By Colin Darke and David J. Nowaczewski
Colin T. Darke and David J. Nowaczewski are associates in the Debtor-Creditor Rights & Bankruptcy Practice Group at Bodman LLP in Detroit, Michigan. They can be contacted at and
Guantanamo , Revisited
In Boumediene v. Bush, 553 U.S. ____ (2008) the Court held that enemy combatants who are detained at the U.S. Navel Station at Guantanamo Bay, Cuba, have the constitutional privilege of habeas corpus. As such, the writ can only be suspended for specific, limited grounds: “The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.” Art. I, § 9, cl. 2. This decision was a direct response to the Detainee Treatment Act of 2005, which stripped courts of jurisdiction to consider writs of habeas corpus that are filed by individuals detained at Guantanamo.
Critical to the Court’s analysis was its view that the Constitution limits government; therefore, the government cannot decide when and how it is applied without the check of the judiciary. The Court noted that the United States has broad control over the Guantanamo Navel Station—the United States has had complete control over Guantanamo Bay for more than 100 years, since Spain ceded control of Cuba to the United States after the Spanish-American War.
The Court gave an historical narrative highlighting the importance of the writ to guard against improper detentions or imprisonments. The Court cited a 1627 decision where Charles I of England imprisoned certain individuals because they refused to lend him money. Those individuals sought to invoke the writ of habeas corpus, but Charles I was able to respond to the writ with a warrant signed by the attorney general that was held as sufficient response. There was a public outcry, and the House of Commons passed a law condemning such imprisonment without cause and providing specific procedures to be followed for guarding the protections of the writ of habeas corpus. This law provided the framework for the habeas statutes of the thirteen American colonies, and the Framers of the Constitution knew the history of the writ well.
The Court referred to English courts that considered the writ in cases involving individuals that were not English subjects—Spanish sailors and African slaves. The Court noted that the unique nature of the war on terror and the nature of Guantanamo detention do not have any precise historical parallel; however, the unique nature of the war on terror compelled the conclusion that the powers of the United States outside its borders are not unfettered and are still restricted by the Constitution.
In his dissent, Justice Scalia gave his own historical narrative and found that English cases did not extend the right to the writ of habeas corpus beyond the Crown’s sovereign territory. Scalia warned that giving such a right to enemy combatants “will almost certainly cause more Americans to be killed.”
Dueling Canons
This past term the Supreme Court decided a case involving a relatively technical bankruptcy issue. Florida Department of Revenue v. Piccadilly Lafeterias, Inc. (128 S.Ct. 2326). While the case did resolve a split among lower courts, it also highlights the continuing divergence of the Justices’ approaches to statutory interpretation. Even though this case will not be remembered as the most controversial of the term, it lends itself neatly to a textbook version of statutory interpretation.
In Piccadilly, the Court held that the stamp tax exemption available under 11 U.S.C § 1146(a) to asset transfers “under a plan confirmed” means that the exemption applies to a plan that was confirmed before such a transfer took place.
The asset transfer in Piccadilly involved the sale of substantially all of Piccadilly’s assets. The sale was approved and was granted exemption from the requirements of the Florida Tax Stamp law on February 13, 2004. Subsequently, on October 21, 2004, the bankruptcy court approved Piccadilly’s plan of reorganization that included the distribution of the proceeds of the sale according to a settlement agreement that was part of the approval of the sale.
Justice Thomas, writing for the majority that included Chief Justice Roberts, Justices Scalia, Kennedy, Souter, Ginsburg, and Alito, accepted the State of Florida’s arguments that the stamp act exemption only applies to postconfirmation transfers. Nevertheless, the Court addressed arguments that the language was ambiguous and resolved any ambiguities in favor of Florida’s position – all while employing no less than three canons of construction to support its holding.
Justice Breyer, writing for the dissent, argued that the language was not as clear as the majority described. In light of the ambiguity, the dissent countered that majority opinion did not serve the primary purposes of chapter 11. Rather, the statute should be read to promote one of the primary purposes of chapter 11, i.e., maximizing available property to satisfy creditors. In addition, Breyer countered that the bright line rule in this case might actually work against this purpose because it would delay and possibly minimize the return on a given sale if the stamp act exemption applied only postconfirmation.
10b-5 Stunted
The Court shut the door on securities class actions against third parties for aiding and abetting. In Stoneridge Investment Partners, LLC, v. Scientific-Atlantic, 552 U.S. ____ (2008), the Court considered the parameters of the private right of action of § 10(b) of the federal Securities Exchange Act of 1934 and SEC Rule 10b-5.
Investors sued Charter Communications and certain other entities, including Scientific-Atlantic and Motorola, for Charter’s fraudulent practices that resulted in inflated revenues.
Scientific-Atlantic and Motorola helped Charter mislead investors by entering into an arrangement that allowed Charter to overpay them for certain goods while they purchased advertising from Charter in return. Scientific-Atlantic and Motorola reported the transactions as a wash, and Charter reported the advertising purchases as revenue and then capitalized its purchases of the goods (contrary to generally accepted accounting principles).
Justice Kennedy wrote for the majority and held that reliance is a necessary element of a § 10(b) action and requires a causal connection between the complained of action and the plaintiff’s injury. In the past, the Court has found a rebuttable presumption of such reliance where: (1) an entity had a duty to disclose a material fact and failed to disclose, or (2) there was a public statement that justified imposition of the fraud-on-the-market doctrine (public information is reflected in the market price, and therefore anyone who buys the stock relied on the statements). These presumptions, however, were not applicable to the case at hand. The plaintiffs asserted a “scheme liability” theory to hold Scientific-Atlantic and Motorola liable for Charter’s issued financial statements: Charter issued fraudulent financial statements to the public that were the natural and expected consequence of Scientific-Atlantic and Motorola’s deceptive actions.
The Court focused on the fact that it was Charter—and not the third-parties—that misled its auditors and filed fraudulent statements that misled the public. The Court further noted that Congress had enacted legislation specifically addressing aiding and abetting liability where only the SEC has authority to pursue the action. In addition, allowing such private actions would allow plaintiffs with weak claims to go after innocent companies. Overall, the Court found that Congress did not broaden private rights of actions under § 10(b) to extend to aiding and abetting liability, and it was not in the Court’s authority to find such a cause of action.
Justice Stevens, joined by Justice Souter and Justice Ginsburg, dissented. Stevens asserted that Charter’s fraud could not have happened without Scientific-Atlantic and Motorola’s knowing acquiescence and that their actions amounted to a “deceptive device” that is prohibited by § 10(b). Stevens also argued that it was enough that Scientific-Atlantic and Motorola’s acts had the foreseeable reaction of plaintiffs’ engaging in the particular securities transactions.
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