an independent relationship.

If I were a trustee for you, I would have general authority to act for you and litigate.

Some other kinds of representatives are appointed by law.

The guardian ad litem is one situation.

The--

Unknown Speaker: And the class representative is another.

Mr. Monaghan: --The class representative is another, and it's a... they all have their unique history.

They all have their unique dangers.

They all... no representative can bind on the basis of inadequate representation.

That's clear law.

But in the history of the class action case, the class representative would pose severe problems, because the class representative is... the guardian gets a general commission when he's appointed, take care of this person.

He may be a guardian only for the purposes of this suit, but it's, take care of this person, but he's a lot closer to the individual.

In the class action--

Unknown Speaker: May I interrupt you--

Mr. Monaghan: --Sure, yes.

Unknown Speaker: --and I apologize for this, but may I interrupt you on this?

I take it the answer to my question is not an answer that depends on Federal law, it is an answer which depends on a kind of a State agency law.

Mr. Monaghan: Yes, Your Honor, but the State agency law--

Unknown Speaker: Then the exclusiveness of the Federal jurisdiction over the underlying action has nothing to do ultimately--

Mr. Monaghan: --No, that--

Unknown Speaker: --with your position.

Mr. Monaghan: --No, Your Honor.

The... you initially start with the dimensions of the agency created by State law--

Unknown Speaker: Yes.

Mr. Monaghan: --but the question ultimately is what the State court could authorize the representative to do, and that representative--

Unknown Speaker: Well, let's assume the State, where it says, we can authorize as a matter of State law, the representative to bind this class, it's just like the guardian ad litem situation.

Assume that is State law.

What is the bar in Federal law, if Federal law would recognize it in the case of the guardian but not in the case of the class?

Mr. Monaghan: --Section 27 works differently with respect to class actions.

The class representative... the class representative is organized entirely around his complaint, State law claims.

A guardian ad litem, pursuing '34 act claims... let me put it this way.

The State could not authorize a guardian ad litem to bring a '34 act claim in the State court, couldn't authorize that, and therefore it can't authorize him to do it in the Federal court... I mean, in the State court... in... in... it can't authorize him to bring it in in the State court and it can't authorize him to settle it, in our point of view.

That's inconsistent with section 27.

What's happening here is--

Unknown Speaker: They why... then it could not authorize him to settle... a guardian to settle either.

Mr. Monaghan: --The guardian could not settle the claim in the State court, no.

Unknown Speaker: Okay.

What if the State court action is brought and there are... in the State by this guardian, and there are Federal claims but there are State claims as well, and district court, or the State superior court, whatever, says I can only deal with the State law claims.

The others, I agree with Mr. Monaghan, I don't have jurisdiction.

And then the parties reach a settlement, and they want to settle not only the State law claims but the Federal claims, execute general releases, just like so many people.

They can do that, I take it, can't they?

Mr. Monaghan: If they did that, and they wanted to make it effective, they would have to go into the Federal court to get the Federal court's approval, subject, of course, Your Honor--

Unknown Speaker: But there's been no--

Mr. Monaghan: --to the statute of limitations, which operates here to eliminate a lot of these problems.

Unknown Speaker: --So they couldn't even... even a general release wouldn't--

Mr. Monaghan: By an individual... I'm sorry.

Unknown Speaker: --By individuals.

Mr. Monaghan: A general release by an individual is fine.

Unknown Speaker: Or by a guardian ad litem.

Mr. Monaghan: The... by a guardian ad litem, yes.

General release--

Unknown Speaker: I thought your answer was that the guardian could not.

Mr. Monaghan: --The guardian couldn't release the Federal claim.

The guardian ad litem could not release the Federal claim... well, I don't know--

Unknown Speaker: Why not?

Mr. Monaghan: --about that, Your Honor.

That's a very hard question.

Unknown Speaker: But if the guardian can--

Mr. Monaghan: It's an individual, and an individual, it's a difficult question, yes.

Unknown Speaker: --But I... all right, let's assume for the sake of argument that the guardian can release the exclusively Federal claim.

If that's the answer, why can the class representative not do the same, because the guardian's authority comes from State law.

It receives some kind of Federal recognition.

The class representative's authority comes from State law.

Why should it not receive a parallel recognition?

Mr. Monaghan: Well, the guardian... bear in mind that you could not appoint a... New York... Delaware could not appoint a guardian to act in New York for us.

The question is, what can be lawfully... what can the State lawfully confer upon somebody who is... whose authority is constituted by law?

My basic position is they cannot authorize these persons to litigate cases in the Federal court.

That's not challenged.

There's no suggestion they can litigate.

What you can't litigate--

Unknown Speaker: In the State court.

Mr. Monaghan: --In the State court, I'm sorry.

Thank you, Your Honor... you can't... you cannot also release in the State court.

Unknown Speaker: Then that covers the guardian.

Mr. Monaghan: That covers the guardian, yes.

Unknown Speaker: So--

--That wasn't the Ninth Circuit's view of the matter, though, was it?

Mr. Monaghan: No, it was not, Your Honor.

The Ninth Circuit's view of the matter was, and it's a perfectly defensible view, was that the State court can release parallel or mirror image claims but not... and we certainly are not abandoning that position.

The Ninth Circuit's view has this advantage, Your Honor.

It results in the Federal claim not being systematically undervalued, because if you can't... if the State guardian can't affect a Securities Act claim in any way, he can't protect it, because he can't fight.

In the overlap cases, the mirror image cases where the State law and the State law are sort of a mirror image of one another, you could make the argument that the State representative, in settling, has got enough muscle to protect the underlying Federal claim.

Unknown Speaker: So if there were a State rule comparable to Rule 14(d)(10), then under--

Mr. Monaghan: Yes, that's right.

That's right.

Unknown Speaker: --the Ninth Circuit view, you would lose.

Mr. Monaghan: You have to understand the reality of this, because... I know Your Honor is not disposed to the question of adequate representation, and I'm not going to press it.

I just want to say one thing about it, if you'll permit.

If you will... if you think it's before you, and I think it's before you, if you will look, the State judge made no inquiry into adequacy representation.

There wasn't... in the record, you will find the word adequate representation mentioned once in the judgment, no inquiry at all, because he didn't think it was relevant, and the reason he didn't think it was relevant, because he was the judge in the Prezant case.

The vice chancellor in this case thought that there was only one issue is this a good settlement?

If you look at his initial opinion, if you look at his subsequent opinion, if you look at the order of notice scheduling a hearing, there is no mention that there will be a challenge to the adequacy of representation.

He's the vice chancellor who was reversed in the Prezant case because he didn't think it was relevant.

Unknown Speaker: What about the argument that you should have come into Delaware to make that objection and not stayed out of it?

Mr. Monaghan: Had we gone into Delaware, our judgment was we could not adequately protect the class.

If we... for a number of reasons which I'll go into.

If we stayed out, relying on the Restatement of Judgments, among other things, we knew that we could make collaterally the attack on lack of adequate representation, due process, and... this addresses a point that may be of particular interest to Justice O'Connor... there would be no Marrese problem because, on page 26 of our brief, we point out that the Delaware court would permit a subject matter jurisdiction attack.

Unknown Speaker: How do you know that... how could you count on the fact that you'd collaterally attack the adequacy of the representation?

Mr. Monaghan: Because--

Unknown Speaker: Did you know in advance that this vice chancellor would not inquire into it?

Mr. Monaghan: --Yes, from his first opinion.

His first opinion--

Unknown Speaker: That's a pretty high risk--

Mr. Monaghan: --Nothing--

Unknown Speaker: --to guess that he would not inquire into it.

Mr. Monaghan: --Nothing, Your Honor, with respect to the risk that we would have undertaken had we gone into the Delaware court.

Unknown Speaker: Can you summarize in one sentence, say a properly constituted class representative in a State court where the proceedings are completely fair, so there's no due process--

Mr. Monaghan: Yes.

Unknown Speaker: --problem can bind the members of his class to give up State claims, maybe even to pay some money in an appropriate circumstance, but cannot bind those members to give up some kind of Federal claim because--

Mr. Monaghan: Because of section 27 of the--

Unknown Speaker: --So it's all the Williams Act.

In other words, unless we find a congressional intent there in section 27, you lose.

Mr. Monaghan: --Well, section 27 is not the Williams Act.

Section 27--

Unknown Speaker: I mean, Section 27, unless because of section--

Mr. Monaghan: --Right.

Unknown Speaker: --So that's what this turns on.

Mr. Monaghan: Because there is no difference between... in terms of the act between adjudicating the claim and releasing it.

Section 27 doesn't make that distinction.

Unknown Speaker: Mr. Monaghan, I'm a little puzzled.

Suppose somebody who's incompetent has a Federal claim against me.

Mr. Monaghan: Mm hmm.

Unknown Speaker: How do I get that Federal claim released?

Mr. Monaghan: He can... if he's appointed by the court, he could release the claim as a matter of contract.

Unknown Speaker: He's appointed by a State court... by a State court.

Mr. Monaghan: He's appointed by a State court, he releases as a matter of contract law.

Unknown Speaker: Oh, he can.

Mr. Monaghan: He can release as a matter... individuals can release as a matter of contract law.

Now, if he's appointed as a guardian for purposes of litigation, he can't litigate it, but if I was appointed your guardian, Justice Scalia, I could release all your Federal claims.

Unknown Speaker: Not an easy assignment.

Yes.

[Laughter]

Mr. Monaghan: But I would submit, Your Honor... and I respect your predisposition, but I would submit that the question of adequacy is before the Court.

Unknown Speaker: You're quite right, the respondent can urge affirmance on alternate grounds, but we rarely do it.

We generally want to decide the question on which we granted certiorari.

Mr. Monaghan: No further questions... thank you.

Unknown Speaker: Thank you, Mr. Monaghan.

Mr. Ostrager, you have 4 minutes remaining.

Rebuttal of Barry R. Ostrager

Mr. Ostrager: With respect to the Supremacy Clause argument advanced by respondents, we submit that the respondents have made a fatal concession to that argument in footnote 26 of their brief, in which respondents concede that individuals can release Federal claims in a State court proceeding, and a derivative action in a State court can release Federal claims.

That same concession is made by the Ninth Circuit in its opinion, and that appears in the petitioner's appendix at page 38 and footnote 32.

Manifestly, if Federal claims can be dismissed in the context of an individual action or in a derivative action, then there's no Federal supremacy issue here, and there's also no Federal preemption issue here.

Unknown Speaker: Mr. Ostrager, your knowledge of Delaware... under your knowledge of Delaware law, if the members purportedly represented here wanted to have this judgment reopened on the basis of the Delaware supreme court's full development in the Prezant case, would it be possible to make an application to reopen this judgment under Delaware law on--

Mr. Ostrager: Delaware law has the equivalent of Federal Rule 60, and so there could be such an application made.

I'd like, if I could, to address myself briefly to the issue of the implied or express repeal of 1738.

This Court held in Shearson v. McMahon that parties could contractually agree to have Federal securities laws arbitrated.

In the Mitsubishi case, this Court held that Federal antitrust claims could be arbitrated.

Since the Becher case in 1929, when Justice Holmes wrote that there can be issue preclusion that will terminate a Federal patent case on the basis of findings in a State court, it can't seriously be contended that what occurs in lawfully constituted State proceedings cannot impact and, indeed, determine Federal proceedings.

In Allen v. McCurry, this Court, in terms of interpreting section 1738, held

"Congress has specifically required all Federal courts to give preclusive effect to State court judgments whenever the courts of a State-- "

Unknown Speaker: --Yes, but supposing a State court had litigated the whole case, including the Federal claims over which it had no jurisdiction, and purported to enter a judgment on the Federal claim--

Mr. Ostrager: --If there had been an adjudication--

Unknown Speaker: --what would happen then?

Mr. Ostrager: --of Federal claims, that would violate the Supremacy Clause.

Then there would be a manifest incompatibility with section 1738, but in the context of a consensual settlement--

Unknown Speaker: But if the State court considered that point--

--Yes, I don't think--

--and came to the conclusion that it wasn't incompatible, and therefore we're going to render this judgment--

Mr. Ostrager: --I believe that in that--

Unknown Speaker: --Fully litigated, and a State court came to that conclusion.

Mr. Ostrager: --In that case, review would be available to this Court under 1257, and that error could have been corrected.

Unknown Speaker: It could have been collaterally attacked.

Mr. Ostrager: We believe it probably could have been collaterally attacked.

Unknown Speaker: I think if you litigate jurisdiction in the State court, the State court decides against you, you lose on the Sunshine v. Treinies, and some of those cases in the early forties.

Mr. Ostrager: Certainly, Mr. Chief Justice, under Underwriters National and Durfee v. Duke, there is a rule of jurisdictional finality.

Chief Justice Rehnquist: Thank you, Mr. Ostrager.

The case is submitted.

Unknown Speaker: The court is now adjourned until tomorrow at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Mcneil v. United States - Oral Argument

Fri, 09 Jan 2009 14:49:25 +0000

Case:

Mcneil v. United States

Media File:

92-6033_19930419-argument.mp3

Related Transcript:

1992_92_6033_argument.xml

Transcript:

Argument of Allen E. Shoenberger

Chief Justice Rehnquist: We'll hear argument next in No. 92-6033, William McNeil v. the United States.

Mr. Shoenberger.

Mr. Shoenberger: Mr. Chief Justice, and may it please the Court:

The issue in this case today is a single one, whether or not Mr. McNeil can have his day in court on the merits in the case he alleged.

His suit alleges experimentation for AIDS and hepatitis purposes without his consent.

The Government answered agreeing that it had funded the research on male prisoners, but claims that the research was done on him voluntarily.

We believe the Court can answer the question presented in this case without reaching all of the many questions presented in the briefs in this case.

In particular, we believe the case can be answered on the argument that Federal Rule of Civil Procedure rule 15(d) means that he perfected his March, 1989 filing by the August, 1989 letter for filing that he sent to the court.

That appears in the Joint Appendix on page 10.

The case is not about exhaustion.

Mr. McNeil clearly exhausted the Federal administrative remedies.

Indeed, we think he at least exhausted it twice, but certainly he exhausted it once and got a letter from the Federal Government saying that he had a right to sue.

However, the case is rather complicated on its facts and I would like to run through a number of those major facts to show the events.

The case began when he filed, in at least January of 1989, an administrative claim.

In that same month, a letter was sent by the administrative agency saying that his administrative claim, which it was labeled, was being sent to a claims officer.

And he was told that if the case was not settled, he would have to bring a lawsuit.

In February of 1989, he received another letter from that same administrative agency, this letter saying that no records could be found to indicate that such experimentation had been conducted with the Federal Government being involved.

After those two letters, Mr. McNeil believed, apparently, that he had an obligation to sue or his rights would be lost.

He brought suit in March of 1989 and included with that suit a motion for leave to proceed in forma pauperis.

In 1989 in May--

Unknown Speaker: Let me stop you there.

Now, do you say that his claim was actually denied in writing?

And if so, which letter do we look to?

Mr. Shoenberger: --He believes or he believed that his claim was denied.

Unknown Speaker: What is your position?

What letter do we look to as a denial?

Mr. Shoenberger: You look to... he believed that the combination of the January 24th letter and the February... I believe it's 9th letter, put together, were a denial of his claim.

Unknown Speaker: Is that your position on his behalf?

Mr. Shoenberger: That is certainly a reasonable position.

I believe a stronger position--

Unknown Speaker: Well, is it your position on his behalf?

Mr. Shoenberger: --It's part of our... my position on his behalf.

I think the better position or the stronger position is that the August filing, the letter that was contained in August, certainly constituted an adequate filing for purposes of this suit.

Unknown Speaker: But if we go this far, because that's where we are chronologically, you say that the two letters, somehow combined, are a denial.

Because there certainly wasn't the passage of 6 months, was there?

Mr. Shoenberger: That's correct.

There was... well, there was by August of 1989, there was the passage of 6 months.

Unknown Speaker: No, but by the time he filed suit in March.

Mr. Shoenberger: That's correct, there were not--

Unknown Speaker: 6 months had not elapsed.

Mr. Shoenberger: --That's correct.

Unknown Speaker: So you would have to say somehow those two letters were a denial.

Mr. Shoenberger: That's... that was clearly what he believed.

As a prose litigant, he clearly believed that and he clearly articulated that to the Seventh Circuit in his reply brief.

Unknown Speaker: But, we're... Mr. Shoenberger, we're talking really a question of law here, not what someone may have reasonably believed, unless the law makes what someone reasonably believed, rather than what actually was, relevant.

Mr. Shoenberger: I agree, Your Honor.

Unknown Speaker: Then why do you keep mentioning your client's reasonable belief in something?

Does the law... does the statute give any reason why reasonable belief should be important?

Mr. Shoenberger: The statute on its text neither refers to reasonable belief... nor does the statute, we believe, in its text indicate the remedy that should occur should a premature filing, if this is deemed a premature filing... had been made.

So the text is absent that would answer this case, except for Federal Rule of Civil Procedure, rule 15(d), which explicitly speaks to the case and we believe explicitly cures any defect that might have been made in the original filing.

Unknown Speaker: Well, but if one were to read the text of 2675(a), which is one of the statutes with you,

"an action shall not be instituted upon a claim against the United States for money damages unless the claimant shall have first presented the claim to the appropriate Federal agency and his claim shall have been finally denied by the agency in writing. "

That suggests that whatever you... whatever you filed in March simply was not... was not permissible under the statute because

"an action shall not be instituted. "

Mr. Shoenberger: Well, what... we contest, of course, whether "instituted" means the same as commenced.

Unknown Speaker: Well--

Mr. Shoenberger: But he believed that he had his denial, and the statute is only clear if you look at the method it specifies for notifying the denial, which refers to certified or registered mail.

Unfortunately, Mr. McNeil was a prisoner, and as a practical matter unless a letter includes within its text a reference to certified or registered mail, he would not know whether or not the letter was certified or registered, because that kind of documentation does not normally come forward to prisoners, at least in most of the prisons that I'm aware of.

Unknown Speaker: --Well--

Mr. Shoenberger: And so he had... he had a gap in knowledge.

Unknown Speaker: --Well, was the letter which he received... was it certified or registered?

Mr. Shoenberger: The record does not indicate whether either the January, 1989 letter or the February, 1989 letter were either registered or certified.

Unknown Speaker: Was this point raised by you in the district court?

Mr. Shoenberger: I did not represent him in the district court.

Unknown Speaker: Was it raised by whoever represented him in the district court?

Mr. Shoenberger: He represented himself prose.

Unknown Speaker: Was it raised by him?

Mr. Shoenberger: He did raise the argument that he had made a sufficient filing--

Unknown Speaker: I'm asking you a very specific question, Mr. Shoenberger, and I think it's capable of being answered yes or no.

Mr. Shoenberger: --I believe he did assert specifically that he had notice in March of 1989 in connection with these two letters that allowed him the right... a permission to sue.

He said that specifically to the Federal district court.

In--

Unknown Speaker: Well, so he wasn't contending there, then, that the mailing he received was inadequate.

Mr. Shoenberger: --No.

I think he thought the mailings were adequate to inform him that the Federal Government had said his claim was denied.

Unknown Speaker: Well then are you... are you here making a... I thought from what you remarked a moment ago that you are here making a point that because there was... there's no evidence the denial was sent by certified or regisetered mail, that that has some bearing on it.

Mr. Shoenberger: In the August, 1989 filing that he made, in his letter requesting to commence the litigation, attached to that letter... that letter was the sum certain denial that was sent in July of 1989.

And internally, that says that it was sent by certified mail, return receipt requested.

Unknown Speaker: Well--

Mr. Shoenberger: That is, the letter contained that particular language.

Unknown Speaker: --Do you make a point here of your claim that the denial from the agency was not sent by certified or registered mail?

Mr. Shoenberger: That as far as we know, in August... in July of 1989 it was sent by certified mail, because that's what the letter says.

Unknown Speaker: And am I right in thinking you make no point of failure to certify or register here, in your case here?

Mr. Shoenberger: We certainly don't, because there's no evidence in the record... and the only evidence in the record would seem to suggest it was, but we don't know that as a fact.

And as I said, Mr. McNeil doesn't know that as a fact, can't know that as a fact by the way mail is processed in the prison.

But in any case, the Government, as we understand it, agrees that that July, 1989 letter was a sum certain denial.

We think that's uncontroverted in the record and any of the briefs that have come up on appeal, either in the Seventh Circuit or in briefs to this Court.

However, rule... rule 15(d), it seems to us, is a completely adequate way of dealing with the particular problem.

If I could ask your Court... the Court to refer to the Joint Appendix, page 10, that's his August filing.

And that filing in its text seems quite clear.

It says he got his second sum certain denial, which was attached to that... it's the July, 1989 sum certain denial.

And it's... he says he's sending that second text, second denial, to the Federal district court.

It also states he was, in fact, infected with hepatitis.

It tells the court that he had paid the filing fee for the case in May of 1989, although in June of 1989 the Federal district court did not apparently know that and stayed all further proceedings until it ruled on the in forma pauperis motion.

There were a number of documents that apparently were mislaid in Mr. McNeil's case by the Federal district court.

Unknown Speaker: Well, now, you don't take the position, do you, that the August 7th letter is a complaint--

Mr. Shoenberger: We--

Unknown Speaker: --For an action?

You rely on the complaint filed back in March.

Mr. Shoenberger: --No.

We take... we believe that the August letter is at least construable in two different ways.

That it's a proper rule 15(d) supplement that perfects the original March filing, or, alternatively, that it is, in fact, a complaint under Haines v. Kerner, to be construed liberally in terms of its text.

So that on either of those grounds... if you find for Mr. McNeil on either of those grounds, the case was validly... was validly filed and perfected, either filed in August of 1989 or perfected in August of 1989, and that he has an ability to go forward with the suit.

Unknown Speaker: Well, is there anything to indicate that the district court acted to grant this implied motion under 15... under rule 15(d)?

Mr. Shoenberger: There is no indication that the Federal district court ever saw this letter of August 7th and the attachments.

There is no reference in the opinion at the district court level that it was ever paid any attention to, and so the answer to that is no.

Unknown Speaker: Well, it's rather odd to rely, then, on an implied motion that the district court has not even seen, much less acted on--

Mr. Shoenberger: But it was filed.

Unknown Speaker: --To cure a defective pleading.

Mr. Shoenberger: But it was filed.

And I would suggest if you look at the language that is the last part, sentence,

"plaintiff prays this Honorable court accepts this letter as a proper request, whereas plaintiff can properly commence his legal action accordingly. "

If... and we disagree.

If the word 2675... and both of those words mean filed, if the statutory language is to bear that interpretation, his letter should bear that same interpretation, being in the same context.

And that means that this particular last sentence or last half sentence should be interpreted as him saying I want to file a case right now, let's get the case going.

Unknown Speaker: Well, no, it doesn't say I am filing a case right now.

It says... it says if you accept the letter, then I can... I will be able to commence my legal action.

It doesn't say I am hereby commencing it.

Mr. Shoenberger: If the... if commencing means filed, if that's the statutory interpretation from 2675 that's correct.

Unknown Speaker: Yeah, but it says it "can properly commence".

It says,

"whereas plaintiff can properly commerce his legal action accordingly. "

Mr. Shoenberger: Right.

Unknown Speaker: That means I am now able to commence my legal action.

Not I have commenced it or I am commencing it, but I can commence it.

Mr. Shoenberger: Well, I think... I think his subjective intent may very well have been that he simply wanted the prior filing to start going forward.

But he was a layperson and he certainly had no great familiarity with rule 15(d).

He also had no great familiarity with the 120 plus odd words that are the first two sections of section 2675.

Unknown Speaker: Well, I don't think it's too much to insist if you want one... one document to be accepted for another one, that he's saying I'm filing a complaint.

I mean, not if you accept this letter, I'll be able to file a complaint or I can file a complaint.

Really, you don't have to be a law school graduate to speak English, and I don't know why we have to bend over backwards for prose litigants to make them say something they haven't said.

Mr. Shoenberger: Well, I don't think you have to bend over backwards.

I think it's quite reasonable to interpret this language, without any stretching of the language, to say here is a filing.

The case is filed, I have a right to sue, I have complied with the exhaustion requirements of 2675 twice, I have two sum certain denials, that he explicitly says.

He explicitly says I have been infected with hepatitis.

There is reference to the theories, through some of the attachments to the letter that was contained.

It's clearly a Federal Tort Claims Act case that he's dealing with.

He cites the caption number of the prior case.

He doesn't, indeed, label it a complaint, but it's only the absence of the word "complaint" that means that this is not a sufficient new filing.

Unknown Speaker: Was a copy of that letter served on or sent to the Government?

Mr. Shoenberger: I do not believe so.

There's nothing in the record to indicate so.

In fact, it's... since the only time the Federal Government and the district court indicated it was aware that an administrative claim had been filed in January of 1989 is in their response brief to his response to their motion to dismiss, I don't believe they ever checked the record in this case to see what was in the record--

Unknown Speaker: Well, but I mean it stretches... it stretches again the argument for the implied rule 15(d) motion to say that it's a... it's a motion for a supplemental pleading when it's not even served on the Government.

Mr. Shoenberger: --In... this Court in decision... in Matthews v. Diaz, it was even more stretched than that.

In Matthews there was not even a filing with the court.

There was an informal notice to the court that a... that an event had occurred in the context where this Court said that it was dealing with an unwaivable jurisdictional issue.

And the jurisdictional issue... the complete issue was that the person there had to apply to the secretary and have exhausted, after a hearing, a particular administrative route.

He hadn't even applied, before the court filing occurred, to the administrative agency.

He also never exhausted, as a practical matter.

But this Court said that the informal notice to the court that occurred during the litigation should be construed as adequate for supplemental pleading.

I'll draw the attention of the Court to rule... to footnote 8 in that decision.

In this case, Mr. McNeil at least tried to let the court know that he had... he had the second sum certain denial, which certainly is an effective sum certain denial.

It's actually more than what the court had in Matthews v. Diaz.

I'll also draw the Court's attentions to the Miller Act cases that are cited in the briefs, the U.S. v. C.J. Electric and the Haydis decision.

Unknown Speaker: Do you cite Matthews against Diaz in your brief?

Mr. Shoenberger: Yes, we do.

Unknown Speaker: Oh, I didn't see it in the index.

Mr. Shoenberger: I believe it's in the... it's in the supplemental.

Unknown Speaker: In your reply brief.

Mr. Shoenberger: Yes, in the reply brief.

Unknown Speaker: Mr. Shoenberger, you know I didn't really think we were going to get into whether... I didn't think we had taken the case to try to figure out whether this August 7 letter was a proper commencement of the suit or not.

How is this set forth in the questions presented?

Mr. Shoenberger: We think it's a question that's a subsidiary question to the one that was presented in the petition for certiorari.

Pages 3 and 6 of the petition for certiorari certainly averred to this question and make it clear... we thought it made it clear to the Court that it was part of the question that was being... was being brought to the Court.

Unknown Speaker: Well, what... which question being what?

How?

Mr. Shoenberger: The question is whether or not the August... the August filing of 1989 was sufficient either as a complaint itself, as a stand-alone complaint with the attachments associated with it, or as a perfecting of the March filing, if this Court should determine that the March filing was perfected.

Unknown Speaker: Well, what... that's fine.

As I have your questions presented in your brief, and you cannot bring in... since you're seeking to overturn the decision below, you can't bring in outside arguments for the purpose of sustaining it.

Your question presented in your brief is whether an incomplete filing of a Federal Tort Claims Act... an incomplete filing may be perfected by filing a notice of final agency denial.

Not a document which could be considered a proper complaint, but by filing a notice of final agency denial prior to substantial progress.

That was your first question.

Your second question is may the United States bar a suit when the prose prisoner files a premature suit but satisfies the congressional requirement by filing a final agency denial prior to substantial progress.

Now, that is a significant legal issue on which there's dispute around the country.

There really isn't very much dispute around the country on the meaning of this letter of August 7, and I don't think we would have taken the case to decide that.

Mr. Shoenberger: I agree.

Unknown Speaker: Well, can we talk about the legal issues that were the subject of the petition.

Mr. Shoenberger: Yes, Your Honor.

The question is whether or not the failing to exhaust generates a particular remedy.

The remedy that the solicitor general's office is seeking is dismissal, to treat as a nullity the March filing.

We don't believe that is consistent with what Congress said.

We don't believe that's consistent with any of the congressional history.

There is a total absence of any reference in floor debate or in committee reports to Congress of a suggestion that this particular remedy, dismissal of the case, is to occur if there is a premature filing.

There was no question that Congress intended that exhaustion occur.

Exhaustion did occur in this particular case.

Unknown Speaker: And you concede that as a jurisdictional requirement.

Mr. Shoenberger: That exhaustion has to occur.

Congress clearly meant that exhaustion had to--

Unknown Speaker: And that it is jurisdictional.

Mr. Shoenberger: --It's something that is certainly necessarily to occur.

Whether it's jurisdictional or condition precedent to recovery or condition precedent to the case going forward, I can't... I can't say.

Whether it's a... would be--

Unknown Speaker: Well, if it were jurisdictional the answer would be a rather neat answer, wouldn't it?

Mr. Shoenberger: --Well, Matthews v. Diaz, I think, gives a rather neat answer to that.

And that answer is that even if it's jurisdictional, it's a 15(d) supplemental thing relating to events that occurred subsequent to the filing.

The case is now perfected and under 15(d) the case can go forward--

Unknown Speaker: So you lose nothing if we do treat is as jurisdictional.

Mr. Shoenberger: --That's correct.

That's correct.

Unknown Speaker: Well, if your client had failed to file any sort of a paper in court in March, eventually his claim would have simply disappeared by virtue of the running of the... either the statute of limitations, wouldn't it?

Mr. Shoenberger: Yes, it would have.

It would have.

And I also want to mention one point in this connection.

He believed... and I believe this is incorrect, but he believed that he had a 6 month obligation to file suit after what he considered to be his filing.

He was wrong.

Unknown Speaker: Again, yeah, why... why is this at all important in our disposition of the question presented, what he believed?

Mr. Shoenberger: Because the Federal Tort Claims Act proceedings, particularly now with the administrative proceedings, are proceedings that are frequently instituted by people proceeding prose.

Unknown Speaker: Where in the statute does it talk about anybody's honest belief?

Mr. Shoenberger: It does... it does not.

It does not appear.

Unknown Speaker: Then why do you raise it here?

Mr. Shoenberger: Because the... this Court has in a number of cases, in particular in relationship to the... to Title VII in the Zipes case, and in the... a DEA case, indicated then... when petitioners proceed prose or can start processes prose, that it will not strictly construe the language in a way that prevents them from going forward.

In the one case, this Court actually ordered that the condition of notifying the State agency, which had not been performed, be performed by staying the Federal action until after the State agency had an opportunity to act.

In Zipes it found that the failures to exhaust, which were clear on the record, did not bar the case from going forward.

We're asking for the same ruling.

It seems to make... we believe it's a sensible ruling in this case.

If Congress didn't say the same thing as it said in the Hallstrom context in the context of RCRA and environmental statutes, we do not have a case here, like there where Federal Rule of Civil Procedure, rule 3, the word "commenced" is, in fact, used.

And Congress used the word "institute".

Unknown Speaker: Well do you think "institute"... well do you think "instituted" means something much different from commenced?

Mr. Shoenberger: We believe it does, Your Honor.

We believe the dictionary definitions are different and the common usage is different.

Everybody would understand if I say I'm commencing a trip to the Grand Canyon.

If I said I'm instituting a trip to the Grand Canyon, it doesn't mean the same thing.

I think there's ambiguity there.

Unknown Speaker: Well, but the fact that you... you can't use one word for everything you can use the other word for doesn't mean that in the... in the area where they have common application the meaning may not be the same.

Mr. Shoenberger: That's correct, Your Honor.

However, Congress has, in fact, used the word "institute", including in the some of the cases that the solicitor general... some of the statutory examples the solicitor general cites, which we refer to in our supplemental, in our reply brief... to mean something different.

To mean, at least in some cases, two different events as what is referred to by "institute".

In one case at least the service of process is necessary to finally commence.

So it's not just a commencement by filing; "institute" means the service of process and the filing.

In another case it's the consent to be--

Unknown Speaker: Is this definition of the word "institute" out of a dictionary?

Mr. Shoenberger: --We have both cited dictionary definitions of the word "institute", yes, Your Honor.

Unknown Speaker: And it talks about a service or a filing.

Mr. Shoenberger: No, no.

The dictionary definitions are not identical, and we believe the common usage is not identical either.

Unknown Speaker: Well--

Mr. Shoenberger: And statutes that Congress... I'm sorry.

Unknown Speaker: --Well, what statutory definition of "institute" are you talking about?

Mr. Shoenberger: There is no statutory definition in this statute of the word "institute".

Unknown Speaker: Well, I thought you were referring a moment ago to... that the word "institute" meant two stages or something like that.

Mr. Shoenberger: In a number of the examples cited by the solicitor general's office, which we discuss in the reply brief on page 8 and 9, the word "institute" is used, in these cases, in the same statutory sections along with the word "commenced".

And I believe it's quite clear that the word "institute" means something somewhat different than the word "commenced" when Congress is using them in the same statutes... the same statutory sections and subsections, the same words.

In particular, if you take a look at the section 256 that's on page 9, in that case

"consent to be included in the lawsuit. "

is required.

And that consent can clearly occur at a later point in time than the initial instituting of the lawsuit, the filing of the lawsuit, the commencing of the lawsuit as a whole, but it "commences" as far as a particular litigant only when that litigant agrees to be part of the lawsuit.

Unknown Speaker: Mr. Shoenberger, as I understand your position, it's that the failure to comply with 2675(a) should not automatically result in dismissal; that it should depend on how far the lawsuit has progressed.

And the further it's progressed, the more ready you should be to dismiss it.

Mr. Shoenberger: We believe that the line that several circuits have drawn that substantial progress had not... has not occurred is a reasonable line to be drawn.

Unknown Speaker: Why--

Mr. Shoenberger: That speaks to the efforts that are involved in the progressing on behalf of the Government and the conservation of the Government's resources in terms of litigating these kinds of cases.

I think it's an appropriate line to be drawn.

Unknown Speaker: --If it hasn't gone... if it hasn't proceeded very far, you dismiss it.

Or if--

Mr. Shoenberger: It's certainly reasonable to dismiss it at that... it's reasonable... no.

If it hasn't progressed at all, it should not be dismissed.

It's--

Unknown Speaker: --I don't understand that.

I mean I would think just the opposite ought to be true, that if it has come a long way you shouldn't dismiss it.

Why does your rule make any more sense than the opposite?

Mr. Shoenberger: --Well, as a practical matter, if Congress was concerned with conserving the governmental resources, we think that purpose is disserved by letting a case go forward and be litigated perhaps months, or as in the Hallstrom case, years until the point happens to be raised.

In this case, however, as the facts of the case indicate, the Government didn't move to dismiss until 13 months after the August filing of the 1989 letter.

So no process occurred, literally.

The Federal court didn't find the filing fee had been paid until approximately 9 months later after the filing of the August 7th letter.

So for purposes of this case, we think it's a perfectly appropriate rule--

Unknown Speaker: But you say if the Government wants to... wait a minute, now.

The further along it is, the more... the more ready you should be to dismiss it, yeah?

Mr. Shoenberger: --If the Government makes that motion.

Unknown Speaker: Gee.

Mr. Shoenberger: We believe that the Government has a--

Unknown Speaker: Well, so the Government should really let all these suits go on as long as possible, waste as much judicial resources as possible, and only then when the judgment is about to come down, the Government gets up, Your Honor we move to dismiss for--

Mr. Shoenberger: --No, at some point--

Unknown Speaker: --It doesn't seem to me to make a whole lot of sense.

Mr. Shoenberger: --At some point there may be an estoppel that would apply.

But we think that this particular whole statutory area is a question of Congress waiving its sovereign immunity in 1946.

There is no evidence in the 1966 statutory amendments or in the congressional history, including the Senate report, to indicate that it intended to retract that waiver.

What is being asked now is the adoption of a special defense available only to the Government, for the... for these kinds of cases.

We don't think Congress explicitly adopted that special defense, and we think it rejected the idea in 1949 of adopting special defenses for the Government.

I'd like to reserve the rest of my time.

Unknown Speaker: Very well, Mr. Shoenberger.

Mr. Kelley, we'll hear from you.

Argument of William K. Kelley

Mr. Kelley: Thank you, Mr. Chief Justice, and may it please the Court:

We believe that the question in this case is resolved by the language of section 2675(a), which has received little attention thus far this morning.

As the court of appeals found, that statute is plain and it is unambiguous.

It states that a plaintiff may not institute an FTCA action unless he first files an administrative claim and that claim is finally denied by the agency.

Petitioner failed to meet that condition and the district court was therefore correct to dismiss his complaint.

Now, my colleague, Mr. Shoenberger, has made much of the August 7th letter to the court and the rule 15 he seeks to make.

Our position is that a prematurely filed complaint that is barred by the terms of section 2675(a) cannot be rescued by a supplemental pleading.

To do so would be squarely inconsistent with the terms of an Act of Congress, something that rule 15 simply cannot authorize.

Rule 15 does not speak in terms of permitting an action to be filed that otherwise could not be; it speaks in terms of correcting a defect in the original complaint.

Now, Matthews against Diaz, which--

Unknown Speaker: Well, suppose that within the limitations period, a formal rule 15(d) motion is applied moving that the court construe the complaint that was previously filed as a newly filed complaint.

Is there any problem with that?

Mr. Kelley: --We would have a problem with that, Your Honor.

We believe that section 2675(a) states that an action may not be instituted.

And if one is, that action is forever lost.

Now if within the limitations period a plaintiff tried to file a new action, that would not be a problem.

But we don't think that a amendment or a supplemental pleading of an existing action would be sufficient to comply with the terms of the Federal Tort Claims Act.

And I would also point out--

Unknown Speaker: --I want to file a complaint now and please... this is within the limitations period, I assume?

Mr. Kelley: --Yes.

Unknown Speaker: And the complaint I want to file is the complaint I filed some months ago and paid the fee on.

Mr. Kelley: We believe that would be insufficient, Your Honor.

Unknown Speaker: Why?

Mr. Kelley: It's merely a formal matter.

Unknown Speaker: It says please... there's a paper in your file that I want you to incorporate in my letter which says this is a complaint.

Mr. Kelley: Well if as an administrative matter a district court wished to accept that complaint as a new action and if, further, as an administrative matter they retained the same number, I suppose nothing would bar that.

I think, however, that a new filing fee would have to be paid, or a new in forma pauperis motion would have to be made.

Because section--

Unknown Speaker: But in any event, August was beyond the limitations period in this case.

Mr. Kelley: --August was not beyond the limitations period in this case.

Unknown Speaker: It was not.

Mr. Kelley: It was within.

Unknown Speaker: All right.

Mr. Kelley: The administrative denial was on July 21st, 1989, the letter was sent August 7th, so it was within the required time.

But as I said, it--

Unknown Speaker: Why would it take a new filing fee?

I would think they... if that filing was void they ought to send his fee back.

Mr. Kelley: --Well, a plaintiff who files a case prematurely, Your Honor, has disserved the court, in effect, and used its resources when he wasn't entitled to.

But this is somewhat beside the point.

I would on... just further on the August 7th letter, as I've said, I don't think that a rule 15 supplemental pleading argument would work, for the reason that it would be barred by the statute.

The letter also cannot be treated as a new complaint, we believe, for two reasons.

One, the terms of the letter, I think, are insufficient to do that.

But more importantly for this Court's purposes, Mr. McNeil did not make that argument in the court of appeals.

And, in fact, the opinion of the court of appeals noted that he disclaimed that argument.

Moreover, that argument simply was not presented in the question presented in the cert petition and, in fact, it's quite inconsistent with the question that petitioner presented.

It would be extraordinary to present a question on which the circuits are in conflict, that is directly inconsistent with an argument you wish later to make, to get the Court to grant certiorari, and then later seek reversal on that ground.

We don't believe that that argument is properly before the Court.

And in any event, it is far afield from the legal issue that has divided the circuits and on which we believe this Court's ruling is necessary.

Now, also without much mention in my colleague's argument was the Court's decision in Hallstrom against Tillamook County.

There the Court concluded that the language of the statute at issue meant what it said, and we believe here, as well, the Court should enforce the terms of section 2675(a) as they are written.

And those terms simply do not permit a plaintiff to file an FTCA action unless he first complies with the administrative process and that process is completed.

Now, the rest of the FTCA confirms that that reading is correct.

Section 2675(a) itself provides exceptions for certain kinds of pleadings.

Conspicuously absent from that are pleadings under rule 15(d), and we believe that the provision of some exceptions and not others should exclude the remaining exceptions that petitioner has sought to have this Court adopt.

Similarly, the Westfall Act amendments in 1988 were enacted on the premise that section 2675(a) requires an action that is prematurely filed to be dismissed.

Section 2679(d)(5) deals with the situation where the United States is substituted as the defendant in an action that is originally brought against a Government employee.

Rather than permitting the administrative claim process to be done away with, or rather than having the action stayed pending an administrative claim, the act extends the statute of limitations to permit a plaintiff to file an administrative claim after his cause of action is dismissed, and later to file a new cause of action.

So we think the FTCA as a whole confirms our reading.

Now, the Court should also not overlook the extent to which it is disruptive to the administrative process to file a lawsuit prematurely under the FTCA.

The administrative process is very valuable and very important... a great many cases are settled... and it would very much disrupt the system to permit plaintiffs to go to court prematurely and vitiate the effectiveness of that process.

As the Court stated in Hallstrom, positions become hardened once litigation is initiated, and settlement becomes less likely.

More practically, FTCA cases for the Government are litigated typically by the U.S. Attorneys offices, and the administrative claims process is cut off by the filing of a lawsuit.

The statute itself provides that.

Section 2672 gives the head of the concerned agency the authority to settle a case prior to litigation being filed, subject to regulations promulgated by the Attorney General.

Section 2677 lodges that authority to settle in the Attorney General after a lawsuit is filed.

It is entirely a separate process.

An agency cannot, on its own, settle a case after a... after the lawsuit is filed.

Unknown Speaker: Does that mean that at the time this man wrote his letter to the agency, the agency really didn't have any authority to settle?

Mr. Kelley: Well, on... these facts are somewhat unusual, Justice Stevens, because the agency did not have notice that the lawsuit had been filed.

I suppose, as an abstract matter, that would be correct, although the Attorney General's regulations respecting settlement of administrative claims do not specifically state that they may not settle claims after a lawsuit is filed.

The structure of the statute suggests that and in the administrative process the way it works, as a practical matter, is that once a case is filed and we know... typically, we're served when a complaint is filed; we were not here... the agency simply cannot do it by itself.

But I don't believe that we would be forced to say that a settlement of this case administratively would have been unauthorized.

I'm not sure the statute strictly requires that, and the regulations do not either.

Unknown Speaker: May I ask with regard to the issue before... you know, the particular legal issue... are the cases that go the other way from the Seventh Circuit and say that you can treat the case as being filed after there's a denial if there's been no substantial progress in the litigation, are they all prose cases?

Mr. Kelley: I honestly don't know, Justice Stevens.

Unknown Speaker: I haven't read them.

I just--

Mr. Kelley: I don't recall.

I don't believe that all of them are, no, although I really am just guessing.

So I'll just say I don't know.

Unknown Speaker: --Because those that... where there's a lawyer involved, it's kind of puzzling as to know why... you know, the statute is pretty plain.

It's puzzling as to why a lawyer would--

Mr. Kelley: The statute is plain.

And we believe, frankly, it is plain... it should be plain to a layperson.

Mr. McNeil, as is reflected by his prose pleadings, is not someone who is completely unfamiliar with the legal system.

And I would actually have to say that he did a pretty good job as a prose litigant in terms of his pleadings; he cited the right statutes, for example.

And he... he made a mistake.

Now, section 2678 of the statute, which deals with the extent of allowed attorneys fees in these cases, which is reprinted in the appendix to our brief, also confirms that there is a big difference between pre-litigation settlement and post-litigation settlement.

Under that statute, a settlement pursuant to section 2672, that is the pre-litigation settlement by the agency, is... allows an attorney to collect a contingency fee of up to 25 percent of the award.

That section also says, however, that once a lawsuit is filed and a case is settled pursuant to section 2677, the percentage of the allowable attorneys fee is reduced to 20 percent, and that is a criminal penalty if a lawyer violates that.

So this all goes to the point that it's important to have a bright line here.

We believe that it is important to know when a lawsuit may be instituted and when one actually is.

Petitioner offers no line, much less one that is clear.

If there are no further questions, we would submit the case.

Unknown Speaker: --Thank you, Mr. Kelley.

Mr. Shoenberger, you have 2 minutes remaining.

Rebuttal of Allen E. Shoenberger

Mr. Shoenberger: Thank you, Your Honor.

I believe through inadvertence, there was a misstatement of the 20 percent and 25 percent attorneys fees.

It's 25 percent if you go to court, and we don't think the difference between 20 percent, if you can settle out of court, and 25 percent is enough to encourage attorneys to go ahead and try to avoid the administrative process, as a practical matter.

In this case, Judge Ripple quite clearly didn't understand, in the Seventh Circuit, that the August filing could be treated as a separate and new complaint.

This is not a new issue in this case.

That was the basis for his dissent.

Unknown Speaker: But he stated that he thought it was unnecessary for the court to decide, the majority to decide as it did, the question on which the circuits are split, didn't he?

Mr. Shoenberger: That's correct.

That's correct.

And we're basically suggesting that that is one alternative way for not having to reach the issue that's involved.

We would also suggest that--

Unknown Speaker: It's a way for not having to reach the issue we granted cert to decide.

Mr. Shoenberger: --That's right.

Because what you granted cert on is also the case.

The case has to be decided.

That goes back to Cohens.

That's the obligation of this Court, and we don't think you have to reach that broader question.

But more importantly--

Unknown Speaker: You mean whenever we grant certiorari, we don't know what issues we're going to have to decide--

Mr. Shoenberger: --No.

Unknown Speaker: --Even on behalf of the petitioner.

Mr. Shoenberger: No.

Unknown Speaker: I mean I can understand the person who's trying to sustain the judgment below coming in and saying, you know, this wasn't raised in the petition, but I'm entitled to my judgment on the basis of this other issue.

But for the petitioner to come in and give us one issue in... you know, a teaser in the petition, and then come in and argue a totally different issue.

I, you know... I, frankly, would not have been interested in discussing the meaning of this August 7 letter.

I know it's important to your client, but I don't think it is to the country.

Mr. Shoenberger: I agree, I agree.

But the obligation is a different one.

And we did think that that issue, as originally stated, did include as a subsidiary issue the issue that we've also addressed in the argument today.

Thank you, Your Honor.

Unknown Speaker: Thank you, Mr. Shoenberger.

Attribution:

The OYEZ Project

Featured:

Daubert Et Ux., Individually And As Guardians Ad Litem For Daubert v. Merrell Dow Pharmaceuticals, Inc. - Oral Argument

Fri, 09 Jan 2009 14:49:29 +0000

Case:

Daubert Et Ux., Individually And As Guardians Ad Litem For Daubert v. Merrell Dow Pharmaceuticals, Inc.

Media File:

92-102_19930330-argument.mp3

Related Transcript:

1992_92_102_argument.xml

Transcript:

Argument of Michael H. Gottesman

Chief Justice Rehnquist: We'll hear argument now in Number 92-102, William Daubert v. Merrell Dow Pharmaceuticals, Inc.--

Mr. Gottesman.

Mr. Gottesman: Mr. Chief Justice and may it please the Court:

Jason Daubert was born missing a part of his right arm and lacking three fingers on one of his hands.

Eric Schuller was born missing one of his hands and with one leg shorter than the other.

In both instances their parents had taken Bendectin during the first 2 months of their pregnancy, the period in which the limbs are forming in the fetus.

There were no other indications of what might have accounted for these birth defects.

There were no genetic histories, or anything else of the like.

Each of these petitioners, with their parents, sued in the State courts of California alleging that the birth defects had been caused by Bendectin and alleging further that Merrell Dow, the sole manufacturer of Bendectin, had been culpable as a matter of State tort law in the manufacture and the distribution of the drug.

Among other things, the allegations are that Merrell had concealed the discoveries in its own laboratories of the effects that this drug had on animals that were tested and that it did not provide a warning consistent with what its own internal knowledge was of the propensities of the drug.

If the cases had remained in State court, it is clear that the expert testimony about causation that is the subject before you today, that that expert testimony would have been admissible as a matter of California law, and we have asserted... and the assertion is not challenged... that that evidence would also have been sufficient as a matter of California law to prove causation in this case.

But Merrell Dow removed both cases to Federal court on diversity grounds, where they were consolidated, and ultimately Merrell moved for summary judgment.

Its motion did not go to the question of culpability but solely to the question of causation, and its contention about causation was that Bendectin does not, in fact, cause birth defects in humans and that the petitioners would be unable to come forward with any admissible evidence that it does.

And they anticipated in the motion that the petitioners indeed would have experts who say that there is causation, but their contention was that testimony would not be admissible under the Federal Rules of Evidence, and in consequence the petitioners would have no admissible evidence to prove causation.

Now, the petitioners countered with affidavits and testimonies of eight experts, and I think it's important to note that these are experts several of whom are very highly credentialed and important scientists in their field.

One, Adrian Gross, has been the chief of toxicology for the Environmental Protection Agency and the chief of pathology at the Food and Drug Administration, in both roles responsible for making these very kinds of determinations about causation.

Another, Shanna Swan, is the chief epidemiologist for the State of California, responsible for determining the causes of birth defects, and on... we have described others in our brief.

Each of these eight experts in their affidavits and testimony expressed their opinion that it is likelier than not that Bendectin is a teratogen in humans at the normal therapeutic dose, that is, that it causes birth defects in humans, and each has recited that the methodology by which they arrived at that conclusion is the methodology which is regularly and commonly employed by scientists in their fields for making these kinds of determinations.

Indeed, as is shown, and as the two governmental experts testified, the methodology they used here is precisely that which they use every day in the performance of their governmental functions, and governmental regulations which we have cited in our briefs say the same thing.

Now, what is striking, and I think needs to be noticed, is that in this record there is nothing that challenges that the methodology that these eight experts employ is not the common and regular methodology for making these determinations.

Merrell did not, in response to these affidavits, make any record demonstration, did not cite a single person who claimed that this methodology was not appropriately employed, but both courts below, responding to and accepting the contention made by Merrell Dow, concluded that the proper measure for determining admissibility of expert testimony under the Federal Rules of Evidence is that which was prescribed in the Frye test, namely that the methods and the principles on which the experts' opinions are based must be those that are generally accepted in the scientific community, and applying that standard, both courts said that that had not been demonstrated in this case by the petitioner.

Now, that poses the question of statutory construction that this case presents.

Unknown Speaker: Do you say that even under the Frye test this evidence would be admissible, or as we take the case it's either Frye applies or it doesn't?

Mr. Gottesman: Well, it was the contention below, the Ninth Circuit having already adopted the Frye case before this case, the petitioners were obliged to argue to the Ninth Circuit that this evidence is admissible even under the general acceptance test of Frye's--

Unknown Speaker: What base... is that issue here?

Mr. Gottesman: --It is here only in the sense that the sole reason the Ninth Circuit gave for saying that this was not generally accepted was its conclusion, again not drawn from the record, that scientists will not accept the opinions of experts and their methodologies unless those experts have published and had peer review of the opinions that they proffer.

Now, we do contend that as an assertion of what constitutes general acceptance, even were that the test, that that is an incorrect and a... not only incorrect as a matter of fact, because the record shows that indeed scientists do, and a number of scientific organizations have cited that... that it is both incorrect as a statement of science and incorrect as a construction of the Federal rules.

That is, that Publication and peer review is not a prerequisite for the admission of scientific expert testimony under the Federal rules.

But Your Honor has shaped, I think, the way in which the statutory construction issue has to be addressed here.

The first question is whether the test that the Ninth Circuit applied is indeed the correct construction of this Federal statute.

That is, does it require general acceptance?

If the answer to that is no, and there seems to be a rather wide consensus among the various groups in this case that it should be no, the Court then does have to address, I think, well, what is the correct construction of the Federal rules so that, whether it's going to decide this itself or remand for reconsideration, there will be a determination of what the standard is.

And what I'd like to do is go through the statutory construction analysis in that two-step way, first demonstrating that general acceptance is not the test, which I think is rather the easier point, and then addressing what is the correct instruction, as to which--

Unknown Speaker: In making that argument, Mr. Gottesman, I hope you will address whether under Rule 702 the words, "scientific knowledge", tell us anything about what's required.

Webster's Dictionary defines 702 doesn't suggest some notion of accepted knowledge.

Mr. Gottesman: --Well, let me jump ahead to that, Your Honor, although I do want to ultimately get back to laying a firmer foundation.

702 says that if scientific knowledge will assist the court a qualified expert may testify thereto.

We agree that the word "thereto" qualifies the words, "scientific knowledge", so really the question is what is the importance of the word "thereto" as it relates to scientific knowledge?

What the advisory committee note says... and we suggest that this is very informative.

I'd like to read it and then relate it to this case:

"The rule recognizes that an expert on the stand may give a dissertation or exposition of scientific or other principles relevant to the case, leaving the trier of fact to apply them to the facts. "

Now, it then goes on and says,

"The use of opinions is not abolished by the rule, however. "

"It will continue to be permissible for the expert to take the further step of suggesting the inference which should be drawn from applying the specialized knowledge to the fact. "

so that what the drafters contemplated in 702 is that the expert would set forth what is known scientifically, and from that would be permitted to infer what should be concluded from that.

Now, in this case, if you read the testimony of these experts, they are putting forth scientific knowledge on every page.

They go through an explanation of what all of the animal studies have shown, how to interpret them, what their significance is--

Unknown Speaker: Yes, but you--

--Mr. Gottesman, does Rule 702 and 703 together give the trial court some discretion in allowing someone who is called to the stand and is qualified as an expert by showing background and so forth?

Mr. Gottesman: --Yes.

Rule 703 provides in terms that if the expert is drawing on facts and data which have been generated by others, as, indeed, our experts were, that those facts and data must be such as are reasonably relied upon by experts in that field for making determinations such as are before the Court.

Unknown Speaker: And that's a preliminary decision to be made by the trial judge.

Mr. Gottesman: Absolutely, and in this case the record shows without contradiction that the facts and data upon which these experts relied are indeed precisely the facts and data upon which all experts rely in making determinations of whether it is likelier than not that a particular toxin is causing--

Unknown Speaker: So it's your position that once a witness is qualified as an expert, he can testify to anything within the area of his expertise.

Mr. Gottesman: --He... assuming that what he's testifying to is what the court needs help on.

There are two links to... there's a need in this case to--

Unknown Speaker: Well, I, you know, assume we weren't interested in weather conditions in this case.

Mr. Gottesman: --Right.

That's right.

I mean--

Unknown Speaker: So it's a matter of relevance, but within the area of causation with respect to birth defects, once any of these experts were qualified as a witness, they could testify as to matters of causation without reference to the methodology of the studies they relied upon.

Mr. Gottesman: --I think the answer is yes and no, Your Honor.

They do have to satisfy the requirement of 703 that the facts and data that they're relying on are those that scientists reasonably relied upon.

That said, the office of sections 702 and 703 are completed.

There are still two gateways that may lead a court to determine that that evidence is not admissible.

One is section 403, which says that even as to otherwise admissible testimony, the court can make on a case-by-case basis... and this Court has said that it is to be determined on a case-by-case basis by the district court... the court can make a calculation of whether the probative value of that testimony is substantially outweighed by the danger of misleading, confusing, or prejudicing the jury.

But it does not follow... even if it is in the court's mind that the probative value is low, it does not automatically follow that it is outweighed by a danger of... and incidentally, I want to be clear we don't think that in this case one could say that the probative value is low, but even if a court thought that, it doesn't follow that the jury is going to be confused or misled.

Unknown Speaker: Are there any other rules of evidence that qualify?

You said that was the first--

Mr. Gottesman: Right.

Unknown Speaker: --That you'd have to look at, and the second is?

Mr. Gottesman: The other, and I think the more important safeguard, is not in the rules of evidence.

The more important safeguard is that a court is entitled to direct a verdict, or in the words of the new Federal rules to direct a judgment, and likewise to grant summary judgment, if it concludes that even though there may be a scintilla of evidence supporting the petitioners' position, it is overwhelmingly refuted by the contrary evidence such that no reasonable juror could conclude on this body of evidence that the point for which the expert is contesting is true.

Unknown Speaker: Well, but before we get to that point, I notice that section 702 that Justice O'Connor inquired about is not part of your calculus, so that once the expert is qualified, subject to the other two sections you mention, he can testify to any area within his expertise whether or not it is based on studies.

Mr. Gottesman: Well, Your Honor, no... 703, we suggest, is... 703 is the provision in the Federal rules--

Unknown Speaker: But you give no effect to 702 in this calculus.

Mr. Gottesman: --We do, Your Honor.

702 and 703 each have their proper office.

703 is the provision that addresses the same thing that the Frye rule did.

That is, it says... its title is

"Bases for the Opinions of Experts: What is the Foundation that will be required for an expert's testimony to be admissible. "

and it spells out what those bases are, and it includes what one might say is a watered down version of the Frye rule, the requirement that the facts and data upon which the expert testifies be those that are reasonably relied upon by scientists.

The office of 702, we suggest, is quite different.

The two are not both talking about the same thing, as respondent argues.

This was a very carefully drafted statute.

Years were spent by draftsmen putting it together.

Unknown Speaker: Yes, but both refer to scientific knowledge, in effect.

I mean, that's the basis, and I notice there are a number of briefs filed here, amicus briefs by people from the scientific community, and they all tell us that scientific knowledge is more than just one person's opinion, that the essence is that it has to be capable of being tested, and something that isn't tested can't be said to be reliable, and if it isn't reliable, it can't assist the trier of fact.

Now, doesn't that suggest that there's a role for the trial judge in determining at the outset what comes in?

Mr. Gottesman: Your Honor, there is, I think, a confusion of two interfaces that I would like to suggest will explain the role of the arguments that Your Honor has just referred to about things have to be tested and validated and the like.

There are, if you will, two different scientific modalities.

One is when we are trying to decide that something has been conclusively established so that we can declare it to be a law of science, and there it is undoubtedly true, scientists do not say, we have now satisfied ourselves that there is an established truth, another law of gravity, if you will, until we arrive at a point of certainty that is replicable, conclusive, et cetera, et cetera, but we live in a world of uncertainty, and for many purposes we can't wait until science arrives at the conclusive answer.

Professor Nesson in his extremely cogent article makes this point and makes it, I think, as effectively as it appears anywhere in the literature:

"There are several contexts in which we are called upon to decide things even though science doesn't have a conclusive answer, and we have to do the best we can. "

He cites as an example the physician who has to decide how to treat a patient.

If the physician needs to know, in order to do that, what is the cause, the physician doesn't say well, I give up, science hasn't got a conclusive answer yet.

The physician says, I will have to make a judgment of what is likelier than not the cause based upon the materials at hand, and Professor Nesson argues, and, we submit, persuasively, that that is the same thing that a court is called upon to do when in a state of scientific uncertainty it has to decide whether causation occurred.

The issue here is not whether the plaintiffs can prove this scientific proposition to the degree of certainly that would make it like the law of gravity.

The issue is whether the plaintiffs can demonstrate that it is likelier or not that this is causing that, and the methodology--

Unknown Speaker: And maybe the issue is whether the judge can review the expert's determination about the probabilities in this area of uncertainty.

I don't... you say that the expert has to be an expert.

He has to be qualified as an expert in the field.

Mr. Gottesman: --Indeed.

Unknown Speaker: The data, you acknowledge, by reason of 703 has to be of a sort that the community would normally rely upon, but there remains the last step, and that is the expert's applying these data to the scientific problem that is relevant to the case and coming up with his conclusion.

Is it your position that so long as an individual is an expert, whatever conclusion he arrives at on the basis of this data that other experts consider relevant data must be accepted by the court?

Mr. Gottesman: Your Honor, yes, subject to Rule 403 and subject to the power that a judge always exercises as a matter of substantive law to say that no reasonable juror could possibly be persuaded in light of the imbalance of the others--

Unknown Speaker: Well but, no, that just goes to whether his testimony is refuted by a lot of other testimony.

Mr. Gottesman: --That's right.

Unknown Speaker: I mean, if his is the only testimony, presumably the jury could accept it.

What about section 401?

Mr. Gottesman: Section 401 defines relevance as anything that makes... that tends to show... I don't... I forget the exact word.

Unknown Speaker: It means evidence having any tendency--

Mr. Gottesman: Any tendency, right.

Unknown Speaker: --To make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it--

Mr. Gottesman: That's right.

Unknown Speaker: --Would be without the evidence.

Mr. Gottesman: Now, let me suggest what we have--

Unknown Speaker: Now, can't... on the basis of that, can't the court make a judgment that even though the data is of the sort the scientific community would accept, and even though this individual has wonderful credentials, it really just doesn't parse?

Mr. Gottesman: --Well, Your Honor, I could imagine that there would be a case such as that.

This certainly is not it.

It certainly... there is a tendency to... proving the point, to know, as these experts have testified and cited published reports for, and that the Government has confirmed, that Bendectin causes limb defects in animals.

It certainly tends to prove the causation point that in vitro studies have identified exactly what it is that Bendectin does that causes the limb reductions, and that is that it impairs a particular substance whose function is to bind the cartilage cells and thus to create the limbs.

This is Dr. Newman's testimony from the in vitro studies of this.

And it is probative to know that that substance, which is impaired by Bendectin in animals, is the same substance that performs the same mission in binding the cartilage cells and forming the predicate for the limbs in human beings, and it is probative to know that the chemical composition in Bendectin is extremely close in composition to the chemical composition of other chemicals which are widely believed to be teratogens in humans, and it is probative to know that when studies were done on human populations, a larger proportion of the women who took Bendectin gave birth to children with limb defects than the proportion who did not.

All of this is probative.

What the lower courts have said was yes, but prove to us to a degree of statistical certainty which would give us 95 percent confidence that the human epidemiological data is reflective, that these higher numbers for the mothers who used Bendectin were not the product of random chance but in fact are demonstrating the linkage between this drug and the symptoms observed.

It is--

Unknown Speaker: Did the court of appeals, Mr. Gottesman, actually say that you had to prove to a 95-per-cent certainty?

Mr. Gottesman: --It's not quite clear, Your Honor.

The district court clearly did.

Unknown Speaker: I thought you said a minute ago that it did.

You said, the courts.

Mr. Gottesman: Well, I'm sorry.

The district court clearly did.

The court of appeals said that Shanna Swan and Jay Glasser, the two epidemiologists... well, let me back up a minute.

The court of appeals definitely said explicitly you can't prove your case just on the basis of animal and chemical data, and they said that although there are four experts' affidavits saying that in appropriate cases you can make a determination that it is likelier than not just from animal and chemical data, and saying that that is the view of the Government agencies for which they work, and in the absence of any contradictory evidence from the other side.

Both lower courts said you can't do it from that.

The court of appeals didn't say exactly what the epidemiological evidence would have to prove, except that it plainly rejected what was demonstrated, and what was demonstrated by Shanna Swan was that if you used a degree of confidence lower than 95 percent but still sufficient to prove the point as likelier than not, the epidemiological evidence is positive, so that implicitly the Ninth Circuit was saying we will not accept that showing at least if you have not published your results.

Now--

Unknown Speaker: Mr. Gottesman, is it fair to say that what you are telling us is that once an expert has been qualified as an expert in the field, and once the expert has at least made a showing or a showing is at least possible that the expert has based some opinion on the kind of facts and data that 703 refer to, that the testimony of the expert himself, that he is competent to express an opinion on probability... i.e., the 51 percent or better chance... is sufficient to satisfy the foundation or knowledge requirement of 702?

Mr. Gottesman: --Yes, Your Honor.

That is--

Unknown Speaker: So that any expert who says, I can testify to a probability, necessarily qualifies as competent to... or as having satisfied the foundational requirement of 702.

It's as simple as that.

Mr. Gottesman: --Yes, subject to the back... again, assuming that he has satisfied 703 and subject to the back-ups of 403 and the power of the court to direct a verdict in appropriate cases.

Unknown Speaker: So, Mr. Gottesman, you in essence reject the view of, let's say, the Third Circuit in the Downing case and the view expressed here by the Solicitor General that there are certain foundation requirements the court would look at?

Mr. Gottesman: I would say that we believe that Congress rejected it, Your Honor.

Congress relied, as this Court has repeatedly said, on the adversarial process to demonstrate that a marginal expert's testimony is, in fact, marginal.

There are some who disagree with that.

There are arguments that the rules should be changed, but we think that's the proper reading of the rules as they presently exist.

Unknown Speaker: It seems to me, counsel, that 703 simply says that underlying background facts and data are admissible if the expert reasonably relied upon them, but that does not go to the question of the qualification of the expert to speak to the subject under 702.

Mr. Gottesman: Well, the qualifications in this case have not been challenged, Your Honor.

These experts are... at least, it is not disputed that they are qualified to testify.

We agree that of course the expert's qualifications to testify on the subject that he's being asked to testify about are within the power of the court to determine.

Section 702 expressly says that.

Unknown Speaker: But... maybe I'll just modify Justice Kennedy's question slightly.

You are saying that 702 in effect substitutes for the foundational requirement.

We'll assume the expert is qualified.

The question is whether there is a foundation for the opinion, and you are simply saying that provided the expert can be said to have relied upon facts and data and provided that the expert is indeed qualified as an expert in the field, that the readiness of the expert to couch his testimony in terms of a probability judgment is a sufficient satisfaction of the foundational requirement of 702.

Mr. Gottesman: That's correct, Your Honor, and we think the--

Unknown Speaker: Every expert basically is guaranteed qualification at least, or is guaranteed success on foundation, so long as it is his own opinion that he does have a foundation.

Mr. Gottesman: --And it is within the area of his expertise, that's correct, subject again to 403.

I would like to reserve the remainder of my time, if I might.

Unknown Speaker: Very well, Mr. Gottesman.

Mr. Fried, we'll hear from you.

Argument of Charles Fried

Mr. Fried: Thank you, Mr. Chief Justice, and may it please the Court:

In our view, scientific knowledge, which is what Rule 702 allows an expert to testify to, is that body of propositions which have been produced by the methods and procedures of science, and it is the heart of our claim that the propositions offered by petitioner's witnesses have not been produced by the methods and procedures of science.

As the Court in the Turpin case said regarding petitioner's crucial witness here... and I say crucial, because it is the only witness.

Dr. Palmer, he's the only witness to testify that it is his opinion that Bendectin caused the limb defects of these petitioners... said of Dr. Palmer,

"Personal opinion, not science, is testifying here. "

"No known basis is offered. "

So we do not speak about propositions that have attained the level of certainty of the laws of gravity.

I think that this contention shows the whole procedure of the petitioners and their amici attack on what not only this Court... not only on the courts below but a number of courts have done.

They caricature what it is that the courts below have said about the requirement of publication and peer review.

None of those courts have said, and it would have been an absurd thing to say, that scientific opinions or propositions may not be testified to if they have not been published.

There are many scientific opinions which are either too particular, too fresh, or of too limited interest to be able to attain publication.

What these courts have said is that publication and dissemination to the scientific community is a factor.

The Downing-DeLuca court, say the Third Circuit, specifically said that it is a factor in determining the reliability of scientific evidence whether it has been exposed... and I believe I used the Third Circuit's own words... exposed to scientific scrutiny.

Now, publication and peer review--

Unknown Speaker: Is that formulation that you've just given us a modification of the Frye rule?

Mr. Fried: --Your Honor, it is a specification, an explication of the approach which the Frye rule exemplifies.

We think--

Unknown Speaker: That sounds to me like a modification.

[Laughter]

Mr. Fried: --Well, if you will, it's a modification.

Unknown Speaker: And I think it's important because one reading of the Ninth Circuit is that it... opinion, not the only reading, but I think one reading of the Ninth Circuit is that it relied on the Frye rule per se, without this modification or explication that we're discussing.

Mr. Fried: Well, as to the opinion of the Ninth Circuit, I think that is virtually... that opinion is virtually a summary affirmance.

There are some judges who take about 5 pages for a summary affirmance.

In fact, the Ninth Circuit specifically stated that it was incorporating the judgments on the same packet of opinions in the First, the D.C., and the Fifth Circuits, as they said,

"for the reasons stated by our sister circuits. "

and those opinions are very detailed, go into the witnesses' testimony in great detail, and that is incorporated by reference.

The Ninth Circuit, having seen that the Federal courts have passed on this a number of times, simply incorporated that by reference.

Now, it's quite clear that the Ninth Circuit was relying on Rule 702.

It cited the Solomon case, and the Solomon case is a 702 case.

The district court relied on Rule 703.

The Lynch court, the First Circuit, whose opinion was adopted by reference by the Ninth Circuit, relied on 703 and 403.

Now, Frye, I think, is simply a shorthand way of designating an approach, and this is another one of the caricatures which the petitioners are required to emit in order to take a very general approach and make it seem extreme.

The Frye rule is a very brief sentence in a very brief opinion in 1923.

It represents an approach.

It is an approach which says, and it was familiar in the Federal courts, it was stated very well by Judge Hand in 1901, that the courts must look to scientific standards to validate scientific claims.

Now, that approach, which I submit is very general, is an approach which reappears in the Federal rules, and why should it not?

The very words which Justice O'Connor was emphasizing... scientific knowledge... bring that approach into the Federal rules.

Why should that approach have been abandoned without a word?

Now, if there had been something like a determinate rule... the Frye rule... then there would be an argument, and I would think we would be in equipoise at best but the Frye rule itself is a rather ambiguous... very ambiguous statement.

If you look at what the Frye rule itself is... let me read it to you from that decision:

"The thing from which the deduction is made must be sufficiently established to have gained general acceptance in the particular field in which it belongs. "

That leaves many questions unanswered, and what I suggest is, it is representative of an approach that there must be a foundation, the foundation must be a foundation in scientific knowledge, and that the courts look to the community of science and to scientific standards to validate scientific claims.

Unknown Speaker: Who was the author of the Frye opinion?

Mr. Fried: You had me there, Mr. Justice... Justice Blackmun.

I'm afraid I can't tell you.

I should know... I beg your pardon?

Unknown Speaker: So should I.

[Laughter]

Mr. Fried: May I return to the publication and peer review factor, because a factor is all that it is.

There are many circumstances, as the Solicitor General points out, where publication and peer review would be impossible and inappropriate.

This is not such a circumstance.

What the petitioners' witnesses were seeking to do was to propose a general proposition about the chemical properties of a much-studied subject.

The substance under consideration, Bendectin, had been studied for over a generation and had generated a vast body of published research.

What the Ninth Circuit and the other circuits have been saying, and here the Fifth Circuit is particularly explicit, in that circumstance where witnesses are seeking to build upon in order to contradict a vast body of unanimous published research, then they must operate in pari materia.

They, too, must submit their research with a clear statement of their premises, their methodologies, their conclusions.

Unknown Speaker: Well, that... Mr. Fried, that's fine if you're trying to get a Ph.D., but how do the rules of evidence justify that requirement?

Mr. Fried: The rules of evidence, Mr. Chief Justice, require that the testimony be to scientific knowledge.

Scientific knowledge is knowledge produced by the methods and procedures of science, and under certain circumstances there is no more elementary method of science than the method of dissemination for criticism, replication, and review by the scientific community.

Unknown Speaker: How can we know that on this record?

Mr. Fried: I think that is a matter of which judicial notice may be taken, that replication, that the community of science is the test of what is science is one of the most elementary facts of which educated men and women are aware, that science is not personal opinion.

It has been stated many times by many courts.

Unknown Speaker: Mr. Fried, could I ask you a question about the studies in this case, the animal studies as an example?

Now, let's assume that maybe they don't really tell us anything about human beings, and therefore an opinion based on them might not be relevant or helpful, but are the animal studies themselves, insofar as they prove anything about animals, scientific knowledge within the meaning of the rule in your view?

Mr. Fried: These animal studies, if properly conducted, and some of them were, are scientific knowledge, without doubt.

The opinion based upon them is an opinion which does not comport with Rule 703, because Rule 703... and here the advisory committee notes are particularly important... does not speak only of the type of information, but also the selection of information, and the reference there to public opinion research in the advisory committee note, Your Honor, makes that quite explicit, that certainly to prove... in the Zippo case which they cite, to prove that there's confusion one would use survey data, but one would have to use survey data in a way that survey data specialists use survey data, and that's--

Unknown Speaker: Just a little more... just stick with the animal studies for a moment.

If we assume they are scientific knowledge, what is it in 703... what language in 703 makes it impermissible for an expert to express an opinion based on that scientific knowledge?

Mr. Fried: --Animal data are not reasonably relied on by experts in the field to reach a conclusion about human teratogenicity at least in the face of an overwhelming burden of human data which points in the opposite direction.

Animal studies are, indeed, used.

They are used by the FDA, they are used quite generally to raise a suspicion.

They are like a scaffolding, but when the building is up, the animal studies drop away.

The animal studies cannot support a building which will not stand--

Unknown Speaker: Mr. Fried, again, how are we supposed to know this?

I mean, if someone on behalf of the defendants had testified to this effect, that would be something in the record that we could take notice of and perhaps the trial court could have taken note, but you know, you're a lawyer, you're not a doctor, and here you are telling me that certain things are so in the scientific field.

You may know, but I don't.

Mr. Fried: --Well, there were introduced among other things a number of learned treatises on exactly this point about he importance of human studies in this... in the birth defects area, and how human studies trump animal studies, so there were... learned treatises were introduced.

Unknown Speaker: This was introduced in this case?

Mr. Fried: Yes, Your Honor.

Unknown Speaker: In the trial court.

Mr. Fried: And they were also introduced in a number of the other case whose records were submitted in this case.

Furthermore, the Canadian study which was introduced by defendants, which was a meta-analysis of all the human studies, made this statement, and finally the petitioners' own witnesses, some of them... not all of them, but their own witnesses stated that it is inappropriate to reach conclusions about human teratogenicity on the basis of animal studies.

There is one well-known textbook which points out that there are 1,200 known animal teratogens and only 30 known human teratogens, so the court quite properly, under Rule 104(a), reached this conclusion, and I would take it that that is a determination by the two courts below, and not only the two courts below, a number of other courts.

Unknown Speaker: Well, what does Rule 104(a) say?

Mr. Fried: Rule 104(a) allows the trial court, indeed, requires the trial court to make a preliminary foundational inquiry whether a proper foundation has been laid for any testimony, whether it's opinion testimony based on personal observation, or scientific testimony.

That authorizes the court to make a foundational inquiry, which is, indeed, what happened here.

Unknown Speaker: Did the court of appeals rely on 104(a)?

Mr. Fried: I believe it cited 104(a), but I can't say that with certainty.

That was in any case the... that is in any case the authorization to the courts to engage in this inquiry.

I believe that this Court in the Bourjaily case--

Unknown Speaker: Mr. Fried, I take it that your answer to the questions of the Chief Justice and Justice Stevens are that you place principally reliance on Rule 703, and you say that this was not evidence on which an expert could reasonably rely.

I had thought the purpose of 703 was just to allow the admission in evidence of facts that are essentially hearsay facts.

Mr. Fried: --It allows... Rule 703--

Unknown Speaker: And that gives no really necessary play to Rule 702 at all.

Mr. Fried: --Well, it is our position, elaborated in the brief, that 703 confirms and works along with 702.

703 allows an expert to base his opinion on hearsay evidence on the premise that the hearsay evidence is being used in a way, in accordance with the principle of 702... that is, to allow the expert to testify to scientific knowledge... otherwise one would have the anomalous result that an expert may not rely on hearsay evidence in a way that's aberrant, but may rely on personal observation in a way that is aberrant, and we--

Unknown Speaker: Mr. Fried, may I inquire what the standard of appellate review is of decisions to exclude scientific evidence testimony?

Is it de novo, or do we have an abuse of discretion standard?

Mr. Fried: --The general criteria which were stated in the courts here are criteria of law.

The application of those criteria to a particular fact situation is a discretionary judgment.

However, where you have recurring fact situations... indeed, an identical fact situation, which is in fact what you have here, then the correct application of a general standard should yield a uniform result, and it becomes an abuse of discretion to apply that general standard incorrectly to a recurring fact situation, and courts of appeals, as the Fifth Circuit did--

Unknown Speaker: I'm a little lost.

Is it an abuse of discretion standard?

[Laughter]

Mr. Fried: --It's an abuse of discretion standard in a particular case.

The criteria are legal standards, and therefore are reviewable de novo, and where the facts do not vary from case to case, then the application of standard to facts must indeed be uniform.

Unknown Speaker: Can you also tell me whether the so-called Frye principle was followed in civil cases generally, or was it just in the criminal field?

Mr. Fried: I am informed... actually, I'm informed by petitioners' counsel... that there are no instances of Frye being cited in civil cases prior to the Federal rules, but it is also the case that expert testimony had not become an important problem at that point.

There is nothing in the statement of the Frye rules to suggest, or the approach to suggest that this is a matter only of interest in a criminal context where, by the way, it binds prosecution as well as defense.

Unknown Speaker: Mr.--

--Would you mind commenting before you're through on the proposed standard of the Solicitor General, your former office, and that of Judge Becker in the Downing case?

Mr. Fried: In our view, the standard offered by the Solicitor General does not differ from the standard we offer.

Rather, it is a matter of emphasis.

We do not say that dissemination, clear statement, an offer for peer review after dissemination... this is not some bureaucratic requirement... is a necessary or sufficient condition for admissibility.

The Solicitor General does not say so.

We both say that in the circumstances of this case, where petitioners' testimony seeks to comment on, build on and refute a vast body of published statement, and there is no exigency, there are no pressing needs, that that factor is determinate.

The Third Circuit also recognized that exposure to scientific scrutiny is a factor, and if something is a factor there must be cases in which the factor is determinate, and we say this is that case.

So we do not think there is a great difference between us, except of emphasis.

Unknown Speaker: Mr. Fried, there is, I take it, a difference between the SG's and Judge Becker's view on the Frye test on the admissibility of an opinion based upon what the Solicitor General called a significant minority view.

I take it Frye would not let that in.

Is that true?

Mr. Fried: Yes, and I think that the Solicitor General is correct there.

This is very nicely illustrated by the controversy petitioners raise particularly in connection with the testimony of Dr. Swan about the so-called Rothman mode of analysis.

Now, the tests which petitioners seek to refute have all been done by a particular statistical technique requiring a 95-percent confidence level.

Dr. Rothman, who is petitioners' amicus, offers a different statistical technique involving nested confidence intervals, displaying a vast amount of data.

That is a minority view.

We do not claim, the Solicitor General does not claim, I don't think it would be reasonable to claim that the Dr. Rothman procedure is ipso facto inadmissible.

That would not be proper.

What is the case is that Dr. Swan, so far as we know, never used the Dr. Rothman principle.

She simply pointed at it and said that I have something here which contradicts everything else using these other techniques, and that shows why clear statement, dissemination to the scientific community, an invitation for replication and comment, where all that is possible, is absolutely crucial.

If Dr. Swan had such a Rothman... such a Rothman analysis, she should have published it.

She never has.

In 18... sorry, in 1987 she testified, no, I haven't published it yet... not yet.

This testimony was offered in 1989.

In 1993, so far as we know, she still has not clearly stated her premises, set them out, and allowed the scientific community to comment upon them.

Unknown Speaker: So the significance of the minority view is in part a function of circumstantial evidence, in a way.

It is to be assessed in part by a court based on the way the person claiming to offer it has behaved in the past.

Mr. Fried: Well, I don't believe Your Honor--

Unknown Speaker: I.e., has the person stepped up to the plate and subjected this to scrutiny or has the person not?

Mr. Fried: --Well, it's not a comment on the behavior of the witness.

It's a comment on the behavior, if you wish, of the proposition... Has the proposition stepped up to the plate +/?

and it's quite interesting that in the First Circuit case, the Lynch case, Dr. Swan had been forced to say something about her premises and methods, and the First Circuit went into it in some detail and totally devastated it as arbitrary and unexplained and quite unreliable.

That illustrates the importance of the publication peer review factor, and it is only a factor, in appropriate cases.

Unknown Speaker: Let me ask you a nuts-and-bolts question.

Let's assume that we agree that Frye is too starchy a standard and we, like you, would find a place for the Solicitor General's view in construing 702.

What should we do in this case?

Mr. Fried: Oh, I think quite clearly that in this case there was a judgment, and that judgment was well-based, and the decision should be affirmed.

Unknown Speaker: Should we adopt the Solicitor General's... let's... and I'm not suggesting that I'm about to do it, but if I were, should I take this opportunity to urge adoption of the Solicitor General's standards, or should I send this case... affirm this case with a view that the Solicitor General's standard is open for development in the lower Federal courts?

Mr. Fried: Well, the most striking thing is the Solicitor General in applying his standard concludes that the decision should be affirmed and that the Solicitor General's standards clearly lead to the denial of admissibility in this case.

It's been so often said that the Court sits to review judgments and not to revise opinions.

The opinion in the Ninth Circuit may be viewed as a little breezy and a little summary, but I think the reason for that is the Ninth Circuit said the Federal courts had seen these same witnesses, this same testimony over and over again.

It has parsed these witnesses and this testimony over and over again.

The Brock case is meticulous in its parsing.

The Lynch case is meticulous in its parsing, and the Ninth Circuit said, for the reasons in those circuits, as well as for the reasons they give, we rule this inadmissible.

Unknown Speaker: But those cases weren't parsing the... based on the Solicitor General's standards.

Mr. Fried: The Brock case is very revealing in this.

The Brock case speaks my language, I believe, and the Solicitor General's language.

The Brock case says, we don't say that this is the be-all and the end-all, the failure to state and disseminate and open to scrutiny.

What we do say is that it's very important here.

It certainly gets our attention.

Unknown Speaker: Mr. Fried, is it not true that in Brock they didn't hold the testimony inadmissible, they held it insufficient?

Mr. Fried: They held it insufficient because they were acting on JNOV.

They had already been... it had admitted and the court was--

Unknown Speaker: Under Brock, then, we would have to assume this testimony was admissible.

Mr. Fried: --I don't believe that that assumption is--

Unknown Speaker: At last, that's what the Ninth Circuit said about Brock.

Mr. Fried: --Brock was a sufficiency rather than an admissibility case.

I would suggest, Justice Stevens, that if a court says, this is evidence which is so unreliable, which is so marginal that no jury could rest an opinion on it, that that is the equivalent of saying, it is also not evidence which constitutes scientific knowledge, or which, if considered by the jury, would not mislead, prejudice--

Unknown Speaker: Well, that may be, but I suppose one possible disposition in this very case, if we weren't sure about the admissibility but we thought they'd applied the wrong standard, would be to send it back and either say, review the admissibility issue again, or, the evidence is admissible but you may still grant your summary judgment for the defendants, as they did in Brock.

Mr. Fried: --Well, it's striking that the Brock court as well as the Ninth Circuit treated those two standards as really interchangeable.

You can either do it on summary judgment or you can do it as to admissibility.

In both cases, what we are talking about, Justice Stevens, is the duty and authority of a Federal judge to assure that a jury verdict either has been or will be rationally based.

Unknown Speaker: But are you taking the position that if we held the testimony to be admissible we must necessarily say the motion for summary judgment should be denied?

Mr. Fried: Well, I would certainly hesitate a while before I said that.

Unknown Speaker: I would think you would, yes.

[Laughter]

But that seems to be your argument.

Mr. Fried: I would say that the Ninth Circuit and the Fifth Circuit were treating those as interchangeable issues, as was the Turpin decision in the Sixth Circuit on summary judgment.

They were treating those as equivalent issues.

Unknown Speaker: Well, was it a submission on summary judgment that summary judgment should be granted because the plaintiff could not come up with admissible testimony?

Mr. Fried: That was the decision in this case.

Unknown Speaker: Yes.

Mr. Fried: That was the decision in the Lynch case.

Unknown Speaker: Yes.

Mr. Fried: That was the decision in the Richardson case, and those cases also were incorporated by reference by the Ninth Circuit quite explicitly, and they did not... and they were not summary judgment, they were indeed admissibility cases.

Unknown Speaker: Well, do you think those cases... all of those cases spoke your language?

[Laughter]

Mr. Fried: Well, I don't know whether they would speak my language in another case, but what they said was to emphasize a factor which is dispositive here.

I cannot believe that the Lynch court or the Richardson court would say of an opinion about what caused a particular accident that that opinion had to be published or peer-reviewed... certainly not.

Those cases referred to publication and peer review in the context of the circumstances, in the context of that case.

Unknown Speaker: Why do you think this factor is determinative in this case?

Mr. Fried: It is determinative because the petitioners seek to overcome and, indeed, use published peer review material.

I thank the Court for its attention.

Unknown Speaker: Professor Fried, there are Harvard Law School professors on both sides of this case, aren't there?

Mr. Fried: Yes.

There are Harvard law professors all over the Court this week, Your Honor.

[Laughter]

Unknown Speaker: I thought you could lead us out of the wilderness and get together up there.

Mr. Fried: I hoped I had, Your Honor.

Thank you.

Unknown Speaker: Thank you, Mr. Fried.

Mr. Gottesman, you have 1 minute remaining.

Rebuttal of Michael H. Gottesman

Mr. Gottesman: Thank you, Your Honor.

The Brock court expressly said the testimony was admissible.

The question of whether it's sufficient to... on the merits is a question of State law, not Federal, and it's our contention you would have to look to California law to decide whether California would agree, for example, with the District of Columbia that this evidence was sufficient.

The human data does not in this case trump the animal data.

The human data here is that a larger percentage of women who took Bendectin gave birth to children with limb defects.

The question is, how confident can we be that that is in fact probative of causation, not at a 95 percent level, but what Drs. Swan and Glassman said was applying the Rothman technique, a published technique and doing the arithmetic, that you find that this does link causation likelier than not.

Professor Fried said that in 1975 the problem of experts was not perceived as it was now.

Look at the advisory committee note to Rule 706.

That note says we are worried about shopping for experts, we were worried for venal experts--

Chief Justice Rehnquist: Thank you, Mr. Gottesman.

Mr. Gottesman: --Thank you, Your Honor.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

Darby v. Cisneros, Secretary Of Housing And Urban Development - Oral Argument

Fri, 09 Jan 2009 14:49:28 +0000

Case:

Darby v. Cisneros, Secretary Of Housing And Urban Development

Media File:

91-2045_19930322-argument.mp3

Related Transcript:

1992_91_2045_argument.xml

Transcript:

Argument of Steven D. Gordon

Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-2045, R. Gordon Darby v. Henry Cisneros.

Mr. Gordon.

Mr. Gordon: Mr. Chief Justice, and may it please the Court:

In enacting the Administrative Procedure Act, Congress provided a general authorization for judicial review of administrative actions.

In section 10(c) of the act, it prescribed when and under what circumstances someone who is aggrieved by an agency action may seek recourse in Federal court.

Congress provided that a litigant need not exhaust available administrative remedies before proceeding to Federal court, unless such exhaustion is expressly required by statute or by agency rule.

The question presented in this case is whether, notwithstanding that Congress has spoken, a Federal court can impose additional exhaustion requirements and deprive a litigant of judicial review under the APA because he failed to pursue an administrative appeal that was not required by statute nor by the agency's own regulations.

The answer to this question, we submit, is no.

The facts of this case are straightforward.

In 1989, HUD initiated administrative sanctions against petitioners, Mr. Darby and his affiliates.

Mr. Darby contested those sanctions in full conformance with HUD's regulations.

He litigated the matter before the agency for some 10 months through a process which included discovery, a 4-day evidentiary hearing, and the submission of post-hearing briefs.

Ultimately, a HUD administrative law judge issued a lengthy written decision which upheld the sanctions.

Pursuant to HUD's regulations, the ALJ's decision became the final agency action unless the Secretary chose to review it.

In this case, neither party sought such secretarial review.

Mr. Darby then filed this suit in Federal district court.

He challenged the sanctions on the grounds that they violated the Administrative Procedure Act and the Due Process Clause.

The Government moved to dismiss for failure to exhaust administrative remedies.

The district court denied this motion and proceeded to grant relief to Mr. Darby, holding that the sanctions were not rationally supported by the facts and that they had been imposed for forbidden punitive reasons.

The Government appealed to the Fourth Circuit, challenging only the district court's ruling on exhaustion.

The Government contended that HUD's regulation providing for secretarial review of an ALJ's decision required Mr. Darby to seek secretarial review as a prerequisite to filing suit in Federal court.

The Fourth Circuit rejected that contention.

The circuit court recognized that no statute and no regulation required Mr. Darby to seek secretarial review.

Nonetheless, it decided that as a, quote, rule of judicial administration, Mr. Darby was required to exhaust this administrative remedy.

Since he had not done so, the court ruled that the district court should have dismissed his suit and left the administrative sanctions in effect.

Unknown Speaker: Mr. Gordon, what if your client had, in fact, taken an appeal within the agency?

Your position then is, I take it, that still and all, you would be able to come to court and prosecute an appeal both in court and before the agency.

Mr. Gordon: Simultaneously, sir?

Unknown Speaker: Yes.

Mr. Gordon: Justice Scalia, I believe that... that under the line of decisions, including particularly ICC v. Brotherhood of Locomotive Engineers, that at the point that the ALJ's decision became... was issued, that Mr. Darby had an option, and that he could have either pursued and administrative appeal or proceeded to Federal court.

Unknown Speaker: Why... why is that?

Because... I mean the text of section 704 reads

"whether or not there has been filed. "

Mr. Gordon: And there was an interesting line of cases during the 1950's where the Federal courts, the circuit courts, wrestled with whether, if you pursued an administrative appeal, the time for your appeal to Federal court would meanwhile expire.

The Ninth Circuit, in a case called Consolidated Flowers, as I recall, held that you could lose your right to judicial review if you pursued the administrative appeal.

The D.C. circuit ruled to the contrary and ultimately the Ninth Circuit reversed course.

And I believe this Court has recognized ever since a decision in the early sixties, CAB v. Delta Airlines, that if you do pursue an administrative appeal, that the agency action is, pending that appeal, not final and therefore not appealable to Federal court.

Unknown Speaker: But why isn't that contrary to the language of 704?

It says whether or not there has been filed.

What I'm saying is maybe we've been playing with 704 up to now; why don't we continue to do that?

Mr. Gordon: Justice Scalia, I would submit that that is simply a practical and common-sense application or construction of the statutory provision.

Unknown Speaker: Well, because it would... it would seem ridiculous to be prosecuting an appeal both before the agency and here, right.

Mr. Gordon: Simultaneously, yes, sir.

Unknown Speaker: Yeah, but couldn't a court consider it ridiculous for you to come complaining to the courts when you haven't completed complaining to the agency?

Why isn't... why couldn't I consider that ridiculous too and say I certainly don't want to interpret 704 to provide for that?

Mr. Gordon: Well, the Court is not writing on a clean slate here.

It seems to us that the fundamental principle is that it is for Congress to prescribe the jurisdiction of the Federal courts.

And this Court has recognized repeatedly, and as recently as last term in McCarthy v. Madigan, that when Congress has prescribed that jurisdiction, that Federal courts are not to decline such jurisdiction on exhaustion principles unless it's consistent with the expressed intent of Congress.

Unknown Speaker: But I'm suggesting we've given that away.

The language of 704 does not permit what you've just said we've done.

The language of 704 says that it's final, whether or not there has been lodged an appeal within the agency.

But you tell me that if there has been lodged an appeal within the agency, we will not consider it final, despite the language of 704, right?

Mr. Gordon: That's correct, Your Honor.

Unknown Speaker: The Government is arguing, well, this is just another extension of the same principle.

Mr. Gordon: I disagree, Your Honor.

The Congress, if one examines the final sentence of section 704 which is what is at issue here, has clearly dealt with the issue of exhaustion, and not simply finality as the Government contends.

The final sentence--

Unknown Speaker: Well exhaustion and finality aren't the same thing, are they?

Mr. Gordon: --No, Justice O'Connor, they are not.

They are closely related.

Unknown Speaker: So I don't see how 704 deals with exhaustion at all.

Mr. Gordon: If I may, Your Honor, the first sentence of section 704 clearly imposes the finality requirement.

The second section... sentence of the section provides that intermediate rulings, or procedural or preliminary rulings, are not directly appealable, but may be heard when the final agency action is appealed.

The third sentence, which is what's at issue here, presupposes final agency action and goes on to address whether there are additional procedural requirements that a litigant must follow.

We would submit that there are... that it is clear that this provision deals with exhaustion and not simply the finality.

Unknown Speaker: Well, it certainly isn't clear to me, because all it talks about is finality.

And I would have thought that 704 simply doesn't address exhaustion.

Mr. Gordon: I believe that there are... beyond the construction of the provision itself, that the sentence, Justice O'Connor, we submit, would be superfluous and inexplicable if it deals simply with finality.

The finality requirement is already clearly set out in the first sentence.

Moreover, in the legislative history, and in particular in a... a explanation of the APA that the Justice Department did, and which was provided to Congress at the time it was considering the APA, the Justice Department said explicitly that the last sentence of section 10(c) dealt with the issue of exhaustion.

And that legislative history is quoted in our brief.

Unknown Speaker: Well, Mr. Gordon, the opening clause of the last sentence, what you're talking about, says except as otherwise required by statute, agency action otherwise final is final for the purposes of this section.

That is surely dealing with finality.

I mean it says so in so many words and it says nothing about exhaustion.

Mr. Gordon: Mr. Chief Justice, when it speaks... it uses the word finality twice.

It says except as otherwise provided by statute, agency action that is otherwise final is final for purposes of this section.

And that phrase,

"final for purposes of this section. "

that is the same thing as saying it is reviewable, because in the first sentence the Congress said it's reviewable.

Unknown Speaker: Well, I don't agree with you.

Why should we read it that way?

It certainly doesn't say so in so many words.

Mr. Gordon: Well, among other things, 5 years ago in Bowen v. Massachusetts, the Court stated that the primary thrust of section 704 was to codify the exhaustion requirement.

Unknown Speaker: That was just an offhand remark in that case.

Mr. Gordon: I agree that it was dictum, sir, but not... I believe it was the correct interpretation.

It's consistent with the legislative history.

It is also consistent with the interpretation that scholars have placed on this uniformly, including, most particularly, Professor Davis in his text, and also other commentators in various law reviews that we've cited in our briefs to the Court.

The view that has been expressed uniformly is that that sentence deals with exhaustion of administrative remedies.

It is true, and Professor Davis and this Court in Bowen have noted, that the courts have tended to ignore that sentence in many decisions, but that doesn't change the fact that that is what's being addressed there.

Unknown Speaker: Well, let's just assume that the... that 704 deals with finality.

But it does deal with finality and it says that... it seems to say that... that there was final agency action here.

Now, is there a time limit on when you can resort to the courts to review a agency... a final agency action?

Mr. Gordon: Justice White, I'm not aware of any specific time limit under the APA for filing suit once you do have final agency action.

Unknown Speaker: And so it might be final for purpose of going to court, unless.

Well, it'd still be final for the purpose of going to court, but you might... may be barred from going to court by the exhaustion principle.

That's the argument on the other side, is it, I guess.

Mr. Gordon: Yes, Your Honor.

And the difficulty we have with the Government's position is that it turns section 10(c) into a trap for the unwary litigant.

The exhaustion requirements must be consistent with the will of Congress.

Congress, in the last sentence, has said that you... has said, in section 704, you must have final agency action in order to seek judicial review.

It says that if you've got... whether or not you have that action, it deals specifically with an administrative appeal.

And it says that you don't need to pursue that appeal in order to have finality, which it defines as the prerequisite for judicial review, unless you are expressly required to do so by statute or by agency rule.

It insists, therefore, on clear procedural ground rules that are spelled out in advance.

And what the Government has done here is come in and sought to obtain through litigation what it never got through rule making.

There is no statute, that's agreed.

There is no regulation, it's agreed, that requires a litigant to pursue this appeal to the Secretary.

And yet the Fourth Circuit said, propounding a rule that was completely inconsistent with... with existing law, that there is this hidden requirement that it has been a rule of judicial administration that you must exhaust all available administrative routes.

Unknown Speaker: Well, Mr. Gordon, let me ask you this.

Suppose we think that 704 deals with finality, not exhaustion, and that courts do retain the equitable discretion to decide to require exhaustion in a given case; would your argument then go to whether the court properly exercised that discretion?

Mr. Gordon: Yes, Your Honor.

Unknown Speaker: And if so, is that question here or would the court have to send it back for that inquiry?

Mr. Gordon: Your Honor, I... the question presented in the cert petition dealt with whether or not Congress has disposed of the issue in section 10(c).

Unknown Speaker: And suppose we disagree with you on that?

Mr. Gordon: I don't believe that it would be necessary to return the case to the Fourth Circuit, although we'd certainly be prepared, if that was the Court's view of the appropriate procedural device, to do it.

Even if section 704 dealt only with finality, which we do not agree with, it is at a minimum an expression of congressional intent and purpose in the area.

And to impose an exhaustion requirement that is 180 degrees in conflict with what Congress has indicated there, we believe would be completely inconsistent and at odds with this Court's jurisprudence saying that courts must defer to... be careful to search for congressional intent in the area and to follow it, and not to impose an exhaustion requirement unless it is clearly consistent with what Congress wanted.

Unknown Speaker: Suppose... I suppose you get relief from an agency action sometimes by appealing to the court of appeals, don't you, from some agency?

Mr. Gordon: Under some statutes.

Unknown Speaker: Under some statutes.

Mr. Gordon: Yes, Justice White.

Unknown Speaker: Well, suppose the agency in that situation had exactly this kind of a nonrequired appeal to the Secretary, and yet the agency order would be final just like it is here.

Is there a time limit, usually, to go to the court of appeals?

Mr. Gordon: Justice White, I'm not aware of any provision under the APA that would permit an appeal directly to the court of appeals.

I believe that any appeals directly to the court of appeals would be under other statutory schemes, and therefore outside the context of the APA, and I do not know whether there are normally time limits that are imposed in those statutes.

Unknown Speaker: But how do you know, in those cases, when an agency action is final?

Mr. Gordon: If those are separate statutory schemes, they wouldn't be controlled by the APA.

We are not contending that section 704 governs exhaustion of administrative remedies in review contexts that are outside the APA.

Unknown Speaker: I take it that you have to, under your view, even wait for 30 days before you can go to court, to determine whether or not the Secretary is going to appeal.

Mr. Gordon: Actually, Justice Kennedy, I believe it would be 15 days.

Under the HUD's regulations, the parties have 15 days to petition for secretarial review.

In this case, neither side petitioned within the 15-day period, and therefore at that point we believe that it became final.

Unknown Speaker: If there had been a petition, in your view what would then be the posture of the case, so far as judicial review, if the Secretary... if the Department had petitioned the Secretary for the Secretary to review?

Mr. Gordon: That's a very interesting question, if I may.

If we had had the normal situation where the... or I shouldn't... a situation where the sanctions were not in effect until there was a final decision and the sanctions were going to be stayed pending secretarial review, clearly we would not have a final agency decision that could be appealed to Federal court pending the secretarial review.

The interesting twist that you have in the administrative sanction context, the suspension debarment context here, is that the sanctions are effective, are in effect during the period that you're litigating before the agency.

And therefore, I think that that is a crucial distinction between this circumstance, for example, and the one presented in FTC v. Standard Oil, where this Court has held that simply filing an administrative complaint is not, in and of itself, appealable final agency action.

Unknown Speaker: Would the sanctions have remained in effect, I take it, if the agency had petitioned to the Secretary for review?

Mr. Gordon: The LDP would have.

You get into some technicalities.

The debarment did not... would not have been effective until the secretarial was completed.

But there was... there were simultaneous sanctions here, and there was a limited denial of participation that had been in effect from day 1 and remained in effect throughout the administration... the litigation before the agency.

Unknown Speaker: And I take it, the agency could appeal to the Secretary to impose a more severe sentence or more severe sanction.

Mr. Gordon: Yes, sir.

In fact, the agency had sought an indefinite term of debarment.

The ALJ had granted them only 18 months, so they had not gotten the period that they'd asked for, and therefore they would have had a basis for asking for a heightened sanction.

Unknown Speaker: But I take it even under your view, the regulated party could not avoid the possibility of the Department appealing to the Secretary by rushing into court, because you have to wait for that 15-day period.

Mr. Gordon: That's correct, Your Honor.

And we have noted, also, that the Government has suggested that to follow our position and construction of 10(c) would invite sort of piecemeal, haphazard judicial review.

And we don't believe that that's the case at all, and we have cited a variety of other doctrines that we believe give the courts full power to keep appropriate control over litigants who would rush into court prematurely.

And those include the doctrine of ripeness, the doctrine of finality, the requirement that in order to have... when you're seeking review under the APA, that your record is limited to the record you've created before the administrative agency itself.

Unknown Speaker: Well, what about the Government's argument, as I understand it, Mr. Gordon, that you may... if you adopt your position, a litigant can obtain judicial review before getting a fully fleshed out decision from the agency.

That you might... you might get a more comprehensive decision from the agency if you... if you exhausted your remedies.

Mr. Gordon: Mr. Chief Justice, I suppose to some extent it's a truism that you may get a more fleshed out decision if you proceed further within the agency.

That's always at least a possibility.

Under HUD's regulations, secretarial review is limited to the record that's been created before the ALJ.

And so in this case, all you could have gotten would have been some further elaboration of... of the rationale for proceeding from those facts that had already been found by the ALJ.

Unknown Speaker: But, Mr. Gordon, wouldn't the logic of your position even apply to the case in which there has been no record made at all?

Would it not apply to a structure, for example, in which debarment can be announced without a hearing by a... by an agency officer, whereupon the contractor has the right, if it wishes, to request an ALJ review of that debarment?

All right, now under... with an appeal later to the Secretary, the rest of it just like the current system.

In that situation, wouldn't you maintain that you don't have to go through the hearing at all?

You could get debarred, simply not go to the ALJ, and come right into court.

Mr. Gordon: Well--

Unknown Speaker: Isn't... wouldn't that be your position?

Mr. Gordon: --No, Your Honor.

Unknown Speaker: Why not?

Mr. Gordon: Justice Scalia, it would not.

First of all, in a decision announced 2 weeks ago, that you wrote, in Reiter v. Cooper, you noted that exhaustion... that to completely bypass an administrative remedy would violate the exhaustion requirement.

10(c) of the APA deals with pursuit of administrative appeals.

We do not contend that 10(c) deals with a complete... it talks about an appeal to superior agency authority.

We do not contend that it covers a situation in which there is a complete failure to contest before the agency, a complete bypass of the agency.

And the district... the D.C. Circuit dealt with that sort of a case, we believe, in the Peter Kiewit Sons' case, which is cited in the Government's brief.

But beyond... beyond that distinction within the exhaustion doctrine itself, between a basic failure to go into the agency at all versus pursuing an administrative appeal, which is what we are talking about here, if you didn't... if you simply left the debarment in effect in your scenario, you would have no administrative record, other than what the agency has created, to go forward on in appeal.

Under the L.A. Truck Lines case, what arguments have you advanced before the agency.

The court is going to hold you to those that you advanced before the agency.

And there are doctrine... you know, the ripeness doctrine might... might be invoked there as well by a court, and we do not contend, and we have made this very clear, that we think that section 10(c) controls the exhaustion doctrine.

It does not.

It simply deals with the issue of procedural defaults.

That's, in our view, what exhaustion is all about, procedural defaults as opposed to whether or not a case is ripe for review by a court and a court is in the appropriate position to rule.

I would note that Senator McCarren, who was the principle sponsor of the APA in the Senate, described it as a charter of private liberty and a solemn undertaking of official fairness, at the time it was enacted.

He said that it was intended to provide, quote, a guide to him who seeks fair play and equal rights under law.

In this case, it is undisputed that the HUD sanctions were arbitrary and unlawful.

Mr. Darby followed the guide that the APA set out.

He did everything that HUD required him by regulation to do, and he did everything that the APA instructed him to do.

Yet, when he sought redress in Federal court, the Fourth Circuit said that he had not done enough and that he had forfeited any opportunity to seek to right the wrong that HUD did to him.

The Fourth Circuit's decision, we submit, nullifies the promise of fair play that Congress made in the APA, and we would ask this Court to affirm that promise that Congress made 50 years ago.

Thank you very much.

I would like to reserve my remaining time, if I may, Mr. Chief Justice.

Unknown Speaker: Very well, Mr. Gordon.

Mr. Feldman, we'll hear from you.

Argument of James A. Feldman

Mr. Feldman: Mr. Chief Justice, and may it please the Court:

In our view, petitioner makes... petitioner's argument makes a wrong turn because it relies on the wrong provision of the APA.

Section 10(c), by its terms and by its intent, deals with the doctrine of finality.

Section 10(a) of the APA, 5 U.S.C. 702, which is the basic provision providing a private right of action for those aggrieved by agency action, that provision provides the sufficient conditions for obtaining judicial... for judicial review.

There... in 1976, Congress determined--

Unknown Speaker: Is it your view that 10(a) creates the exhaustion doctrine, codifies the exhaustion doctrine?

Mr. Feldman: --It's my view that... it's our view that section 10(a) is the... is the basic provision that gives you a right of action for judicial review.

Unknown Speaker: Well, before the... and that's what requires exhaustion.

Mr. Feldman: Well, and then--

Unknown Speaker: And what language in 10(a) requires exhaustion?

Mr. Feldman: --Right, I would--

Unknown Speaker: What is 10(a)?

Could you give me a code number for 10(a)?

Mr. Feldman: --702.

Unknown Speaker: 702.

Mr. Feldman: It's on 1a in the appendix to our brief.

Unknown Speaker: 1a on your brief.

Mr. Feldman: Yes.

Unknown Speaker: It would help me if you tell me what language in that section talks about the exhaustion doctrine.

Mr. Feldman: I think prior... if you talk about prior to 1976, I think the first sentence... well, I think the statute didn't specifically, in terms, address the exhaustion doctrine prior to 1976.

Unknown Speaker: Unless it did it in 10(c).

Mr. Feldman: Right.

It didn't address it by its terms.

Unknown Speaker: Yeah.

Mr. Feldman: But I think the understanding was, not only with respect to exhaustion but, as counsel conceded, with respect to ripeness and primary jurisdiction, other doctrines which have traditionally been equitable doctrines that govern the timing and availability of judicial review, I think everyone believed that those doctrines were available and limited judicial review in the period--

Unknown Speaker: But my question is is there any language in 10(a) that talks about exhaustion?

Mr. Feldman: --Prior... prior to 1976.

Unknown Speaker: Either before or after.

Mr. Feldman: Right.

After 1976, there is... the word exhaustion isn't mentioned, but I do think that when they added the proviso saying nothing herein affects other limitations on judicial review or the power of a court to dismiss or deny relief on any other appropriate legal or equitable ground... when they added... when Congress added that proviso, the doctrine of exhaustion of administrative remedies, like the other doctrines I've mentioned, are plainly encompassed within the terms limitation on judicial review or appropriate equitable grounds.

Unknown Speaker: And where before this... before '76, where did you find the exhaustion doctrine in the statute?

Were we just plain wrong in the Bowen opinion saying we thought it'd been codified in 10(c)?

Mr. Feldman: Well, I think... the Bowen opinion was addressed to a different question, a different part.

Unknown Speaker: I understand.

Was that statement just plain wrong?

Mr. Feldman: No.

Actually, I think the... insofar as... insofar as it's... I think it was not a full statement--

Unknown Speaker: We said in that sentence that we thought 10(c) codified the exhaustion doctrine.

You're telling me that's wrong; the exhaustion doctrine was in some other part of the statute or somewhere up in the sky.

Mr. Feldman: --I think it was in 702 at that time.

Unknown Speaker: But no language mentioned it, did it?

Mr. Feldman: But... and I don't... insofar... it was an issue that was important in Bowen, but I would say there was a footnote in Bowen which I think states our position precisely.

On page 902 in footnote 35, the Court said,

"It is certainly arguable that by enacting section 704. "

that's 10(c),

"Congress merely meant to ensure that judicial review would be limited to final agency actions and to those nonfinal-- "

Unknown Speaker: Which is entirely consistent with the notion that the exhaustion doctrine determined when an action was final.

Mr. Feldman: --Well, that... that would be--

Unknown Speaker: It wouldn't be final until there was exhaustion.

Mr. Feldman: --Well, that would be--

Unknown Speaker: So that's entirely consistent with the text on the next page.

Mr. Feldman: --I think that would be... that would be an additional premise.

But our position is that the exhaustion... that finality and exhaustion are distinct doctrines.

The Court has referred to them as distinct doctrines on a number of occasions.

The Court did it last--

Unknown Speaker: And the exhaustion doctrine is entirely nonstatutory.

Mr. Feldman: --Yes.

Except... well, except that I think 702 shows that the Congress in 1976, when it was amending the statute, plainly thought that exhaustion, as well as these other doctrines, still applied.

There's nothing unusual--

Unknown Speaker: Of course, that language would still have exactly the same meaning if the exhaustion doctrine were part of 70(c)... 10(c).

Mr. Feldman: --I don't see--

Unknown Speaker: The amendment in '76 didn't take away any defenses that were already in the books, including the requirement of finality.

Mr. Feldman: --Well for... the amendment... the legislative... the reports and so on which explicated that phrase specifically mentioned exhaustion, as well as a number of other doctrines.

Unknown Speaker: But it didn't... did it mention exhaustion as something separate from what was in 10(c)?

Mr. Feldman: No, but... no, but it talked about traditional, equitable limitations and traditional defense.

Under 10... under petitioner's view in this case, it's hard for me to see how... what remains of the exhaustion doctrine after 10(c).

There's now a codified rule that no longer governs.

Unknown Speaker: Well, it remains that if the agency wants him to... if every case, if they want the applicant to make the petition before the Secretary, they ought to have a rule that says so.

Mr. Feldman: Right.

Unknown Speaker: And then they can require it.

In which event the... in which event the agency action isn't final.

Mr. Feldman: Right--

Unknown Speaker: If the agency so provides by rule.

Mr. Feldman: --That's right.

And that, I think, is a codification of the traditional rule of finality.

Finality has to do with when an agency is satisfied that its decision can then... can take effect at a certain point.

It doesn't have to do with whether there's an additional administrative remedy that's available... that... available to a litigant to cure a defect in an agency action.

That's traditionally the distinction between the two doctrines, and there's no reason in the language of section 704 to think that it was dealing with the latter situation.

Unknown Speaker: Well, Mr. Feldman, if... if you are correct that exhaustion is something that the court, in its discretion, can impose, do you think that the court can properly impose it in circumstances where it does become a trap for the unwary?

Mr. Feldman: I think that that... first of all, I would say I don't think that question has... is presented by this... by this case.

But I think it is an equitable doctrine, and the Court has repeatedly said you look at all the circumstances.

There may be cases in which there was a trap for the unwary, where--

Unknown Speaker: Well, like in this case.

I mean it certainly came as a surprise to the litigant here, apparently, that exhaustion would be required.

I think it would come as a surprise to me, reading the statutory scheme.

Mr. Feldman: --I think, actually, I would, with respect, differ with... on that.

I think that a seasoned litigant before an administrative agency shouldn't be surprised to know that he has to follow an internal appeals process that can... especially up through an agency's ranks, before he can go to court.

I think that has been an accepted rule, that people would be surprised to find they didn't have to follow.

Unknown Speaker: Well, would it have been an abuse of discretion for the district court to entertain this action?

Mr. Feldman: I think that if... if a district court found... let me add one other fact, and then I can answer that, which is petitioner has never claimed, that I'm aware of in this litigation, that he wasn't aware of the internal appeals process.

But if you take a case, for instance, where... where a... where a litigant honestly wasn't aware of the existence of an administrative appeal process, I think that would be a factor to be taken into consideration in the equitable weighing that... that happens when you apply the doctrine.

Unknown Speaker: But, the more you make it equitable and discretionary, Mr. Feldman, it strikes me the more likely it may be a trap for the unwary.

I mean if you don't know until you get to court how a judge is going to decide as to whether you should have exhausted that last remedy, then the doctrine really does have some potential for mischief.

Mr. Feldman: I would say that, in general, the doctrine... the doctrine is not complex.

It says if there's an adequate remedy that's not futile, the way... the decision maker is not biased.

If it meets some of those basic prerequisites, that you are required to undergo that before you go into court.

Unknown Speaker: Well, then you're not talking about something that is discretionary in the sense you weigh all... or the district court weighs all the facts in each case.

You're talking about a general rule that might be subject to some exception.

Mr. Feldman: Yes.

But I would say, for instance, in the question of what is an adequate remedy, the courts have discussed a number of different types of factors.

There might be a case where a... where the failure to publicize a process or impossibility for a litigant to find out it was... it was even in existence.

Unknown Speaker: But, Mr. Feldman, in this very case your position, as I understand it, is that the sentence that says

"any party may request such review in writing within 15 days. "

really means every party must request review if that party wants judicial review.

Mr. Feldman: That's right.

That's right.

Unknown Speaker: And you don't think that's misleading language.

Mr. Feldman: No, I don't think so.

I think that that is the... that is the consequence of having an equitable doctrine such as exhaustion that has been applied for 100 years to administrative proceedings.

Unknown Speaker: Yeah, but it hasn't been applied this way since the Administrative Procedure Act was enacted.

Most of that 100 years was before it was codified in 704.

Mr. Feldman: Well, we would disagree that it was... that it is in 704.

Unknown Speaker: Mr. Feldman, what... what is the purpose of 704, if it isn't... if it isn't that?

I mean I agree that finality and exhaustion are different concept, but so are animal and dog different concepts, but one is a subspecies of the other.

Why isn't exhaustion one sort of lack of finality; it's not final because you haven't exhausted your administrative remedies?

Why isn't that a perfectly way to explain why exhaustion is different from finality, but nonetheless makes sense of section 704?

Mr. Feldman: Well, I think section 704 serves a different purpose, or this last sentence of section 704.

What that does is it permits a litigant... it permits an agency to create a role saying you have to take this internal agency appeal.

And regardless... and then at that point.

Unknown Speaker: No, but that... that's--

Mr. Feldman: That is a pre--

Unknown Speaker: --That's not what the APA was meant... the APA was sponsored by the American Bar Association to stop these newfangled agencies from jerking people around, and the purpose of 704 was... was explicitly to stop agencies from making you go through one hoop after another hoop after another hoop before you could get to court.

Isn't that the purpose of it?

Mr. Feldman: --Well, I--

Unknown Speaker: I always thought it was.

Mr. Feldman: --Actually, I don't think so.

I think 704, first it... 704, my reading of it, it is a... it provides necessary conditions for taking advantage of the procedure for judicial review that was created in 702.

And those are condition... and among things... I think it would be common ground in this case that among the effects that 704 has is if the agency were to adopt a rule saying you have to take an internal agency appeal before you can get into court, if an agency were to adopt that rule--

Unknown Speaker: Right.

Mr. Feldman: --A litigant would have to do that regardless of any application of the exhaustion doctrine.

Unknown Speaker: But you're saying they have adopted that rule.

Mr. Feldman: No, I'm not saying... no.

Unknown Speaker: Yes, you say that's the fair reading of that last sentence.

Mr. Feldman: No.

Unknown Speaker: They must do that in order to get into court.

Mr. Feldman: If they do it by rule.

What 704 does, and I think this is probably consistent--

Unknown Speaker: No, I'm saying that the Secretary's present regulation is, in your... as you interpret it, exactly that kind of rule.

Mr. Feldman: --No.

Well, if I said that, it was perhaps a little misleading.

What I meant was--

Unknown Speaker: Well, I said isn't your interpretation of this sentence that he must apply for the... within the 15 days if he wants to go into court, and you said yes.

Mr. Feldman: --The legal consequence of that rule is that that--

Unknown Speaker: Is exactly what I said.

Mr. Feldman: --Not... I guess, sir.

Perhaps maybe... perhaps not exactly.

The difference is the legal consequence of that rule, the rule that's currently in the regs, is if he wants to get into court, he should exhaust his administrative processes unless the... there... the administrative remedy is inadequate or futile or comes within one of the other exceptions to it.

If the agency had adopted the... an... a rule that said, in terms, you must take the internal agency appeal before you get into court, then the existence of those exceptions would be irrelevant.

The agency would therefore have the power to say you have to do it, and assuming its rule was valid, you would have to do it.

And that's what the power to have--

Unknown Speaker: So what you say is it means is you must file within 15 days unless you want to take... assume the burden of proving that remedy is an inadequate remedy.

Mr. Feldman: --That's right.

Unknown Speaker: That's what it means.

Mr. Feldman: That's right.

And I think that was a reasonable thing for Congress to do, to give agencies the power to do that, but without upsetting the exhaust on doctrine, which requires... which gives agencies a chance, under the common law that had developed prior to the APA and which was preserved in section 702, to make... to hear litigant's complaints and make rulings as to... and make sure that their decisions are in accordance with agency policy before they go into court.

Unknown Speaker: Mr. Feldman, do you know if this "may" language is common among the agencies in terms of internal review?

Mr. Feldman: It's quite common.

I can't give you a percentage.

Unknown Speaker: Well, why would say... I wonder why they use the word "may".

It seems kind of silly to me.

Mr. Feldman: Well--

Unknown Speaker: Why don't they either put up or shut up.

[Laughter]

Mr. Feldman: --Well, one reason that they use the word ALJ, after you look at all things considered, you may take an appeal to the agency, superior agency, to the Secretary.

Unknown Speaker: Well, why don't you... yeah, but you've... but... but the agency, in using "may", bars them from going to court right away.

Mr. Feldman: That's right.

That's the... but that is a standard application of the exhaustion doctrine which always has had the effect of barring people from going to court if there is an alternative administrative remedy.

This case, in fact, is a very--

Unknown Speaker: Well, 704 seems to say that if you want to postpone finality, the agency wants to postpone finality or hold up going to court, the agency should do it by rule.

Mr. Feldman: --Right--

Unknown Speaker: Do it by rule and say that... that the... that the action... what... the rule that says that the action is meanwhile inoperative, so it isn't final.

Mr. Feldman: --As I said, an agency... an agency can adopt a rule, and that has a rather different effect than the rule that they did adopt.

The effect of a rule like that under 702, under the authority of 702, is to make it an absolute requirement that you go to superior agency authority, regardless of whatever the equitable factors might be, or the exceptions to the doctrine of exhaustion.

The effect of just simply creating a remedy for a litigant, as in any other case where the agency creates a remedy for a litigant or, as here, where... this, in fact, is a case, similar to what Justice Scalia mentioned earlier, where the procedure starts by the agency sending out a notice of proposed debarment.

If the litigant doesn't do anything, he is debarred, I think, within 30 days, I'm not sure of the exact period.

Now, it permits the agency... the litigant... the litigant may ask for conference at that point.

I think the rule uses the word "may" in that context as well.

The litigant may go to the ALJ, he may present evidence or he may not.

That doesn't mean that if he sits on his haunches he can go into... he can go into court prematurely.

Unknown Speaker: But, of course, as Mr. Gordon said, the ALJ before whom he would have the hearing cannot really be described as a superior agency authority in that context.

So I don't know that 704 would... would comfortably be applied to that situation.

Mr. Feldman: There are such... whether... whether he would be a superior agency authority or not is... maybe it isn't worth getting into on the facts of this particular case.

But in any event, there would... could easily be cases where that would be the case, where you get a proposed... I know the Department of Energy has proposed remedial orders.

It's a very common way of... for administrative proceedings to run.

In this case, it happens that the... the notice of proposed debarment was sent, I think, by an assistant secretary.

Unknown Speaker: But why... why... what is the great disaster about our just saying... I, frankly, don't see what 704 was directed at unless it was the problem of the agencies setting up one obstacle after another after another before you can finally get to the... get to court.

And what 704 says is you can do it, but if you want to do it your agency... your action cannot be effective.

You have to announce in advance, and the real bite is your action cannot be effective, you cannot debar, you have to just propose to debar.

And then you can make me jump through as many hoops as you like, but nothing happens meanwhile.

Mr. Feldman: And that, indeed, was what happened in this case.

Unknown Speaker: Well... well, no.

He was... the final debarment had... had not occurred.

Mr. Feldman: But what had happened was--

Unknown Speaker: But there... but there was a disqualification from it.

Mr. Feldman: --There was a limited denial of participation which was issued by the local... a local HUD office which had a very limited effect.

It applied to just the local office and just the program that Mr. Darby was involved in.

That took effect at... before, even, the notice of proposed debarment went out, and that was simply a means for the agency to protect itself while anything else was being litigated.

To say if we suspect someone of having defrauded us or swindled us, or however you characterize what they suspected happened.

If we suspect somebody of doing that, we need a way to protect ourselves while... we can't just let this person go on and contract in the same program with us, until we can find out the facts and figure out what happened.

That... the rationale for that, for limited denial of participation, is different, very different, from that of a debarment.

And we could discuss whether that's a good idea or whether an agency ought to be able to... permitted to do that, but if that limited denial of participation is sufficient to permit a litigant to go directly into court, then he doesn't have to wait for anything.

That happened actually even before the debarment proceedings had started here.

I mean, in fact, I think that that's a reasonable way... that serves the purpose of protecting an agency's particular program while a debarment is being considered.

Unknown Speaker: Well, you don't say that he... that this permissive review wasn't available to this person, do you?

Mr. Feldman: It was... it was available.

Unknown Speaker: Yeah.

Mr. Feldman: It was available at the--

Unknown Speaker: And suppose the Secretary had turned him down; he could go to court.

Mr. Feldman: --That's right.

Unknown Speaker: Mr. Feldman, let me ask you a question Justice Scalia kind of asked you.

That is isn't the legislative history against you?

Mr. Feldman: I don't think it... I don't think it is.

I think there's about three or four different strands of the legislative history.

One is the consistent statements that this was intended to codify existing law.

I think that cuts strongly in favor of our position.

Second, there was Attorney General Clark's statement--

Unknown Speaker: Well, you're talking about 1945 now.

Mr. Feldman: --Yes.

I'm talking now the earlier legislation.

In that the exhaustion doctrine, as it applies... as it applies to finality, I think is the word that he used, I... then is codified in this section.

I think what he indicated by that, plainly, was that he was talking about finality and not exhaustion.

He wasn't saying the exhaustion doctrine, apart from concerns of finality.

He was talking about finality.

Unknown Speaker: Well, except that some of the language of the section itself is just as consistent with exhaustion as it is with finality, in a very narrow sense.

I mean you yourself said 10(a) can be dealing with exhaustion though it doesn't mention it, and I suppose the same thing is true of 10(c).

And when... when you've got text that refers to... to requests for reconsideration and appeals to superiors, I mean that smacks just as much of exhaustion as it does of... of finality, in the narrow sense, doesn't it?

So that would be consistent with that legislative history that you try to explain away.

Mr. Feldman: I think that... all I can say is that when Attorney General Clark, I think, used the words "as to finality", he was signaling that he was talking about finality and not exhaustion.

And this court has, in a number of cases, distinguished between the two.

Unknown Speaker: But the... but the text still--

Mr. Feldman: The other--

Unknown Speaker: --I mean the text, in references to reconsideration and superior authority, is dealing... despite its finality language, is dealing with exhaustion concepts, is it not?

Mr. Feldman: --I think that those things could be relevant to either.

There is certainly overlap between... even between ripeness as well.

The petitioner hasn't alleged... hasn't said that section 10(c) eliminates the ripeness doctrine, but I actually don't see why it wouldn't have that effect, at least in many cases, under his reading of the statute.

But the other comments from the 1945 or 1946, they're perfectly consistent with our reading.

What they say is it permits the agency, by rule, to require an appeal to superior agency authority.

At that point, that is codified, it is a prerequisite, a necessary condition for obtaining judicial review under the statute.

And an agency can do that regardless of--

Unknown Speaker: Well, it provides for a necessary condition.

Mr. Feldman: --Right, right.

Unknown Speaker: It does not impose it.

Mr. Feldman: That's right, provides for it.

And regardless of whether you would meet any of the... what... the traditional exceptions to the exhaustion doctrine, regardless of whether somebody would view it as inadequate or futile or whatever, an agency can require you to go through these processes, assuming its regulations are valid.

In 1976--

Unknown Speaker: In this discussion of legislative history, are you talking about the attorney general's manual?

Mr. Feldman: --I... there was... the attorney general's manual actually came afterwards.

Unknown Speaker: That's right.

Mr. Feldman: But there was one... there was, I believe, one copy--

Unknown Speaker: That's why I wonder how that's legislative--

Mr. Feldman: --Right.

I was really talking about the attorney general's comments to... that were prior... that were submitted to Congress prior to the enactment of the statute, and there was one comment, I think, on the floor or in a committee report, that was similar to that.

The attorney general's manual just said more or less the same thing.

But except... all except... all of those comments, except for Attorney General Clark's first statement, are perfectly consistent with our view, which is it permits an agency to require someone to go... appeal to superior authority without any of the limitations of the exhaustion doctrine.

That's what it does and those are perfectly consistent.

In 1976, though, I'd add, I think that if you look at the legislative history... first of all, 702 has something which 704 doesn't have.

That is, 704 has no general term which could encompass the specific doctrine of exhaustion; 702 does.

It talks about traditional limitations on judicial review and appropriate equitable grounds on which a court may deny relief or dismiss a case.

It seems clear to me that those... those, even just on the language, apart from the legislative history, plainly apply to the exhaustion doctrine.

It certainly is a tradition limitation on judicial review.

Unknown Speaker: --Well, they also plainly apply to the finality requirement.

And if the finality requirement includes the exhaustion doctrine, they apply to both at the same time.

Mr. Feldman: Right.

Well it says APA are doing, and therefore to refer also to 7... we have seen so far is 7... it says--

Unknown Speaker: Well, "nothing herein" was meant to be this additional waiver of sovereign immunity.

It isn't to... it isn't to waive any other defenses.

Mr. Feldman: --It says "affects other limitations".

Unknown Speaker: Well--

Mr. Feldman: Actually, that was the term was I was trying to--

Unknown Speaker: --What does "herein" mean?

Mr. Feldman: --Other limitations.

Unknown Speaker: I thought 702.

Mr. Feldman: Well, it probably refers to section 702.

I don't think it really makes a difference because--

Unknown Speaker: The waiver of sovereign immunity in particular.

It's saying in waiving sovereign immunity, we're not waiving all these other things.

Mr. Feldman: --Right.

And one of the--

Unknown Speaker: But we're not talking about 702, we're talking about 704.

The issue is what 704 provides.

Mr. Feldman: --I think what Congress intended by the 702 does, which is create a statutory cause of action for judicial review, that in creating that we are not... Congress did not intend originally, and certainly in 1976 made clear that it didn't intend to upset these traditional doctrines such as exhaustion and primary jurisdiction and lateness and so on.

Unknown Speaker: Well, Mr. Feldman, on that point, what is traditional?

Are there cases out there that were decided before the adoption of the APA that clearly said exhaustion is required in the situation of a discretionary agency appeal?

I haven't spotted any and I wondered if you had.

Mr. Feldman: I haven't... I haven't spotted any.

Actually, I haven't spotted cases that--

Unknown Speaker: Well, they're a little hard to pinpoint under traditional, it seems to me.

Mr. Feldman: --Well, it depends--

Unknown Speaker: In fact, wouldn't you agree that Meyers against Bethlehem Steel is the classic case on exhaustion?

Mr. Feldman: --Yes.

Unknown Speaker: And isn't that a finality case?

The holding of the court is

"No one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted. "

That's what the case held.

Mr. Feldman: Right.

Unknown Speaker: And that's what was codified in this... you don't think so.

Mr. Feldman: I don't believe it.

I think that's actually a codification of the exhaustion doctrine.

More, if you look at cases such as Aircraft & Diesel against Hirsch, that was a case where someone went to the renegotiation board, had a ruling against them, and instead of pursuing the... what is very comparable to what happened here, which is an appeal to the tax court in that case, but to a superior authority, it went directly into court to complain about the administrative action.

This Court held that that was barred by the exhaustion doctrine.

In fact, it was barred by the exhaustion doctrine regardless of whether he could ever have gotten an appeal from the tax court judgment in that, had he won it.

Unknown Speaker: And it's still not clear to me what your position is as to whether it not it would have been error for this court to proceed, if it had chosen to do so.

Mr. Feldman: It would have been error for the district court--

Unknown Speaker: Yes.

Mr. Feldman: --To proceed here.

My position is the district court... our position is the district court did not... the district court... well, I think there's nothing on the facts of this case that suggests that the Fourth Circuit decided it wrong.

The kinds of things that petitioner raised--

Unknown Speaker: Well suppose... suppose the district court had proceeded with this case; is that an abuse of discretion or some other error?

Mr. Feldman: --I would say it is--

Unknown Speaker: Because we're talking about an equitable doctrine, and I want to know if the district court... or a district court situated in a case like this would have the discretion to proceed, if it chose to do so.

Mr. Feldman: --It's hard... since discretion necessarily allows a range of judgments, it's hard for me to say that there would be no circumstances, especially if you filled in some additional facts, that a district court could have not proceeded on... could have proceeded in this case.

But I don't think that the facts that were before the Fourth Circuit or the arguments that were made by petitioner were sufficient to excuse him from the exhaustion doctrine.

The arguments that were made by petitioner about whether the doctrine applies were that... that the... that the administrative remedy was inadequate because the Secretary could extend the time period, even in the absence of any showing that the Secretary ever had extended the time period and even where the periods are relatively brief, 30 days or so.

I think he could have had a complete judgment in 75 days.

The Fourth Circuit rightfully said well that's not a basis for excusing exhaustion, where you have no basis to say the Secretary wouldn't have just followed the time deadlines and the rules.

I think the petitioner also claimed that it would be futile to pursue the administrative remedy, but there's no reason to think either that that was... that that would have been a factor here.

That's simply his speculation, that he would have been unsuccessful.

I think that, in fact, this case is a classic case where exhaustion should be required.

The Court has said exhaustion is particularly potent where administrative discretion is at issue, and expertise.

Well, the decision whether to debar is expressly made a discretionary decision, and... and it involves weighing the seriousness of the acts against the mitigating circumstances and so on.

Those are decisions that the Secretary should have had a chance to make, if petitioner didn't like them, before... before the ALJ's decision was reviewed by a court.

In addition, of course, there's a lot of expertise involved here in interpreting HUD's regulations and in interpreting the debarment procedure itself and the standards for debarment, as well as the substantive standards governing the program the petitioner participated in.

Unknown Speaker: Your position is that this "may" type internal review suspends finality.

I mean it destroys finality for purposes of judicial review.

Mr. Feldman: I think the "may" in the regulation, it doesn't destroy finality, because the regulations specifically provide that the... that things become final if no review is... if no one seeks a further agency appeal.

What the "may" does is it gives you an avenue to go to the agency so it can--

Unknown Speaker: Yeah, but what if you don't... you cant' go to court because it isn't final?

Mr. Feldman: --Well, I guess I would just characterize that differently, perhaps, and say you can't go to court because you haven't exhausted your administrative remedies, even if it becomes final.

It's the same thing as if, where a district court judgment becomes final before an appeal... an appeal, a timely appeal is not taken to the court of appeals.

In those circumstances, you can't then take an out-of-time appeal to the court of appeals on the ground that the district court judgment is now final.

That... this "may" has the same effect as that.

The agency action does become final if you don't do anything.

That is, the agency is satisfied--

Unknown Speaker: Yes.

Mr. Feldman: --And put it into effect if the... if no one has complained to the Secretary.

Unknown Speaker: But even though final, you can't get into court without... without exhausting your remedies.

Mr. Feldman: That's right.

And I think that that is generally... that's always been true of applications of the exhaustion doctrine, and actually numerous other doctrines.

Petitioners' argument basically is that because a statute... which in our view 704 sets a necessary condition for judicial review.

Because you meet that one necessary condition, which is finality, you thereby can get into court, that's a sufficient condition.

And I think all of the Court's cases dealing with the whole range of doctrines that we discuss in our briefs, stand for the proposition that even where you meet the statutory prerequisites for suit, those are the cases precisely where these doctrines apply and can govern the timing and availability of--

Unknown Speaker: I had thought sometimes that... that where exhaustion applies, a court in which a suit is filed would just stay its hand until the administrative remedy is exhausted.

Mr. Feldman: --That would... I think that would be... in appropriate circumstances, that would be an appropriate--

Unknown Speaker: Except for the time limit.

Mr. Feldman: --That's right.

If there's no reason to do it, it might not, although I'm aware that HUD, perhaps in an appropriate case, could provide for an extension of the time.

Thank you.

Unknown Speaker: Thank you, Mr. Feldman.

The Court notes from your admission papers that today is your birthday; you're 43 years old.

[Laughter]

Mr. Feldman: Thank you.

Unknown Speaker: Happy birthday.

[Laughter]

Mr. Feldman: Thank you very much.

Unknown Speaker: Mr. Gordon, you have 4 minutes remaining.

Rebuttal of Steven D. Gordon

Mr. Gordon: I'd like to address several points, if I may.

The first is what I believe to be the absolutely erroneous contention that the Government has advanced that the decision of the Fourth Circuit here was consistent with the existing law of exhaustion.

The law of exhaustion, from the time of Meyers v. Bethlehem Steel up through this Court's decision last term in McCarthy v. Madigan, has always been that litigants are required to exhaust the prescribed administrative remedy, and that phrase "prescribed" is critical and it has always been there.

And in our view, all that section 10(c) of the APA did was to ordain which remedies would be considered prescribed for purposes of judicial review.

Moreover, the law had always been that litigants need not exhaust permissive administrative appeals.

In Levers v. Anderson, decided by this Court a year before the APA was passed, Justice Black, writing for the Court... precisely this contention was made.

The Government stood up and said that the litigant was out of luck because they hadn't pursued a permissive motion for reconsideration.

And Justice Black said that the Court was not persuaded that "may" means "must",--

And yet that's what we hear from the Government, "may" means "must".

And if you, as the litigant, if you're sufficiently seasoned, if you can't figure that out, shame on you.

That is nothing less than turning these administrative appeals into traps for the unwary, which was completely at odds with what Congress set out to do.

The... I would note--

Unknown Speaker: Do you know any cases, Mr. Gordon, in which the concept of finality was applied to failure to seek an appeal within the agency?

Say it's not final because you've failed to seek an appeal.

Mr. Gordon: --No, Justice Scalia, I do not, sir.

Unknown Speaker: Yeah, I don't either.

Mr. Gordon: I would also... on the facts here, the Government has pooh-poohed the notion that the LDP, which was in effect throughout, had much of an impact on Mr. Darby.

The record reflects, and this is in an affidavit filed before the district court, that during the 10 months that he'd already been under the sanctions, he had lost a HUD contract that he anticipated would have been worth approximately a half a million dollars of profit to his business.

So this is a litigant who diligently did everything that HUD told him to do pursuant to its regulations at the same time he was enduring a tremendous cost for doing so.

And the Government suggests that there was little cost in him being required to jump through further hoops.

If the additional 75 days for the secretarial appeal... and that's under an optimistic time frame... had gone by, the LDP could have expired, because it's limited to a year, and according to the Government in its pleadings before this Court, once it expires it becomes a moot issue because it doesn't have the continuing consequences that a debarment does.

So the Government propounds, in our view, nothing less than a catch 22 here, and we don't believe that the exhaustion doctrine is a catch 22 or should be construed by this Court to place litigants in that position.

If there are no questions from the Court, that concludes my presentation.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Gordon.

The case is submitted.

Attribution:

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Featured:

Ankenbrandt, As Next Friend And Mother Of L. R. v. Richards - Oral Argument

Fri, 09 Jan 2009 14:49:36 +0000

Case:

Ankenbrandt, As Next Friend And Mother Of L. R. v. Richards

Media File:

91-367_19920331-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Richard Lynn Ducote

Chief Justice Rehnquist: We'll hear argument next in No. 91-367, Carol Ankenbrandt v. Jon A. Richards.

Am I pronouncing your name correctly?

Mr. Ducote: Ducote, Chief Justice.

Chief Justice Rehnquist: Ducote... Mr. Ducote.

You may proceed.

Mr. Ducote: Mr. Chief Justice and may it please the Court, I represent two young girls, one 9 and one 7, who come before you through their mother as their next friend.

Their parents were divorced and their mother was awarded full custody, and during the court-ordered visitation they were physically and sexually molested by their father and his girlfriend.

Because of the abuse, the Jefferson Parish, Louisiana Juvenile Court through its child protection statutes permanently terminated all the parental rights of the father and permanently enjoined him from having any contact whatsoever with the children again.

Therefore, under State law he is a legal stranger to them.

That decision was never appealed and is final.

After that decision, the children filed suit against their father and his girlfriend in tort, in Federal court in Louisiana, under diversity of citizenship, because they were no longer residing in the same State.

The district court in the Fifth Circuit through the case out saying what this really is is a domestic relations case over which the Federal courts have no jurisdiction.

I think it's first important to note what this case is not.

This case is not about establishing a new Federal cause of action.

This case has nothing to do with the concerns expressed by the Chief Justice and other Members of this Court about creating new Federal causes of action such as the actions now pending before Congress concerning making all crimes against women perhaps civil rights actions which could be brought in Federal courts, or against making all crimes committed with handguns Federal offenses.

There's no question, and it's never been contested in this case, that all of the elements of diversity have been satisfied.

Unknown Speaker: Well, we could go further, could we not, Mr. Ducote, in saying what the case is not about, in saying that it is not about a decree of divorce, it is not about child custody, it's not about probate... something like that?

Mr. Ducote: That's correct.

It's a simple diversity tort action.

Every tort action under diversity is a State and a local cause of action, just as this case is.

If these children had been, say, run over by their father by an automobile they would have Federal relief.

If they had been sexually molested, say, by their minister or by their schoolteacher, they would have a Federal forum.

Perhaps... and it's not clear under the Fifth Circuit's test where the line would be drawn, but perhaps if it had been an uncle... an uncle or an aunt or a first cousin who had molested them, they'd also be able to sue in Federal court under diversity of jurisdiction.

Why is it, then, that the Federal courts can abstain or simply refuse to hear a case because it's the father who's involved, and I submit that they can't.

I don't believe that the test of Federal jurisdiction is whether or not we want to get involved, when the Federal courts say I don't want to get involved because it sounds too much like a family matter.

The real question here--

Unknown Speaker: Well, but you... in your earlier answers to the chief justice you seem to be saying that well, if it were a family matter, that would be a different question.

As I understand, your position is if it were probate, if it were any traditional family matter, there would still be no basis for the Federal court staying out, right?

Mr. Ducote: --Well, one of the questions the court asked is whether or not there is a Federal... a domestic relations exception to Federal jurisdiction.

Unknown Speaker: That's right.

Mr. Ducote: My position is that if the diversity criteria are met and the amount in controversy exceeds the $50,000 threshold, no matter what the source of the money is, it should be within Federal jurisdiction unless Congress determines otherwise.

Unknown Speaker: So you can sue in Federal court for divorce.

Mr. Ducote: Well, I don't believe so, because divorce itself has no $50,000 threshold, nor does child custody, nor does child visitation.

If what is sued for is money, then yes, if the $50,000 threshold is met and the diversity criteria are met, the Federal courts have jurisdiction until Congress says otherwise.

Unknown Speaker: Well, what if a husband sues for a divorce and requests a property settlement agreement, saying that the amount of controversy, our property, amounts to several hundred thousand dollars.

Would that meet the jurisdictional amount for diversity?

Mr. Ducote: Unfortunately, at this point, given the fact that the Federal jurisdiction is defined by Congress and Congress is not exempted, that sort of question from the diversity of jurisdiction, I think to be true to the Constitution, yes, the Federal courts would have jurisdiction.

Unknown Speaker: We really don't have to decide that question, do we, to rule in your favor?

There could be a domestic relations exception which embraced divorce, child custody, and still did not extend as far as your case.

Mr. Ducote: That's absolutely correct.

Unknown Speaker: What about a suit for the partition of real estate in another State?

I mean, that, like divorce, has been considered traditionally a nontransitory cause of action, so you had to sue within the State where the property was.

If you sued in another State's courts you couldn't get it, but your position is you can sue in any Federal court for it.

Mr. Ducote: My position is that if the diversity criteria are met and the amount in controversy exceeds $50,000 and the State law that's applicable in the jurisdiction where the Federal court sits allows for that cause of action, the Federal courts under Article 3 and the congressional mandate under 28 U.S.C. section 1332 says that you have jurisdiction.

Unknown Speaker: Don't you think that that congressional mandate took into account accepted notions of transitory causes of action and nontransitory causes of action so that it was entirely understood that to get a divorce you could only sue in the court of the State where the people are resident?

Mr. Ducote: I think first you have to look at the State law, and whatever the State where the forum sits says about what can be done with property that another State would control.

Unfortunately, and as all of the Law Review articles and Judge Weinstein in the Spindel case point out, most of what the courts have said about the domestic relations exception have been on very weak grounding, that these things about well, ecclesiastical courts used to do this, and courts of equity didn't do this and all, just don't apply, and I think with the position, unfortunately, where we have to look at what the Constitution says about who decides what Federal courts have jurisdiction over and return the responsibility to Congress to sort through the problems that you're suggesting, I think as a matter of principle if the Federal courts can simply define their own jurisdictional boundaries we just have all sorts of--

Unknown Speaker: They're not defining their own.

They're just assuming that the congressional grant of jurisdiction, if not the constitutional grant of jurisdiction, took into account ordinary notions of nontransitory causes of action that could only be brought in certain courts.

What about criminal jurisdiction?

Can Federal courts try for State crimes?

The traditional notion is that no sovereign enforces the criminal laws of another sovereign.

Mr. Ducote: --I agree.

Unknown Speaker: Can a State attorney bring in Federal court a prosecution for a State crime?

Mr. Ducote: No, but in the diversity cases... and that's the unique nature of diversity jurisdiction... diversity jurisdiction specifically deals with local causes of action, local concerns, and simply says that because of this... in the Bullone case it's expressed, the concern about local prejudice, and then the... sort of the equal footing that nonState parties should have in that court, that the Federal courts should have diversity of jurisdiction.

Unknown Speaker: In some of our cases, Mr. Ducote, we've said that when Congress enacts a jurisdictional measure it takes it with knowledge of any judicial gloss on it, so to speak, such as Canon v. University of Chicago.

Now, this Court has been speaking about domestic relations exceptions to diversity jurisdiction since the turn of the century, and the Congress has revisited the diversity statute several times and never made any addition to it indicating that it disapproved of that exception.

Doesn't that suggest that your analysis is a little bit two-dimensional when you simply say well, we just look at the statute?

Mr. Ducote: Well, the Court... the last pronouncement was in the 1930's on the domestic relations exception, except for Thompson v. Thompson in 1988, when in a footnote the Court talked about the tradition of the domestic relations exception, and what I'm saying... and again, I don't think this is essential for us to prevail in this cause of action, but I think what we have to do is sort of pull that all back together and make some sense out of it and get back to the issue that Congress needs to set out what the parameters of Federal jurisdiction are and what are the exceptions.

And I think Congress did an excellent job of that in 1990 in the supplemental jurisdiction provision under 28 U.S.C. 1367, where the Court said... Congress said the Federal courts can have supplemental jurisdiction if this criteria is met, this criteria, and they may choose to decline supplemental jurisdiction if State law is uncertain or the issues are too complicated or for other good reasons.

So in that case, Congress specifically authorized an abstention, if you would, from jurisdiction, and I think that's really what we need to do so this doesn't spread further and--

Unknown Speaker: Is there any suggestion that that was done in the light of this Court's statement about the domestic relations exception?

Mr. Ducote: --I think it had to do with perhaps some of the other abstention doctrines, Younger v. Colorado Water District, but I think if we're going to have exceptions to Federal jurisdiction, or we're going to allow for abstention of Federal jurisdiction, then I think it should be by congressional mandate and not by judicial activism.

Unknown Speaker: Well, but these cases, speaking of the domestic relations exception, have been on the books... our books for a long time.

Are you saying we should overrule them?

Mr. Ducote: The specific issue in this case has never been addressed by the Court.

Unknown Speaker: Absolutely right, and one could easily say that those cases referred to things like seeking a decree of divorce, child custody, other nontransitory causes of action, and that therefore your case is not governed by them, but when you get into the more general area, it seems to me you're arguing for just a rather sweeping clearing of the brush, so to speak, which I'm not sure isn't inconsistent with all our cases.

Mr. Ducote: Well, I think the cases of Burrus and Barber and Popovici and De La Rama v. De La Rama have simply said in very broad brush strokes the relations between husband and wife, parent and child, belong to the States and we're not going to get involved in it, and those cases have sort of set up judicial chaos for 100 years in all of the circuits that have led to this sort of decision.

The fact that in 1991 a Federal district court can look at sexual abuse, a sexual abuse tort action and say that well, this is domestic relations under... citing Barber v. Barber in 19... I'm sorry, 1880, shows the extent to which this issue is still uncertain.

So I think yes, it... again, the principle is important that either Congress sets up the parameters of Federal jurisdiction or the courts do on an ad hoc basis, and that's the concern, but I don't think that's the most important issue here, because these kids should be able to sue in tort no matter who the defendant is if there's a cognizable State cause of action and the other criteria of the diversity statute have been met.

The other issue is the Younger abstention issue.

Unknown Speaker: Counsel, before you get to that point, suppose that in this case the mother was involved in the proceedings in the Louisiana domestic court and the court made findings of fact that the abuse had not occurred?

I take it that that would have operated as issue preclusion in the suit that you're bringing now.

Mr. Ducote: Under Louisiana law it would not.

Unknown Speaker: It would not.

Mr. Ducote: Louisiana probably has the most restrictive issue preclusion statutes in the country.

Unknown Speaker: I think that in other States it would, although I'm not sure of that, and if that's so then my next question would be if there would be issue preclusion going back the other way, if the tort were tried first, I assume it would not be a violation of due process at least for a domestic court, say, that this has already been litigated and it's going to accept those findings.

Mr. Ducote: I don't think so.

You know, very often in other contexts, for example in police brutality cases, it's not unusual for there to be State court proceedings and Federal court proceedings in the prosecution as well as administratively in any number of areas, so I think the law should not... or the rules of the game should not change simply because we're dealing with children or because we're dealing with sexual abuse and we're dealing with families.

I think one of the things that's happened in the courts is this issue is something that people haven't wanted to get involved in, and they've looked for a way to sort of get rid of it, and I think in another context, were it not a family context, those questions wouldn't even be raised.

And that's sort of what the district court does with the Younger issue and says well, you know, the State court permanently terminated this man's rights, therefore the State's interest in this case is obviously even more compelling than it would be in another case, and that's even more cause for us to keep out of it.

And I look at it and I say because his rights were terminated, if you apply the Younger rules the State's already finished with the case.

The man is a legal stranger, so it's even more compelling it should be in Federal court.

So again I think the rules have to be clarified... family, no family, whatever.

If it meets the criteria of the statute, unless Congress exempts it it should be adjudicated.

As has this Court said in Deakins v. Monaghan, the Federal courts have an unflagging duty to adjudicate cases that are properly in their jurisdiction.

Unknown Speaker: Mr. Ducote, was there any equitable relief sought in this case?

Mr. Ducote: Absolutely none.

It was straightforward tort action for compensation.

Unknown Speaker: It might be a different case if there were equitable relief.

I mean, would you have any problem with the Federal court using its power to decline to exercise equitable jurisdiction on the basis that family law matters, even more broadly than divorce and status and affiliation and so forth, shouldn't be addressed by Federal courts?

Mr. Ducote: I have no problem with that, and as Justice Kennedy discussed in the case of McIntyre v. McIntyre in the Ninth Circuit, when issues of status are not involved and the court... the Federal court has not asked to impinge on the State supervision of a minor and it's just simply an issue of compensatory damages, it's like every other case, and again we just can't simply say well, this is family business and we don't like to be involved in family business that--

Unknown Speaker: Counsel, I'm interested from a practical point of view.

What is the great attraction for you of a Federal court in Louisiana?

Mr. Ducote: --Well, I think there are two points.

One is that the Federal Rules of Evidence, because of not only the rules themselves but because of Federal court decisions in child sexual abuse cases, provide a better opportunity for the evidence that is available in this case to be presented to a jury.

The second question is the fact that one of the respondents is an attorney in this case who practices in the local State court where the case would have to be brought.

These are the traditional sort of concerns that are the underpinnings of diversity jurisdiction.

We think that these out-of-State plaintiffs having to go into a State court where one of the respondents is a practicing attorney might not receive as fair a shake as they would in the Federal court.

And if there are no other questions I would reserve the balance of my time for rebuttal.

Unknown Speaker: Very well, Mr. Ducote.

Mr. Weidenfeld, we'll hear from you.

Argument of Paul S. Weidenfeld

Mr. Weidenfeld: Mr. Chief Justice and may it please the Court:

The first issue here is whether or not there is a domestic relations abstention to Federal court jurisdiction.

This Court since 1859 in Barber has stated that there is one.

Unknown Speaker: Mr. Weidenfeld, you just use the word abstention.

Did you mean exception?

Mr. Weidenfeld: I did.

I did, Your Honor... Mr. Chief Justice, excuse me.

Is there an exception to Federal jurisdiction for domestic relations?

This Court has said since 1859 there is such an exception to jurisdiction.

I think from 1859 to 1930, 71 years passed.

There were three intervening cases which reaffirmed that doctrine, and in 1930 Justice Holmes reaffirmed it yet again, allowing that doctrine to defeat the original jurisdiction of the Federal courts in matters involving consoles, and that was of course Papovici v. Agler.

Unknown Speaker: Of course, that general proposition doesn't give us the answer to this case, yet.

Mr. Weidenfeld: No, it doesn't Your Honor, but of course this Court has asked to address that issue, at least in brief, and I think that as a matter... it has to be accepted that there is a domestic relations exception to jurisdiction.

Either there is or there is not, and I suggest that there is, that Congress has had 130-some-odd years, 13 separate terms, to modify it, abolish it, do something to it, and they've never taken the opportunity to do so.

Unknown Speaker: Mr. Weidenfeld, do you think the exception which you would have us continue to recognize is based on the Constitution, or is it something statutory?

Can Congress change it?

Mr. Weidenfeld: I think that the exception goes back to the concept of the Tenth Amendment in that it actually was a matter not delegated to the Federal Government.

I think that the common understanding, as Justice Holmes said, was that domestic matters are matters unique to the States and belong to the States.

Unknown Speaker: So you don't think Congress could directly address this, and for instance in the parental kidnapping case direct Federal courts to have jurisdiction of certain family related matters?

Mr. Weidenfeld: The common understanding at the time was that matters domestic... that is, matters involving parent and child, husband and wife, were excluded from the jurisdiction of the Federal courts in that--

Unknown Speaker: Yes.

Would you answer, though, the question I asked?

Do you think Congress can enact laws such as the parental kidnapping case and give Federal courts jurisdiction over matters that do relate, in a sense, to family matters?

Mr. Weidenfeld: --Well, I think that--

Unknown Speaker: Yes or no.

Mr. Weidenfeld: --No, not as it stands, and this Court has found that it did not, of course, in Thompson v. Thompson.

I would make a caveat to my no, and that is, is a kidnapping act a domestic matter, is the question.

That is, how far does the... how far is there the exception to jurisdiction?

What is excepted from jurisdiction... what domestic matters?

What constitutes a domestic matter?

I think what constitutes a domestic matter--

Unknown Speaker: --you're pressing for an exception to Federal jurisdiction.

Would it be correct to say that we're really talking about abstention rather than exception?

Mr. Weidenfeld: --No, not in the context of the domestic relation exception to jurisdiction.

I'm talking about abstention in relation to Younger, but not in relation to the... if domestic matters are excepted from jurisdiction, then it's not an abstention doctrine.

Then there either is jurisdiction or there is not.

Either it is a matter domestic, or it is not.

Unknown Speaker: Well, they certainly are different, but I'm wondering if all through the years we're really speaking of the Federal courts abstaining from getting into this area rather than formulating a nonstatutory exception, so to speak, to diversity jurisdiction.

Mr. Weidenfeld: Well, the... the broader concepts I think lead to the same place.

The broader concepts are the interrelationship between the Federal Government and the State governments, so that gets to the same place, but this Court has spoken about domestic relations as an exception itself to jurisdiction, so the question is what makes it domestic?

If it is a matter reserved to the State, what makes it domestic, and my answer is that you have to look to the States and have the States created... and do the States give us guidance, and they do.

Unknown Speaker: Well, isn't it dangerous to read into the Constitution what isn't there, to wit, a domestic relations exception to Federal jurisdiction, and aren't we on sounder ground if we were talking about abstention, as maybe the Court should have done over the years?

Mr. Weidenfeld: Well, it is always dangerous to read things into the Constitution.

I think that this Court has decided, or at least has held, that it is jurisdictional, and Congress has never decided to take that position on.

If it... if this Court wishes to rephrase the language and call it abstention, that is something that it can do, but the object is that if it is abstention... whether it's abstention or jurisdiction, although this Court calls it jurisdictional, we have to get to how do we define what a domestic matter is?

The States have defined what domestic matters are.

The States have significant rules that abridge the rights of individuals to sue within the family unit.

Fathers cannot sue their wives, cannot sue mothers.

Children cannot sue their parents.

It was incorrect for counsel to say that had John Richards run over his daughter, she could have sued him in State or Federal... in Federal court because he was her father, if it happened while he was her father.

Unknown Speaker: But that really is a question of what law is applicable, isn't it, rather than whether there's jurisdiction?

I mean, if that is the rule in Louisiana, presumably the same result will obtain on the merits no matter whether it's in the State court or in the Federal district court?

Mr. Weidenfeld: That's correct, Your Honor, my point being that the States have... that each State has its own set of rules involving parent... the domestic harmony, and the results that involve the interrelationship between spouses and between parents and children.

The Federal courts and the Federal Government has always deferred to that for the simple reason that domestic matters are unique to the States.

Unknown Speaker: Well, we may have deferred to it, but it doesn't make it jurisdictional, does it?

Mr. Weidenfeld: Well, by this Court's phrasing of the... by this Court's prior determinations that domestic matters are jurisdictional, the question that leads to is, is it a domestic matter, and how do we decide if something involves the domestic relations.

That's how it seems to come to me, and when you're deciding is something a domestic matter or not, you have to see it's going to be the same considerations as in an argument that involves comity, that involves Younger v.--

Unknown Speaker: So you think it's... your criterion of what is domestic looks to the State law of capacity, is that what you're saying?

Mr. Weidenfeld: --I'm saying that's a factor.

I'm saying... yes to the extent that you look to, not just Louisiana, all States have very particular rules as between suits between spouses and suits between children.

In fact, the common law I think until this century did not permit... well, I know until this century, did not permit suits as between spouses, nor did they permit suits as between parent and child.

They simply didn't permit it.

So they have taken control... they have wrested control of this area, of the area involving parent and children, husband and wife, without any question by anybody, and the reason is because it is a matter uniquely unto the State, so you look narrowly at an individual law, but the scope, these... the areas involving suits between children, or suits between spouses, or a child and their father, are a matter of the domestic relations.

The considerations have always been domestic... the harmony of the family and the peace of the family.

Unknown Speaker: So in any case these are sort of pointers as to what presumably the Court may have had in mind and Congress may have had in mind perhaps in ratifying what we did, but you're not making the argument that every State law with respect to capacity is jurisdictional--

Mr. Weidenfeld: No.

Unknown Speaker: --With respect to Federal jurisdiction.

Mr. Weidenfeld: No, Your Honor, I'm not making that argument, and I'm not making the argument that any tort involves... is domestic.

I think that's a matter for the sound discretion of the Court.

That's a matter that the district judge has to look at and say, is this a domestic matter?

When you get to the heart of it, are we talking about a matter that will be domestic, and if so, then we don't handle it because the Federal courts never have handled domestic matters, and I don't think that Judge Arceneaux's discretion should be overturned, that he made an abuse of that discretion.

Unknown Speaker: If a wife kills her husband somehow in violation of Federal law is it your position that a Federal criminal court could not entertain the suit because that involves domestic matters?

Mr. Weidenfeld: I have not addressed the interplay between the--

Unknown Speaker: I know you haven't.

That's why I asked you the question.

Mr. Weidenfeld: --Would you repeat the question, Your Honor?

Unknown Speaker: If a wife kills her husband in some manner that violates Federal law, using a handgun that's been carried interstate or something like that, is it your position that there can be no Federal prosecution because it's a domestic matter?

Mr. Weidenfeld: No.

Unknown Speaker: Well, why is that different from a tort in which a wife hits her husband, and then the next question is going to be why is that different from a tort in which a father hits his son?

Mr. Weidenfeld: Because Congress has made that a crime.

Congress has specifically stated that it's a crime, and I don't think that the common understanding that Federal crimes... that crimes that occurred at the time of the Constitution, if it was a Federal crime it would have been in Federal court, domestic or otherwise.

Unknown Speaker: This is not a spouse-killing Federal crime, it's a general Federal criminal statute.

You cannot... you know, any crime committed with the use of a handgun that's been carried interstate, and it so happens that a wife kills her husband in violation of that statute.

It's not a specific Federal spousal statute.

Mr. Weidenfeld: But there's... the answer is there has never... at least my answer is there has never been any case that has excluded that as a matter of being a domestic case, whereas there have been in the civil arena.

Had there been such a case, it is my guess that Congress would have looked at it and said you have extended the domestic relations doctrine a bit far.

It is a... if it's a Federal offense, then the Federal criminal courts should handle that matter.

Unknown Speaker: May I ask you, among these cases... I'm just not as familiar as I should be with the earlier cases.

How many of the earlier cases was jurisdiction sought to be invoked on the basis of diversity of citizenship?

Are there some?

Mr. Weidenfeld: No... No, Your Honor.

Unknown Speaker: They were... under the Popovici case they were trying to... suing under Bassett or something or something like that, wasn't it?

Mr. Weidenfeld: Under the original jurisdiction of the Court, and In re Burrus it was a habeas case--

Unknown Speaker: Right.

Mr. Weidenfeld: --In Simms and De La Rama, they were both cases that emanated from the territories.

Unknown Speaker: What is your answer if a child is battered, receives severe injuries and sues for medical payments, sues the father through a next friend?

Mr. Weidenfeld: In Federal court?

Unknown Speaker: Yes.

Mr. Weidenfeld: Is it during... the tort occurred during the existence of the marriage?

Unknown Speaker: Yes.

Mr. Weidenfeld: Then it's going to be a matter--

Unknown Speaker: This is a child suing the parent.

Mr. Weidenfeld: --That would be a matter that would go to the... that would fall within the domestic relations exception and it should go to State court as a part of the State court's unitary system that involves their special interest in the family, because when you're dealing with the family, that is a matter that is uniquely the State's concern... the health and well-being of the domestic harmony of the families within it.

I don't think... I think it goes without saying that the State's interest in the family as a unit is strong and is unique and is very basic to the sovereignty of the State.

In support of that interest, what the States have done is they have... or various States have done it in various ways but they have tried to come up with a unitary way or means of dealing with matters that evolve from domestic disputes.

So that there is the juvenile court system, there is the divorce and custody... as in fact in this case.

This matter ended up in criminal courts, in two separate criminal courts, in a juvenile court, in a custody court, and three separate court of appeals.

There's... the State has recent... the State of Louisiana at least has recently brought together all their juvenile court laws into a 700-page tome and each State, each State in this country is trying to do the same thing.

They're trying to bring together the laws and treat it in a unitary way.

The factors that are always in support of comity, of the doctrine of Younger v. Harris, is that you don't want to disrupt this unified body.

You don't want to risk the Federal courts giving de novo trials after State matters.

The normal circumstance in which this case is going to come to a Federal court is not from the winning party but from the losing party.

The losing party in the State action is going to try and relitigate the matter through the Federal courts.

That's the normal way in which this case... this is the usual way in which this case is going to come to the Federal courts.

That's the way it's going to come in all... in most other cases, to use the United States district court as a court of review for fact-finding unfavorable to the person while they were in the State.

Unknown Speaker: Mr. Weidenfeld, a few minutes ago you were asked by Justice Stevens whether there had been any cases sounding of diversity jurisdiction in which this statement as to the domestic relations exception had been announced.

What do you conceive the basis of the Federal jurisdiction to have been in the case of Barber v. Barber?

Mr. Weidenfeld: That was diversity, Mr. Chief Justice.

I apologize.

That was the enforcement of an alimony decree, and that was in--

Unknown Speaker: Yes, and that certainly suggests that even back then, December term 1858, that the Court saw definite limits to the domestic relations exception, doesn't it?

I mean, didn't they allow there the enforcement of a New York judgment for alimony?

Mr. Weidenfeld: --Yes, they did, Mr. Chief Justice, and the... so that yes, I agree that there is a limit to it.

It does not go forever.

You have to draw a line somewhere, and how do you draw the line, and who draws that line, and I suggest... the way I would suggest that the line be drawn is whether the matter sued upon occurred during the existence of the... during the marriage, because if it occurred during the existence of the marriage, those are the matters in which the State has taken a particular interest.

If it's something that occurs after the marriage, then there's not going to be any revisitation of any of the facts around the divorce or around the custody decrees or around the alimony decrees.

If it occurs... that's if it occurs after the marriage has terminated, but if it occurs before the marriage has legally terminated, as happened in this case, then all of those factors, all of those actions are going to be... are involved in the divorce case itself.

Unknown Speaker: But Mr. Weidenfeld, the State court is through with this case.

It's awarded custody to the mother, the marriage is terminated, only money damages are sought.

It seems to me this is a perfect case for Federal diversity jurisdiction.

Mr. Weidenfeld: Justice O'Connor, these cases never end.

The custody of the children is always, in all instances, subject to review, so much so that for a long time custody judgments were not even considered final judgments for the purpose of full faith and credit, so the case never ends.

If in this case we come and there is a jury interrogatory which determines that no abuse occurred... and no abuse did occur.

These are allegations.

There has never been a full and... a true and full hearing in this matter.

I mean, the only hearings have been where Mr. Richards was unable to present a defense because he was about... because he had criminal charges hanging over his head and elected on advice of counsel not to expose his defenses.

But when there is a full-blown hearing, a full trial, and then the facts are revisited, or actually in this instance visited at the first instance and the factors that come out show that no abuse occurred, or that the abuse occurred at the instance of the mother, or that... or for whatever other contradictory verdict comes down, someone... it may not be Jon Richards because his parental rights have been terminated, but someone is going to go back to the State court, or someone ought to go back to the State court and say is the best interest of this child such that we should not now revisit this in light of all the evidence which has finally come to bear?

Unknown Speaker: In Louisiana, is it open to a third party stranger to come in and reopen a question like that?

Mr. Weidenfeld: Well, it is always a matter that's open.

The State represents the children, and often cases it's the State taking away children as against both parents, so the State would have the responsibility, I would suggest, to reopen that matter.

Unknown Speaker: In another sense that doesn't help you, though, because if the Federal court enters a judgment making certain findings as, let's say the child abuse did occur, if the proceeding is always open in Louisiana and if Louisiana does not give preclusive effect to that determination, the jurisdiction of the Louisiana court remains unfettered and unconstrained by the Federal judgment.

Mr. Weidenfeld: That's... that would be correct, and what... but what would happen is you now have the Federal courts telling the State courts that we don't... that really you haven't done it correctly.

You've come to the wrong result.

You need to relitigate this matter.

Unknown Speaker: But the State court is just as free as it would have been if there had been no Federal proceeding at all, as I understand both your submission and that of your opposing counsel.

Mr. Weidenfeld: That's correct.

Unknown Speaker: Well, couldn't... are you agreeing that you could not claim collateral estoppal, an offensive use, let's say, of collateral estoppal in a State court if the State proceeding is left open and there has been a determination and judgment in the Federal proceeding?

Mr. Weidenfeld: That there'd be no collateral estoppal as between the State proceeding and the Federal proceeding?

Unknown Speaker: No, the other way around.

Let's... I thought you were saying the State proceeding is never closed, so there's no judgment and therefore no preclusive effect running from the State proceeding binding on the parties in the Federal proceeding, but if the Federal proceeding goes to judgment and the State proceeding is always open, one could make, I presume, either offensive or defensive use of collateral estoppal if one reopens the State proceedings based on findings of fact made in the Federal tort action.

Mr. Weidenfeld: That... yes, that's correct.

Unknown Speaker: Okay.

Mr. Weidenfeld: And what would happen is that... and then you see what happens.

A party loses in the State and says well, wait a minute, since I can reopen this matter, I'm going to hop over into the United States district court to relitigate my case because I have a friendlier... I perceive myself to having a friendlier forum there.

I have more favorable laws, as is suggested, and so I get to redo the whole case, which you wouldn't be able to do in the State court.

Unknown Speaker: But Mr. Weidenfeld, there are a lot of tort actions that could have an effect on a custody decree.

I mean, a tort action by a total stranger against the mother who has been given custody on the ground that she was a drunken driver and injured... or on the ground that she was violent and whipped the plaintiff's child, I mean, that would be an indication in the State courts, wouldn't it, of the mother's incapacity or unsuitability to have custody of the child?

Now, is that tort suit to be disallowed in Federal courts as well because it might have a collateral estoppal effect on the State custody proceeding?

Mr. Weidenfeld: No.

My test is whether or not it occurred during the existence of the marriage and it involves the State interests vis-a-vis parent--

Unknown Speaker: Well, I know that's your test because it fits your case, but I don't know why the one is any more logical than the other.

Mr. Weidenfeld: --Well, the State has no interest or no involvement in the other, per se.

I know that this Court has never extended Younger to a diversity case and... but I suggest that the State interests are the same as in a diversity case, and the Federal interests if anything have decreased.

Unknown Speaker: But for Younger, even in the criminal context there has to be a pending proceeding, doesn't there, a pending proceeding in the State court?

Mr. Weidenfeld: There does, and I think that the pending proceeding is the... and this is a stretch which I admit, but the pending nature of the proceeding is that custody is always pending, is always on-going, because the State's interest never ends.

Unknown Speaker: Well, we don't need a domestic relations exception then, if we have that sort of an abstention doctrine.

It's to accomplish exactly the same purpose.

Mr. Weidenfeld: I agree with that.

I agree absolutely with that.

I mean, the same purpose can be achieved in either way, and I think the purpose ought to be achieved, and the purpose that ought to be achieved is that the State... that the Federal court in this instance is not to be used by disgruntled litigants.

In this case they're not a disgruntled litigant, but that's what's normally going to happen, to be used to review or revisit or to gain some advantage.

I don't think that that's the purpose of the Federal courts.

Unknown Speaker: Counsel, one question for clarification.

Let's assume that the domestic relations exception applies to the father, respondent Richards.

How does it apply to his companion, respondent Kesler?

Mr. Weidenfeld: It would not... well, in two ways.

One, she is in effect the co-respondent, and there is the eternal triangle.

It's a domestic matter.

It's a three-edged sort of triangle... mother, the new girlfriend, and the father... so in that sense... and in Louisiana you couldn't marry a proven co-respondent, but I think the easier way that it works is that once it's... once it is Jon Richards, if that... if there's no jurisdiction in that case, then the girlfriend, as opposed to having them in two instances, you come very close to a Colorado River type situation where you've got litigations in parallel jurisdictions and it would... the duplication of resources, it wouldn't make sense to have the two, so the one would... the one against the girlfriend would come back over to the State.

I would only close by saying that there needs to be some way to determine what is a matter that is domestic, and I think that that ought to be a matter that goes to the discretion of the court, of the trial court.

They're in the best position to make that determination, and that Judge Arceneaux in this instance did not abuse his discretion.

Thank you.

Unknown Speaker: Thank you, Mr. Weidenfeld.

Mr. Ducote, you have 11 minutes remaining.

Rebuttal of Richard Lynn Ducote

Mr. Ducote: Mr. Chief Justice and may it please the Court:

I think there are a number of situations where a State court action can result in a Federal... or the facts that result in a State court action can result in a Federal action, and we don't have all of this fear.

For example, you can have a criminal conviction in State court and then a tort action among the same players, the perpetrator and the victim, and if there's a decision in the Federal court action based on diversity that is contrary to the State court criminal proceeding it's no basis to go back and reopen the criminal court proceeding.

Just as in this case, this man's parental rights were terminately and unalterably and permanently terminated in an unappealed final decision.

That's it.

The case is over.

Unknown Speaker: He could never get custody back.

Mr. Ducote: He would have no right of action under State law because he's a legal stranger to the children.

The case is over and done with.

Now, people can go into domestic court on all sorts of reasons and try to reopen cases.

The fact that people can attempt to do things doesn't mean that the whole constitutional and congressional grant of jurisdiction should then tremble and say well, you know, this might happen, this might happen and this might happen.

He's over and done with as far as the children are concerned as a matter of State law.

Unknown Speaker: Well, most... all of us I guess react by where our own practice was.

Where I practiced, you could... you would... a father who was denied custody could have some years later come back in and moved to reopen that saying look, the mother is not proving to be a good custodian, there are new facts available, the money is situated differently, the child is now 14 years old and expressed a desire to live with me, and the decree would be reopened.

That doesn't happen in Louisiana.

Mr. Ducote: Well, commencing about the 1970's virtually every State has enacted termination of parental rights statutes because of the child abuse problem.

The denial of custody is different than what happened here.

This is a permanent termination of all parental rights, meaning he doesn't even have the right as another parent would to come in and seek custody.

He's not on the same footing any more, and he's permanently enjoined from any contact.

Unknown Speaker: Would you be here making the same argument if instead custody had been awarded to the mother but no termination of parental rights?

Would you still think that the Federal courts should entertain the tort action?

Mr. Ducote: Certainly.

I don't think that has any bearing.

I think that made this a clearer case for review because his parental rights were terminated, but I don't think that in and of itself has any bearing because, as Justice Blackmun questioned, is this an exception, or is it abstention, and if it's going to be abstention, then it has to be one of the abstentions that the Court has recognized... Younger, but again doesn't apply because there are no pending State actions.

So again if it meets the diversity criteria and it's a diversity case, then the Federal court has to do what Congress says it's supposed to do... hear the case, decide on the merits, award damages, don't award damages, whatever the jury decides, and what happens in the State court proceedings will happen, and that's to be dealt with separately.

If there are no other questions--

Chief Justice Rehnquist: Thank you, Mr. Ducote.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Mccarthy v. Madigan - Oral Argument

Fri, 09 Jan 2009 14:49:29 +0000

Case:

Mccarthy v. Madigan

Media File:

90-6861_19911209-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul M. Smith

Chief Justice Rehnquist: We'll hear argument now in No. 90-6861, John J. McCarthy v. Mr. Maddigan.

Mr. Smith.

Mr. Smith: Thank you, Your Honor.

Mr. Chief Justice, and may it please the Court:

This case involves a Bivens action that was dismissed on the grounds that the Federal prisoner who brought the action had not exhausted the Bureau of Prisons grievance procedure.

Now, in seeking reversal of that ruling, we are not contending that Bivens plaintiffs could never be required to exhaust an appropriate administrative procedure.

Here, however, there are two key features of the existing grievance procedure that in our view make it fundamentally ill-suited to being the first stage of Bivens litigation by Federal prisoners.

First, that grievance process provides no remedy whatever to a potential plaintiff seeking compensation for a past constitutional injury.

Second, the procedure contains a series of mandatory hurdles, beginning with a 15-day filing deadline, that create a very high risk of inadvertent forfeiture of constitutional claims.

Now, these features of the grievance process are not surprising in light of its origin.

What we have here is a process that was created to provide an informal outlet for any and all inmate complaints.

It's not limited to legal claims, it contains no standards that have to be applied, and it creates no right to anything other than a written response.

It's basically an opportunity for a dialogue with prison administrators.

Unknown Speaker: If there is an adequate administrative remedy, then is there a Bivens option at all?

Mr. Smith: Well, Your Honor, I think there could be a situation where you would have an administrative remedy that would be adequate enough to justify exhaustion, but not so comprehensive that you would want to give it--

Unknown Speaker: Have we had a situation like that?

Mr. Smith: --You haven't.

But there's an analogy, certainly, under the Civil Rights for Institutionalized Persons Act, where Congress has mandated under certain circumstances exhaustion by State prisoners in 1983 actions, but still left in place the opportunity to go to court thereafter.

And I think if you had a process similar to what is mandated in CRIPA you could have a process, for example, that offers $2,000 in damages and doesn't have a lot of due process, but still has some reason to exhaust it and still say people should be able to go to court thereafter.

Unknown Speaker: Now this prisoner is no longer in Federal prison, as I understand it.

Mr. Smith: He was transferred to Federal prison temporarily and then went back to State custody.

In fact, his term of imprisonment is now over.

He's not in prison anywhere at this moment, Your Honor.

He left Federal custody last spring.

Unknown Speaker: Is he seeking damages?

Mr. Smith: This case entirely involves damages, Mr. Chief Justice.

There was never any claim for anything else in this case.

Now, consider what happens when you take this informal process that I described, this dialogue process, and you import it into the Bivens litigation system and say it has to be pursued in every case where somebody's trying to get to court on a damages claim.

Basically what you do at that point is you say, this prisoner who is trying to get compensation for his injury has to exhaust a system that doesn't provide any compensation, and has three tiers of review.

And I think it's important to get a little bit concrete about how this works in practice.

Imagine a prisoner like petitioner, who is complaining about the medical care he received in prison.

That prisoner might convince the warden that... the initial level of the three levels of the process... that he hasn't in fact been getting very good medical care.

And the warden might say that in writing in response to the grievance.

But the one... the two things the warden wouldn't do at that point, he wouldn't comment in any way on the legal merits of any constitutional claim for damages, and he certainly wouldn't provide any compensation for any injury received by the prisoner.

So at that point you've got your grievance, you've gotten some kind of a response, even a somewhat favorable response, but what are you supposed to do when you're still just trying to get to court on your constitutional claim?

At that point, apparently, you would have to continue exhausting because you haven't received what you're seeking.

You'd have to appeal even though you in a sense won at the initial level.

Unknown Speaker: The Government refers to the capacit of the prison to give some money under the Federal Tort Claims Act and says that presents the situation you have described, that they do have the power to give some money Now, does the cause of action of this plaintiff incorporate a Federal Tort Claims Act claim?

And is that in fact available?

Mr. Smith: The complaint that was filed in this case, Your Honor, was limited to a Bivens action against the individual medical personnel in the prison.

It did not include a Federal Tort Claims Act claim.

It could have.

The kind of claim he brought, medical malpractice, could be brought under the Federal Tort Claims Act.

He would have had to exhaust the entirely separate Federal Tort Claims Act administrative procedure before he could have brought such a claim.

And he didn't.

Unknown Speaker: Did the Federal regulations explicitly note that as an exception?

Mr. Smith: The point I would make in response to the Government's argument about how you should file a grievance, because it might give you a settlement under the Tort Claims Act, is you've got two different procedures here; a grievance procedure that says it's not for tort claims, and the procedure for tort claims, which is an entirely different part of the CFR.

And what they're saying in kind of a Rube Goldberg thing, is you should go over to this procedure because although it's not for tort claims, we might nevertheless consider it as a tort claim, and on our own initiative offer you a settlement under this other authority over here that you haven't pursued.

And I think there are several problems with that kind of a theory if you're going to make that the basis for justifying exhaustion of the grievance procedure.

First of all, the petitioner had no way of knowing that he had this golden opportunity to get a settlement offer for damages by filing under the grievance process, which expressly says it's not for tort claims and it doesn't have any damages in it.

So there's kind of a notice problem to begin with.

I also think basically the whole scenario is a little bit implausible.

The idea that these Federal prison officials are sitting around taking these grievances that come in and plucking out those that look meritorious and making on their own initiative settlement offers to people that haven't even made any indication that they want to pursue a legal claim for damages, either under the Tort Claims Act or in court, strikes me as unlikely.

And if it doesn't happen in any significant number of cases, then it certainly doesn't justify putting everybody through this three-level process.

Unknown Speaker: Why didn't you bring your action under the Tort Claims Act?

You didn't think you could win, I suppose.

Mr. Smith: Well, Your Honor, I think the decision was certainly made by a pro se inmate at the time, and I actually don't know the answer to that question.

Unknown Speaker: What would you think now about the Torts Claim Act?

Mr. Smith: Well, there are differences between the two in terms of the relief that's available and--

Unknown Speaker: Yes.

What's the standard... what would you have to prove to win under the Tort Claims Act?

Mr. Smith: --In this kind of case you would have to... in some sense the standard of proof would be less.

It would be more of a negligence case than the deliberate indifference standard that you'd have to meet under Estelle v. Gamble in a medical constitutional case under Bivens.

Unknown Speaker: Well, what would the... you think if you just proved negligence in this case you could win on your Tort Claims Act?

Mr. Smith: If he had brought a Tort Claims Act... as I understand it, the Government has waived sovereign immunity and therefore, if there was a tort... State law tort committed by these Federal prison--

Unknown Speaker: Well, why should... if there's this alternative route to go, why would we put up with a Bivens action?

Mr. Smith: --Well that's the... that whole issue was discussed at length in Carlson v. Green 11 years ago.

And the Court indicated in that case that there are differences between the two causes of action, that Bivens claims give you greater deterrence because you can sue the individual wrongdoer, that they don't depend on the vagaries of State law.

And sometimes there is no State analog, and you have no claim at all under the Tort Claims Act, or there are exceptions to the Tort Claims Act.

There's also no jury trial under the Tort Claims Act, and there's no potential for punitive damages.

So those are the four reasons--

Unknown Speaker: That hasn't been regarded as dispositive in other cases where we've had, held... Bivens claims have been preempted.

Mr. Smith: --More recently, Mr. Chief Justice--

Unknown Speaker: This is a suit against Federal prison officials, isn't it?

Mr. Smith: --Yes, they were medical officials at Leavenworth Prison in Kansas.

Unknown Speaker: So the Federal Tort Claims Act is available?

Mr. Smith: It's available, sure, but this is not the route that was pursued.

And there will be... many case that could be brought under Bivens that are not overlapping with the Tort Claims Act, although I think this one does.

And so one of the things that one would have to do if you're going to eliminate Bivens cases is make sure that you don't eliminate them in situations where the Tort Claims Act--

Unknown Speaker: You think the standard of deliberate indifference would be close enough to intentional conduct to be barred by the Tort Claims Act?

Mr. Smith: --Well, the... as I read the Tort Claims Act it doesn't say we bar all intentional torts, it just bars specific intentional torts like assault and battery and things like that.

There probably is room in there for some medical malpractice cases to meet the deliberate indifference test and also still be State law torts that would qualify for the Tort Claims Act.

There probably is some overlap, bit it gets very messy trying to figure out how to separate these two sets of claims and make sure that they're covered by both.

The other point I would make about this opportunity that the petitioner allegedly had to get a Tort Claims Act settlement is if that's what we're going to justify exhaustion on the basis of, why don't we just have exhaustion of a procedure that directly addresses the issue of damages?

I mean, the only reason we're talking about this grievance procedure is because it's the thing that happens to by lying around in the CFR.

But if exhaustion is going to be justified on the basis that somebody ought to have an opportunity to seek damages and this opportunity exists, why not have a procedure that says you can ask for damages administratively and get an answer to your request for damages administratively rather than going into this grievance process, where you don't even know whether the issue of damages was considered or not considered.

It depends on the initiative of whatever prison official was responding to a grievance.

Unknown Speaker: But there still may be some benefits though, I suppose, by having a prompt administrative look at the facts.

Mr. Smith: I don't dispute that.

Unknown Speaker: There may be some public benefit to that kind of thing.

Mr. Smith: I don't dispute, Justice O'Connor, the possibility that there are State interests served by having exhaustion of an administrative remedy in this kind of case.

The point I would make, though, is that there is no reason why we should serve those State interests without at the same time having features in the procedure that offer a remedy and at the same time don't interfere with the legitimate interests of the prisoner.

Why not... there's no reason those couldn't be served equally well in a more adequate administrative process.

Unknown Speaker: Well, do we have to look on a case-by-case basis at whether the remedy, the administrative remedy is adequate, or do we take a more global look at it?

Mr. Smith: I don't think it would depend on the individual case.

There is no dispute here that in the grievance process there is no compensatory remedy.

So if you're talking about a Bivens claim, then I think you can decide that issue and say we're going to exhaust... we're going to require exhaustion in pure Bivens cases.

Where the issue is damages, there ought to be a compensatory remedy of some magnitude available in the administrative process.

Unknown Speaker: Swear a suit against State prison officials.

Mr. Smith: If this were a suit against State prison officials, in most States there would be no exhaustion, because in most States the standards of CRIPA have not been met and the general rule that there's no exhaustion in 1983 cases would apply.

Unknown Speaker: Well, isn't there a Federal statute about exhaustion?

Mr. Smith: Yes, that's CRIPA, the Civil Rights for Institutionalized Persons Act.

And it requires that either the Attorney General or a court certify that the State exhaustion... the State grievance procedure meets certain standards before they will require exhaustion.

And as I understand it, it's only about 10 States where that has occurred in most cases.

Unknown Speaker: Well, what about one of those States?

You have to exhaust under that statute even though there isn't a damages remedy.

Mr. Smith: As I understand it, Your Honor, that's not right.

The court, first of all, has discretion about whether to require exhaustion under CRIPA.

And the Attorney General in putting out the regulations in 1980 indicated if it's a pure damages case and the State does not provide compensation, the court shouldn't require exhaustion.

Unknown Speaker: At all?

Mr. Smith: At all.

The other thing about CRIPA is you file your case in court, and then it's held for 90 days.

So you don't have this other problem which I want to get to, this potential forfeiture of claims by failure to file the grievance very quickly before you get to court.

And I think that is in fact maybe even a more serious problem with this argument for exhaustion in this case, is the deadlines that you have to meet and the hurdles you have to get over, and the risk of forfeiture of constitutional claims that it creates.

I mean, you look at this procedure, you have to file your grievance within 15 days of a constitutional deprivation.

And in fact, I think that's an overly generous way of describing it.

What the regulations actually say is you have to complete whatever informal grievance resolution procedures the prison may have in place and then file your formal grievance... all within that 15-day period after the alleged constitutional violation occurred.

At Leavenworth what that in means in practice is you have to file two forms: file an informal form, get a response, and then file your formal form all within 15 days.

And then when you lose, which is inevitable if you're seeking damages, since it doesn't provide damages, you have to appeal to the regional level and you have to appeal to the central office of the Bureau of Prisons.

The first one has a 20-day deadline, the second one has a 30-day deadline.

I submit it's hard to imagine a system that could be better designed to make it likely that people who aren't represented by counsel will make a foot fault and forfeit their constitutional claims.

Unknown Speaker: Did this petitioner comply with the 15-day period, or was he given some sort of excuse or extension?

Mr. Smith: This petitioner went directly to court thinking that he didn't have to exhaust because it was a pure damages claim.

It was dismissed.

He then went back and tried to exhaust.

And his claim actually went up to the second level, the regional level, and was a few days late and was dismissed for being untimely at the second level back in the summer of 1990.

Unknown Speaker: And then he did... did he then file again or--

Mr. Smith: No, we're just reviewing the initial--

Unknown Speaker: --We were talking about the first suit.

Mr. Smith: --Yeah.

It was dismissed for failure to exhaust.

What he argued to the court in the district court was essentially what we're arguing here, that because it's a damages case, exhaustion shouldn't be required, as several circuits have held.

Unknown Speaker: Well, suppose he had included in the complaint injunctive or declaratory relief as a prayer?

Mr. Smith: If he included that--

Unknown Speaker: Now there it might make a difference for administrative procedure.

But would you still be here arguing that the 15-day deadline makes it inadequate even if injunctive relief were sought?

Mr. Smith: --I think that the consensus in the lower courts is that in an injunctive case you do have to exhaust because there's clearly a remedy.

They can stop doing whatever they're doing.

And the 15-day deadline is also a much less serious problem in the case involving prospective relief because if they're doing something every day, and you miss the deadline, you can just file it again.

There's no forfeiture problem when... because the clock essentially keeps running continuously for an ongoing problem as to which you're seeking prospective relief.

So both the forfeiture problem and the remedy problem are quite different in an injunctive case, and that's why I think it's clear that no court has ever held that you should be able to go and seek an injunction against Federal prison conditions without trying to--

Unknown Speaker: Mr. Smith, I'm not sure you've answered Justice O'Connor's question.

What is your view about a mixed complaint?

Mr. Smith: --Okay.

A mixed complaint, I think, ought to be held as well.

I think that that probably is the right way to handle it, that if you have both, you ought to go ahead and file.

Now, there could be different ways to handle it.

It does get messy.

For example, someone might file a damages complaint and then still seek prospective relief from the grievance process and kind of split his claim that way.

And it does get messy.

I think the right way to handle that, frankly, is to have a grievance process that has some compensation in it and make everybody with every kind of complaint exhaust it.

Unknown Speaker: I know, but we don't have that now.

What about a mixed... I'm still not quite clear.

What should a judge do with a mixed complaint in which damages are sought and there's been no exhaustion?

Mr. Smith: I guess my view, Justice Stevens, would be that the court ought to hold on to the damages element of the case and tell them to go exhaust on the prospective relief and come back and then litigate the case at that stage so that there's no waste of judicial resources at the same time that the case is held at the district court level.

Now, this kind of maze that you have to go through, it seems to me, is the kind of thing that this court would never tolerate in any other context.

And I would point out that one thing that it does is it creates severe discrimination against Federal constitutional claims vis-a-vis State law claims.

For example, a prisoner who wants to bring a common law claim under the Federal Tort Claims Act has 2 years by statute to file his initial administrative form.

But if he wants to bring the same complaint under the Constitution under Bivens, he has this 15-day deadline.

And this Court has many times noted, certainly in Wilson v. Garcia and Felder v. Casey and elsewhere that in the 1983 context such discrimination against Federal claims is a severe problem in examining the kinds of statute of limitations that might or might not be borrowed from State law in the 1983 context.

Unknown Speaker: What you're comparing with here, though, is two Federal claims: one under the Federal Tort Claims Act and the other under the Constitution.

The fact the Federal Tort Claims Act may subsume some State law claims doesn't make it any less a Federal remedy.

Mr. Smith: That may be.

I guess... the Federal Tort Claims Act can be viewed as a Federal remedy or as a waiver of sovereign immunity on State claims.

And I guess in some sense it is a Federal remedy, certainly because it creates a different defendant, the United States, rather than the individual tort feasor.

That's true.

The underlying issues, though, certainly are State law tort issues.

Unknown Speaker: Why couldn't we hold that you have to exhaust for that as well, so even though it has a 2-year statute, if you haven't... if you rendered it impossible for you to exhaust, you're out of court?

Mr. Smith: Well, what the statute says--

Unknown Speaker: Is that possible?

Mr. Smith: --What the statute says is that you have 2 years to file your administrative claim with the agency that administers your... that involves the torts.

So I think it would be difficult for this Court to require some prior administrative filing under the Federal Tort Claims Act because the statute is quite clear that you have that 2-year period for your initial administrative filing.

Unknown Speaker: Can you give us some examples of Bivens claims that would not have a counterpart under the Federal Tort Claims Act?

Mr. Smith: Sure.

There are, for example, intentional assaults under the Tort Claim... are not covered under the Tort Claims Act.

There is an exception for law enforcement officials who do commit intentional assaults, that is covered.

So the question then is what are prison guards, what are prison medical doctors?

Are they law enforcement people?

And that's an unsettled question.

Discretionary functions are not covered under the Tort Claims Act, and they could still give rise to constitutional claims... if you were put into maximum security for some punitive reason related to your exertion of First Amendment rights, things like that.

There are others, as well.

But there certainly are some cases.

Now, I want to recognize again that first of all, there's legitimate concern in all courts about frivolous prison litigation and the number of cases that are being filed.

The point I would make about that is that this maze of hurdles that you have to go through is not a legitimate response to that.

First of all, who's going to be injured by it?

Not the person who files 25 cases a year, who's a litigious prisoner.

It's the unsophisticated prisoner who may have a very serious injury, but may not realize for a few weeks or months that he has a constitutional claim, at which time it will be too late.

Unknown Speaker: Well, you do concede then that the Government, with a properly drawn regulation under its existing statutory authority, could require an exhaustion process for a Bivens claim?

Mr. Smith: I don't believe the Government could require it.

I do think the Government could create an appropriate process and ask this Court to require it as the institution that controls Bivens procedure in the absence of action by Congress.

I don't know that an executive official can put out a regulation that says, in constitutional litigation here's the route you have to follow.

But I think if they create a procedure that's available that provides some compensation and gives you fair deadlines to meet and not lots of hurdles to cross over, this Court, I think, could reasonably at that point, even without action by Congress, require exhaustion.

Unknown Speaker: Well, would there be statutory authority for such a properly drawn regulation?

Mr. Smith: Certainly there would be no problem with them creating a procedure that doesn't have a 15-day deadline and three levels of review.

Whether they have statutory authority to provide monetary compensation on Bivens claims at the administrative level before they're filed in court is an issue on which I... perhaps they could provide a better answer than I can, Your Honor.

I think they probably could because they already have a regulation that seems to provide settlements to, in cases involving Federal employees, after they're in court... that's 50.15, 28 CFR.

And I don't know that there's any statutory authority for that either.

So I assume they could probably back that up to the administrative level if they wanted to and create an analog to the Federal Tort Claims Act administrative procedure for Bivens claims.

Indeed, they probably could be built in together.

You file in one place for both kinds of procedures.

You get an answer, we'll give you some money or we won't at that point, and then go to court.

I think they probably have statutory authority to do that.

Unknown Speaker: If Congress decided to do something like the legislation involving State prisons, it could do that.

Mr. Smith: Absolutely.

Congress could do that.

The only thing that would limit what Congress could do would be constitutional limitations.

And I think there might be some if Congress created a procedure that was so unfair that... you know, if they gave you 20 minutes to file your constitutional claim, or something like that.

But other than that, Congress has the authority certainly to do that.

Now, let me just--

Unknown Speaker: You consider a Bivens claim a constitutional claim, not... it's not a sort of like a negative commerce clause, our guess as to what Congress wants in the absence of different provision by Congress?

Mr. Smith: --Well, I guess it is a remedy for a constitutional claim.

Clearly, it has to be... the underlying violation has to be a constitutional claim.

Whether or not there's a constitutional requirement that this remedy exists in the absence of Congress, or whether it's a common law decision by this Court--

Unknown Speaker: That's what I had always thought.

Mr. Smith: --I think of it as a common law decision by this Court, just as the Court makes decisions in the statutory area or in other kinds of... or State law courts make in other common law areas, this is the kind of field of Federal common law that has been created to help enforce the Constitution in the absence of congressional action.

Unknown Speaker: And I suppose, though, although you might not... and I think you gave some persuasive reasons why you should not hold that the Federal Tort Claims Act supersedes Bivens, what about the scheme of remedies provided in Federal prisons?

Why... I mean Congress has a number of statutes that interlock and that give prison officials the right to establish this grievance procedure for violations.

Why could not that be interpreted as, in effect, Congress supplanting Bivens remedies with respect to those matters that it's given the prison authorities power to provide for?

Mr. Smith: Well, Your Honor, if there were a procedure created by Congress that provided compensatory relief of a substantial nature and had due process for that claim, I think that would be a situation in which this Court could very seriously consider the issue, as in Bush v. Lucas or Schweiker v. Chilicky, the issue of whether that preempts Bivens claims.

Unknown Speaker: Do you think the Constitution requires monetary relief?

I thought you said it was common law that we're sort of filling in the interstices.

I thought Congress could abolish that monetary relief if they wanted to.

Mr. Smith: The only point I'm making now is that if you're going to eliminate Bivens on the basis of some remedy that exists, it ought to be a significant remedy, or there at least ought to be some affirmative indication from Congress that it doesn't think there should be compensation, because this Court has already indicated its judgment that compensation is an appropriate remedy.

And I would think at that point you'd want to wait for a pretty strong indication from Congress to get rid of compensation all together.

The other point I'd make is it's not like Congress has specifically encouraged grievance procedures or authorized this specifically.

This is entirely a creation of Bureau of Prisons under statutes which say things like, you're authorized to run the prisons.

Just one more point about Congress, and then I'll reserve the balance of my time.

I do think it's important to recognize that CRIPA does not support exhaustion in this case for the reasons that I said before.

CRIPA first of all prevents forfeitures of claims because you file in Federal court first.

They then hold the case for 90 days, and say go exhaust there.

So you don't have this inadvertent forfeiture beforehand based on some State law deadline for your grievance.

And as I said before, the Attorney General took the view when the regulations under CRIPA were put out, that you don't have to exhaust a futile procedure.

If you have a damages claim, and there are no damages available, then you don't have to exhaust.

So CRIPA, if anything, supports our side in the case.

The point I'd make is ultimately you... there could be a procedure.

It's just that they haven't created it yet.

And there's no reason to rush to borrow this one because it happens to be in the Code of Federal Regulations, even though it's clearly inadequate for the reasons I've stated.

Thank you.

Unknown Speaker: Thank you, Mr. Smith.

Ms. Mahoney.

Argument of Maureen E. Mahoney

Ms Mahoney: Mr. Chief Justice, and may it please the Court:

The dispute in this case really has come down to it's not a question of power.

Everyone here is in agreement that this Court has the discretion to require exhaustion of this procedure as part of its power to fashion an appropriate Bivens remedy.

The issue really is whether or not the Bureau of Prisons has designed an appropriate grievance procedure.

And that issue, we submit, is firmly entrusted to the BOP and its expert judgment about what's going to work in this prison system.

The way that the system is designed is to serve a variety of purposes.

And in fact, the petitioner does not dispute that this system does serve very, very important institutional purposes.

The 15-day requirement that they say is so prejudicial to the inmate is for the benefit of not only the inmate complaining but also the other inmates within that system.

Unless the prison has--

Unknown Speaker: Ms. Mahoney, what if the prisoner is beat up and unconscious in the hospital for 2 weeks?

Ms Mahoney: --Your Honor, that would be... he would certainly be excused from meeting the 15-day deadline.

If I could just describe how the 15-day deadline works, I think it would satisfy any concern that this is somehow--

Unknown Speaker: Are there provisions for excuses?

Ms Mahoney: --Absolutely, Your Honor.

The regulations specifically provide that the inmate is to file his complaint, which is a simple one-page statement, within 15 days of the date of occurrence, but that the Bureau of Prisons shall... and I emphasize shall... waive that time limit if there is any, quote, "valid reason for delay".

And even if there is no valid reason for delay, the Bureau of Prisons would retain discretion to waive the time limits.

Unknown Speaker: Have you ever been in a Federal prison?

Ms Mahoney: Your Honor, I've been in a State prison.

I don't believe I've ever been in a Federal prison.

They do retain the authority to waive the time limits, and as I indicated, it is mandatory if there's any valid reason.

In practice, it is liberally applied.

In fact, in cases such as Mr. McCarthy's, where the allegation is one of medical negligence, it is the practice of the BOP not to hold them to the 15-day requirement even if they miss it, because of the serious nature of the problems that stem from having doctors who are not carefully treating patients.

And in fact, I'd like to point out that in this case, when Mr.... the record indicates from the Tenth Circuit that when Mr. McCarthy went back to the prison to try to exhaust his claim, the warden did in fact investigate his claim of medical malpractice, even though it was filed more than 2 weeks late, and did not dismiss it for lack of timeliness.

It was only after the petitioner appealed to the regional director 2 days late that it was dismissed, that the appeal was dismissed for untimeliness.

But there was an investigation of the facts and it was considered on the merits.

And we don't know why Mr. McCarthy--

Unknown Speaker: Well, if the prison did not excuse a delay in filing an administrative grievance, would the Bivens action, then, have to be dismissed by the court for the failure to exhaust in a timely fashion?

Ms Mahoney: --Your Honor, I think it would be up to this Court in its equitable discretion to determine whether the reason for failure to follow the procedural rules established by the system should be excused.

That's precisely the type of analysis that this Court has conducted for years in the habeas context.

And in cases where there is a deliberate bypass of those procedural rules, the Court has not excused the failure.

And I think the same should apply in this case.

Unknown Speaker: Do you think that the procedure, the grievance procedure is adequate when only monetary damages are sought as relief?

Ms Mahoney: Yes, Your Honor, for a number of reasons.

First of all, we have to measure the system in accordance with the way it works in practice.

Even though Mr. McCarthy may say he only wants damages, in most cases there are other things that the inmate wants.

In this case, he wanted more medication.

He wanted different medication.

He wanted a new cell.

If in fact he had filed his grievance and the warden had decided to give him any one of those things, he probably never would have filed his damage action.

And that's what the Fifth Circuit in fact found in the Catalanotto case dealing with 1997(e) procedures.

It said even if there is no monetary remedy, we still should require exhaustion because in many of these cases there will be a remedy that satisfies the inmate, even though he claims he only wants damages.

Second, in this case--

Unknown Speaker: Of course, that's pretty speculative on your part, isn't it, Ms. Mahoney?

Ms Mahoney: --No, Your Honor, I don't think it's speculative at all.

It's the practice--

Unknown Speaker: I heard you say probably he wouldn't bring his case.

Probably.

Ms Mahoney: --Your Honor, the experience of the BOP is that many, many inmates who obtain some sort of relief in the administrative process never file a claim even if they theoretically, or even if they've asked for money to begin with.

It simply... and in addition, Your Honor, they also find that many never file a claim even if they don't get relief.

We have to keep in mind that these... that prisoners often have a motivation to sue for harassment and intimidation and that if we make it easy for them to file a complaint in Federal court against one of their guards or their doctor the day that they have a disagreement with them--

Unknown Speaker: Well, I agree with all that, but nevertheless, you were confronted with the fact there's no provision for damages in a grievance procedure, is there?

Ms Mahoney: --Your Honor, there is the potential to settle the claim.

And I will turn to that right now.

This works both as... this procedure works as an opportunity for the BOP to give an administrative remedy such as new medication or changing a cell, but it also works as an opportunity to give them notice of a claim so that they can use their settlement authority to settle the claim if they believe there is some merit or--

Unknown Speaker: Ms. Mahoney, are there any examples in the record that you can call our attention to where the Government has in fact paid money to any prisoners on Bivens claims?

Ms Mahoney: --Your Honor, there is no record in this case to speak of.

The Government--

Unknown Speaker: You described the general practice and what happens, but there's nothing in the record.

Can you point to any objective support for the proposition that in the past there have in fact been monetary payments on Bivens claims?

Ms Mahoney: --Your Honor, the only thing I can do, I'd be happy to submit something supplemental.

I can make a representation to this Court on behalf of the United States that yes, in fact there are claims that have been asserted by inmates in this grievance procedure, that theoretically could have been cast as Bivens claims that have been settled.

Because what--

Unknown Speaker: Settled by the payment of money?

Ms Mahoney: --Settled by the payment of money.

That's correct, Your Honor.

Because the way this works is that the inmate files his notice--

Unknown Speaker: And those claims also could have been brought as Federal Tort Claims Act claims?

Ms Mahoney: --Yes, Your Honor.

Unknown Speaker: Are there any that could not have been brought as Federal Tort Claims Act claims where a Bivens payment of money has been made?

Ms Mahoney: In settlement or after judgment?

Unknown Speaker: In settlement.

Ms Mahoney: Not that I know of, Your Honor.

I can--

Unknown Speaker: That's, of course, where the problem is critical because there is a category of Bivens claims for which there's no Federal Tort Claims Act remedies.

Ms Mahoney: --Well, Your Honor, if I could--

Unknown Speaker: And if you addressed yourself to that problem, then I find you more persuasive.

Ms Mahoney: --All right, I'll address myself to that one.

I think that that category is probably quite small because if we look to the FTCA--

Unknown Speaker: But this case isn't in that category.

Ms Mahoney: --It is in... excuse me, it is in the category of cases that could be settled under FTCA authority, Your Honor, because this case, while he claims it is a Bivens case, a case of deliberate indifference, it certainly can also be characterized as a malpractice claim, which is--

Unknown Speaker: Well, correct me if I'm wrong, but I thought that in that case the regulation doesn't apply at all because it exempts tort claims.

Ms Mahoney: --Well, Your Honor, there is a separate procedure for tort claims, but it's not that it does not apply.

If the inmate brings the grievance to the attention of the prison officials through this administrative remedy process, and they wish to treat it as a claim that could be settled under its FTCA authority, they simply ask the inmate to file an additional form and exercise their authority to settle the claim.

Unknown Speaker: Well, Ms. Mahoney, though, it says in the regulation filings will not be accepted under the administrative remedy procedure for tort claims.

Ms Mahoney: Your Honor, the way that that has been applied by the Bureau of Prisons is if an inmate says the only thing I want is a Federal Tort Claims Act suit, they will treat it as an FTA suit which has a separate administrative claims process.

And let me explain why there's a separate process.

Congress established under the Federal Tort Claims Act that there should be administrative exhaustion of FTCA claims, and they provided a variety of aspects of that system.

And it has not been up to the Bureau of Prisons to establish its own system for pure FTCA claims.

And for that reason those, the pure FTCA claim needs to be... it's a very similar process, but it has some separate provisions.

Unknown Speaker: Well, do you take the position that this particular claim is a pure Federal Tort Claims Act claim?

Ms Mahoney: No, Your Honor, he has styled it as both a... he has styled it as a Bivens action.

It's a question of--

Unknown Speaker: Well, do you say that the Federal Tort Claims Act covers his entire complaint?

Ms Mahoney: --No, Your Honor, if he were correct that these doctors engaged in wanton and deliberate conduct subjecting him maliciously to injury, he might well be entitled to damages above and beyond that which he could get in a Federal Tort Claims Act suit.

But Your Honor, we're not submitting that he's required to take a settlement under our FTCA authority.

He would certainly have the option, if we offered him money... if we said we can settle your claim and we'd like to do so, he could say no, thank you very much, I have finished my exhaustion, and I'm heading to Federal court because what I want are punitive damages paid out of the pockets of these defendants.

He retains that right.

All we are asking for is an opportunity to let the grievance process work, to let us sort through these claims.

Let us determine if there is some way to settle it short of coming to Federal court.

It's a very quick process, it's an easy process.

In the ordinary case, the remedy is complete within 3 months.

Unknown Speaker: Why... can you tell me, why is it that a Bivens claim can't be categorized as a tort claim?

Ms Mahoney: No, Your Honor, I'm sorry.

This could be categorized as either a Bivens claim or a tort claim.

There's an overlap.

Unknown Speaker: Why can't a... isn't a Bivens claim also--

Ms Mahoney: Oh, under our regulation?

Unknown Speaker: --Yes.

Why isn't it that a Bivens claim can't be thought of as a tort claim under your regulation?

Ms Mahoney: Because simply, it could be except that it's not.

The BOP established this regulation and it's interpreted its own authority, and it has consistently interpreted it to apply to any claim relating to any aspect of imprisonment, except for those claims in which a prisoner says I want an FTCA remedy only.

Unknown Speaker: Did it make that... did it change that interpretation after Congress passed the 1983 grievance process statute?

Ms Mahoney: No, Your Honor.

It has been using the regulation in this way for--

Unknown Speaker: It has been consistent at all times?

Ms Mahoney: --Your Honor, I don't want to say that it's been consistent at all times.

I don't know enough about what other things may have happened in the past, but I can say that there has been a persistent effort to require inmates to bring any kind of grievance that they have, whatever it relates to through this process, because it serves such important interests of the institution to get notice within 15 days to investigate it and to serve its purposes.

I don't think that this inmate--

Unknown Speaker: Why wouldn't the regulation be rewritten to make that clear if that's the situation?

Ms Mahoney: --Your Honor, if that's what required, BOP certainly would do that.

But I think that that would be sort of an unnecessary hurdle at this point.

There's no indication that this inmate, that Mr. McCarthy did not understand that the BOP in fact required him to bring this claim under his administrative... under the administrative grievance process.

And in fact, when he filed his Federal action... the Tenth Circuit's been quite clear on it, Your Honor, for more than 10 years since Brice v. Day.

So this inmate knew, and in fact he fully briefed the issue of the exhaustion cases in other circuits at the time that he went to Federal court.

In addition, the judge in this case dismissed his claim for failure to exhaust, telling him he needed to go exhaust before his 15 days had even expired.

So he didn't lack notice that he was required to do it.

And when he filed his grievance with the warden, they didn't reject it because it was a tort claim.

They went ahead and considered it on the merits, had a factual investigation, and responded to him saying that they thought what was appropriate was for him to get psychiatric care, and they were making it available.

So it is clear from this record that they have in fact encouraged inmates to use this grievance system and that it has in practice not worked any undue prejudice.

Again, though, if Mr. McCarthy came to the Federal district court, filed a new complaint and said, I didn't exhaust because it was absolutely unclear that I had to resort to that procedure, that would presumably be a reason to provide equitable relief.

On this record, though, it is clear that he cannot say that.

He knew he was required to exhaust, the court told him so.

And the warden went ahead and considered his claim, even though it was 2 weeks late.

So I don't think that we have that problem in this case.

Unknown Speaker: What authority does the Bureau of Prisons have to provide monetary relief under this particular procedure where the claim is not under the Federal Tort Claims Act?

Ms Mahoney: Your Honor, this particular procedure does not spell out what relief will be available and whether it be monetary or nonmonetary.

Unknown Speaker: Oh, I know, but what authority... where does it get the... where does the BOP get the authority to pay money?

Ms Mahoney: The Attorney General has delegated authority to the Bureau of Prisons to settle claims for tortious conduct against Federal prison officials pursuant to the authority under the Federal Tort Claims Act.

Unknown Speaker: Well, I know, but this is... I just said, what authority is there for a non-Federal Tort Claims Act to give money?

Ms Mahoney: Well, Your Honor, it's all a question of characterization.

Mr. McCarthy could have easily styled this action as an FTCA claim, and certainly in our settlement powers we could characterize it as exactly that.

We could say, look, you called this a Bivens action, but what you're really complaining about is the malpractice of our doctors.

Unknown Speaker: Well, I know, but you say that what... if this plaintiff wants to prove deliberate indifference he might be able to get much more money than the Federal Tort Claims Act, so it would not be a Federal tort claims procedure.

Ms Mahoney: Well, Your Honor, he would have the option, if he chose to go to Federal court and try to do that.

And no, we couldn't pay him a settlement for punitive damages.

But if we offered him $2,500 or $5,000 under our FTCA authority, he might well jump at the chance.

And in fact, I'd be highly surprised if he didn't, Your Honor.

So I think that while he may want to characterize it as a Bivens action when he arrives at the courthouse, that doesn't eliminate the fact that he may be quite content.

Unknown Speaker: I think you still haven't really answered the question.

Let me see if I can ask you another one.

Assume a claim that could not be characterized as a Federal Tort... discretionary function or a willful assault and... there must be a category of a claim that could only be brought as a Bivens action.

Could you... do you have any statutory authority to settle that case for dollars without recasting it as a Federal Tort Claims Act claim?

Ms Mahoney: Your Honor, I believe that the Attorney General does, but that the Bureau of Prisons does not.

Unknown Speaker: So this regulation really does not authorize a monetary settlement in that hypothetical case, which you say is a very rare case.

Ms Mahoney: That's correct, Your Honor.

And on that point, in terms of it being a very rare case, it is important to emphasize that under the Federal Tort Claims Act, intentional claims for assault and battery by law enforcement officials are still compensable torts and--

Unknown Speaker: Does the Attorney General take the position that correction guards are law enforcement official representatives?

Ms Mahoney: --Yes, Your Honor.

Unknown Speaker: Let me ask you another sort of more basic question.

It seems to me that there is some rule making that's going to be required by either this Court... you're asking the Court to approve a 15-day statute of limitations waivable and so forth and so on.

Isn't this whole area something in which Congress could really do a much better job than we could of fashioning the right kind of rules as they've done for State prisoners?

Why isn't the right thing to do is to go Congress and get them to draft a statute that will clear up all these problems so we don't have to meet them one at a time?

Ms Mahoney: Your Honor, I think Congress already delegated the power to the Bureau of Prisons to come up with a system that's workable.

And that's what we have here--

Unknown Speaker: Why do you suppose they wrote a statute for the States and not the... you think that the authority was already clearly there?

Ms Mahoney: --Yes, Your Honor, under 18 USC, section 4001, the Congress established that the Attorney General and the Bureau of Prisons would have the authority to establish a system of government for prisons, to control and manage and adopt whatever regulations are necessary.

These regulations governing the administrative grievance procedure are really a fundamental part of the government of those prisons.

It is of critical importance not just to reduce the need for answering complaints in Federal court, but also to provide a system where prisoners will have some recourse, will have some chance to meet with prison officials to talk about their concerns, and to obtain speedy and effective relief.

And that's what this system does, Your Honor.

Unknown Speaker: What if a prisoner gets beat up the day before he's let out of prison?

Ms Mahoney: Your Honor, if a prisoner gets beat up--

Unknown Speaker: What would his remedy be?

Ms Mahoney: --If he got beat up the day before, I would still believe--

Unknown Speaker: You still say he has to exhaust.

Ms Mahoney: --I would still believe that he would have to exhaust.

And the reason I say that, Your Honor, is because this does not benefit just the prisoner.

It benefits all the other prisoners who live in this closed environment.

If the prison officials do not know that he was beaten up that day, they have no opportunity to take corrective action by disciplining the particular prison guard.

It's absolutely vital that they have that notice.

In addition, just as this Court found in Coit, it's very efficient and useful to have a process that requires claims for money damages to be brought to the attention of the agency before the Federal action is filed so that if they think there is any merit, and if they want to settle the claim, they have the opportunity to do that.

And I would submit that the 15-day deadline, which we do not view as a statute of limitations in any sense... it is simply a procedure that is readily waivable both by the BOP and in appropriate cases by this Court... serves that function.

The 15-day deadline isn't to erect some sort of barrier for inmates with meritorious claims, it's to protect the interest that the system was established for in the first place.

It allows for very, very speedy relief which helps to reduce tensions.

It also helps to eliminate the harassment suits that might be filed if the prisoner is allowed to go straight to court, when 2 months later he may change his mind.

And in the Bureau's experience this system, including that 15-day deadline has been... has worked very well.

It has not caused forfeiture of rights as the petitioner would suggest.

In fact, 97 percent of all of the grievances filed in the last 11 months... and I think there were some 9,000 of them... were filed within the 15-day period.

The prisoners know how to comply with this rule.

The staff helps them.

Unknown Speaker: How long is the... when did the rule come into effect, Ms. Mahoney?

How long have these regulations been in place?

Ms Mahoney: In the early 1970's, I believe 1974, Your Honor.

And I would also note that these regulations, including the 15-day deadline, have been used in the habeas context by the lower Federal courts and they have required that this regulatory system be exhausted before filing an action for habeas under 2241 regarding conditions of confinement.

Therefore, in other words, the horrors that the petitioner is talking about, these artificial barriers, these problems, they simply have not come up.

If you do look through the cases of the lower Federal courts, you will not find any significant number of cases dealing with whether or not to waive the 15-day deadline.

And again, without that system... without that time limit, how can we in the Bureau of Prisons insure that this process will be quick and effective so that if they then want to file a judicial action at the conclusion--

Unknown Speaker: Yes, but you don't... do you require this procedure in a Federal Tort Claims Act situation?

Ms Mahoney: --Your Honor, we don't--

Unknown Speaker: Why doesn't all the policy arguments apply there as well?

Ms Mahoney: --They do, Your Honor.

Congress--

Unknown Speaker: But then why don't they... why don't you insist it?

Why don't you impose it?

I don't understand.

Ms Mahoney: --The reason that we don't, Your Honor, is because Congress established the procedure for the Federal Tort Claims Act, for the Federal Tort Claims Act remedy.

And it did that with all Federal agencies in mind, not with the Bureau of Prisons specifically in mind.

Unknown Speaker: I know, but if you have this wonderful record of the wonderful benefits of 15-day rule, why don't you tell Congress about it and say, let's make this exception for Federal prisons?

We'd get tremendous benefits from it.

Ms Mahoney: Well, Your Honor, in most cases, inmates who want to pursue a Federal Tort Claims Act case will bring... they also want something else, too.

And so they will come and they will file a grievance.

Unknown Speaker: Yes, but they don't have to.

Ms Mahoney: That is correct, Your Honor, they don't have to.

And I think you're right.

I think we would like for that to be changed.

It simply is a consequence of having a system that was designed--

Unknown Speaker: It's not important enough to ask Congress for its help, though.

Ms Mahoney: --Well, Your Honor, we have been... as I say, the experience has been that these claims ordinarily will be brought to us.

And more importantly, Your Honor, I would also note that while the system is different, it still does require that the claim be brought to the attention of the Bureau of Prisons before it could be filed in Federal court.

And that is one aspect of this system that is of great importance.

Unknown Speaker: I realize that, but most of these claims will be Federal Tort Claims Act.

You've demonstrated that earlier.

And I find it rather surprising that you don't have regulations that would implement the very strong policy arguments you've been making here in that area, which covers most claims.

Ms Mahoney: Well, again, Your Honor, most of these claims such as this one, even if they may seek an FTCA remedy, they do bring them under this system as well in order to try and obtain some other kind of relief.

In addition, Your Honor, I think that the thing that we really do not want to lose sight of here is that we are talking about a system that has been designed by the Bureau of Prisons based upon its experience and expertise and it has found that it has very, very substantial benefits.

The exhaustion jurisprudence of this Court suggests that it is entirely appropriate, even if full relief cannot be given to the claimant, that exhaustion be required in order to accommodate the benefits and the policies of the agency that is adversely affected when exhaustion is not required, and the petitioner in this case doesn't even contest that those benefits apply here.

Therefore, we would submit that it is appropriate to defer to the scheme that's been established by the BOP, and if there are problems associated with a meritorious claim where an inmate believes that he has not had an adequate opportunity to present his claim, this Court still would retain equitable jurisdiction to provide relief in those circumstances.

One last point on the issue of the FTCA remedy.

One reason why in the Bivens context it's very important that the 15-day deadline and the process that's been established here be exhausted is that the statute of limitations for Bivens is not uniform.

And in some jurisdictions it would only be 1 year.

And therefore... and under the FTCA procedure they would not necessarily exhaust it by the time that statute of limitations would run.

So by funneling Bivens... potential Bivens actions through the administrative grievance procedure, we help to insure the protection of the litigant's rights to ultimately bring that action, even in the States that have the shortest known statutes of limitations.

If there are no further questions.

Unknown Speaker: Thank you, Ms. Mahoney.

Mr. Smith, you have 4 minutes remaining.

Rebuttal of Paul M. Smith

Mr. Smith: Thank you, Mr. Chief Justice.

Just a few quick points.

First of all, on the issue of whether or not there can be extensions of time of the 15-day deadline, Ms. Mahoney referred to it as a mandatory requirement that they get extensions.

But it's mandatory only where somebody determines that there's a valid reason for the extension.

And the regulations provide no standards whatever for what reasons will be considered valid or invalid.

So you're left either with two possibilities on this extension of the 15-day deadline.

Either it's going to be entirely up to the unguided discretion of the Bureau of Prisons to decide when to give an extension, or... and Ms. Mahoney suggests this is what would really happen... you're going to kick this issue over to the courts.

And whenever somebody doesn't get the extension, they're going to be in court saying, well I should have gotten it because I had a valid reason, and this Court's going to have to develop a whole new jurisprudence about which reasons are valid and which ones aren't, exactly similar to the habeas situation, which--

All this arises because you have a procedure which was not created with litigation in mind.

And if you had a situation... procedure that was created as a basis, as a possible prelude to litigation, you wouldn't have a standardless provision like we'll give you an extension when you have a valid reason.

You'd have something entirely different.

Also on that point, the suggestion was made that this issue hasn't arisen in the courts, and therefore it must not be creating a lot of problems.

But the reality is that they only require... the requirement of exhaustion of the grievance procedure only exists in the Tenth Circuit.

In other places the requirement in damages cases does not apply.

So people have no reason to end up in court fighting about extensions of time on the grievance process.

On the issue of whether people might be satisfied by some relief other than compensation, and therefore there might be some purpose served by people... making people go through the grievance process, obviously that is a possibility, but it's not an interest which can justify requiring everybody to exhaust.

The respondent's brief says that you still have to exhaust this process when you're out of prison altogether when the only interest it could possibly... the only interest that you could possibly have is a compensatory interest, but they still want you to exhaust that.

Unknown Speaker: But the argument for doing so isn't a classic exhaustion argument, it's a kind of help the Government argument, really.

They're saying this is the way of making sure that the Government is informed that there is a problem, if indeed there is one, and that independent benefit ought to be sufficient to justify it.

Mr. Smith: That is a different argument.

I think the problem with that argument from the Government's point of view is they are making contradictory points.

First they're saying everybody's rushing off to court to bring these Bivens claims, and at the same time, they're saying they're not getting adequate notice of what's going on in the prison in time to fix it.

The third thing that Ms. Mahoney now says, in the Federal Tort Claims Act situation this doesn't arise because 95 percent of the Federal Tort Claims Act claims do get brought to the grievance procedure within that 2-year period before they go to the Tort Claims Act procedure... so they're sort of telling us everybody's going to file a grievance, everybody's rushing off to court.

But at the same time, that somehow they just don't know what's going on in these prisons and they don't have enough notice about which guard is beating up on people.

I submit to you that the arguments don't make any sense if you put them right next to each other.

The final point about this idea that you're going to get Federal Tort Claims Act monetary settlements, first of all, it ignores entirely the issue of notice.

Nobody in any court that I'm aware of has ever suggested until after cert was granted in this case that the reason we were going to go through this grievance process in Bivens cases is because of a monetary settlement you might get under the Tort Claims Act.

And every court that's looked at this issue, including the Tenth Circuit, has assumed there's no damages available, that damages is not something that justifies sending people through the grievance process.

And petitioner certainly had no reason to know otherwise.

Chief Justice Rehnquist: Thank you, Mr. Smith.

The case is submitted.

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The OYEZ Project

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Franchise Tax Board Of California v. Alcan Aluminium - Oral Argument

Fri, 09 Jan 2009 14:49:18 +0000

Case:

Franchise Tax Board Of California v. Alcan Aluminium

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1989_88_1400_argument.xml

Transcript:

IN THE SUPREME COURT OF THE UNITED STATES

FRANCHISE TAX BOARD OF CALIFORNIA, ET AL., Petitioners v. ALCAN ALUMINIUM LIMITED, ET AL.

No. 88-1400

November 1, 1989

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 11:51 a.m.

APPEARANCES:

TIMOTHY G. LADDISH, ESQ., Assistant Attorney General of California, San Francisco, California; on behalf of the Petitioners.

LAWRENCE A. SALIBRA II, ESQ., Cleveland, Ohio; on behalf of the Respondent.

PROCEEDINGS

11:51 a.m.

CHIEF JUSTICE REHNQUIST: We'll hear argument next in Number 88-1400, Franchise Tax Board of California versus Alcan Aluminium Limited.

Mr. Laddish, you may proceed.

ORAL ARGUMENT OF TIMOTHY G. LADDISH ON BEHALF OF THE PETITIONERS

MR. LADDISH: Mr. Chief Justice, and may it please the Court:

This is a tax case, but where are the taxpayers? The domestic corporations that do business in California and that are assessed and pay the California taxes are not before this Court today. Counsels employed by those taxpayers are counsel of record here and they are challenging the validity of the California tax. But today they are on the record as representing the taxpayers' sole stockholders, Alcan and Imperial, the foreign corporations which control the domestic taxpayer corporations.

It is that control which has orchestrated these suits so that taxpayers are not before the Court today. It is that control which should lead to the dismissal of these actions under the Tax Injunction Act.

Most of the space in the briefs is taken up with discussions of the standing issues, but since the Tax Injunction Act provides its own plain, speedy and efficient means of resolution of these case, I will discuss the Tax Injunction Act first.

For purposes of this part of the argument it should be assumed that somehow the Respondents have satisfied the Article III and prudential standing rules. If the taxpayer subsidiaries were before the Court today in these federal actions there is no question but that the Tax Injunction Act would apply to bar them from the federal courts and to point them back to the plain, speedy and efficient remedies provided by the California courts. Recognizing that, Respondents, the foreign corporation parents, have decided to hide the taxpayers under their parental skirts and take the federal field themselves. They have filed their actions in the Seventh Circuit, since the Ninth Circuit had denied relief to other foreign corporations, foreign parents --

QUESTION: Mr. Laddish, does the California state board have an office in Chicago, so there is personal jurisdiction, I take it?

MR. LADDISH: There is an office there and audits are conducted there, Your Honor. Not necessarily the audits in this case, but audits are conducted there.

The -- certainly Alcan would not be bringing this action in the Second Circuit because it had already been denied standing in that Circuit to -- to raise these sort of issues. But once they were in the federal courts and were confronted with a Tax Injunction Act, then they said well, the Tax Injunction Act can't apply to us because we have no plain, speedy or efficient remedies in the state courts.

QUESTION: Do they?

MR. LADDISH: They do, in effect, have plain, speedy and efficient remedies.

QUESTION: How? How?

MR. LADDISH: Through the fact that they are the sole stockholders of the taxpayers in this --

QUESTION: You think that the domestic subsidiary can raise the issues for them?

MR. LADDISH: Certainly, Your Honor. The -- the domestic subsidiaries are the taxpayers. They are the parties that have been assessed the tax. What's put in issue in the -

QUESTION: You think they can raise the foreign commerce clause issues, the domestic subsidiary can?

MR. LADDISH: It -- it's only common sense that they can, and also it's, if you look to what is going on in the California courts right now --

QUESTION: You don't think you would be in there arguing against that?

MR. LADDISH: Excuse me?

QUESTION: In the -- you wouldn't be arguing against that in the state courts?

MR. LADDISH: Currently there are cases pending in the California state courts where the issues are being raised by subsidiaries --

QUESTION: And what position is the state taking on those? Is the state saying fine, we're going to litigate those issues?

MR. LADDISH: The state is taking the issue, as to some of them, the state is taking a procedural defense that they did not raise them in the claims for refund. But in no case is the state claiming that the subsidiaries cannot raise those foreign commerce claims. And we -- we would be unsuccessful if we did try to raise that, because --

QUESTION: And how about the claim that it costs more for the parent?

MR. LADDISH: Those claims are being fully litigated in -- in the state courts. In one case, the Barclay's case, I believe that is one of the issues where we are claiming that they did not raise that in the -- in the claim for refund.

QUESTION: Do you think under California state tax law that the state could take the position that it can tax the parent, that the parent's the taxpayer?

MR. LADDISH: Not under the California state law, Your Honor, in that the California --

QUESTION: Well, it reads broadly enough. I mean, you take the position you can tax all their income.

MR. LADDISH: No, Your Honor, we do not.

QUESTION: Well, that you can consider worldwide income in levying the tax.

MR. LADDISH: The California statute states that the -- taxpayer is the person subject to the tax. That doesn't get us anywhere except that the section that does impose the tax, Section 23151 of the California Revenue and Taxation Code, says that -- imposes the tax on every corporation doing business in the state. Now, in these cases the corporations doing business in the state are the domestic subsidiary corporations. And those are the corporations, under the stipulations of fact, that the assessments have been made against, those are the corporations that information has been requested from and those are the corporations that we are determining what their -- what income should be attributed to their California business.

Now, in determining that, California does turn to the income of the unitary business, and looks to the whole unitary business in order to make the apportionment. But the tax is levied on that corporate entity, and the Franchise Tax Board deals with that corporate entity in its tax procedures. In the Container case, this Court recognized that, although California counts income arguably attributable to foreign corporations in calculating the tax -- taxable income of that domestic corporation, the legal incidence of the tax falls on that domestic corporation.

And as a final touch to consider, if that corporation did not pay the tax, under California law there was no means for us to go after the foreign parent corporation. It is that corporation that has the tax liability, and if that corporation goes insolvent we must file claims in the -- in the bankruptcy of that corporation. But there are no provisions that that is not really the taxpayer after all, and we can go after anyone else.

So we submit that the foreign parents, having let their subsidiaries keep their California procedures lying fallow while going to the foreign -- the federal courts, that this is a forum shopping, a form of forum shopping that strikes at the very heart of the federalism that Congress meant to preserve in the Tax Injunction Act. This forum shopping strips California of its tax remedies, which Congress meant to protect in the Tax Injunction Act, and subjects California to the expense and peril of litigating the ultimate constitutional validity of its tax structure, regardless of whether the tax has been paid, against nontaxpayers, in actions where California would not have the other procedural or other substantive defenses or issues it might raise against the taxpayer itself.

QUESTION: We'll resume there at 1:00, Mr. Laddish.

MR. LADDISH: Thank you.

(Whereupon at 12:08 p.m., the oral argument in the above-entitled matter was recessed, to reconvene at 1:00 p.m., this same day.)

AFTERNOON SESSION

12:59 p.m.

CHIEF JUSTICE REHNQUIST: You may resume, Mr. Laddish.

MR. LADDISH: Thank you, Mr. Chief Justice. You will recall, we left California confronting a challenge to its basic tax structure in a distant federal forum which has absolutely no familiarity with the procedural or substantive nature of California tax law. The threat that this might occur to other states has caused 39 amici states to join with California in asking this Court to recognize this threat for what it is and give it the fate that it deserves under the Tax Injunction Act.

The Tax Injunction Act has quite clear language to avoid such forum shopping as we see today. These shareholder corporations cannot get the declarative or injunctive relief that they seek if -- where a plain, speedy and efficient remedy may be had in the courts of the state. This Court, in the Grace Brethren case, recognized that, at the time of the Tax Injunction Act's enactment, Congress was well aware that tax refund procedures were the sole remedy offered in many states, and in the same case this Court recognized that California's tax refund remedy, in a similar statute and another tax, provided a plain, speedy and efficient remedy.

Under a very strict reading of the Tax Injunction Act language itself, this recognition would be enough to bar these suits, for at least some interpretation must be had -- given to the language to add the requirement that anyone other than the taxpayer have a plain, speedy and efficient -- remedy. If a requirement were to be read into the statute that the party bringing the federal action must, in effect, have a plain, speedy and efficient remedy in the California courts, that requirement would be met here.

In order to protect the state's finances, the State of California offers its remedy in the usual tax refund form. This is, by its form, limited to the taxpayers. That limitation, though reasonable by itself, could arguably lead to inapplicability of the Tax Injunction Act if the parties before the court, the federal court, only could rely upon the hope of persuading the taxpayers in the state courts to raise certain issues or to raise them in a certain way. But that is not the case before the Court today.

Here we have the sole stockholders of the taxpayers in California, and those stockholders do not need to rely upon the hope of persuasion. They have the certainty of control.

The result of barring these actions under the Tax Injunction Act is not only consistent with the language, it is fully consistent with the purpose underlying the act, which was to limit drastically federal court jurisdiction to interfere with the lifeblood intense local concern of the states in the assessment and collection of their own state taxes. In furtherance of this purpose, this Court, in the Grace Brethren Church case, recognized that the plain, speedy and efficient remedy should be construed narrowly.

Now, in further answer to the question as to whether the taxpayers' remedy themselves, itself, encompasses the ability to raise all the foreign commerce clause issues, I submit that if -- upon reflection, any other result would be absurd. The issue before the Court today is the constitutionality of the California tax. That tax is imposed upon the domestic corporation subsidiaries. If the tax is invalid, the subsidiary would not be liable for that tax, and it only stands to reason as common sense, that the subsidiary necessarily had standing to raise any question going to its own tax liability.

When we move to the standing issue, the subsidiary taxpayer's ability to raise all the issue pertaining to the validity of its tax is also central, and the application of the dispositive rule here, the stockholder standing rule. Under the stockholder standing rule a stockholder will not have standing to litigate an issue if the stockholder's injury is derived from its status as a stockholder, and if the corporation itself would have standing to raise the same issue. Assuming arguendo for the moment that there is Article III standing here, which I will be dealing with in a moment, clearly the stockholder standing rule would apply under the facts of this case as a prudential rule of standing.

QUESTION: May I -- may I give you a hypothetical case --

MR. LADDISH: Sure.

QUESTION: -- that I have been thinking about? Supposing the subsidiary's tax would be the same whether you use the unitary business approach or their, you could somehow or other isolate them, if they claimed it was unconstitutional. But there really didn't make any difference in the tax obligation of the subsidiary, and therefore arguably it wouldn't have standing to raise all sorts of constitutional issues. Might it, nevertheless, be true that in such a case the state's insistence on following the unitary approach would pose a lot of burdens on your adversaries here that were not imposed on the taxpayer, and that there would no forum in which that particular claim could be litigated?

MR. LADDISH: Still, if, as to the validity of the tax, I believe, since California is not only taxing the -- corporation that is doing business in California, it is asking that corporation for all the information pertaining to the assessment of the tax. Why, it is that corporation that has the direct request or demand made upon it by the Franchise Tax Board, and that corporation would have the standing still to challenge, if -- if we're talking about whether the tax is valid because of administrative burdens --

QUESTION: It would even if it didn't affect its tax -- even if it wouldn't affect its tax liability?

MR. LADDISH: I believe so, Your Honor, because it would still be, as is the situation in the litigation in the California courts today, that is one of the grounds that is being raised. And that ground itself, I think, is based on a cost factor. And so, it's more than just an idle question as to -- there would be a case in controversy as to whether or not this corporation would need to supply the information, or undergo the penalties for failing to supply the information.

The stockholder standing rule here clearly applies because all of the injuries flow to -- if there are injuries here, they flow to the Respondents here because of their stockholder status. And I think a hypothetical would make this clear.

If Alcan, say, were not a stockholder in its domestic subsidiary, in other words Alcan and Alcancorp, have absolutely no stockholder relationship, but California somehow didn't get the word and still assessed a tax on Alcancorp taking into account all of Alcan's income, and asking Alcancorp for a considerable amount of information about Alcan, Alcan, not being a stockholder, could just sit by and see how it all comes out if it is even interested in finding out. But there would be absolutely no acrimonic detriment to Alcan. All of the injuries that are alleged in this case and that are found by the Seventh Circuit flow from the stockholder standing, from the stockholder status.

Just as clearly, as I mentioned before, pure common sense says that the corporation itself would have standing to raise all of the issues that are being -- meant to be raised today by the Respondent. And I point out that the Grace Brethren Church case, again, in looking at a similar California tax refund statute for another tax, particularly recognized that the taxpayer there could raise all the arguments pertaining to the validity of the tax.

Respondents have not come forward with any policy reasons justifying the departure, any departure from the use of the stockholder standing rule as a prudential rule of standing. To the contrary, there are strong policy reasons supporting the application of the rule in this case.

QUESTION: Well, the Seventh Circuit found, didn't it, Mr. Laddish, or perhaps found isn't the right word, maybe held, that the corporations here did sustain a different kind of injury from the taxpayer?

MR. LADDISH: The Seventh Circuit, Your Honor, mixed the merits with the standing issue, when considering the standing issue forgot to consider the strong issues of federalism that we can maintain underlie both the standing issue and the Tax Injunction Act issue in this case, and did find this injury that was really, as I understand it, would be, gee, there's a good chance that foreign commerce is being interfered with here, and these people are in foreign commerce, and therefore we will find an injury where we might not otherwise find. It is submitted that that injury is not cognizable standing injury, even under Article -- Article III standards. It certainly would fit under the stockholder standing rule, without the stockholder link there would be no standing. And certainly I think it could be raised by the taxpayer corporation as a violation of the foreign commerce clause.

But, under Article III standing, when boiled down to its essence, that, that injury, as found by the Seventh Circuit, is really that if a state imposes any tax upon a subsidiary, why, then, that -- the subsidiary's parent, whether it is an interstate or foreign commerce, would feel this burden upon its decision making as to whether to do business in that state through the use of the subsidiary.

It is submitted that that is basically saying corporation don't like standing and, to borrow a term from First Amendment cases, if you impose a -- tax on a corporation and its parent is doing business in interstate or foreign commerce, that is a chilling effect on interstate and foreign commerce. And it is submitted than an analogous approach was taken in Meese v. Keen in 1987 First Amendment case of this Court, which found that -- noted that such arguments of a subjective chill would not be cognizable injury.

Moving back to the stockholder standing rule itself, this Court in Hawes v. Oakland, more than 100 years ago, decided that it was perfectly appropriate to apply the stockholder standing rule to prevent forum shopping through the abuse of federal diversity jurisdiction. And then in 1945 this Court, in the Shindley Corporation case, held that it was particularly appropriate to apply the stockholder standing rule when there was a situation where you had sole stockholder, since that sole stockholder could control the litigation of its subsidiary, precisely the situation we have today.

The facts of today's case and the forum shopping aspects of it that I described earlier, and the combination of these policy currents that we have seen from prior cases, show that the stockholder standing rule as applied in this case certainly would not be an anachronism. It is supported -- that application would be supported by the same concerns that underlay the Tax Injunction Act itself: the basic principles of federalism which recognize the imperative need of the state to administer its own fiscal operations regarding its own taxes.

Now, a somewhat closer question comes up when we talk about whether Alcan and Imperial have Article III standing. I have already discussed the Seventh Circuit's found injury that Alcan and Imperial didn't know they had until the Seventh Circuit pointed it out to them. But as to the injuries that they assert as far as the standard double taxation injuries and cost of compliance injuries that they assert, I would point out that there is -- although the rule may be different in other areas, when a party is challenging the validity of a statute, federal or state, in order to establish a distinct and palpable injury to himself, that party must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement.

That rule was most recently stated in the case of Penel v. City of San Jose in 1988. That rule would apply to the facts of this case in that the only actions by the Franchise Tax Board were taken as against the stockholder -- excuse me, as against the subsidiary corporation, the California taxpayer in this case. And any effect of those actions would be indirect upon the Respondent.

As to Imperial's argument that if its United States subsidiary had issued any dividends, why then a double taxation injury would have occurred to Imperial because of the United Kingdom statutes having to do with dividend credits, we submit that that purported injury would fail for two reasons. Number one, it is hypothetical. There never were any such dividends. We don't know exactly what would happen when that occurred, and the only source for determining that is an affidavit where the United Kingdom person giving the affidavit was not -- was very forthright in saying he wasn't entirely certain what would happen under the law. But the second reason that that injury should be rejected is that, under this Court's decision in Warth v. Seldin, the line of causation that has to do with the requirement, Article III requirement, that the injury must be fairly traced to the actions of the defendant, that line of causation would be broken by any intervening acts of the tax authorities, in this case it would be the United Kingdom tax authorities.

Franchise Tax Board is in full agreement with Imperial in one respect, and that is that Alcan is wrong when it argues that this Court must decide the ultimate constitutional merits of this case in order to decide the standing issue. This Court, barely six months ago in ASARCO Inc. v. Kadish, stated the established rule that federal standing in no way depends on the merits of the claim. And it certainly makes sense in the foreign commerce clause area, where you might have an undoubted injury -- I'm giving you a hypothetical example -- a party may, may be subjected to the same injury that the taxpayer in Japan Line felt, double taxation injury, and yet upon analysis this Court might find that Congress had taken the same line of actions as was taken in the case of Ward Air Canada v. Florida Department of Revenue.

In that case this Court decided that Congress, through its actions, had indicated that the states could tax as they pleased in a particular area, and Congress, being in control of foreign commerce, not the executive, would have control, and that would not be a violation of the foreign commerce clause, even though the taxpayer might have an injury that, in Japan Line, led to a decision in its favor in the merits.

Moving to the question as to what effect does the pleadings have in the -- on the standing issue in this case. The -- if standing was being decided at the pleading stage, by non-speculative allegations of the complaint certainly would be binding on the standing issue. But here we have stipulations of fact which have superseded the complaints in many respects.

QUESTION: Well, if there is no standing, do we ever reach the Tax Injunction Act?

MR. LADDISH: There is, if there is no standing there is no need to reach the Tax Injunction Act.

QUESTION: No need, but can we?

MR. LADDISH: I believe this Court can assume standing --

QUESTION: Assume it? Assume it?

MR. LADDISH: -- and reach the Tax Injunction Act.

QUESTION: And reach the, and say, and dismiss the case on the --

MR. LADDISH: That even if there were standing, why the Tax Injunction Act would apply. I believe so, Your Honor.

QUESTION: Would that be true if there were no Article III standing?

MR. LADDISH: I believe the Court could take that approach. I believe the Court has at times decided that it would not reach a particular issue because another issue would apply even it -- no matter what it decided on the first issue.

QUESTION: Even where that issue was a standing issue? I mean, that is sort of remarkable. We can decide all sorts of things though where there is no standing, so long as we decide them against the person who asserts standing, we can reach all sorts of issues.

MR. LADDISH: I would be perfectly happy, Your Honor, if you decided for me on the standing issue and left the Tax Injunction Act issue alone.

QUESTION: I think --

MR. LADDISH: I wanted to argue the tax --

QUESTION: I always thought we had to resolve standing issues before we got to other issues.

MR. LADDISH: That certainly makes practical sense to me, and I believe --

QUESTION: It is very impractical. I think it --

QUESTION: You just wanted to make sure to get the Tax Injunction Act argued before you ran out of time.

(Laughter)

MR. LADDISH: That is absolutely correct, Your Honor.

The -- also we should point out that the allegations of the complaint should not be irrefutable for standing purposes when they are indeed matters of law. As an example, Alcan's complaint in paragraph 17 of page 10 of the Joint Appendix says that since California is using worldwide unitary income as its base, it is therefore imposing a tax upon Alcan. There is no sense to bind California to that for standing purposes, when just this last term in Shell Oil Company v. Iowa Department of Revenue this Court decided that the mere inclusion of income in the preapportionment tax base does not by itself constitute taxation of that income.

I would like to reserve the remainder of my time, if I could.

QUESTION: Thank you, Mr. Laddish.

Mr. Salibra.

ORAL ARGUMENT OF LAWRENCE A. SALIBRA II ON BEHALF OF THE RESPONDENT

MR. SALIBRA: Mr. Chief Justice, and may it please the Court:

I represent two foreign parents, Alcan Aluminium Limited and Imperial PLC. They have some common characteristics that give rise to this litigation that I think are important to consider. The first is they are foreign parents and do not operate in the United States. They have no permanent establishment in the United States, as that term is generally recognized in the tax area. They operate exclusively in the U.S. through subsidiaries. Both are assessed by California on the worldwide combined apportionment method. And both, in their view, feel that as a result of that assessment the promises made to their government, that when they invested in the United States through a subsidiary they would have no impact on their operations outside of the United States, except as derived from the shareholder status, is being in fact undermined by the California tax.

We see this case not as a Tax Injunction Act case, but as a shareholder case. Is this tax treating us like a mere shareholder or a passive investor? It came up out of the district court in that way. Judge Williams ruled that we had no right to pursue this case because the only possible injury we could have is the injury derived from a passive shareholder investor. We think that is incorrect.

We think, and we agree with the Seventh Circuit, that when you look at this case and you look at the impact of the tax, it is the fact that we are not being treated like a shareholder which gives rise to our right to standing and gives rise, simultaneously, to our objection to the tax on constitutional grounds.

QUESTION: You're not being treated at all by California.

MR. SALIBRA: On the contrary, Justice Scalia. We are in fact being treated as though we in fact were operating in the United States as a permanent establishment.

QUESTION: You don't get any bill from California, do you?

MR. SALIBRA: We get a bill from California in this sense. California says there is, there is a single unitary business. It is operating in our state. We want to determine what income is available to is. We have determined that based on that worldwide operation, and we are sending that bill to that portion of the unitary business that is in our state. Do they send it to Alcan Aluminium? No. Is there a real worldwide impact from the tax? Yes.

I think the most telling example that probably answers your question perhaps more directly than whether we get a bill is the example I used in the brief concerning the impact on a totally independent operation halfway around the world. If there is a business manager in an Alcan facility --

QUESTION: May I interrupt before you go with --

MR. SALIBRA: Yes, you may.

QUESTION: Are you assuming this totally independent operation is part of the unitary business?

MR. SALIBRA: I am, Your Honor.

QUESTION: Then it is not totally independent.

MR. SALIBRA: Well, it is not -- it is part of the unitary business, that is correct, it is not totally independent. That may be a wrong -- it is part of the business; it is operating in India. As it operates, the business manager of that facility decides that, some employees are retiring, and he can do two things. He can not replace those employees and maintain the same productivity level, and he can not replace, he can actually change the process and eliminate some of his capital equipment. The result of that plant decision, his California tax goes up. That is where the impact --

QUESTION: Well, is that true? The total income goes up, but isn't it also true that the percentage of the business done in California goes down?

MR. SALIBRA: No, no. I didn't say that. It is the tax goes up, I am sorry. The tax goes up, the California tax goes up.

QUESTION: Well, does it? Because --

MR. SALIBRA: The income --

QUESTION: The gross income goes up.

MR. SALIBRA: No, the total income stays the same. He is making his same level of productivity. He has produced -- the same amount of goods are produced now as they were before. All that has happened is he has reduced his payroll and he has reduced his property factors.

QUESTION: Oh, I see.

MR. SALIBRA: Fewer people, same income, California tax goes up. He has made a limited operational decision, a plant decision in India, and California tax goes up. And that is the impact. That is what they are doing to us that is the cause of concern.

And I might add, Justice Scalia --

QUESTION: (Inaudible) like a little different -- you present this argument to the court of appeals?

MR. SALIBRA: Oh, yes.

QUESTION: Are you arguing standing now?

MR. SALIBRA: Yes. And I am arguing why that --

QUESTION: Well, they -- did they agree with you?

MR. SALIBRA: I believe they did. They ruled in our favor.

QUESTION: Well, I know. I thought they invented another sort of --

MR. SALIBRA: Well, I take issue with the fact that they invented that, Your Honor. In fact I would like to get to the point. I will.

QUESTION: Well, that's all right. I'm sorry.

MR. SALIBRA: The -- we did argue this. Because, you have to understand the impact of the tax to understand the nature of our claim. Okay. Our claim is that none of these impacts would have been visited upon us, nor was there expectation when we invested in the United States through a subsidiary vehicle, if in fact the understanding between our governments had been observed. Now --

QUESTION: That goes to the merits of the question, doesn't it, Mr. Salibra?

MR. SALIBRA: Well, it -- I think it does not, and let me just answer that by looking what the Seventh Circuit said. The issue is whether or not the choice that we made, that is, are we simply here for seeing some economic impact, or is there some decision that is uniquely our decision that has been infringed? What the Seventh Circuit said is, in the context of the unitary tax, what happens is there is a fundamental choice that needs to be made by foreign operations who wish to invest in international commerce. They have three options. They can either, one, operate in the other foreign company directly. They can, two, operate via a subsidiary. Or, three, they can operate by contract. Different tax considerations, different business considerations, are associated with each choice. You -- the foreign investor looks at the options, makes the decision.

What the Seventh Circuit said is that, in the context of Aluminium and Imperial, the California tax takes away one of the options. There was an agreement between nations that we would have three options; California takes away one of the options.

QUESTION: But whether they are options or not depends on the merits, doesn't it?

MR. SALIBRA: Well, I agree with you. This is why -- and this is the case -- the point we made in our brief, it is impossible to determine -- okay -- to really -- to review the share, whether we are being effected by the tax as a shareholder or independently, without in fact addressing the merits. I think it is possible to determine that there is sufficient injury, as the Seventh Circuit did, and say there is sufficient injury but we have not found -- determine whether that injury is elevated that that constitutes a constitutional violation.

However, if there is a determination that there is no injury, I think you are forced to the conclusion that there is no constitutional burden. That is, in fact, what the Second Circuit did in our case. It decided, I think incorrectly, and we can all agree, that Mobil decided the constitutional issue with respect to worldwide combined apportionment applied in the foreign parent context. It said so specifically. And then it decided, because of that, there is no injury and there can be no standing. Because the -- any injury that Alcan would see, or Imperial would see, would be derived solely through their status as a shareholder.

Here the Seventh Circuit recognized that there is a direct injury, a choice, a choice of how you will invest, how you will conduct foreign commerce, and that choice is a choice that only the foreign parent can make.

QUESTION: It seems to me that would give shareholder standing in connection with wholly-owned subsidiaries in an awful lot of areas. If that is a valid principle it seems to me hard to limit it to foreign commerce considerations. Presumably domestic sole owners may have considerations and options as to what they are going to do. And I don't see how you can ever limit that to foreign commerce.

MR. SALIBRA: I can understand that concern. I can assure you, Justice Rehnquist, that that doesn't exist. And the reason is simple. The tax --

QUESTION: (Inaudible.)

MR. SALIBRA: I understand that. I am going to try to explain why --

QUESTION: Shouldn't.

MR. SALIBRA: Shouldn't exist, yes. It shouldn't exist because the nature of the unitary method of taxation is such that what it does is it ignores the concept of the subsidiary in assessing the tax. It says there is one business, it is operating just like a single entity, and it -- and therefore we are going to compute the tax in effect like it is a single entity. There are no other shareholders, sole shareholder cases, that would fall within that doctrine unless --

QUESTION: Well, but wait a minute.

MR. SALIBRA: -- they were unitary.

QUESTION: But what if it was, what if the parent, instead of being an English or Canadian corporation, was a New York corporation, and had subsidiaries all over the United States, and maybe one or two in Canada.

MR. SALIBRA: Yeah, okay. And to the extent that it was unitary, one could argue that, at least with respect to the unitary issue, it would apply. The Seventh Circuit said, we think that standing in this case, and that the shareholder rule in this case, differs to the extent that there is the condition in addition that we impose that it be both unitary and that that impact be on foreign commerce. Because the choice --

QUESTION: Well, but the New York corporation might want to build a plant in India too. And its decision might be affected by how much they pay for things, and all the rest, in India.

MR. SALIBRA: In guess -- I apologize. I miss seeing the --

QUESTION: I am assuming that the parent is not a foreign, not a United -- non-United States corporation; it is a New York corporation.

MR. SALIBRA: Okay.

QUESTION: It has hundreds of subsidiaries, a few of which may be in India or Great Britain.

MR. SALIBRA: Okay.

QUESTION: Why isn't your principle applicable to that company?

MR. SALIBRA: Why wouldn't -- let me just see if I understand this. Why wouldn't an American company investing in India have standing to challenge the unitary tax independently because the California tax is affecting --

QUESTION: Its investment decision in India.

MR. SALIBRA: Well, I guess what I don't understand is what level of protection exists. Here the level of protection, the issue --

QUESTION: Well, they claim the statute is basically unconstitutional, as I understand you do.

MR. SALIBRA: Well, no, no. You see, I think that is where we disagree. I think the point that we are making is that the injury that we are alleging is an agreement between our nation, Canada, the U.K., an agreement between our nation and the United States as to how we will be treated. I don't see, in your example --

QUESTION: Well, you rely on, basically on the treaty as -- I don't think --

MR. SALIBRA: Well, the agreement of the kind -- I think the answer to that is that there is -- there are two levels. The first level, there are treaties that express the fundamental concept, Canada refers to it in its amicus brief, that investments in the United States will not result in taxation beyond the shareholder role, except --

QUESTION: But if you accept the theory of the unitary tax it doesn't. The only thing that is being taxed is the subsidiary. You just measure the tax by its percentage of the total business.

MR. SALIBRA: Well, once again, what I am saying is I understand if you accept the philosophy, but I think your example is why isn't -- why wasn't -- why doesn't the U.S. have standing in a claim, and the answer is there is no alleged foreign commerce injury.

QUESTION: Well, there is a foreign commerce injury but not a treaty violation.

MR. SALIBRA: Well, there is no --

QUESTION: Does your case boil down to special standing because you claim a treaty violation?

MR. SALIBRA: Well, because we claim that there is a violation of an understanding between the United States, a course of conduct exemplified in some treaties and exemplified in the fact that there is a common understanding among nations, recognized by this Court in Container, that international transactions will be evaluated under Section 42 arm's length standards.

QUESTION: So something to do with the merits confers standing.

MR. SALIBRA: To the -- well, something to do with the merits confers standing to the extent that, yes, it is true there must be a foreign commerce injury.

QUESTION: The Seventh Circuit said we are only going to apply this where foreign commerce is involved. But logically, why should it be limited? What is peculiar about foreign commerce to this particular question of standing, other than the arguments on the merits?

MR. SALIBRA: Well, I -- my analysis of that would be very simply that it -- that one could, I think, make the argument that you suggested. When you unitize a company with its subsidiary, regardless of whether it is a foreign unity or an American -- or a U.S. unity, the shareholder role no longer exists. The shareholder role has been defeated, because he is not being treated like a shareholder, he is being treated like one common element of a single business. I think that is what you are saying. You are saying why should you add in addition to that -- am I correct?

QUESTION: I asked you a question.

MR. SALIBRA: Yeah. And, I guess my an -- I guess I am not clear. The question is why is it tied to the merits?

QUESTION: Yes. You know, you say the Seventh Circuit says we won't apply this except in the area of foreign commerce. But I don't see anything there that would logically limit that principle to foreign commerce, other than something to do with these treaties you are talking about, which are basically questions of the merits.

MR. SALIBRA: Well, Your Honor, I don't disagree with that. I guess I am saying I agree with you. They limit it to foreign commerce. I think it is logically possible to say whenever the shareholder role has been eliminated, whenever the shareholder isn't being treated like a shareholder any longer, then the -- then one is precluded from coming in when he wants to vindicate a right and say you can't come in because you are a shareholder. I agree with that. That is not what the Seventh Circuit said. It said there were reasons why it was limiting it to foreign commerce. But I agree that, to the extent that a shareholder is not -- is suffering an injury that is not derivative through his role as a shareholder, he should have a right of action, is in fact the fundamental principle that all of us recognize. I agree with that. There is established law on that principle that shareholders who suffer injury, Universal -- Schaffer v. Universal Rundle, that shareholders who suffer injury, and that injury is not injury that derives from their shareholder position but is unique and personal to them, have a right of action. And I agree that that is a rational position.

The important point, I think, in this case, from the point of view of some of the foreign parents, is that, as I said, is that in this case once you decide we are not a shareholder -- or, I am sorry, that we are a shareholder, and that is the only derivative impact we see from the unitary method of taxation, the ability for us to go in and say this tax affects us in a way that violates the foreign commerce clause requirements is, in our view, lost. We can't make it anymore.

QUESTION: Well, I thought I understood counsel for the state to say that the argument can be raised in state court by the domestic subsidiary.

MR. SALIBRA: Well, I --

QUESTION: I asked specifically about that, and was informed yes, it can be litigated in state court. Now, if that is true, why isn't that sufficient?

MR. SALIBRA: Well, I don't believe that is true. I think the issue is if there is a determination by this Court that the worldwide combined apportionment method, as it applies to foreign parents in this case, treats them just like a shareholder, with no other impact. Just derivative shareholder --

QUESTION: Suppose the holding here is you don't have standing, you don't have shareholder standing.

MR. SALIBRA: Then I believe --

QUESTION: Now, they say you can litigate -- that the domestic subsidiary can litigate your concerns about the unitary tax scheme in state court.

MR. SALIBRA: And my, I guess my answer to that is you have determined the merits. There is nothing to litigate. We would go in and we would say that the unitary method of taxation is imposing an unconstitutional burden upon us. The court would say what is that burden. The Supreme Court has determined that the only impact that this tax on you has --

QUESTION: So, you're telling me that if we find you, your clients have no standing, that you are going to give up any attempt to go to state court and have the domestic subsidiary raise that argument. We are finished.

MR. SALIBRA: I am saying that if you hold that there is -- that there is no injury beyond the injury of a normal shareholder, I don't see what claim we could make.

QUESTION: The state is quite willing to assume you do have standing. And then it says go ahead and, but nevertheless, the Tax Injunction Act applies and you must go to the state remedies.

MR. SALIBRA: It says we do have standing.

QUESTION: Well, it says they are willing to assume to have -- they started out arguing the Tax Injunction Act saying let's assume that there is standing, and nevertheless the Tax Injunction Act bars going forward to this suit in the Seventh Circuit.

MR. SALIBRA: And we would, we would disagree it doesn't bar that. The Tax Injunction Act applies, and the principle of comity applies, when there is a plain, speedy and efficient remedy. And there is no plain, speedy and efficient --

QUESTION: Well, now, why not? The state says that these very issues, even though you have standing, these very issues can be litigated in the state courts.

MR. SALIBRA: And the -- and our answer is the fact that the -- assuming that the issues could be litigated, assuming the issues could be litigated, the Tax Injunction Act still wouldn't apply.

QUESTION: Why not?

MR. SALIBRA: And it wouldn't apply because of the uniform recognition of this Court and those courts, every court in this case which applied that doctrine, that absent the plain, speedy and efficient remedy, the fact that there may be similarities of interest, similarities of claims, does not bar the action of another party without a remedy.

QUESTION: Well, why should anybody but the taxpayer have a speedy remedy?

MR. SALIBRA: For the very same reason the Ninth Circuit recognized a direct and immediate injury to the foreign parent.

QUESTION: Well, the foreign parent then can litigate it through the sub.

MR. SALIBRA: Well, I think what we are speaking of is whether that is in fact a principle under the Tax Injunction Act and an intention of Congress. And I think this Court has interpreted that and stated clearly that the fact that another party has a remedy --

QUESTION: But the other party is the actual taxpayer here. As Justice Scalia says, your client isn't getting any bill from the California State Tax Commission.

MR. SALIBRA: No, but our client --

QUESTION: Wait a minute.

MR. SALIBRA: I am sorry. I apologize.

QUESTION: It is only -- it is only the domestic subsidiary, which your client owns, that gets the bill from the State Tax Commission. And the state says that domestic subsidiary can litigate all the foreign commerce issues it wants to in the California proceedings.

MR. SALIBRA: Well, that brings -- I am not convinced they can do that. I -- I believe that the foreign commerce issues, the foreign commerce issue, which is the right we have to select the remedy, is a remedy that we can only argue. California, I don't think -- Alcancorp, I don't think, can come in and say we are here litigating the fact that our parent Aluminium is being deprived of its choices of how it wants to operate, or --

QUESTION: Well, that is what the Seventh Circuit cooked up. But I mean the ordinary foreign commerce rule, that the tax on the domestic subsidiary on a unitary basis violates the foreign commerce clause.

MR. SALIBRA: Well, I think it is incorrect to say that they cooked it up. I think what they had said was there is a unique -- they, I think they recognize that there is a unique injury here to Alcan. That that injury is a -- is a injury that we have to evaluate in terms of how we are going to make an investment.

QUESTION: (Inaudible) said that there wasn't a plain and speedy remedy.

MR. SALIBRA: That is uncontested, Your Honor.

QUESTION: What do you mean, it is uncontested?

MR. SALIBRA: California, they asked California quite directly, is there a remedy for Alcan --

QUESTION: Well, I just heard the state say that you have a plain and speedy remedy through your subsidiary.

MR. SALIBRA: And our response to that is --

QUESTION: And I would -- I think if this case had come from the Ninth Circuit we might, I might say we ought to give some credence to their holding that there is no such a remedy, but gee, this is the Seventh Circuit. What do they know about California?

MR. SALIBRA: Well, I think the answer is there was a question posed to California, is there a remedy for Alcan, and the answer was no, there is no remedy.

QUESTION: How could they have -- not for the parent.

MR. SALIBRA: Not for the parent.

QUESTION: I mean, they can't go in, they can't go in there and litigate themselves, but they can litigate through their subsidiary. They own it.

MR. SALIBRA: But that was exactly the issue, Your Honor, that they litigated in EMI 1 in the Ninth Circuit, and the Ninth Circuit said the same thing that the Seventh Circuit said. There is no plain and speedy remedy for EMI. Capitol may have a plain, speedy and efficient remedy, but EMI doesn't. And therefore the Tax Injunction Act and its policies doesn't apply -- don't apply.

QUESTION: That's, but that makes the judgment, which we can certainly review here, that a remedy for the sub does not amount to a remedy for the -- for the principal corporation. And if we say that is wrong, then we just say, you know, both the Seventh and the Ninth have been wrong.

MR. SALIBRA: That is correct, that is correct. You can say that. But I think it is incorrect to say that the Ninth Circuit held differently. It held --

QUESTION: But, on that point the Ninth Circuit isn't describing California law. It is not saying that California will not let the sub raise Alcan's claims. What it is saying is that even if the sub can raise Alcan's claims, that is not enough.

MR. SALIBRA: And that is our position. That isn't enough.

QUESTION: Right. Okay.

MR. SALIBRA: That is precisely our position.

QUESTION: But that point is not a point of California law, it is a point --

MR. SALIBRA: It is a point of U.S. law, which I think is well established. There is not, in our view and in the Seventh Circuit's view, any dispute about that. Nor is there a dispute by any court that has ever reviewed that issue. And that is why the doctrine doesn't apply.

QUESTION: Well, it's just hard for me to understand, if we assume that the sub, your subsidiary can raise all, every question that you want raised there, and you can direct how they do it and who they hire to press it, I can't imagine why that isn't a plain and speedy remedy for the parent.

MR. SALIBRA: If we were to -- if Alcancorp would just be the surrogate, is that what you're saying? That we would go under their name and we would in fact try the case?

QUESTION: Well, that's what you will --

MR. SALIBRA: That's what you're saying.

QUESTION: That is what is going to happen anyway.

MR. SALIBRA: And I think, once again, I am going to do it very quickly, but once again --

QUESTION: That's probably what is happening now.

MR. SALIBRA: I think the answer to that is, once again you assume that they can raise all -- that when this case is adjudicated, resolved under California, they can resolve all the claims. I don't think that is true.

QUESTION: But let's assume it is. Just assume it is.

MR. SALIBRA: Okay, I assume that it is.

QUESTION: Then how about the Tax Injunction Act?

MR. SALIBRA: That still doesn't apply.

QUESTION: Why not?

MR. SALIBRA: And it doesn't apply because of the continued holdings of this Court --

QUESTION: Because you mean that --

MR. SALIBRA: You're saying is there a policy why it shouldn't apply?

QUESTION: You mean because the, there is no way that the parent itself can file for a refund?

MR. SALIBRA: No, no. They have that, there is no remedy for itself, right. I think there is, you can either file for a refund of you can, as the Ninth Circuit suggested, permit them to have access to the court indirectly, through the same procedure that the --

QUESTION: Mr. Salibra, can you tell me a specific argument that you think you can make to Judge Williams in Chicago that you cannot make in California?

MR. SALIBRA: Yes, yes. Well, that I couldn't make in California?

QUESTION: That you could not -- one you could make to Judge Williams but not to the California forum.

MR. SALIBRA: Yes. I would argue that I think that I could argue to Judge Williams that this, that the burden that we are litigating here is the impact on our, Alcan Aluminium's, ability to conduct its foreign commerce through the vehicles that there has been agreement were available to them. California has preempted that.

QUESTION: But why -- how do you know you can't make that argument in California?

MR. SALIBRA: I believe we cannot make that argument in California because California would say that argument is not an argument for Alcan to make; you are not the right party. The right party, the real party in interest, the injured party with respect to that claim is not here.

QUESTION: Well, they can't say that --

QUESTION: He means can you make it through the sub, I thought.

QUESTION: Yeah, make it through the sub.

MR. SALIBRA: Through the sub.

QUESTION: The sub make it on the ground that you, California, are treating the sub and the parent as a unitary business. This is an injury to the unitary business, which happens to impact directly on the parent, which I can describe to you.

MR. SALIBRA: I understand what you are saying.

QUESTION: Ergo, I want to make the argument. And you are telling me California won't listen to it. It seems inconsistent with their posture that you are all one business.

MR. SALIBRA: Well, I understand that. But if you assume that we're all one business, then we should be able to come in anyway.

QUESTION: You should be able to make any argument that would tend to show that the California procedures are unconstitutional in the California forum.

MR. SALIBRA: Your Honor, we could make it. The -- I, I think there is a serious risk that they will say --

QUESTION: Well, there is always risk.

MR. SALIBRA: -- you're wrong, you're not the right party.

QUESTION: Well, maybe you can read back to the person making that argument the transcript of the oral argument today when Mr. Laddish conceded that you could.

MR. SALIBRA: Well, it's -- it's interesting, the only, I guess my response to that, Justice O'Connor, is that courts sometimes decide that, regardless of what the other side concedes, it, they are going to apply the doctrine as they see it and is appropriate. In fact the entire standing issue that we are discussing here today was raised not by California --

QUESTION: But that determination in itself would result in a judgment from the state court that could be reviewable here.

MR. SALIBRA: That would be true.

QUESTION: Yes.

MR. SALIBRA: That would be true. We would, we are trying to avoid, however, coming back too many times.

I would just like to conclude by saying that this case involves, in our view, very serious interests, that are interests that the nations of the world have recognized are interests of foreign nationals. The foreign nationals have no remedy. The Seventh Circuit indicated that there is a sound basis in international comity for recognizing a need for foreign nationals to have their own independent remedy to recognize the injury to them, and not a derivative injury, and that that is another sound basis for this Court to hold the Seventh Circuit's reasoning is in fact rational, and in fact makes sense in the context of the unitary method of taxation.

There is, in our view, really no doubt that there is a substantial and overwhelming burden on foreign companies imposing this tax, on which this tax is imposed. The problem is not --

QUESTION: Why is it that a foreign corporation has standing to object to a violation of the United States Constitution if it is not doing business here? Is it only because you are doing business here that you get that standing?

MR. SALIBRA: No, I think every -- I think it is recognized that we have a right to object to a constitutional violation.

QUESTION: Why? Because you are doing business here?

MR. SALIBRA: Because I think this Court has recognized that the right, constitutional rights that are available under the constitution are available to anyone in the position to argue them. We have come here to argue those rights.

QUESTION: You mean someone in India can argue that there is a violation of the Constitution of the United States that affects them?

MR. SALIBRA: If there is some injury to someone in India for which there is a remedy in this Court, for which there is a constitutional violation that is cognizable in the constitutional law, it could come here and argue that.

QUESTION: Thank you, Mr. Salibra.

Mr. Laddish, do you have rebuttal? You have three minutes.

REBUTTAL ARGUMENT OF TIMOTHY G. LADDISH ON BEHALF OF THE PETITIONERS

MR. LADDISH: Just a couple of points, Your Honor.

The argument for the other side basically is arguing the merits as to the validity of California's method of taxation. These are not properly before the Court today, and I will not counter with our own counterarguments.

I would point out a few things that this Court has held in the past, and that is, in Amerada Hess just last term, this Court held that you -- a taxpayer cannot meet the burden of demonstrating no rational relationship between the income attributed to California and the inter -- intra-state values of the enterprise in California, if the unitary method -- unitary nature of the activities are established, which they are stipulated in this case, and if the benchmark three factor apportionment formula is used, which the stipulations show it was used in this case.

QUESTION: But, Mr. Laddish, I guess I don't agree with you that it's not fair game to argue the merits along with the standing issue. It is not at all unusual that the merits issue and the standing issue boil down to one and the same thing. It happens all the time.

MR. LADDISH: I think that --

QUESTION: Now, a chilling effect, whether someone who is chilled by a First Amendment or something else, the question whether the person has standing to sue and the question whether he wins by reason of a chill, whether a chill would be enough to give him victory, are one and the same question. So, you know, --

MR. LADDISH: There are certainly times, Your Honor, when that is true, but I think when you are dealing with the foreign commerce clause in the situation we are here, for the reasons that I stated before, they are not one and the same. Certainly there are statutes that create injuries, and if you violate that statute you are injured. And it would be very hard to separate out the standing injury from the -- from the decision on the merits. But that is not the case today. If it is determined that they do not have standing here, that does not mean that that does away with all the arguments that they are making as far as it being invalid under the foreign commerce clause. The taxpayers can make that argument and, as pointed out by one of the amici supporting the Respondents today, there are -- there is litigation in the California courts that are raising these issues now, and one of the litigants is a subsidiary and the other one is an intervening parent, but the ultimate parent is not a part of the litigation.

QUESTION: I understand from your adversary to say the Ninth Circuit has decided that these issues can't be raised.

MR. LADDISH: The Ninth Circuit has only decided that as to the -- the Ninth Circuit first decided that there was no standing. But as to the Tax Injunction Act, the Ninth Circuit decided, in a rather mechanical version, that the control that the sole stockholder would have over its taxpayer should not be considered by the court as giving it an effective remedy in the California courts. It just said since they cannot proceed in their own name --

QUESTION: Well, you're arguing that it is an effective remedy.

MR. LADDISH: Yes, I certainly am, Your Honor.

QUESTION: So you are arguing the Ninth Circuit is wrong, as well as the Seventh?

MR. LADDISH: On that, yes. Thank you very much.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Laddish. The case is submitted.

(Whereupon, at 1:52 p.m., the case in the above-entitled matter was submitted.)

Attribution:

The Oyez Project

Featured:

New Orleans Pub. Serv., Inc. v. New Orleans - Oral Argument

Sun, 06 Feb 2011 03:46:57 +0000

Case:

New Orleans Pub. Serv., Inc. v. New Orleans

Media File:

88-348_19890425-argument.mp3

Related Transcript:

88-348_19890425-argument.xml

Transcript:

ORAL ARGUMENT OF REX E. LEE ON BEHALF OF PETITIONER

Chief Justice William H. Rehnquist: We'll hear argument first this morning in No. 88-348, New Orleans Public Service, Inc. v. the Council of the City of New Orleans.

Mr. Lee.

Mr. Lee: Thank you.

Mr. Chief Justice, and may it please the Court:

This is an abstention case.

The question presented is whether the court of appeals and the district court properly abstained from deciding a threshold preemption challenge to the jurisdiction of the Respondent, City Council, to consider disallowing in its retail rates wholesale costs that have been determined by the Federal Energy Regulatory Commission.

The short reason why the Fifth Circuit's judgment must be reversed is that that judgment is based on an abstention standard that everyone sitting at the council table today agrees was wrong.

But we all phrase it a little differently, all three of us.

The Petitioner, Respondents, and the government are in basic agreement concerning the preliminary assessment that a federal court should make in deciding whether to abstain in a preemption case.

Frankly, I think the Respondents say it best.

Twice in their brief, at page 25 and again on page 30, they reiterate that the responsibility of a federal court in deciding whether to abstain from deciding a preemption claim where there is a pending state court proceeding is to decide whether the federal issue is facial, direct, readily apparent, and dispositive.

Very frankly, very simply, the Fifth Circuit simply did not do that.

Though the court did not formally reach the preemption issue, any objective reading of its opinion leaves no doubt that it regarded the federal preemption issue as controlling and correct and of a quality that placed the Council's prudence inquiry, in the language of the Fifth Circuit's opinion, beyond the Council's retail ratemaking authority.

What the Fifth Circuit has held, therefore, is that abstention is required even where the preemption claim deprives the state of jurisdiction and regardless of how correct and dispositive the preemption claim must be.

The net effect of that holding is to overrule this Court's consistent decisions.

But one of the three prerequisites for Younger v. Harris abstention is the existence of a substantive state interest... something apart from an adjudicatory interest... which would be infringed if the federal court were to decide the federal issue.

Unidentified Justice: Mr. Lee, what if we had before us a state criminal case and the defendant raises, for example, a federal constitutional double jeopardy claim and says the state has no right to try him at all, and that issue would be completely dispositive of the state's right to try the case.

We abstain, typically, in those cases--

Mr. Lee: That is correct.

Unidentified Justice: --in the federal court.

Mr. Lee: That is correct.

Unidentified Justice: How is that different from your case?

Mr. Lee: It is different in this crucial respect, Justice O'Connor, and the answer to that question is pivotal to this decision because I am well aware of the post-Younger cases that have involved that kind of constitutional challenge to a state proceeding.

On at least three separate occasions subsequent to Younger v. Harris, the Court has reiterated and each time has made a little more explicit what was really said in Younger v. Harris itself.

And that is, that one of the reasons... I think the reason... for Younger v. Harris' abstention is that it gives, in those constitutional challenge cases, an opportunity to the state court to place a narrowing construction on the state statute in such a way that it will mediate between state and federal interests.

Now, the classic example of where that is possible is when you have such state statutes as were involved in these post-Younger v. Harris cases, such as obscenity statutes, criminal syndicalism statutes, lawyer disciplinary proceedings.

Unidentified Justice: I don't see how that fits--

--That's not true in double jeopardy.

--the double jeopardy claim though.

Mr. Lee: With a double jeopardy claim even so, there is still the possibility that the state court might be able to... depending on the circumstances of the case... that you might be able to have a narrow construction.

Now, in the event that in the particular instance there was not the opportunity for mediation because of a narrowing construction, then I would say it should come out the same way as here.

Unidentified Justice: Do you think a double jeopardy claim then... if there was no question of state law involved, a federal court should be able to intervene prior to trial?

Mr. Lee: It would depend so much.

It is, after all, realty a balancing test.

What you really have to look at--

Unidentified Justice: Well, but you said just a minute ago it would come out the same way.

Is that your answer?

Mr. Lee: --In the event... yes.

In the event... In the event that there were no opportunity for mediation by narrowing--

Unidentified Justice: Well, what do you mean by--

Mr. Lee: --by the narrowing of the statute.

Unidentified Justice: --What do you mean by mediation?

I mean, I thought the reason for Younger v. Harris was the idea that we would trust state courts to give a fair interpretation of federal constitutional claims as well as state claims.

I didn't think mediation was any big reason for it.

Mr. Lee: Well--

Unidentified Justice: And I don't think any of the opinions say that.

Mr. Lee: --Well, I submit, Mr. Chief Justice, that that really is said in Moore v. Sims, perhaps most prominently, in Pennzoil, and in Trainor v. Hernandez.

And the notion that state courts ought to be able to decide these federal issues as well as federal courts can is certainly one of the underpinnings of Younger v. Harris, but it is not the only one.

Another one is that there must be... and the Court has consistently said that, and it is reiterated again in Pennzoil that it is more just an adjudicatory interest, more than just an interest.

In the state courts deciding cases that are before it, there must be a substantive interest.

Now, in this case, the Petitioner... excuse me, the Respondents suggest two such interests.

The first is an interest in retail rate regulation, which is certainly important to states.

But, it simply is not at stake in this case because out of the total package of constituent elements that go into retail rate regulations, such as determining rates, the rate of return, what the rate base ought to be, and so forth, the only component that this federal suit would carve out and remove from the state's jurisdiction is the very one over which the Council has no jurisdiction anyway.

The other state interest that is advanced is this one in setting the state's own house in order.

That is nothing but an exhaustion of state remedies argued, which the Court has consistently rejected.

And it proves too much because school desegregation actions, for example... and, indeed, I think virtually every Section 1983 suit will inevitably involve allegations of wrongdoing by local governmental officials.

Surely, the federal courts are not required to bar the courthouse door to those kinds of suits in order to permit the state to set its own desegregation and civil rights violation house in order.

The other basis on which the Fifth Circuit held in--

Unidentified Justice: Excuse me.

Doesn't... in the context of a 1983 suit or a federal civil rights suit, doesn't your thesis also prove too much?

Do you say that... Do you say that when there is a state interest involved, when there is a possibility of a state statute being interpreted in a certain fashion that a federal court must abstain in civil rights and desegregation in 1983 situations as well?

Mr. Lee: --What we say, Justice Scalia, is almost that, but not quite.

But in the final analysis, it must be a balancing test, that you have to see to what extent federal interests are really involved and to what extent state interests are really involved.

Younger v. Harris itself said that what we need is a sensitivity to the legitimate interests of both state and national governments.

And among the factors to be taken into account are these that I said.

But, in this instance, the case is clear because we come into Court not with a blunderbuss but with a rifle and the one issue, what you have... what is being reviewed here is a Fifth Circuit judgment that assumed we were right on the preemption issue.

Unidentified Justice: Well, Mr. Lee, there is no question, is there, that the Louisiana courts could decide that preemption issue?

Mr. Lee: There is absolutely no question about that, Justice O'Connor, and I think that that poses the issue very neatly because if the Fifth Circuit's judgment is upheld, then the rule for abstention cases will be that abstention is proper whenever a state court can decide the federal issue.

That is not the law, has not been the law, and should not be the law because it makes a judicial comity, a street that runs only in one direction and does not take into account the competing federal interests.

Unidentified Justice: Do you contend that you were entitled to federal court intervention before the initial state hearing was concluded here?

Mr. Lee: Yes.

Yes.

It is easier, Justice Kennedy, once it has been concluded, for reasons that will be developed more by Mr. Lazarus.

But we would have been entitled to abstention in the earlier... in the early phase.

We agree in this respect with the Ninth Circuit, that in most cases where the sole issue before the federal court is preemption, a decision to abstain is necessarily a ruling on the merits.

And the reason is this: the controlling inquiry under Burford is whether the issues are predominantly local, and under Younger v. Harris it is whether there are legitimate state interests.

A ruling that the... that there are predominantly local interests, or that there are legitimate state interests is necessarily a ruling that there is no preemption, because if there were preemption, then federal law would trump and there would be no state issue and no state interests.

Unidentified Justice: Well, under that analysis do we give any deference at all to the importance of allowing state procedural and adjudicatory mechanisms to operate?

Mr. Lee: Of course we do.

Of course we do.

But that is strictly an adjudicatory interest, and the Court is already past the point of deciding whether adjudicatory interests alone are enough to do the job.

And every member of the Court in Pennzoil said that they were not.

Moreover, much more is at stake in this case than whether NOPSI's FERC-mandated costs are to be honored in its retail rates.

At issue in this case is nothing less than whether judicial comedy really is a two-way street or whether it favors only state courts.

The crucial fact is that the Fifth Circuit... this is an abstention case.

It is not a preemption case, and the Court need not and should not reach the merits of the preemption issue.

The reason is that the Fifth Circuit has abstained on the broadest possible ground.

What it has said is we agree, in effect.

We assume that the preemption is argument is correct.

And notwithstanding that assumption, and notwithstanding the fact that that preemption argument, if correct, deprives a state court of jurisdiction to proceed at all, it's still abstained.

Unidentified Justice: Well, what is the preemption question were an open one?

Mr. Lee: Then it would be harder.

Then it would be harder.

But the federal court at least... at least... should make this preliminary assessment.

But what you're dealing with here is a judgment that held, in effect, that abstention is required whenever the federal issue can be raised in a pending state proceeding.

Unidentified Justice: Well, then... but what's your position, Mr. Lee?

That if the district court were to decide on the merits that the preemption claim was correct, then it should go ahead and decide that?

With no... well, what preliminary inquiry do you make to decide whether--

Mr. Lee: Basically the same one the Respondents are talking about and what most of the lower courts have said, which is that you make a preliminary assessment to determine... something like the quick-look doctrine in antitrust.

Now--

Unidentified Justice: --Well, how do you go about that?

I mean, that is not... by no means self-evident--

Mr. Lee: --Well... well--

Unidentified Justice: --from the phrase.

Mr. Lee: --It is easy in this case.

It is easy in this case because in this case the Fifth Circuit had no difficulty assuming at the outset that we were right on our preemption claim.

But, in most instances, what you would do is to determine whether that claim is substantial.

Whether on its face--

Unidentified Justice: What does "on its face" mean?

Mr. Lee: --Well, whether... whether... perhaps "on its face" is not the right word.

As a preliminary first look matter, whether it has some merit.

And I would simply point out in that respect--

Unidentified Justice: That's a very, very--

Mr. Lee: --No, but--

Unidentified Justice: --nebulous test.

Mr. Lee: --But the courts of appeals have had no difficulty dealing with them.

Unidentified Justice: Well, we're in this Court.

Mr. Lee: I understand.

I understand.

But all I'm saying is that the experience of those courts of appeals teaches.

Instances are cited in our reply brief where what the courts of appeals have done is to make this first look and then often after they decide, yes, this preemption challenge needs to be considered, they eventually conclude that indeed they should abstain because the total balance of factors after they look at it as a total matter leads to the conclusion that they should abstain.

Unidentified Justice: Mr. Lee, you're saying it is not enough if the federal court satisfies itself that there is some state substantive interest involved outside of the adjudicatory interest?

Mr. Lee: We're saying--

Unidentified Justice: You have to weigh whatever state substantive interest there is against the federal preemption interest?

Is that your--

Mr. Lee: --That is correct.

And there will be instances, Justice Scalia, in which it's going to be a hard decision to make and which is not going to be an easy one.

But this one is easy, and in this case affirmance of this judgment on the ground that it was handed down by the Fifth Circuit would open a gaping hole in the ability of the federal courts to enforce federal rights across a broad range of issues, including 1983--

Unidentified Justice: --Well, this one is easy, you say, if we adopt the test that's a hard test to apply.

I mean,... but the issue before us is whether we ought to adopt the test that's a very hard test in the ordinary case to apply, or, rather, adopt the more categorical test that goes one way or the other and let Congress fiddle with the niceties that you want to... you want to--

Mr. Lee: --Well, if you want to--

Unidentified Justice: --by these balancing tests.

Mr. Lee: --Yes.

Yes, but if you wanted to adopt a categorical test, then you would simply say that if the claim... if the claim has been made, then... and if it isn't... if it isn't rejectable on its face, then federal courts are there to decide federal issues and they ought to decide that one.

Unidentified Justice: Mr. Lee, what was the non-adjudicatory interest of the state in Younger v. Harris?

Mr. Lee: Oh, it was in this narrowing... this narrowing construction that the state might be able to give to its own criminal syndicalism statutes and thereby mediate between state and federal interests.

I'd like to save the rest of my time for rebuttal.

Unidentified Justice: Mr. Lazarus.

ORAL ARGUMENT OF RICHARD J. LAZARUS AS AMICI CURIAE, SUPPORTING PETITIONER

Mr. Lazarus: Thank you.

Mr. Chief Justice, and may it please the Court:

There is no question under this Court's precedent that the hypothetical described by Justice O'Connor in which a double jeopardy defense was raised to a pending state criminal prosecution that in those circumstances abstention would be warranted.

This case, we believe, is--

Unidentified Justice: Well, what is the state's non-adjudicatory interest in the double jeopardy case?

Mr. Lazarus: --In the double jeopardy case you have an ongoing criminal prosecution.

In this case we think there is no ongoing state proceeding that is necessary for the vindication of an important--

Unidentified Justice: So, if... but if the state proceeding had started before the federal, then this would come out differently?

Mr. Lazarus: --No, no.

In this case be have a completed administrative proceeding.

And then we have three pending state court proceedings.

But I think if you look at each of those three pending state court proceedings, you'll see that they're very different from the kind of proceeding at issue in Younger or in any of the other cases in which this Court has upheld Younger abstention.

Unidentified Justice: Well, but what is... what is the non-adjudicatory interest in the double jeopardy case?

Mr. Lazarus: In the ongoing enforcement of criminal laws in the state.

Unidentified Justice: Well, why doesn't the state have the same interest here in the ongoing processing of these state court actions?

Mr. Lazarus: Because you have to look at each of the three state... the one, for instance, there is a NOPSI lawsuit against the City Council.

Let's go through each of the pending state proceedings so I can try to show you where our position comes out.

Starting with NOPSI's own lawsuit against the City Council... but that is a suit which is not brought to vindicate a state interest.

NOPSI brought that suit in order to vindicate the integrity of FERC's allocation order.

It's merely protective in nature.

If the Court were to rule that that was a basis of abstention, this case would be a mere sport because in the future utilities such as NOPSI, would not initiate such protective filing.

The second pending state proceeding is the City Council's lawsuit against NOPSI for declaratory relief.

But we believe that is an equally unnecessary proceeding within the meaning of Younger.

The sole purpose of that proceeding is to confirm the results of an already completed administrative proceeding that has resulted in a final agency order with legal effect.

It is, therefore, unlike any of the proceedings in which this Court has upheld Younger abstention.

There is no ongoing criminal prosecution, no ongoing nuisance enforcement, no employment discrimination investigation.

The sole purpose for that suit for declaratory relief is to have the state courts, rather than the federal courts, determine the constitutional issue.

And in that way it really is most like the type of first-right collateral litigation that Younger was designed to discourage, not to encourage.

Finally, there is the suit that had been brought by the Alliance for Affordable Energy in state court.

But that suit, too, is not even directed immediately at NOPSI.

The City Council is the defendant in that suit.

NOPSI is simply a third party defendant.

And it raises the wholly secondary question of whether NOPSI should have been denied an even greater share of Grand Gulf by the City Council.

That entirely secondary state law issue shouldn't deny NOPSI its right.

And then--

Unidentified Justice: Well, Mr. Lazarus, I thought Mr. Lee suggested in the criminal case I posed of the pure double jeopardy claim that maybe there shouldn't be abstention.

Mr. Lazarus: --And I'm suggesting that there would be abstention because of the different nature of the proceedings.

There would be abstention in that case.

I don't think he meant to say what I think that we--

Unidentified Justice: I thought Younger and some of the other cases emphasized very heavily the fact that it was a criminal proceeding.

To say that an unusually strong interest--

Mr. Lazarus: --That's right.

Unidentified Justice: --enforcing its criminal law.

Mr. Lazarus: That's right.

And there was an ongoing enforcement action.

Here we don't have that.

The final argument is--

Unidentified Justice: It's not true of Trainor against Hernandez, Moore against Sims, the Ohio Civil Rights case.

Certainly, there are civil cases in which--

Mr. Lazarus: --There are civil cases which the Court... where there are ongoing enforcement actions.

Here we don't have that.

It's completed.

The final argument that the City Council makes is that you should assume for Younger purposes that the City Council administrative proceedings are in effect ongoing because of the availability of subsequent state court review.

We think that simply proves too much.

It's Burford, and not Younger, that describes the discrete set of circumstances where the working relationship between state courts and state agencies in fashioning state policy is so close that abstention is required.

Burford does not call for abstention whenever a constitutional challenge is brought to state... completed state agency action which is subject to state court review.

Burford, instead, provides that such abstention where a federal claim is raised is warranted only if two factors are present, neither of which are present here.

First, an especially close working relationship between state courts and state agencies in the fashioning of state policy, and second, where the exercise of federal court review will require the resolution and inquiry into predominantly local factors.

Neither is present here.

There are no expert courts or specialized courts.

We simply have courts of general local jurisdiction who are reviewing the City Council's determination not de novo, as in Burford, but under the substantial evidence test.

Unidentified Justice: --Now, how do you fit Pennzoil into this?

Mr. Lazarus: We Pennzoil we had an ongoing state proceeding and we had a state court that was enforcing a judgment against them.

And it was attacking the proceeding itself.

Here what NOPSI is challenging is the administrative proceeding, not the ongoing state proceeding.

Unidentified Justice: You mean--

Mr. Lazarus: Here we had an ongoing state court proceeding, and the constitutionality of that was under challenge, an aspect of it.

Unidentified Justice: --You mean if the state court proceeding here had proceeded to the point where there was an order issued and then the federal court was asked to set aside that order, we'd be in the Pennzoil situation?

Mr. Lazarus: Actually, we wouldn't be in the Pennzoil situation because still... I think it would be a very different case... but, still, there they would be basically challenging what the City Council had done.

In Pennzoil it was a direct attack on the procedures of the state courts themselves.

And it was the constitutionality of that which the Court upheld had an independent adjudicatory interest that was sufficient.

Turning quickly back to the second aspect of Burford abstention, which we also think isn't present here... but it is Burford which really governs these kinds of cases.

There is no predominantly local factor that needs to be required to determine the federal preemption issue like there was in Burford for the economic due process issues there.

This Court reached and disposed of a virtually identical preemption claim in the Mississippi Power & Light case.

There was no need whatsoever for any inquiry into the predominantly local needs of the different operating companies as there was in Burford and in the Alabama Public Service Commission.

Instead, indeed the thrust of the Court's opinion in that case was that it was appropriate to treat the four operating companies as a system, as one system.

And it was appropriate for FERC in allocating the shares of Grand Gulf to ignore and to overlook the particular needs of each operating company.

This case simply does not depend on a logical application of Younger and Burford.

It demands a dramatic expansion of Younger at the expense of the important limitations expressed on abstention in Burford.

Unidentified Justice: Does your argument assume, Mr. Lazarus, that we agree that there is no substance whatever to the... to the assertion that the utility here could have complied with the federal requirements of FERC and nonetheless done what the municipality here wanted it to do by reselling the power it was committed to take?

Mr. Lazarus: To the extent that I'm talking about Younger initially--

Unidentified Justice: Yes.

Mr. Lazarus: --our initial argument, the necessary preceding argument is independent of that inquiry.

To the extent that it doesn't matter... with a federal preemption issue or another kind of constitutional issue.

To the extent that I'm talking about Burford, it still doesn't require it because all you really need is to determine whether resolution of this particular type of federal claim requires inquiry to predominantly local factors.

And we think under the Federal Power Act, as a general class that won't be the case.

There may be federal preemption issues which could be raised which would require such inquiry.

But we certainly don't think it is here.

We have a secondary argument which is, even if this Court thinks... which is outlined in our brief... that there is a Younger-type proceeding that abstention would still not be warranted.

But there is this threshold very significant other argument, and that is that there is really no proceeding here at all like in any of the other cases in which this Court has upheld Younger.

Unidentified Justice: Well, the federal issue could be decided in one or more of those cases.

Mr. Lazarus: In the state court.

Yes, it could, but that's--

Unidentified Justice: Well, what if it's... what if you... what if the state court beats the federal court to the issue?

Mr. Lazarus: --If the state court beat the federal court to the issue, then we might have a res judicata problem that we--

Unidentified Justice: A rather severe one, wouldn't we?

Mr. Lazarus: --But we don't have here.

Unidentified Justice: But you're not... are you saying that the federal court should be able not only to deny abstention, but to enjoin the state proceedings?

Mr. Lazarus: No.

And there is no request here for any injunction on the state court proceedings.

Thank you.

Unidentified Justice: Thank you, Mr. Lazarus.

Mr. Vince.

ORAL ARGUMENT OF CLINTON A. VINCE ON BEHALF OF RESPONDENTS

Mr. Vince: Mr. Chief Justice, and may it please the Court:

The principal issue in this case is whether the lower federal courts should be required to step in and review state ratemaking decisions which are subject to full review in ongoing state court proceedings when a debatable preemption claim is raised.

Justice Scalia asked about the relationship of the Pennzoil case to our present case.

NOPSI here is seeking a utility company exemption from normal state court review in much the same way that Pennzoil or Texaco sought a Fortune 500 exemption in the Pennzoil case improperly.

In Pennzoil... our fact pattern is considerably stronger in favor of abstention than Pennzoil.

In Pennzoil the lower federal courts found that the Texas state courts were inadequate.

They found exceptional circumstances.

They found irreparable harm on the basis that Texaco could not meet a $13 billion bond.

In our case, the lower federal courts, both courts, found that the state court system was perfectly adequate to handle all of NOPSI's claims, including the preemption claim.

They found that the track record of state courts in Louisiana on preemption issues was very good, and that the tract record nationally on preemption issues for state courts was very good.

That the states had essentially developed the Narragansett doctrine that is the core filed rate doctrine that NOPSI relies upon.

Unidentified Justice: Did they make that same finding as to the Agency?

Mr. Vince: Could you repeat the question.

Unidentified Justice: Did they make that same finding as to the Agency, the New Orleans Council?

Did that have a good track record too?

Mr. Vince: Yes, your Honor.

The Federal District Court found in the NOPSI-won case that specifically that the City Council was acting in good faith at a point when NOPSI raised the issue that the City Council was not acting in good faith.

And there has never been in this case an argument that the City Council or the state court systems have been acting in bad faith or in a harassing manner.

There simply has been no exceptional circumstance argument here, your Honor.

In Pennzoil there were private litigants and so Texaco argued that there was no legitimate state interest.

Here, we have the state level regulatory body directly involved in the conflict.

Unidentified Justice: Well, if there is only the federal claim of preemption presented and there is no undecided issue of state law at all remaining... just make that assumption... then what is the comity based interest that says the federal court should abstain?

Mr. Vince: I think there would be three basic state interests, if I understand your assumption correctly.

The first state interest would simply be that the state courts have an interest in governing their local regulators and making sure that they make correct decisions, particularly if there is a preemption claim.

If there is a preemption claim and a problem, the state courts should be allowed to address that and develop state policy.

The second legitimate interest, I believe, would be the profound interest that the state has in local ratemaking.

And that interest exists whether or not NOPSI wins on the merits of this case.

The third interest is much more specific to our case, and it is hotly contested.

That would be the state interest in making sure that utilities attempt to reduce risks to local... to retail customers if it's reasonable and feasible to do so.

Unidentified Justice: Well, you strayed from my assumptions in your response.

But, it is difficult to understand that strong state interest remains if the assumption is that only the federal preemption claim remains.

Mr. Vince: Your Honor, if only the federal preemption claim remains, the state still needs to look at what the state regulator did and compare that to what the federal regulator did.

And that is a balancing and there is a legitimate state interest in conducting that balancing and putting... allowing the state to put its own house in order on that subject.

Unidentified Justice: Mr. Vince--

Mr. Vince: But more... excuse me, your Honor.

I would just put a tag on that the real factor here is that your assumption is present in our fact pattern.

That is, we have had a horror story in terms of multiple track litigation.

When NOPSI... NOPSI first brought its preemption claim before the state regulator and it then exited the state system when it got an adverse ruling and brought a collateral attack or tried to bring a collateral attack in federal court on the identical issue but in isolation of the administrative record.

At the same time, it pursued all of its other Challenges to the rate order, the state challenges in the state court system.

That immediately set up a dual litigation track.

This Council has been sued three times in federal court in three years, with 20 major motions, continuous appeals up to the Fifth Circuit.

Unidentified Justice: --Well, that's understandable, perhaps, if the City Council persists in trying to trap the costs.

I mean, that gets into the merits of the case.

But I don't... I don't see that that should resolve the abstention question.

Mr. Vince: Your Honor, if you assume that the City Council was wrong, that still is a matter that should properly be addressed in the state court system.

As a practical matter, there is a very debatable issue... at least, we feel there is and the lower federal courts have felt so... that the preemption issue is not the lay-down hand that the government and NOPSI contend.

Unidentified Justice: Mr. Vince, you rely in part, I think, or Younger v. Harris in that line of cases.

But that generally assumes that there is an ongoing state proceeding that is commenced before the federal action is going to... what is the state proceeding here that you say was commenced before the federal action was brought?

Mr. Vince: Mr. Chief Justice, that would be a two-part answer.

There is a generic ongoing proceeding in the sense that all you have now is the lowest echelon order of the state in the form of the local rate order.

Unidentified Justice: Issued by the City Council?

Mr. Vince: That's correct, your Honor.

And the ongoing proceeding would be the fact similar to Younger, that this can still be reviewed and is subject to judicial review in the state court system where the state courts no doubt will develop additional policy on this point.

It may be that if the states do their job correctly and Justice O'Connor's assumption is exactly right, which we disagree with, the state courts could still deal with that and this matter might not need to reach this door step at all... this Court's doorstep.

As a practical matter, the multiple state litigation is a matter of concern not just with reference to this local controversy, but multiplied across the country.

The major organizations of state and local governments and the major national organization of state regulators have come in on the City Council's side, not simply to all date our position on the merits, which they agree with, but they are concerned about a much larger problem.

And that is, state regulators with limited resources having to immediately face a multiple litigation track any time that a competent team of utility lawyers can draft a federal conflict into their complaint.

That's not difficult to do under the Federal Power Act which is essentially... contemplates dual regulation, dual federal / state regulation.

The preemption test that NOPSI gave is not exactly identical to ours, but they fall their own facial preemption test.

The Federal District Court here, and later two state courts, have made specific findings that there is no facial preemption in this case.

Unidentified Justice: Do you have a definition of Mr. Lee's?

Mr. Vince: Your Honor, I... yes, I believe that facial preemption should be determined within the four corners of the FERC order in the four corners of the Council's orders so that you can look at those two orders and see with relatively little assessment that there is a clash.

Unidentified Justice: You wouldn't look at any statutes?

Mr. Vince: Yes, your Honor.

The relevant statutes would have to be looked at as well.

Unidentified Justice: Well, then how does facial preemption differ from other kinds of preemption?

Mr. Vince: Because basically what it does not require is an adjudication of the merits of the case in order to determine whether implicitly there has been some violation.

And, frankly,--

Unidentified Justice: Well, wait a minute.

You're talking about something short of the merits and yet you look to the statute, you look to the conflicting orders.

How is that different than a determination on the merits?

Mr. Vince: --I believe the example would be exactly what the Federal District Court did in our case, your Honor, and that is he looked at the Federal Power Act and he looked at the two orders and he saw no direct clash.

He saw that the Council's rate order was ostensibly guided towards something that was allowable under the Federal Power Act for retail ratemakers.

Basically the question you pose is a frustration for us in terms of saying how does a Federal District Court draw the line?

We know here there is something less than facial.

But how does he draw the line in terms of a strong preemption claim or a red-hot one?

We know that any utility company coming in with a preemption claim is going to argue that it's a very strong claim.

If there is no facial clash that can be discerned with relatively... with relative ease by a competent jurist at the Federal District Court level--

Unidentified Justice: Kind of a time question.

He spends 15 minutes and if it's not apparent that it's not facial--

Mr. Vince: --No, your Honor.

I don't think so much the time of how long it takes to review the respective orders.

I think the matter is that the judge does not need to go through a full-fledged look at the... for example, the administrative record, to determine what it really was that the Council did.

And NOPSI here makes the statement and made the allegation in their complaint in this case that there was no set of facts that could sustain the City Council's order.

But in their briefs and in our arguments we have gotten into some very difficult disputed facts that really should be sorted out in the state court system before the consideration of the merits of preemption is reached.

As I pointed out a moment ago, the concern of the Council and the state courts involved has been that there's been much more than simply utility company hauteur towards the state courts here.

There has been a very real disruption of a state regulator's ability to function.

This Council, whether its ruling on the merits ultimately will be upheld or not, was sued at the commencement, during, and after its regulatory proceeding in federal court.

The Council members individually and personally were sued for a billion dollars in federal court.

There is... there comes a point where it's much more sensible, we contend, to allow a single track to proceed.

A single track will achieve just as good a result, it will be fair to all parties.

This Court will still have the opportunity to vindicate, if it wishes, through the certiorari process.

But the whole question of multiple litigation and depletion of resources is then removed.

Unidentified Justice: --How is that any different from exhaustion of remedies?

Mr. Vince: I believe that it is... it is analogous to exhaustion of remedies in the sense that there is an ongoing proceeding that the company should become involved with in order to resolve this in one single proceeding.

I don't feel that it is the same legal doctrine as exhaustion.

Unidentified Justice: Well, it's certainly the same result the way you describe it.

I fail to see the difference.

Mr. Vince: Well, I think that it is essentially the result that the Younger and Huffman line of cases says is appropriate in Younger-type of abstention, your Honor, where there is the ongoing opportunity for judicial review in the state court system.

Unidentified Justice: Mr. Vince, refresh my recollection.

What is the posture... present posture of the various state proceedings?

Are any of them about to be decided?

Mr. Vince: Yes, Justice Stevens.

The principal state case that is deciding the very issue of preemption that's been raised here is ongoing.

It's been... the pre-trial briefs have been filed, the case has been argued.

The parties agreed on a post-argument schedule, and that has been delayed with the agreement of both parties so that we could file our briefs and argue this case.

And it will resume immediately and presumably be resolved within the next several months.

Our concern is that NOPSI basically has pole-vaulted out of the ongoing state proceedings with its preemption claim up here and basically in their briefs present a rather full argument on the merits even though this is a relatively narrow procedural question concerning abstention.

Unidentified Justice: And what is the rate structure right how?

Did they get... have they gotten any relief in the matter of rates or is that--

Mr. Vince: Absolutely, your Honor.

The track record in terms of rates was this.

The Council first invited the company to come in when they were making their initial procedures for rates and invited the company to seek interim relief.

Instead, the company sued the Council.

That was the billion dollar lawsuit.

The Federal District Court conducted a preliminary injunction hearing and said there is no irreparable harm here, and told the company to go back to the Council.

When they did that, the Council gave interim relief.

Then the Council entered into a settlement with the company that put essentially the full rate package into effect, minus $51 million that the company voluntarily agreed to absorb.

That rate has been... was in effect all during the pendency of the prudence investigation.

When the prudence investigation was completed, the Council gave a ruling that for a ten-year period instead of being able to collect six percent increases annually, NOPSI would only be able to collect four and a half percent rate increases annually.

So, the company has been receiving rate relief and the district court... Federal District Court in our case made a specific finding that the Council was acting in complete good faith on this point and using everything that it possibly could, all reasonable measures to keep the company in a positive cash position.

To conclude, your Honors--

Unidentified Justice: --May I... if you're about to conclude, may I ask, would those findings be necessary to sustain your theory?

Supposing they had granted no relief at all, your legal position wouldn't be any different, or would it?

Mr. Vince: --If they had granted no relief at all, the legal position would not be different, Justice Stevens, for this reason.

The company would then immediately be able to go into state court and seek an indication.

And the case that I would give you that's directly on point is the Louisiana Power & Light case that we cited in our brief, which is the sister company to NOPSI.

At that time the Middle District was considering the Louisiana application for Grand Gulf costs at the same time that the Council was in litigation in federal court in the Eastern District.

Both... both courts not only abstained, but ruled that there was a Johnson Act prevention from a federal court considering the issue.

That's since been overturned by the Fifth Circuit.

But when Louisiana Power & Light was forced to go into state court, they got a $119 million emergency rate relief ruling within one to two months, which demonstrates that the state court system here is not broken, it is able to handle these cases if there is viable claim.

And that simply brings me to my conclusion, that I would urge this Court not to accept or put its imprimatur on the basic essence of NOPSI's case.

And that is that the federal courts are going to be the protectors of federal questions and that state courts are going to be the enemy and not do the job.

Here the track record in Louisiana is quite good.

Unidentified Justice: It is critical, your position, is it not, that the preemption issue is debatable?

Mr. Vince: Yes.

Unidentified Justice: Yeah.

Mr. Vince: Well, Justice Stevens, let me clarify that, please.

Our position is that if there is facial preemption, the Federal District Court then has the discretion not to abstain.

But it is still within the Federal District Court's discretion.

Unidentified Justice: I have some of the same difficulty that Chief Justice did, with the concept of facial preemption.

It seems to me it's either... you know, you feel very strongly that the issue isn't all that hard or it's very debatable.

And maybe that's the difference, whether it's the degree of difficulty of the issue.

It seems to me you do rest on a case in which there is a debatable issue of preemption.

If we thought it was clear-cut the other way, your argument would really not be quite so strong.

Mr. Vince: I think it would seriously diminish our argument, Justice Stevens.

But the example, again, that I would give is in the Younger case.

The criminal syndicalism statute, or one very similar to the one considered in Younger, was actually deemed invalid in the Brandenburg case which occurred, I believe, 19 months earlier.

And yet the Court felt, even though there was a substantial possibility that the statute was invalid... they still felt that abstention under those circumstances was appropriate.

Unidentified Justice: Yes.

Of course, at that time the fact that it was a criminal case was more important than maybe it is today here.

Mr. Vince: That's absolutely correct, your Honor.

But I think the... the point is that the state courts here are adequate to give this type of relief and that there are not the type of exceptional circumstances that might exist in a civil rights case or a case that simply is not present here.

Unidentified Justice: Thank you, Mr. Vince.

Mr. Lee, do you have rebuttal?

REBUTTAL ARGUMENT OF REX E. LEE ON BEHALF OF PETITIONER

Mr. Lee: Just briefly, Mr. Chief Justice.

A few items.

First of all, Justice Stevens, what Mr. Vince told you is substantially correct.

We are at the present time not collecting one million dollars per month in FERC-mandated costs, but we have been assured by the City Council that if we win this lawsuit, then those amounts can eventually be recovered.

Now, I want to stress that this question of whether the preemption issue is debatable or not really isn't relevant in this particular case because of the nature of the Fifth Circuit's holding.

They agreed with us that it was correct, but still abstained.

In other instances... not this case... the Court will have to make an inquiry into the substantial... whether it is substantial.

But that is the kind of inquiry that federal courts make on a regular basis in deciding the pendent jurisdiction claims.

We agree that there should be--

Unidentified Justice: Excuse me.

Then all you're asking us to do is to send it back to ask the Fifth Circuit--

Mr. Lee: --That is correct.

Unidentified Justice: --to decide whether it's clear or not?

Mr. Lee: That is correct.

Unidentified Justice: You're--

Mr. Lee: That is correct.

What you're reviewing is the Fifth Circuit's abstention judgment.

And it was clearly wrong.

It's the Fifth Circuit, if there is any question about it, that ought to make... ought to make that threshold inquiry.

Unidentified Justice: --It was clearly wrong.

It was clearly based on the wrong reason, you're saying?

Mr. Lee: That is correct.

Unidentified Justice: It might still be right.

Mr. Lee: That is correct.

Their abstention standard was wrong.

We agree with the single track proposition.

But where the preemption claim disposes of the whole case and can be decided without inquiry into any state law or any facts that are set before the state administrative body, then it's the federal court that ought to decide it.

And in this case, Justice O'Connor, I really think this case is your hypothetical because the only argument in the federal complaint is that this case is preempted and it deprives the state of jurisdiction.

And what you are reviewing is a Fifth Circuit Judgment that requires abstention even where there is no jurisdiction.

What the case really comes down to... What the case really comes down to is a rule that requires abstention under Younger v. Harrison only one single showing, and that is the pendency of the state court proceeding.

It is a rule that is squarely inconsistent with the non-exhaustion state remedies argument.

There is no basis for distinguishing the number of cases that have held that there is no requirement of state exhaustion from the holding of the Fifth Circuit in this case, and that judgment has to be reversed.

Thank you.

Chief Justice William H. Rehnquist: Thank you, Mr. Lee.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Coit Independence Joint Venture v. Fslic - Oral Argument

Sun, 06 Feb 2011 03:46:40 +0000

Case:

Coit Independence Joint Venture v. Fslic

Media File:

87-996_19881101-argument.mp3

Related Transcript:

87-996_19881101-argument.xml

Transcript:

ORAL ARGUMENT OF ROBERT E. GOODFRIEND ON BEHALF OF THE PETITIONER

Chief Justice William H. Rehnquist: We'll hear arguments first this morning in No. 87-996, Coit Independence Joint Venture v. FSLIC.

Mr. Goodfriend, you may proceed whenever you're ready.

Mr. Goodfriend: Mr. Chief Justice, and may it please the Court:

This case involves the so-called Hudspeth Doctrine, a rule of law that was announced by the Fifth Circuit in 1985 and that effectively closes the courthouse door to creditors of insolvent savings and loans that have been placed in receivership by the Federal Savings and Loan Insurance Corporation, which I will refer to hereafter as FSLIC.

Under the so-called Hudspeth Doctrine, at least as it was originally conceived, a creditor's claim must first be presented to FSLIC, then any adverse ruling appealed to the Federal Home Loan Bank Board, and thereafter any adverse determination reviewed by the courts under a very limited standard of review under the Administrative Procedure Act.

This case began when Coit, a real estate partnership, sued FirstSouth, a federal savings and loan, in state court, suing FirstSouth for usury, breach of fiduciary duty and breach of a duty of good faith and fair dealing in connection with two real estate transactions.

The case remained in state court for approximately two months at which time FirstSouth became insolvent and was placed in receivership by FSLIC.

Thereafter, FSLIC's move to dismiss the case from federal court under the Hudspeth Doctrine, which motion was granted, and Coit took an appeal to the Fifth Circuit.

The Fifth Circuit affirmed relying on its prior decisions under the Hudspeth case.

This Court then granted a writ of certiorari.

A conflict presently exists between the Fifth and the Ninth Circuits on the Hudspeth Doctrine, the Ninth Circuit having rejected the Hudspeth Doctrine in the Morrison-Knudsen case.

Now, the issue has changed somewhat from what it was when this Court initially granted a writ of certiorari.

Initially this case involved the question of whether Congress by statutes had ousted the federal courts of subject matter jurisdiction to hear a broad range of creditor or claims against an insolvent savings and loan association.

In so ruling, the Fifth Circuit relied on two statutory provisions: 12 U.S.C. 1464(d)(6)(C) which has the restrain or affect language, and 12 U.S.C. 29(d) which makes FSLIC's appointment as receiver

"subject only to the regulation of the Federal Home Loan Bank Board. "

A recent Law Review article in the Western New England Law Review, which we have sent the Court, extensively reviews the legislative history of these provisions and I think presents convincing legislative history that neither of these provisions has anything to do with the jurisdiction of the courts to hear creditor claims.

The restrain or affect language was inserted initially to limit challenges by the savings and loan itself and by its directors to the appointment of FSLIC as receiver limiting those challenges to a 30-day period.

And that's specifically in the statute.

And the subject only to the regulation of the Board language was apparently inserted in response to a special situation which arose in the State of Illinois where a state court-appointed receiver ignored FSLIC's request for information and FSLIC's monetary claims.

Unidentified Justice: Mr. Goodfriend, FSLIC has retreated substantially--

Mr. Goodfriend: Yes.

Unidentified Justice: --in this Court from the doctrine of the Hudspeth case.

Has it not?

Mr. Goodfriend: Yes, Your Honor, and I was about to get exactly to that point.

Let me just say we've also argued on... in terms of the initial position of the Court that any determination as to the amount and validity of a claim has never been considered to be an interference with the functions of the receiver at common law.

Unidentified Justice: May I also inquire whether as of this time the claim of your client has ever been acted upon--

Mr. Goodfriend: No, it has not, Your Honor.

Unidentified Justice: --administratively?

It's still in the so-called black hole?

Mr. Goodfriend: Exactly, retained for further review.

It has now been 13 months since that claim was originally filed and a little bit more than two years since Coit originally sued in state court.

Unidentified Justice: Now, do you take the position that the statutes do not permit FSLIC, as you call it, to adopt an administrative--

Mr. Goodfriend: Yes, Your Honor.

Unidentified Justice: --exhaustion requirement?

Mr. Goodfriend: We... we reject both the initial position of the Fifth Circuit, which was a subject matter jurisdiction position, and we also reject the revised position of the Solicitor General which concerns agency-mandated exhaustion, which we wish to clearly distinguish from court-mandated exhaustion, which was referred to somewhat in the Morrison-Knudsen case.

We think the implications of agency-mandated exhaustion are very different from judicial exhaustion.

The Solicitor General has revised the issue in this case.

He no longer takes the position that this is a matter of subject matter jurisdiction, and he no longer takes the position that FSLIC has the power to adjudicate creditor claims.

What he does say... and I think this is the nub of the case... is that the Federal Home Loan Bank Board has the power to promulgate regulations under section 5(d)(11) of the Homeowner's Loan Act to mandate that creditors exhaust their administrative remedies before FSLIC and the Board before seeking review in the courts.

We think that the Solicitor General contemplates de novo review after completion of the exhaustion process, but his position in this regard is not entirely clear.

Unidentified Justice: And if there is de novo review, there wouldn't be any Article III problems.

Mr. Goodfriend: Your Honor, I think... we think there still is.

Initially that... that was my thought.

But what we submit, Your Honor, is where the delay in agency-mandated jurisdiction is undue, as it has been in these cases, so that ultimate judicial review may be ineffective or worthless to a litigant, Article III concerns and Seventh Amendment concerns are still in the case.

As for the due process question, the constitutional due process question of the absence of a disinterested tribunal, that is very definitely still in the case because this Court has held in Gibson v. Berryhill and in Ward v. Monroeville that a party is entitled to a disinterested tribunal at the first level even if he subsequently obtains de novo judicial review.

Unidentified Justice: How has the delay hurt your client in this case?

Mr. Goodfriend: Your Honor, the delay we say has hurt our client in a number of ways.

The significant thing is that this case involves a wasting asset.

The Solicitor General refers to it as a limited pool of assets.

It doesn't involve the... the savings and loan has long since gone.

It has been... but there is a pool of money.

That pool of money is wasting every day.

It is wasting in receivership expenses.

It may be diminished by interim distributions made to other creditors.

Unidentified Justice: But would your be... but would your being able to get into court earlier than you have effect that at all--

Mr. Goodfriend: Absolutely.

Unidentified Justice: --because it's in still a receivership.

Mr. Goodfriend: Yes, Your Honor.

But the validity of our claim might have already been determined in a state court.

Indeed, the--

Unidentified Justice: But supposing the validity of your claim had been determined in a state court.

Mr. Goodfriend: --Yes, Your Honor.

Unidentified Justice: Would it have advanced your client's position so far as his dollars and cents are concerned?

Mr. Goodfriend: Well, what we say is we would then be in line for a potential distribution from the receiver depending upon the priority of our claims under FSLIC's regulations, and we might receive substantially more money, maybe 50 percent of the amount of our total claim, instead of two or three years down the line, maybe we might receive only 20 percent.

Unidentified Justice: That's a... that would be kind of unusual for a receivership to distribute in that manner, wouldn't it?

Mr. Goodfriend: Well, my understanding is that interim... interim distributions from a receivership estate are authorized.

Now, it does depend upon the priorities whether I think you're on a higher level of priorities or low level of priorities.

And quite frankly, FSLIC's priorities in this regard are not clear except for the fact that in certain states they have promulgated a regulation recently whereby they have placed themselves in the position where they can recover on their subrogation claims first ahead of every other creditor, we think a very questionable ruling on their part.

We also say, Your Honor, that we are potentially threatened every day by foreclosure on our property.

The situation there is that the receiver had at one earlier point, in fact, about two weeks before the Fifth Circuit ruled in this case, posted Coit's property for foreclosure.

We then petitioned the Board under the expedited claims procedure to stay that posting of the foreclosure, and before the Board could act, FSLIC voluntarily withdrew its claim without prejudice to reinstating it at any time.

So, I could leave this podium today, go back to my office in Dallas and find out that FSLIC is foreclosing on my client's property.

And nothing prevents them from doing that.

The only thing I can do is go back to the Board and ask them for discretionary relief.

So, we say that that constant threat and the wasting nature of this asset not only... makes even the constitutional claims ripe for review at this time.

I would like to make a number of points at the outset, if I may.

First--

Unidentified Justice: Excuse me.

Mr. Goodfriend: --Yes, Your Honor.

Unidentified Justice: I assume that you would have no judicial remedy for that foreclosure?

Mr. Goodfriend: Your Honor, as I understand the Board's position, in its regulations they say that when property is posted for foreclosure, a... the owner of that property has five working days to seek relief from FSLIC... excuse me... from the Federal Home Loan Bank Board, which is the supervisory agency over FSLIC, from the foreclosure.

And then, if he misses the five working days, his right to seek judicial review is waived.

If he gets within that... those five working days, he may then appeal the Board's failure to give that judicial relief into the courts.

But he may not initially go into a state court, which I submit almost every litigant not familiar with these arcane procedures would do and seek a temporary restraining order.

Unidentified Justice: Being... being deprived of your property by foreclosure is not--

Mr. Goodfriend: Absolutely.

Unidentified Justice: --is not an added threat unless you miss the five days.

Mr. Goodfriend: Yes, Your Honor.

Unidentified Justice: Okay.

Mr. Goodfriend: But it's easy to miss those five days.

I would like to make a couple of points at the outset.

One is the tremendous breadth of the Hudspeth Doctrine.

This is not a doctrine which applies only to a narrow range of claims as to which the Board might claim some expertise.

It applies to virtually every conceivable state and federal cause of action against an insolvent savings and loan.

It covers antitrust claims, securities claims, employment discrimination claims, RICO, and under state law a breach of contract, fraud, usury, even personal injury claims.

If I left this courtroom and was hit by a vehicle owned by a savings and loans that was insolvent or one that became insolvent, I would have to present my personal injury claim to FSLIC.

Further, the Board has defined in its regulations the concept of claims so broadly that it includes compulsory counterclaims and even affirmative defenses.

If FSLIC goes into court and sues my client on a note, which they could do in this case, foreclose on the property and sue on the deficiency, or on a contract, as they did in Mr. Hudspeth's case, he may not... the defendant may not counterclaim or set off his own claims against FSLIC in... in court, but must, according to the Hudspeth Doctrine, raise his counterclaims or even some courts have held his affirmative defense by way of offset in the administrative proceeding.

So, what this does--

Unidentified Justice: Is that--

Mr. Goodfriend: --is bifurcate.

Unidentified Justice: --Is that mandated by FSLIC regulation now?

Mr. Goodfriend: Yes, Your Honor.

They have... I will read to the Court.

They have defined the term "claim" in... in their... I have the April regulations.

I understand from my co-counsel, Mr. Art Leibold, that just yesterday FSLIC made these regulations final with some additional prefatory language that I have not seen.

But under the term "claim", Your Honor,

"Claim includes but is not limited to demand for recoupment, set-off, security, priority or preference. "

Unidentified Justice: But now we... let's assume that you're totally right on the meaning of the regulation.

We don't have that particular problem before us.

I mean, there's nothing in this case that requires us to consider the validity of every single aspect of--

Mr. Goodfriend: No.

Unidentified Justice: --FSLIC's regulations.

Mr. Goodfriend: No, Your Honor.

But... but you do have that issue before... my client has been threatened with foreclosure once.

And the question of--

Unidentified Justice: We... we don't have before us... or correct me if I'm wrong.

We don't have before us the situation where FSLIC initiates a lawsuit against a party.

The party seeks to counterclaim.

FSLIC says, no, you should have filed a claim.

You... you can no longer counter-claim.

That isn't present in this case, is it?

Mr. Goodfriend: --Your Honor, it hasn't happened yet.

It can happen on the facts here before the Court because once FSLIC forecloses on the property, they can sue my client on the deficiency on the note.

And then, when I raise our... try to raise those as a defense or offset in federal court, I will be referred to the administrative track under Hudspeth.

So, it hasn't happened yet, but it's... it is implicit in the facts of the case.

Unidentified Justice: If... if we rule in... generally in your favor, should that include a declaration that you're not required to submit claims at all even for notice purposes?

Mr. Goodfriend: You say for notice purposes.

Is this... is your--

Unidentified Justice: I mean, I... I assume that you have to submit notice of claims to FSLIC within 30 days under the regulations.

Mr. Goodfriend: --That goes to the bar date, Your Honor?

Unidentified Justice: Yes.

Mr. Goodfriend: That's I think a very important point.

What we say happens in this case is that the combination of a mandatory exhaustion requirement, together with the receiver's bar date, which is usually 90 days after the receiver publishes notice of the receivership to all creditors, actually operates to modify substantive state and federal statutes of limitation.

So, if you combine that with the mandatory exhaustion requirement, I would dispute it.

If you say there is only a permissive exhaustion requirement, as there is under the National Bank Act where a creditor can file a claim, if he wishes, with the receiver, but the bar date of the receiver... this is the Queenan v. Mays case... does not prevent the creditor from going into court even after the bar date has run and having the validity of his claim determined there.

Now, he cannot execute on any judgment he obtains from a court.

Unidentified Justice: But you would conceded the authority of FSLIC under either existing regulations or the existing statute to require a notice of claim?

Mr. Goodfriend: A voluntary claims procedure.

Is that the same as--

Unidentified Justice: Suppose it's a... would you concede that they can require a mandatory claims procedure to give them notice of the existence of the claim not for adjudication purposes?

Mr. Goodfriend: --Let me ask this.

Does that contemplate that we cannot go into court until we--

Unidentified Justice: No.

Mr. Goodfriend: --comply?

Unidentified Justice: Yes.

Yes, it means that before you can go to court, you have to give them notice of your claim.

Mr. Goodfriend: Your Honor, that takes it... I would say this, that there is no authority for that.

But if it does not entail any significant deferring of federal court jurisdiction, yes.

If it requires any significant deferring of federal court jurisdiction under express jurisdictional grants to... to litigants, I would say no.

Unidentified Justice: Suppose it doesn't require deferring, but it cuts it off.

I mean, suppose if you don't file, you can't bring a suit... you can't bring a suit in court, state or federal.

You wouldn't like that.

[Laughter]

Mr. Goodfriend: I wouldn't like it.

Unidentified Justice: But once you file, you can sue as soon as you like.

Mr. Goodfriend: There is no express authority for this, Your Honor.

I would say this, that if this Court held that such a notice requirement were required, but that a litigant, once he complied, could go immediately to federal court, I would say there would be no significant infringement on... or it would not be a significant abuse of the powers granted by Congress.

The problem here--

Unidentified Justice: But you think we can't rule for you and... and have that regime.

I mean--

Mr. Goodfriend: --It could have--

Unidentified Justice: --it's really all or nothing... nothing at all.

Mr. Goodfriend: --Well, Your Honor, I think it's a question of power.

And what I think is that really what is at stake here is the question of whether an agency can by regulation with no express statutory authority force a federal court to defer jurisdiction.

And I think that is probably the key question in this case.

Unidentified Justice: Is it arguable that the existing regulations can be interpreted to provide that there must be notice, or would those--

Mr. Goodfriend: No, [inaudible]--

Unidentified Justice: --regulations have to be amended?

Mr. Goodfriend: --Well, Your Honor, I think they would have to be amended.

What is requires now is that the creditor file a claim and then it sits... he cannot go to court, and it sits there until the special representative either denies it or retains it for further... no... either grants it, denies or retains it for further review.

And what we have shown in the limited statistics we have available--

Unidentified Justice: But--

Mr. Goodfriend: --is they're very large claims.

Unidentified Justice: --I take it your position isn't that once you get your judgment, if you get it, that you don't have to go to the receiver.

Mr. Goodfriend: No.

That is not... my position, Your Honor, is you have to go to the receiver.

Unidentified Justice: And you... and I suppose that the receiver would have to wait until he knew what the other claims were before you divided up the pie.

Mr. Goodfriend: Your Honor, that's what the Fifth Circuit thought.

And that seems contrary to all prior receivership practice and contrary, for example, to interim distributions which are authorized under the Bankruptcy Code.

Unidentified Justice: Well, I... I take it that isn't... I guess that issue isn't here anyway, but--

Mr. Goodfriend: Well, it's here only in that the Fifth Circuit felt that that was a restraint.

And he needed to know the... he would say we need to know the denominator of the equation, how much we're going to pay out, before we can pay anything out.

Unidentified Justice: --But if... if there's only 10,000 units available in the pool, and you have a judgment for 5,000 units, and yet there are claims ten times that, do you think you should get a distribution for 5,000 units?

Mr. Goodfriend: Well, what has happened, Your Honor, first of all, sometimes claims of a certain priority are all in and a receiver can make distribution with--

Unidentified Justice: Yes, yes.

Mr. Goodfriend: --without prejudicing--

Unidentified Justice: But you... you agree that... that all the claims of a certain class ought to be in before anybody gets anything.

Mr. Goodfriend: --No, I don't, Your Honor.

I think you can set up a... let me say under the Bankruptcy Code there is a provision that contemplates this where you can set up a reserve where there is contested litigation.

And you can make distributions to creditors whose claims are liquidated while the receiver sets up a reserve to cover the claims of those that are not.

Unidentified Justice: But is FSLIC required to borrow from the bankruptcy statute that particular procedure?

Mr. Goodfriend: No, Your Honor, I don't think they are required.

The point is this that the Fifth Circuit's assumption that all the claims must be litigated and therefore that the mere attempt to liquidate a claim in court is a restraint is fallacious.

Unidentified Justice: One can accept that I think without going as far as you do in suggesting that the... the receiver would have to follow some provisions about interim distributions that aren't at all clear from the statute.

Mr. Goodfriend: I agree, Your Honor.

He does not have to follow those provisions, but the point is it is his voluntary decision to make or not make interim distributions.

He does not have to have all claims liquidated before he can make any distribution.

What I'd like to address, if I may, is the... what I think is the critical issue in this case, and that is the question of whether... whether or not... what the standard of review is for determining the validity of a regulation by a federal agency mandating exhaustion where, as the Solicitor General admits in this case, there is no express statutory authority for a mandatory exhaustion requirement in the statute; and secondly, where the Solicitor General has cited no relevant legislative history concerning congressional intent to require exhaustion.

Yet, in that context, the Solicitor General proposes the most deferential standard of review as to the validity of this exhaustion regulation.

He proposes that it be reviewed under the standard of whether it is reasonably related to the purposes of the enabling legislation.

We discuss this in footnote 15 of our brief.

And he relies on Mourning v. Family Publications and Weinberger v. Salfi, and a number of other cases cited in a footnote.

Secondly, Hudspeth... in the Morrison-Knudsen case there was an oblique reference to the standard of review of administrative regulations, and the court there referred to the Chevron v. National Resource Defense Council case by this Court.

And also there's a Duke law Journal that has been sent to this Court which uses the Chevron test which is also very deferential.

It is whether or not the regulations should be upheld according to Chevron if it is not arbitrary, capricious or manifestly contrary to the statute.

Unidentified Justice: We're talking here about the standard by which a court reviews FSLIC's regulations not by which a court would review a FSLIC determination that a claim wasn't any good.

Is that right?

Mr. Goodfriend: What I'm talking about, Your Honor, is the validity... the SG has taken the position that FSLIC has the power... the Board has the power to impose these regulations.

And the question is, under section 5(d)(11) of the Act, which is a general grant to FSLIC of the power to set up receiverships... and the question is does the Board have the power to impose mandatory exhaustion requirements under that general grant of power and, if so, by what standard is the validity of the exercise of that power to be determined.

And we reject both the Chevron test and Mourning v. Family Publications and Weinberger v. Salfi.

And we do so because we believe that what is at issue here is the validity of agency regulations which attempt to limit the access of litigants to the courts.

And traditionally, when dealing with a limitation on the right of access to the courts, this Court has always subjected that kind of legislation or regulation to a higher degree of scrutiny than other types of legislation, and it has placed the burden of showing that Congress intended to limit access on the party asserting the limitation.

Unidentified Justice: But every--

--Didn't the... didn't the regulations in Salfi limit access to the courts?

Mr. Goodfriend: Yes, Your Honor, but I distinguished Salfi, Your Honor, because there the statute expressly contemplated exhaustion.

It said you've got to go to the Secretary and then you can appeal any final decision.

The statute set up the exhaustion mechanism.

An agency did not by fiat with no statutory authorization at all declare exhaustion.

And I have found no case... and maybe the Solicitor General can... can advise the Court.

I have found no case from this Court which has determined whether an agency can enact an agency-directed and mandated exhaustion requirement with no statutory authorization.

And the question is when that happens, what is the standard of review.

And we submit that under... this Court has used a heightened scrutiny in Johnson v. Robison and Abbott Laboratories v. Gardner to review cases where Congress tries to limit judicial review.

And even in the abstention area, Justice Brennan writing for the Court in Colorado River Water Conservation District and later the Court's decision in Moses Cohn where abstention comes up, which is also a postponing of the... of jurisdiction, this Court has referred to the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them.

We think Mourning is inapplicable.

It does not involve exhaustion.

Chevron doesn't involve exhaustion.

Weinberger did, but it was expressly in the statute.

Unidentified Justice: Do you... do you mean, Mr. Goodfriend, if there's a statute that says the Secretary can make a particular determination... that's all the statute says... the agency can't... doesn't... and the agency has rulemaking authority, just general rulemaking authority, the agency cannot devise a... a system by which that determination will be made which requires the applicant to apply first to one level with an appeal to a second level--

Mr. Goodfriend: Possibly if--

Unidentified Justice: --with an appeal to a third level?

And you... you think we wouldn't hold that he had to exhaust?

Mr. Goodfriend: --I think if it contemplated action by the action by the Secretary, in some ways I think the agency could flesh out the details of the exhaustion requirement.

The point here is all you have is a general grant to the agency to enact regulations dealing with receiverships.

Nowhere does it contemplate a priority, who goes first.

Unidentified Justice: But it does say that the corporation shall have authority to liquidate the institution in order... in an orderly manner.

Mr. Goodfriend: Yes, Your Honor, it does say that.

Unidentified Justice: That is a... that is quite a grant of power.

Mr. Goodfriend: But, Your Honor, I think this is the significant thing.

Only creditors of savings and loans have to go through this administrative process which involves no... no hearings, no... no taking of evidence, only one-way discovery basically.

The creditors of just about every other financial institution, banks, credit unions, insurance companies, in liquidation, when those financial institutions go into litigation... into liquidation, all those other creditors get to have their claims determined in court.

Under the National Bank Act, since the 1800s, creditors of banks have had the right to have their claims determined in court.

Unidentified Justice: We're not fighting about that anymore I thought.

Mr. Goodfriend: We're not fighting about what, Your Honor?

Unidentified Justice: The right to get it determined in court.

I gather that has been conceded.

Mr. Goodfriend: Well, as far as I know, Your Honor, under the National Bank Act, there is no exhaustion requirement.

In fact, as we have pointed out in our brief, there is a voluntary claims procedure before the FDIC, and a creditor who, say, has a small claim and doesn't want to incur the expense of... of litigation can go there.

But the fact that that claims procedure exists and the fact that the receiver may impose a bar date in a bank liquidation does not prevent a creditor of a national bank in receivership under FDIC from having his claim determined in federal or state court.

And that discrimination I believe between creditors of savings and loans and creditors of banks I think is going to upset the careful balance that Congress has crafted between savings and loans and banks and other financial institutions.

And one of the reasons that the U.S. Savings League, the trade association of the largest number of savings and loans in this country, is here in this Court filing an amicus curiae brief on behalf of Coit and against the regulatory agency that regulates savings and loans is that they fear that the Hudspeth Doctrine is going to cause businessmen in the future to prefer banks and other financial institutions over savings and loans when it comes to engaging in new business transactions.

And we think savings and loans are going to be... and apparently they do to... going to be seriously hurt by the existence of the Hudspeth Doctrine.

We also think that the Hudspeth Doctrine threatens the security of many homeowners in this country who, because of the limited nature of review for foreclosure proceedings, actually stand at risk if their mortgages are held by savings and loans because if FSLIC posts their home for foreclosure, even mistakenly, and they don't meet that five-day window, their property can be taken and no court in the land under the Hudspeth Doctrine can come to their aid.

So, we believe that this is a sweeping doctrine.

And we believe if that if the Board wishes to contravene the rights of these litigants to avail themselves of express jurisdictional grants from Congress and to shorten federal and state statutes of limitations, then the Board has the burden to show that Congress intended to make an exception where insolvent savings and loans are concerned.

We believe if any lesser standard were used, then every federal agency could require exhaustion simply by adopting a regulation to that effect.

Unidentified Justice: Thank you, Mr. Goodfriend.

We'll hear now from you, Mr. Minear.

ORAL ARGUMENT OF JEFFREY P. MINEAR ON BEHALF OF THE RESPONDENT

Mr. Minear: Mr. Chief Justice, and say it please the Court:

The savings and loan industry is presently facing the worst financial crisis since the Great Depression.

The Federal Home Loan Bank Board estimates that at least 400 federally insured savings and loan institutions are insolvent.

And the Bank Board, which itself is facing serious financial constraints, has already ordered the liquidation of 85 other hopelessly insolvent institutions.

The liquidation process is just beginning, and already there are thousands of claims seeking billions of dollars against just these 85 thrifts.

Those claims are pressed by a wide variety of interests, including defaulting borrowers like Coit, who claim that they are not obligated to pay back their loans and that the lender, in fact, should pay them damages.

This case presents an extraordinarily important, albeit it narrow, question, namely, what is the first step in the process for resolving these thousands of claims.

We submit that claims against an insolvent thrift that has been placed in Federal receivership must be presented to the receiver in the first instance for allowance or disallowance before the claimant can seek a judicial remedy.

The circuit courts that have tolled in this vineyard all recognize the concepts of primary jurisdiction or exhaustion of remedies apply, but they have differed with respect to whether a claimant must always participate in the administrative process before seeking judicial review.

The Third, Fifth and the Seventh Circuits require a mandatory resort to the Bank Board's claims procedure where the Ninth Circuit's Morrison-Knudsen decision held that a trial court should consider whether recourse to that process is appropriate under the circumstances of the particular case.

We submit, based on the logic and language of the relevant statutes, that a claim... a claimant is required to participate in the Bank Board's claims process and that any other result would have disastrous consequences for the orderly liquidation of a failed thrift.

Unidentified Justice: You say that there's a statute that requires exhaustion?

Mr. Minear: No, Your Honor, we do not say that there's a statute that expressly requires exhaustion.

The exhaustion requirement, in fact, is implicit in the statutory scheme that is set up by the Homeowner's Loan Act and the National Housing Act.

Section 5(d)(6) of the Homeowner's Act gives the Bank Board exclusive power to reorganize or liquidate an insolvent thrift using FSLIC as receiver for that purpose.

Section 5(d)(11) then broadly states that the Board shall have power to make rules and regulations for the liquidation of associations and the conduct of receiverships.

Congress, in short, gave the Bank Board broad power to design and put into effect an administrative process in lieu of the Title XI bankruptcy procedures for liquidating failed thrift institutions.

And here, as in de la Cuesta, it would have been difficult for Congress to have given the Bank Board a broader mandate.

Unidentified Justice: The only issue is whether that includes the power to cut off a claim.

Do you think that language fairly includes the power to cut off a claim is what we're talking about--

Mr. Minear: There's... we're not asserting that the Bank Board has the power to cut off a claim.

We're asserting that a... that the claims process only postpones judicial determination of that claim until FSLIC, after review by the Bank Board, has had a determination... a chance to make a determination whether to pay, settle or dispute that claim.

Unidentified Justice: --Aren't you... aren't you claiming that if... if... if a claim is not presented timely to FSLIC, the claim is cut off?

Mr. Minear: But that... that really results... that result follows from failure to comply with the administrative process.

Unidentified Justice: Well, to be sure.

But... but the power you're asserting is the right... is the power to cut off a claim if they don't do what you tell them to do.

Mr. Minear: But, Your Honor, I think the same thing would happen under the Social Security Act, for instance, if a party refused to comply with the Secretary's regulations governing the... the pursuit of a claim in the administrative forum.

What we're asserting is that the claimant does, in fact, have to comply with these rules and regulations that FSLIC might... might impose.

Now, whether those rules or regulations are fair, in fact, can be reviewed by this Court.

Unidentified Justice: Under the Social Security Act, the claimant must establish his claim before the Social Security Administration.

You have conceded that the claimant does not have to establish his claim before FSLIC.

He's entitled to establish it before the courts.

I there find it... I, therefore, find it hard to imply a power on the part of FSLIC simply to chop that claim away if this individual doesn't follow what FSLIC wants, or at least I... you know, it seems to me there ought to be more specific language in the statute.

Mr. Minear: Your Honor, without that sort of power, it would be impossible to conduct any sort of liquidation procedure at all.

If parties are not, in fact, willing to comply with the... the liquidation scheme that Congress has set up, then the liquidation scheme will simply not work.

We think that this power is implicit in the broad grant of authority to create a liquidation scheme.

Absent the power to require creditors to comply with the liquidation provisions, it's going to be... it's going to be impossible to get anyone to even participate in this liquidation scheme.

Unidentified Justice: Mr. Minear, is it de novo judicial review, if you want to call it judicial review, when a person takes a claim to court after it has been passed down by the Board?

Mr. Minear: Well, Your Honor, first this question isn't squarely presented here, and we think--

Unidentified Justice: Well, but I... I think it's very useful.

It would be very useful to me in deciding the case because if the FSLIC determination means absolutely nothing, turning down the claim is entitled to no weight in court, there doesn't seem to be much point to the whole procedure.

And on the other hand, if the FSLIC determination is entitled to some weight, then the... you wonder whether an agency can by regulation cut off the... the right to process it in court ab initio.

Mr. Minear: --We submit as follows with respect to that question, Your Honor.

Once FSLIC has made a determination whether to pay, settle or dispute a claim, if it... if its determination is to dispute the claim, the parties go to court and they litigate that question.

And it, in fact, is a... the beginning of a judicial remedy.

All we've really done is postponed the judicial determination of that claim until the Bank Board has had an opportunity to determine whether to allow it--

Unidentified Justice: Well, that's where FSLIC, in effect, denies the claim.

Mr. Minear: --Yes.

Its denial of its claim is, in essence, an assertion it's going to dispute that claim in court.

Unidentified Justice: Most claims are granted.

Most claims that have any basis for them--

Mr. Minear: Yes, that's--

Unidentified Justice: --And it's very important to get those out of the way.

Mr. Minear: --Exactly.

And, in fact, FSLIC often cannot make a wise litigation judgment on these claims until it has an opportunity to see all the claims that have been presented and sort out the relationship between the creditors and the validity and nature of the claims.

Unidentified Justice: Because in the... in the claims process that's provided for by the regulations, it doesn't contemplate any kind of a hearing, just a filing and a paper... a paper presentation.

Mr. Minear: They can, in fact... FSLIC can, in fact, require an oral presentation.

Unidentified Justice: I... I know they can, but they--

Mr. Minear: They can require it, but they do not.

It's not required.

Unidentified Justice: --But the... but the claimant has no right to an oral presentation.

Mr. Minear: No, he does not have a right to oral presentation.

Unidentified Justice: So, it just... it just contemplates a... a tentative decision about it.

And if they're going to grant it, it's final.

Mr. Minear: Yes.

Unidentified Justice: If they're not, why, you're going to litigate.

Mr. Minear: Yes.

And with respect to that, I think it's useful to point out how the... the present status of this receivership.

There are over 1,700 claims that were filed in this particular receivership that sought over $800 million in damages from the receivership estate.

At this point approximately 570 of those claims have been resolved, either allowed, disallowed or settled.

At present another 530 are under negotiation under a global settlement plan.

These 530 claims all arise from 67 related loans.

Unidentified Justice: Mr. Minear, after FSLIC turns down a claim, is its denial of the claim entitled to any weight in the judicial proceeding?

Mr. Minear: The Bank Board has argued in a number of cases that it's subject to APA review, and the Solicitor General disagrees with that position.

Unidentified Justice: What does the Solicitor General--

Mr. Minear: The Solicitor General's position is that the party begins his claim anew.

It's, in essence, a de novo determination of that claim.

Now, there are... I think it's important to point out at the same time, however, that there are... that the receivership determination can, in fact, constrain as a practical matter this claim in various ways.

For instance, the receivership's determination might be admissible in court under a hearsay exception.

For instance, 803(c)(8) I think would allow admission of that.

It also might lead to stipulations among the parties as a practical matter.

The net effect of the receivership procedure is to narrow the issues in these cases.

Often times it will allow for a summary judgment determination of these claims once the parties find through the receivership process that there, in fact, is no factual issues in dispute.

Unidentified Justice: --What about time?

What about time?

The claimant has to wait until there's a decision by FSLIC.

Mr. Minear: Yes, generally, but there's also an APA remedy in the... in the event--

Unidentified Justice: Well, can't... do you... can't the party just file a suit?

Let's assume he files with the receiver.

May he also file a suit in court and then have that stayed?

Mr. Minear: --We submit that he cannot, that simply the receivership process will not work under--

Unidentified Justice: Well, how does he avoid the statute of limitations?

Mr. Minear: --There's a couple of ways.

First of all, these claims are often resolved long before statute of limitations--

Unidentified Justice: Well, they often aren't.

[Laughter]

Mr. Minear: --Well, in this respect, Your Honor, that there has been a claim here that this claim has lingered for 13 months, and I do have to clarify the record on that.

Unidentified Justice: Well, let's--

Mr. Minear: When this--

Unidentified Justice: --You don't have to do that till you answer this question.

Mr. Minear: --Sure.

Unidentified Justice: What about the statute of limitations?

Mr. Minear: Certainly, Your Honor.

The statute of limitations problems can be dealt with in several ways.

First of all, if it appears that the statute of limitations is going to run, FSLIC can allow the party to file its suit subject to a stay pending the determination of the receiver whether or not to go forward with that plan.

Unidentified Justice: Well, but FSLIC you say may--

Mr. Minear: Yes.

Unidentified Justice: --Why would it do that?

I mean, it's--

[Laughter]

It's the person owing the money.

Mr. Minear: But, Your Honor, the... the... FSLIC's interest here is in a fair resolution of these claims.

And FSLIC does not have any interest in forcing people to, in fact, default on their claims through a statute of limitations.

That is simply not what FSLIC is interested in doing.

In any event, if the claim is delayed, the party can go to court and seek a remedy under the APA for agency action unduly delayed.

There is a remedy there that would preclude any of these problems.

Unidentified Justice: What... what if you want to go to state court and sue?

Mr. Minear: Well, there's still the APA remedy in those circumstances for, in fact, obtaining--

Unidentified Justice: So, you bring a separate APA suit in federal court against FSLIC for unlawfully delaying your claim before you can go into state court and file a claim on the merit.

Mr. Minear: --Yes, Your Honor, but that... first of all, these... these threats are all rather hypothetical.

In fact, as I pointed out already, in one year the First South receivership has resolved 550 of the 1,380 non-shareholder claims.

Unidentified Justice: Yes, but it hasn't resolved the claim that your opponent is fighting about.

Mr. Minear: And there's a reason for that, Your Honor.

And if I can point out, when they... when Coit filed its claim, it also included a letter, and this letter states:

"Claimant's claims are presently on appeal in the United States Court of Appeals for the Fifth Circuit. "

"The Claimant will supply additional factual material in support of the attached proof of claim at the appropriate time, but in order to save cost to all parties, all information is not being presented at this time. "

As a result of that--

Unidentified Justice: Yes, but of course, you probably have read the complaint, and you're a party to the litigation.

So, it's not exactly a mystery what the lawsuit is all about, is it?

Mr. Minear: --Well, yes, your... but, Your Honor, there is still... in order for... these determinations are made by separate parties.

The receiver is not the same person as the person who is, in fact, litigating this claim in a different court.

For the receiver and his special representative to determine this claim, he has to acquire certain information that is going to be necessary for him to pass on that judgment.

Unidentified Justice: Well, who is in--

Mr. Minear: Until he receives that--

Unidentified Justice: --Who is in control of the defense of state court litigation?

Mr. Minear: --The Bank Board is in control of that; the Department of Justice is not.

Unidentified Justice: But... and FSLIC can't get the information from the Bank Board?

They don't know what the case is all about?

Mr. Minear: Well, it can, but again, Your Honor, remember there are 1,700 claims here, each of which can be a potential lawsuit.

And this is just one receivership.

Unidentified Justice: Well, this is not a potential lawsuit; this is an actual lawsuit.

It started even before the receivership was started.

Mr. Minear: Yes, Your Honor, that's true.

And when FSLIC steps into the shoes of the savings and loan in these circumstances, it has the difficulty of learning about the claims, learning about what those claims are about, whether they're meritorious or not, whether or not to defend the claim, whether or not to settle the claim, whether or not to pay the claim.

Unidentified Justice: Well, Mr. Minear, the... the Petitioner alleges that in actuality the small claims are dealt with by FSLIC and resolved, and the claims that amount to substantial sums of money go into the so-called black hole and just aren't acted on.

How is the administrative scheme adequate under this Court's holdings if there is no time limit and if there is no reasonable mechanism by which the creditors can expect to see action in a timely fashion on their claims?

Mr. Minear: Your Honor, when a claimant, in fact, can point to undue delay in the administrative process, then that is the time to review that question.

But we don't have that in these circumstances.

FSLIC has not been provided with the information necessary to act on Colt's claim.

And until it does, it's very disingenuous for the party to claim that this claim has disappeared into a black hole.

As for the size of the claims that are disputed here--

Unidentified Justice: But there is nothing in the administrative regulations that even purports to set any kind of time limit for action by the FSLIC.

Mr. Minear: --Well, if that is the only--

Unidentified Justice: I would find it very difficult to think that's an adequate administrative remedy frankly.

Mr. Minear: --Your Honor, if that is the only deficiency in these regulations... and I'm sure that the Bank Board could enact a regulation that would require action on those claims within a certain time.

But you must remember that these claims are oftentimes very complex, they're interrelated, they cannot be resolved immediately.

Mr. Hudspeth's claim... they point to the... the supposed nightmare of Mr. Hudspeth.

He settled his claim this summer.

In fact, these claims are being resolved.

Hundreds of them are being resolved.

Thousands of them are being resolved.

I think it's also important in terms of--

Unidentified Justice: Of course, some people may have settled because they're worn down not being able to--

Mr. Minear: --Well, Your Honor, of course.

Unidentified Justice: --go into state court.

Sure.

Mr. Minear: But they might also have settled because FSLIC has, in fact, given them a fair deal on their claims once they determine how little is, in fact, in the assets of the receivership estate.

Unidentified Justice: Well, Mr. Minear, I can see how it's necessary for an orderly conduct of the receivership to know what claims are out there and... and maybe the... the general language is enough to... to give you that authority.

But why is it necessary for a orderly conduct of the receivership to stop people from commencing lawsuits which you have acknowledged will be the determinative lawsuits?

You've acknowledged that ultimately the state or federal court determinations are going to be what govern.

Mr. Minear: Your Honor, for the very same reasons that there's an automatic stay in bankruptcy, that when the receiver or a trustee steps into the shoes of an insolvent debtor, it must have an opportunity to assess the legal situation and the financial situation of the particular debtor.

Without that breathing space, there's simply going to be chaos.

And that is the... the prospect that we face right here.

Unidentified Justice: Who is... who is going to make the ultimate determination in the bankruptcy case?

Mr. Minear: In the bankruptcy case of the... the claim itself would ultimately be made by the Bankruptcy Court.

Unidentified Justice: That's a big difference, isn't it?

I mean, that's the point.

Here the ultimately... the ultimate determination is not going to be made by FSLIC.

It's going to be made by those courts anyway, as you... as you've now told us.

Under the former theory that FSLIC had, it made some sense.

You could say, well, since ultimately FSLIC is going to make the determination, subject to... subject to arbitrary and capricious review, it makes a lot of sense to say you have to come to FSLIC for, but... first.

But now you come before us and you say FSLIC isn't the one that makes the determination; it's going to be the state and federal courts.

If that's the case, I don't see any reason why... I can see a reason why you want to know what claims are out there, but why don't you let the courts go ahead and tell you what... it actually helps you.

Mr. Minear: Because the receiver--

Unidentified Justice: You'll know that much sooner which claims are good ones.

Mr. Minear: --The receiver also has to have an opportunity to make a determination, not simply know about the claim, know that someone submits a paper and says that the receivership estate owes them $100 million.

They have to have an opportunity to evaluate the legal significance of those claims whether or not they're right on the law, whether or not the claim ought to be settled because, in fact, there are no assets in the receivership estate.

One of the anomalies that the... the Court's position creates here is tremendous litigation over an empty bucket.

There... in fact, in many of these receivership estates, there are no assets, and yet we have parties that are going out and filing claims, seeking discovery and, in fact, demanding litigation when, in fact, there is no money there that would ultimately pay the claims.

The one--

Unidentified Justice: People represented by lawyers?

Mr. Minear: --What?

[Laughter]

Unidentified Justice: Take a default.

Mr. Minear: Surprisingly so, yes, Your Honor.

Unidentified Justice: Take a default.

It will serve them right.

Mr. Minear: Well, the government is not in a position to be taking default judgments in these matters.

And this is a serious question, Your Honor, that in fact should FSLIC, if there are no assets in the receivership estate, simply take default judgments.

That's... that would be a very peculiar situation.

What is also peculiar--

Unidentified Justice: I take it, counsel, that FSLIC could request a state or federal court to stay the action at the court's discretion.

Mr. Minear: --Again, the courts... the court... the Bank Board and FSLIC can certainly do that.

But if in fact, end up litigating over the question of exhaustion itself... and that is what is occurring in the Ninth Circuit--

Unidentified Justice: Well, it's not exhaustion; it's just... it's just a request for stay so that you can evaluate your position.

Mr. Minear: --[inaudible].

Unidentified Justice: Any court would exercise its discretion.

You've been arguing that FSLIC has discretion.

Courts have discretion as well.

Mr. Minear: But... but, Your Honor, that neglects the fact that oftentimes many of these claims will all arise out of one piece of property, one or a series of related transactions.

Suits will be filed all across the country all relating to that particular property.

Unidentified Justice: What is the experience in the Ninth Circuit where they have a contrary rule?

Mr. Minear: The... what FSLIC tells me is, in fact, they spend a good deal of time now litigating whether or not the claims process ought to be exhausted.

And, in fact, they can spend thousands and, in some cases, tens of thousands of dollars--

Unidentified Justice: If we decide for the other side--

Mr. Minear: --[inaudible] determinations.

Unidentified Justice: --you won't be litigating that--

[inaudible]

[Laughter]

Mr. Minear: No, we won't, but we'll be litigating the... certainly the litigation bills will be even higher.

And it's important to remember that those litigation costs are borne by the receivership estate.

And this is where we go again to the point of a need for an orderly mechanism for litigating these claims.

All that FSLIC is asking for in this situation is the opportunity to evaluate whether to pay, settle or disallow a claim--

Unidentified Justice: I can't imagine, Mr. Minear... I don't... I don't know what your experience with district judges is, state of federal, but I can't imagine if FSLIC goes in when the suit is filed and says, you know, Your Honor, we are in active settlement negotiations, we're evaluating this thing.

The court says, no, no, I'm sorry.

I want to go ahead with a trial.

I want to have a trial on my docket.

I can't imagine that that's what happens.

Mr. Minear: --But is this Court really--

Unidentified Justice: If you were actively--

Mr. Minear: --Is this Court really willing to rule on that decision based on its perception of what hundreds, literally hundreds, of judges might do in particular cases?

There really is a need for a rule here to restore order.

Unidentified Justice: --I can... I can more accurately predict a good result from what those judges will do than a good result from leaving it with FSLIC to... to... to decide how long it wants to act upon these things.

Mr. Minear: Your Honor, I'd like to point out that it has been treated as if this whole process is truly unique or abnormal.

But we only need to look to Texas State procedures to see that, in fact, this is the way that receiverships are often conducted.

Under Article 852(a) of the Texas Civil Code, Section 8.09, Texas has established a receivership proceeding... and, in fact, they call it a liquidation proceeding... that is very similar to, in fact, what FSLIC is advocating in this particular case.

In that case, the liquidating agency--

Unidentified Justice: It's a shame I suppose that Congress didn't enact a similar statute.

[Laughter]

Mr. Minear: --Your Honor, this... again let's remember the context of these statutes.

They were enacted in 1933 at a time when there were thousands of foreclosures taking place.

There's very little legislative history on this statute, and it's quite clear that what Congress did in this particular statute was delegate exceedingly broad authority to the agency to create a liquidation scheme.

They entrusted the agency with that responsibility in lieu of the bankruptcy procedures.

And, in fact, the result that... that would follow from Coit's argument here would be that there would be less protection and far less protection than is available under the bankruptcy scheme.

And we can't believe that Congress really wished that sort of anomaly, that in the case of every other insolvent debtor except thrifts--

Unidentified Justice: Yes, but again you compare it to the Bankruptcy Code.

That's not a... a one-line document saying bankruptcy judges make up a lot of rules.

It's a rather elaborate legislative code that's administered.

Mr. Minear: --That's... that is correct, Your Honor.

Unidentified Justice: It's quite different from--

Mr. Minear: But that simply underscores the difficulties of the problems that are faced here.

Unidentified Justice: --The Bankruptcy Court's decision there is the operative decision.

That's a big difference from what... what... what... the situation here.

Here the receiver does not make the decision.

Mr. Minear: But, Your Honor, let's compare this again to the Texas code that I was alluding to simply a few minutes earlier.

In that case a liquidating agent is appointed.

The liquidating agent has authority to pass on claims.

When he makes... first of all, all the parties are required to submit their claims to the liquidating agent within a period of time.

It's longer than the... than the FSLIC program.

But if a party does not submit his claim, he is precluded from any participation in the distribution of the receivership assets until all of the other claimants who have timely filed have been paid off in full.

Now, after the party submits his claim to the liquidating agent, the liquidating agent makes a determination on that, on that claim.

If he determines to disallow the claim, the party is then entitled to bring a suit in state court in a particular county, mind you, in Travis County, to in fact litigate that claim.

Now, that's not far removed from what the receiver is asking for here.

And, indeed, it would be quite anomalous if in the case of federal receiverships, no such protection is given, but in the case of state receiverships, that protection is available when they are liquidated through the state proceedings.

There are other anomalies that result from Coit's position that I must point out.

Absent a centralized process requiring presentation of claims, FSLIC would have to wait until the expiration of the longest period... the longest possible statute of limitations before it could even determine the total amount of claims that face the receivership.

FSLIC, accordingly, would be unable to begin even partial distribution of assets until that time.

Under these circumstances, it's clear that FSLIC would have great difficulty in making even interim distributions because it must wait until it has all the claims before it.

Unidentified Justice: A notification requirement would stop that problem.

You don't need an exhaustion requirement--

Mr. Minear: The notification would solve that particular problem, but it wouldn't solve the problem that courts could still become engaged in pointless litigation.

As I pointed out before, some receiverships have no assets.

In other cases, individual claimants are each pursuing their claim without regard to others and, in fact, are exhausting the receivership assets.

Now, that certainly is not in the best interest of an orderly liquidation.

And it's not in the best interest of the claimants in this situation either.

Now, Colt has raised several other objections here to the... to this process.

And one of those is the question of foreclosures.

And the fact of the matter is that FSLIC gives as much protection to foreclosures as the states often give.

A party is entitled upon receiving notice of a foreclosure to seek a stay on an expedited basis from the Bank Board.

If the Bank Board rejects that stay, the party then has an opportunity to seek judicial review before the foreclosure takes place.

In this particular case, there was a notice of foreclosure, and based on the... the litigation, the ongoing litigation, and other matters as well, FSLIC has determined not to foreclose on that property.

There's no--

Unidentified Justice: --Does... does FSLIC have authority to foreclose without going to court?

Mr. Minear: --In... in states where it's operating under a deed of trust--

Unidentified Justice: So, it depends on the deed of trust-mortgage distinction basically.

Mr. Minear: --Yes, state law.

They are looking to state law.

But in most states now, there are nonjudicial procedures for foreclosure.

And as for the... with respect to the claim-counterclaim controversy, there is no reason to believe that the administrative claims process will inevitably lead to the resolution of FSLIC claims and creditor counterclaims in different forums.

When FSLIC is litigating a claim against a receivership claimant, it can agree to stay its action pending the claimant's exhaustion of the administrative remedy.

Furthermore, a district court in appropriate circumstances could order such a result.

In any event, the mere possibility that claims and counterclaims might be decided in different forums provides no reason for dispensing with the substantial benefits that flow to every claimant from the administrative claims process.

Finally, Colt has discussed the careful balance between the bank statute, the National Bank Act, and the thrift statute in this case.

I think it's important to point out that the states... the banks and thrifts operate under completely different statutes.

And in addition, it's important to point out that there is a centralized procedure in the banking context that does allow for... for determination of these claims; 12 U.S.C. 94 of the National Bank Act provides, in fact, that all claims must be filed... in a receivership must be filed in a particular district.

And that, in effect, solves the centralized... centralization problem that I've discussed so far.

Again, I think it's important... we cannot understate the importance... or we cannot overstate the importance of a centralized process resolving these thousands of claims.

And, again, this situation is only likely to grow worse.

In short, the Bank Board's administrative claims process is a lawful and sensible first step in resolving creditor claims.

The Bank Board can justly require that claimants participate in this process before seeking a judicial remedy.

Any other result would severely cripple the Bank Board's ability to deal with the present savings and loan crisis, a crisis that is widely expected to grow only worse in the coming years.

Unidentified Justice: xxx are you litigating this issue in any courts of appeals now?

Mr. Minear: I believe that the issue continues to be... to arise in courts of appeals.

Many courts are simply staying these actions pending your decision in this case.

Unidentified Justice: Has anyone... this is a new position that the... that the FSLIC has taken.

Mr. Minear: Yes, that is correct.

Unidentified Justice: And are you presenting this to courts of appeals now?

Mr. Minear: Well, part of the problem here is--

Unidentified Justice: Or are you going on the... down the old road?

Mr. Minear: --The Bank Board, in fact, conducts the litigation in the lower courts, and we've advised them of our views on these matters.

The Bank Board does not necessarily agree with us on every point; however--

Unidentified Justice: So, the litigation is going on based on the jurisdictional--

Mr. Minear: --I'm not sure whether it is or not.

I think that the Bank Board is, in fact, trying to dismiss these claims based on our theory, but I can't be certain what--

Unidentified Justice: --Are there any other decisions on this issue in the--

Mr. Minear: --The most recent decision that I'm aware of is the O'Henry decision which, in fact, is not squarely a Hudspeth decision but, in fact, does address Hudspeth as a question of primary jurisdiction.

Unidentified Justice: --And where is that?

Is that--

Mr. Minear: We have filed a copy of that opinion with the Clerk of the Court.

Unidentified Justice: --What... what CA is that in?

Mr. Minear: This is in the Fifth Circuit, and there's a concurrence by Judge Higginbotham in which he discusses his view of the Hudspeth decision as well.

So, in fact, there is... there does continue to be litigation here.

Judge Higginbotham does treat this as a matter of primary jurisdiction, and he points out that Hudspeth, in fact, did not address the issues of what judicial relief or remedy would be available after the administrative process is followed.

If there are no further questions.

Chief Justice William H. Rehnquist: Thank you, Mr. Minear.

The case is submitted.

Attribution:

The OYEZ Project

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