Atlanta lawyer Thomas Byrne is claiming victory in his first outing to the U.S. Supreme Court.
Monday’s decision by the U.S. Supreme Court doesn’t explicitly rule for Byrne’s client, an Alabama man who ran into bankruptcy trouble in the midst of a family squabble. The high court merely set the standard for further proceedings, and Byrne’s opposing counsel has said Byrne’s client, Randy Curtis Bullock, should lose no matter what the standard.
But Monday’s unanimous ruling clearly puts Bullock in a better position than he was in before. "This was the most the court could do for us as a practical matter," said Byrne, adding he was confident that absent a settlement, his client would win in the end.
The Supreme Court agreed to take the case after a group of Emory University law students worked up a certiorari petition. The March oral argument was Byrne’s first at the high court. His win is made all the more sweet given that the Obama administration had taken the opposing side. "The solicitor [general] does usually win these cases," said Byrne, a litigation partner at Sutherland Asbill & Brennan.
Bullock’s troubles stem from three loans made from a trust created by his father. According to the underlying opinion from the U.S. Court of Appeals for the Eleventh Circuit, Bullock became trustee in 1978, and he and his four siblings were named as beneficiaries. The trust’s only asset was a life insurance policy.
The loans, totaling a little more than $264,000, were taken against the cash value of the insurance policy between 1981 and 1990. One, made at the request of Bullock’s father (who died in 2008), went to Bullock’s mother to repay a debt she owed to Bullock’s father’s business. The other two went to both Bullock and his mother, ultimately for purchasing a garage fabrication mill in Ohio and other real estate, according to the Eleventh Circuit ruling.
Bullock and his mother made payments to the trust over the years, but in 1998 some of Bullock’s siblings asked him to resign as trustee. According to his cert petition, Bullock complied and paid off the remaining balance on the loans, plus interest, within a few months of resigning. In all, Bullock and his mother paid more than $455,000 on the loans, according to the cert petition.
In 1999, two of Bullock’s brothers sued Bullock in Illinois, where several family businesses were located. The suit alleged that, in borrowing the money, Bullock breached his fiduciary duty as trustee. In 2002, an Illinois judge said that, although Bullock did not appear to have had a "malicious motive" in borrowing the money, he had breached his fiduciary duty. The judge awarded the trust damages of $250,000, plus $35,000 in attorney fees.
In 2009, Bullock filed for bankruptcy protection in Alabama. BankChampaign, which had taken over as trustee, asked the bankruptcy court not to relieve Bullock from his obligations under the Illinois judgment.
The bank argued that Bullock’s actions in taking the loans from the trust amounted to "defalcation." The federal bankruptcy code had long said debts caused by the defalcation of someone acting in a fiduciary capacity can’t be discharged, but courts hadn’t been able to agree on the meaning of the term, which carries definitions ranging from failing to meet an obligation to embezzling.
Representing himself, Bullock lost to the bank before a bankruptcy judge and again at the federal district court. Bullock secured a lawyer and took the case to the Eleventh Circuit but lost there, too.
The panel of Eleventh Circuit Judges Rosemary Barkett and William Pryor Jr. and a visiting district court judge said Bullock’s actions amounted to "objectively reckless" self-dealing and thus qualified as defalcation.
Students with Emory’s Supreme Court Advocacy Project noticed the case, which implicated a disagreement among the federal appeals courts of the sort in which the Supreme Court often is interested. Sutherland is one of the firms that works with the student project, and Byrne had plenty of bankruptcy experience, so he got involved to help with the cert petition. The petition told the Supreme Court the better interpretation was that of the First and Second Circuits, which had adopted a standard requiring an intent to defraud for an act to be considered defalcation.
After the high court agreed to take the case, Byrne said he prepared his oral argument by, for one thing, sitting in on February high court arguments over DNA evidence and sentencing guidelines.
When it came time for the big show, said Byrne, he was joined at counsel table by Emory law professor Sarah Shalf; Bullock’s original appellate lawyer, James Engelthaler of Florence, Ala.; and Dechert partner Eric Brunstad Jr., who filed an amicus brief in the case. Bill Bensinger of Baker Donelson Bearman Caldwell & Berkowitz’s Birmingham office argued for the bank, and a Justice Department lawyer also appeared to argue against Byrne’s position.
Byrne noted the line for his case wasn’t quite as long as that for the gay marriage arguments the following week. But, he said, "it’s a terrific experience for any lawyer. … This certainly is the apex in terms of the level of preparation of each of the justices and the sophistication of the questioning."
Monday’s opinion from the court by Justice Stephen Breyer said that the term "defalcation," as used in the bankruptcy code, requires some sort of bad faith, moral turpitude, immoral conduct or intentional wrong. He noted that intentional wrong could encompass not only conduct the fiduciary knows is improper but also reckless conduct that amounts to a gross deviation from the standard of conduct that a law-abiding person would observe.
Among other reasons for reaching that standard, Breyer cited policy concerns raised by the sort of factual scenario presented by the case: "In the absence of fault, it is difficult to find strong policy reasons favoring a broader exception here, at least in respect to those whom a scienter requirement will most likely help, namely nonprofessional trustees, perhaps administering small family trusts potentially immersed in intrafamily arguments that are difficult to evaluate in terms of comparative fault."
Breyer also suggested the court was simply doing its best to give an answer to a difficult question: "[I]t is important to have a uniform interpretation of federal law, the choices are limited, and neither the parties nor the Government has presented us with strong considerations favoring a different interpretation."
Byrne said the defalcation exception doesn’t come up frequently in litigation over exceptions to bankruptcy discharge, which he said often centers on the exception for fraud. But he said the court’s ruling ensures the defalcation exception isn’t interpreted too broadly so as to cover things other than what he called "true misconduct."
As for his client, said Byrne, "the family will have a chance to come together and resolve it, or there will be further proceedings in which I’m confident he’ll end up getting his discharge."
Bensinger, the bank’s lawyer, didn’t return a call seeking comment. But he had argued to the Supreme Court in opposition to the cert petition that, by any standard, Bullock should lose because he had borrowed from the trust against its express terms.
Louis Laverone, who acted as leader for the student team that worked on Bullock’s case, was lining up to receive his diploma from Emory on Monday when he learned of the court’s ruling. He said that, moments before the ceremony began, another fellow graduate, Ed Philpot, said "We won," as he walked by. But Laverone wasn’t sure quite what Philpot meant until he filed out of the law school building to take his seat and ran into Dean Robert Schapiro. The dean explained the team had won its Supreme Court case. The outgoing Student Bar Association president announced the win to enthusiastic applause during his speech to the graduates, Laverone said.
"Fantastic graduation present, I think," said Laverone. He added it was a "huge moment not only for those who worked on the case but for the program itself. Now we’ve just got to do it again."
He said he expects the clinic to file a cert petition in a wage-and-hour case out of the Sixth Circuit later this year.
The case decided Monday is Bullock v. BankChampaign, No. 11-1518.