Yesterday’s Supreme Court Citations

May 14, 2013

Bullock v. Bankchampaign, N.A.

Docket No. 11-1518

2013 WL 1942393


In an adversary proceeding, judgment creditor sought a determination that judgment debt, which arose from Illinois state court’s determination that Chapter 7 debtor breached his fiduciary duty by self-dealing while serving as trustee of his father’s trust, was excepted from discharge. The United States Bankruptcy Court for the Northern District of Alabama entered summary judgment for judgment creditor. Debtor appealed. The District Court and  Eleventh Circuit Court of Appeals affirmed.

The Supreme Court vacated and remanded holding that the term “defalcation,” as used in the section of the Bankruptcy Code excepting from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny,” includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior; abrogating In re Sherman, and In re Uwimana.

Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the (nonprofessional) trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times.  His siblings obtained a judgment against him in state court for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on certain of petitioner’s interests—including his interest in the original trust—in order to secure petitioner’s payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of petitioner’s state-court-imposed debts to the trust, and the Bankruptcy Court granted respondent summary judgment, holding that petitioner’s debts were not dischargeable pursuant to 11 U.S.C. § 523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The Supreme Court disagreed and instead found that where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty. Thus, the Court held that the Court of Appeals applied a standard of “objectiv[e] reckless [ness]” to facts presented at summary judgment and remanded the case to permit the court to determine whether further proceedings are needed and, if so, to apply the heightened standard set forth by the Supreme Court.

Justice Breyer delivered the opinion for a unanimous court.



Bowman v. Monsanto Company

Docket No. 11-796

2013 WL 1942397


Holder of patents for genetically modified soybean seed brought action against farmer, alleging farmer infringed patents by planting progeny of genetically altered seeds covered by patents. The District Court for the Southern District of Indiana, granted holder’s motion for summary judgment of infringement, and farmer appealed. The United States Court of Appeals for the Federal Circuit affirmed.

The Supreme Court held that the patent exhaustion doctrine did not permit farmer to reproduce the seeds through planting and harvesting without the patent holder’s permission.

Respondent Monsanto invented and patented Roundup Ready soybean seeds, which contain a genetic alteration that allows them to survive exposure to the herbicide glyphosate. It sells the seeds subject to a licensing agreement that permits farmers to plant the purchased seed in one, and only one, growing season. Growers may consume or sell the resulting crops, but may not save any of the harvested soybeans for replanting. Petitioner Bowman purchased Roundup Ready soybean seed for his first crop of each growing season from a company associated with Monsanto and followed the terms of the licensing agreement. But to reduce costs for his riskier late-season planting, Bowman purchased soybeans intended for consumption from a grain elevator; planted them; treated the plants with glyphosate, killing all plants without the Roundup Ready trait; harvested the resulting soybeans that contained that trait; and saved some of these harvested seeds to use in his late-season planting the next season. After discovering this practice, Monsanto sued Bowman for patent infringement. Bowman raised the defense of patent exhaustion, which gives the purchaser of a patented article, or any subsequent owner, the right to use or resell that article. The District Court rejected Bowman’s defense and the Federal Circuit affirmed.  Under the patent exhaustion doctrine, “the initial authorized sale of a patented article terminates all patent rights to that item”… and confers on the purchaser, or any subsequent owner, “the right to use [or] sell” the thing as he sees fit.  However, the doctrine restricts the patentee’s rights only as to the “particular article” sold.  It leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item. By planting and harvesting Monsanto’s patented seeds, Bowman made additional copies of Monsanto’s patented invention, and his conduct thus falls outside the protections of patent exhaustion. Exhaustion does not extend to the right to make new copies of the patented item. If Bowman was granted that exception, patents on seeds would retain little value. Thus, patent exhaustion does not permit a farmer to reproduce patented seeds through planting and harvesting without the patent holder’s permission.

Justice Kagan delivered the opinion for a unanimous Court.

Dan’s City Used Cars, Inc. v. Pelkey

Docket No. 12-52

2013 WL 1942398

Vehicle owner brought action against towing company that towed his vehicle and later traded it to a third party without compensating owner, alleging violations of state laws governing enforcement of statutory liens for storage and towing fees, the New Hampshire Consumer Protection Act, and common law negligence. The Superior Court, Northern Judicial District of Hillsborough granted summary judgment to towing company on grounds that the Federal Aviation Administration Authorization Act (FAAAA) preempted owner’s claims. Owner appealed. The Supreme Court of New Hampshire reversed and remanded.

The U.S. Supreme Court affirmed holding that the FAAAA does not preempt state-law claims for damages stemming from the storage and disposal of a towed vehicle, abrogating Weatherspoon v. Tillery Body Shop, Inc.

The Federal Aviation Administration Authorization Act of 1994 (FAAAA) preempts state laws “related to a price, route, or service of any motor carrier … with respect to the transportation of property.” Plaintiff alleged that defendant Dan’s City Used Cars, a towing company, took custody of his car after towing it from his landlord’s parking lot without Pelkey’s knowledge, failed to notify him of its plan to auction the car, held an auction despite Pelkey’s notice that he wanted to reclaim the car, and eventually traded the car away without compensating Pelkey for the loss of his vehicle. In disposing of his car, Pelkey further alleged, Dan’s City did not meet the requirements contained in chapter 262 of the New Hampshire Revised Statutes Annotated, which regulates the disposal of abandoned vehicles by a “storage company.” Dan’s City’s misconduct, Pelkey charged, both violated New Hampshire’s Consumer Protection Act and breached the towing company’s statutory and common-law duties as a bailee to use reasonable care while in possession of a bailor’s property.   The Supreme Court found that where Congress has superseded state legislation by statute, the Court’s task is to “identify the domain expressly pre-empted,” focusing first on the statutory language. The  phrase “related to” embraces state laws “having a connection with or reference to” carrier “ ‘rates, routes, or services,’ “ whether directly or indirectly. At the same time, the breadth of the words “related to” does not mean that the preemption clause should be read with an “uncritical literalism.” Thus,  § 14501(c)(1) does not preempt state laws affecting carrier prices, routes, and services “in only a ‘tenuous, remote, or peripheral … manner.’ Pelkey’s state-law claims escape preemption because they are “related to” neither the “transportation of property” nor the “service” of a motor carrier. The FAAAA addition of the words “with respect to the transportation of property”—significantly limits the FAAAA’s preemptive scope. It is not sufficient for a state law to relate to the “price, route, or service” of a motor carrier in any capacity; the law must also concern a motor carrier’s “transportation of property.” Title 49 defines “transportation,” in relevant part, as “services related to th[e] movement” of property, “including arranging for … storage [and] handling.” § 13102(23)(B). Pelkey’s Consumer Protection Act and negligence claims are not “related to th[e] movement” of his car. Chapter 262 regulates the disposal of vehicles once their transportation—here, by towing—has ended. Pelkey seeks redress only for conduct occurring after the car ceased moving and was stored. Dan’s City maintains that because § 13102(23)(B)’s definition of “transportation” includes “storage” and “handling,” Pelkey’s claims fall within § 14501(c)(1)’s preemptive ambit. But “storage” and “handling” fit within § 13102(23)(B)’s definition only when those services “relat[e] to th [e] movement” of property. Thus temporary storage of an item in transit en route to its final destination qualifies as “transportation,” but permanent storage does not. Here, no storage occurred in the course of transporting Pelkey’s vehicle.  Pelkey’s claims are also unrelated to a “service” a motor carrier renders its customers. The transportation service Dan’s City provided—removal of Pelkey’s car from his landlord’s parking lot—did involve the movement of property, but that service ended months before the conduct on which Pelkey’s claims are based. Because chapter 262, on which Pelkey relies, addresses “storage compan[ies]” and “garage owner[s] or keeper[s],” not transportation activities, it has neither a direct nor an indirect connection to transportation services a motor carrier offers its customers.

Justice Ginsburg  delivered the opinion for a unanimous Court.