U.S. Supreme Court Justice Anthony Kennedy’s mysterious recusal in a bankruptcy case decided on May 29 may have been triggered by his son Justin’s professional prominence in a financial field affected by the case.
Kennedy did not recuse when the Court first granted review in RadLAX Gateway Hotel v. Amalgamated Bank last December. But he surprised advocates by bowing out of the case on April 23, the date of
oral argument, and he did not participate in the decision. Like other justices, Kennedy does not publicly explain the reasons for his recusals.
His son Justin, formerly with Deutsche Bank A.G. and The Goldman Sachs Group Inc., is co-chief executive officer of LNR Property LLC, which bills itself as the “market leader” in servicing commercial mortgage-backed securities.
LNR Property, based in Miami Beach, Fla., was not a direct party in the RadLAX case. But an amicus curiae brief filed by several financial trade associations said that the Court’s decision on so-called “credit-bidding,” the main issue of the case, would have a “particularly acute” impact on commercial real estate loans held in the mortgage-backed securities.
One of the groups joining the amicus brief was the Commercial Real Estate Finance Council. Both Justin Kennedy and his co-CEO Tobin Cobb have been active in the council, according to Thomas Nealon III, general counsel of LNR Partners, a subsidiary of LNR Property. Cobb is currently a member of the council’s board of governors.
Justin Kennedy did not respond to messages seeking comment, referring questions to Nealon instead. Nealon said he had no knowledge of the justice’s reasoning for the recusal. But Nealon did say, “I will tell you that as the largest special servicer of commercial mortgages, there are certain elements of the [RadLAX] decision that are helpful to us.”
In its 8-0 decision, the Court ruled that, under bankruptcy law, secured creditors cannot be denied the right to credit-bid when debtors’ property is sold at auction. Circuit courts had split over the issue of credit bidding, a process that allows creditor banks to use the debt they are owed to offset the purchase price of a debtor’s assets, rather than having to use all cash.
The amicus brief filed by financial industry trade groups urged the Court to allow credit bidding in Chapter 11 reorganizations, asserting that how the Court rules “will have a substantial impact on the cost and availability of secured credit in the United States.” A footnote stated that requiring creditors to bid with only cash would be especially difficult for loans held in mortgage-backed securities.
Other facts may yet emerge about the Kennedy recusal. But two judicial ethics experts said Sunday that each fact known thus far — a case that could benefit a close relative’s industry niche, and that relative’s involvement in an amicus group — would not, standing alone, have required Kennedy’s recusal under ethical codes and statutes. But together, the two elements might have compelled Kennedy to bow out of the case.
“It does appear that Kennedy recused in nonmandatory circumstances or, one might say, in an abundance of caution,” said Steven Lubet, professor at Northwestern University School of Law.
DePaul University College of Law professor Jeffrey Shaman agreed. “While the connections here are attenuated, considered together they amount to a substantial appearance of partiality,” said Shaman. “It seems to me that it was the better part of discretion for Justice Kennedy to recuse himself in this instance.”
Kennedy’s decision to take himself out of the case may go beyond at least the spirit of a 1993 statement that he and six other justices signed, spelling out what they would do when a close relative is a lawyer involved in a case before the Court. “We do not think it would serve the public interest to go beyond the requirements of the statute, and to recuse ourselves, out of an excess of caution,” the justices agreed. “Even one unnecessary recusal impairs the functioning of the Court.”
Chief Justice John Roberts Jr. made a similar point in his annual report on the judiciary last Dec. 31. Unlike lower federal courts in which recused judges can be replaced by others, there are only nine Supreme Court justices, Roberts noted. “If a justice withdraws from a case, the Court must sit without its full membership,” Roberts said. “A justice accordingly cannot withdraw from a case as a matter of convenience or simply to avoid controversy.”
The fact that the RadLAX case was decided unanimously without Kennedy’s vote lessened the impact of his absence. But presumably, Kennedy did not know how the Court was going to vote when he decided in April to recuse.
Tony Mauro can be contacted at email@example.com.