SCOTUS to Review Expenses Clause, Overtime and Bankruptcy Fraud
On May 2, the United States Supreme Court added three more cases to its docket for the next term. The first raises the question of whether expense clause legislation can ever confer a privately enforceable “right” under section 1983. The second relates to when an employee is “highly paid” and is not therefore not subject to federal rules on overtime pay. And the third is whether the US Bankruptcy Code’s prohibition against the discharge of debts incurred as a result of fraud applies when the debtor has no knowledge of the fraud.
The Expense Clause and Overtime Pay cases will be closely monitored as they are likely to affect thousands of public entities and private companies. A number of amicus briefs were filed in these cases while they were pending in their respective circuit courts, and both certs. the petitions had several amicus briefs in support. And while the bankruptcy case did not result in amicus briefs at the cert stage, it is also likely to have significant ramifications, especially for bankruptcy cases involving allegations of fraud.
Use of Section 1983 to enforce rules in expense clause statutes
Section 1983 provides a cause of action for deprivation, under state law, of “any right … guaranteed by the Constitution and laws.” This provision is known as a tool to enforce constitutional rights, but in 1980 the Supreme Court ruled that the reference to “and laws” means that Section 1983 can also be used to enforce certain statutory rights. In Marion v. Talevski County Health and Hospital Corporationthe Supreme Court will consider whether federal laws enacted under the Spending Clause — which include a wide variety of statutes governing Medicaid and other federal spending programs — can create the kind of statutory rights that are privately enforceable through the Section 1983.
In particular, in 1990, in Wilder vs. Virginia Hospital Association, the Supreme Court allowed private parties to use Section 1983 to enforce rights contained in expense clause statutes. But over the next three decades wilder, the Court found no other private enforceable right in the expense clause legislation. And the accused of Marion County Health and Hospital Society — an Indiana long-term care facility, its public owner, and its private management company — asked the court to reconsider wilder and to assert categorically that expense clause laws do not implicitly confer such rights. They insist that the expenditure clause laws operate as contracts between the federal government and the recipient of federal funding, and they further argue that when Congress enacted the Section 1983 contracts, they did not not create enforceable rights by third party beneficiaries. Accordingly, the defendants argue that the expense clause statutes cannot create statutory “rights” within the meaning of section 1983. If the Court disagreed with this assertion, the defendants also sought to The court will consider whether the federal law’s transfer and medication nursing home reform rules create such rights.
Object to cert. petition, the plaintiffs argued that there was no reason to reconsider wilder, arguing that it was ratified by Congress and that there is no reason to isolate the expense clause statutes for special treatment. The plaintiffs also pointed out that there is no circuit division on the issue of federal nursing home reform law. Nevertheless, the Court agreed to consider both issues. And because spending clause laws regulate many entities in multiple extended benefit programs – such as Medicare and Medicaid, which in 2020 reached nationwide spending that exceeded $829 billion and $670 billion, respectively – the Court’s decision will have considerable economic consequences.
Application of overtime pay rules to employees highly paid at the daily rate
In Helix Energy Solutions Group, Inc. v. Hewitt the Court will determine when the Fair Labor Standards Act (FLSA) overtime pay rules apply to employees who are both highly paid and paid daily. The FLSA generally requires employers to pay “time and a half” for time worked beyond the standard 40-hour work week, but exempts those “employed in a bona fide executive, administrative, or professional capacity” from this requirement. . Department of Labor regulations provide detailed rules governing employees covered by this exception, and such a settlement considers employees exempt if 1) they perform at least one of a defined set of executive, administrative and professional functions, 2) earn at least $107,432 per year, and 3) earn “at least $684 per week paid on a salary or fee basis.”
This case — which involves an employee who earned more than $200,000 a year overseeing 12 to 14 other employees on offshore oil and gas operations — turns on the last of those criteria, commonly referred to as the “base salary” requirement. The employer paid the employee once every two weeks on the basis of a daily rate of nearly $1,000 per day, regardless of the number of hours worked that day. And the employer argues that because the employee received nearly $1,000 in each week he worked, he earned “at least $684 per week paid on the basis of salary or fees” and therefore meets the basic salary requirement.
The United States Court of Appeals for the Fifth Circuit issued a sharply divided decision, 12 to 6 en banc, rejecting this argument. The majority of the Fifth Circuit held that the key fact was not the employee’s high compensation, but rather the fact that his compensation was calculated on a daily basis. Because he was paid at a daily rate, she concluded, the employee could only be considered an exempt employee under a separate regulation which, the majority explained, provides “a special rule which must be satisfied before an hourly or daily rate is considered ‘wage’.” Because the employer did not argue that he met the requirements of this regulation, the majority of the Fifth Circuit ruled that the employee was not exempt and therefore entitled to retroactive overtime pay.
The Supreme Court is now ready to consider this complex issue for itself. And as the cert. petition notes, the court’s response will have far-reaching implications, particularly for the wide range of employers, such as those in the oil and gas industry, who often pay per diem rates to workers.
Disclaimer for Frauds of Others
The U.S. Bankruptcy Code offers debtors a way to discharge their debts and thereby obtain a fresh start – but the law exempts certain debts from discharge, including debts of money or goods obtained by “de false pretences, misrepresentation or actual fraud. ” And in Bartenwerfer vs. Buckleythe court will decide whether this fraud exception applies to the exclusion of liability for fraud committed by a debtor’s agent or business partner even where the debtor was unaware of the fraud .
The fraud at issue here stems from a husband’s failure to disclose alleged defects in a house he and his wife sold together as partners. After the husband incurred a judgment in state court for non-disclosure of material facts — a judgment imputed to the wife under common law principles — the couple filed for joint bankruptcy. . The bankruptcy court held that the judgment against the husband was not dischargeable under the fraud exception, but—applying a “knew or ought to have known” standard developed by the U.S. Court of Appeals for the Eighth Circuit – he held that the fraud exception does not apply to the wife because she was completely unaware of the fraud. The United States Court of Appeals for the Ninth Circuit, however, backtracked. In a brief unpublished opinion, the Ninth Circuit departed from the Eighth Circuit and ruled that a debtor’s liability for fraud is not dischargeable “regardless of his knowledge of the fraud.”
The Supreme Court will now resolve this inter-circuit dispute, and its response will likely provide a uniform rule governing partner-agency relationships in a wide variety of contexts. Bankruptcy practitioners across the country will monitor the court’s decision.