Federal Common Law Is Not So Common
By Michael Enright
The Supreme Court does not often speak in sweeping terms when it decides an issue in a bankruptcy appeal. Usually, the decision carefully parses code language and strives for a narrow ruling. In contrast, the Court broadly observed in Rodriguez v. FDIC, No 18-1269 (Feb. 25, 2020) that it “took this case only to underscore the care federal courts should exercise before taking up an invitation to try their hand at common lawmaking.” The case involved a dispute between a bank in FDIC receivership and the Ch. 7 trustee of its parent company’s bankruptcy estate. Both claimed entitlement to a federal tax refund the IRS owed to their corporate group. The problem was deciding which member of their corporate group was entitled to the refund. The courts below applied the ruling of In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262 (9th Cir 1973), which created a federal common law rule that directed the refund to the member of the corporate group that generated the losses that created the entitlement to the refund. The Supreme Court reversed, holding that “[j]udicial lawmaking in the form of federal common law plays a necessarily modest role under a Constitution that vests the federal government’s ‘legislative powers’ in Congress and reserves most other regulatory authority to the States.” Noting that the federal government may have an interest in how it receives taxes, but would not have an interest in how a tax refund is distributed among members of the corporate group that paid the taxes in the first place, the Court directed the application of state law to resolve the dispute, and remanded. Lawyers relying on federal common law to guide their decision-making may wish to reconsider whether the decisions that provide them guidance remain a reliable indicator of a rule they can follow in practice.