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  • Writer's pictureElizabeth Slattery

Keeping up with the Court: 12/4/23

As I was about to press "publish" on this post, I saw the sad news that retired Justice Sandra Day O'Connor passed away at age 93. We'll dedicate a longer post to the trailblazing legacy of Justice O'Connor, who was the first woman to serve on the Supreme Court. May her memory be a blessing to the justice's family and friends.

Next week is the Supreme Court's final sitting of year. The justices will wrap up the year with three oral arguments concerning a Big Pharma bankruptcy, taxes, and employment discrimination. Between Christmas shopping, holiday parties, and Santa visits, I bring you this preview of the upcoming arguments.


On Monday, the justices will hear argument in Harrington v. Purdue Pharma. If you haven't seen Dope Sick on Hulu, Painkiller on Netflix, or The Crime of the Century on HBO, allow me to bring you up to speed.

In the 1990s, Purdue Pharma developed OxyContin, a pain management drug for terminal cancer patients. The company obtained FDA approval to market OxyContin as a painkiller for chronic pain, despite its highly addictive nature. This significantly contributed to the opioid crisis. Purdue Pharma and its owners, the Sackler family, were hit with a "veritable deluge" of lawsuits brought by people suffering from opioid addiction and the families of people who overdosed on OxyContin. The claims against Purdue Pharma and the Sacklers are estimated to exceed $40 trillion.

In order to settle the civil claims, Purdue Pharma and the Sacklers agreed that the company and its various entities would file for bankruptcy, the Sacklers would contribute roughly $6 billion to a fund that would be used to resolve public and private claims, and all civil claims against the Sacklers would be released.

After an extensive mediation, the bankruptcy court approved this proposed plan, but several claimants and the U.S. Trustee objected. They appealed to the U.S. District Court for the Southern District of New York, which reversed the bankruptcy court and held that the Bankruptcy Code does not allow nonconsensual release of third-party claims against non-debtors.

A quick run-down of terminology: Purdue Pharma and its related entities are the debtors, the Sacklers are the non-debtors, the U.S. Trustee is a Justice Department official who serves as a watchdog and oversees bankruptcy cases, and third parties are, well, everybody else suing Purdue Pharma and the Sacklers.

The U.S. Court of Appeals for the Second Circuit reversed the district court, explaining that it was not the court's role to answer "questions about fairness and accountability . . . in releasing parties from liability for actions that cause great societal harm." The appeals court found that the relevant provisions of the Bankruptcy Code permit nonconsensual third-party releases of direct claims against non-debtors. The court reasoned that such releases were "equitable and appropriate" under the circumstances of the case, citing the fact that the Sacklers were contributing "the largest amount that shareholders have ever paid in such a context of these types of third party claims."

Now the case is before the Supreme Court, and the question presented is whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.

The Trustee argues that bankruptcy law concerns the relations between debtors and their creditors – not non-debtors. The Bankruptcy Code:

"establishes a basic quid pro quo. A debtor seeking bankruptcy relief must shoulder a host of obligations. . . . In exchange, the debtor may receive a discharge of its debts . . . [and] release . . . from personal liability with respect to any discharged debt by voiding any past or future judgments on the debt and by operating as an injunction to prohibit creditors from attempting to collect or to recover the debt.”

As non-debtors, the Trustee maintains, the Sacklers have not shouldered the obligations of bankruptcy. On the contrary, the Trustee says they drained Purdue's total assets by 75%, leaving the bankruptcy estate with insufficient assets to fund the plan. Thus, the Sacklers are not entitled to the benefits of bankruptcy.

The Sacklers contend that Congress has long afforded bankruptcy courts "flexibility to tailor solutions to the circumstances of each case." They maintain that the Trustee's categorical rule is contrary to the text of the Bankruptcy Code, which expressly allows a bankruptcy court to issue "any order and approve any appropriate plan provision that does not contravene specific limitations in the Code."


On Tuesday, the justices will hear Moore v. United States, which asks whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states. As an aside, Andrew Grossman of BakerHostetler (who just so happens to be an adjunct scholar at Cato and former colleague of mine) will make his Supreme Court debut, arguing on behalf of the Moores. 

Under the original Constitution, Congress had the power to levy “indirect taxes” uniformly, whereas “direct taxes” had to be apportioned among the states. Apportionment was set in proportion to the census or enumeration of the states’ populations, meaning that if one state had twice the population of another, it had to contribute twice as much.

In a series of decisions throughout the 19th century, however, the Supreme Court limited “direct taxes” to capitation or head taxes, land taxes, and taxes on personal property and the income from personal property. In Pollock v. Farmers Loan & Trust Co. (1895), the Court held taxes on income of real estate and of personal property, such as rents and dividends, are direct taxes. Backlash to this ruling led to the ratification of the Sixteenth Amendment, which overruled Pollock and created a limited exception to the apportionment requirement.

For those who misplaced their pocket Constitutions (order a new one today!), the Sixteenth Amendment empowers Congress to “lay and collect taxes on incomes, from whatever source derived, without apportionment” among the states. It left undisturbed the requirement that Congress apportion other types of direct taxation, such as a tax on property interests.

In Eisner v. Macomber (1920), the Supreme Court interpreted "income" under the Sixteenth Amendment to mean "the gain derived from capital, from labor, or from both combined." The Court explained that income is not "a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital." Fast forward to the fall of 2017: Congress passed the Tax Cuts and Jobs Act, which included the Mandatory Repatriation Tax aka MRT.

Man on couch talking
The Dude abides ... except when it comes to taxes.

It’s a one-time tax targeting American shareholders of foreign corporations that reinvested earnings overseas rather than distributing them to shareholders as dividends. Previously,

shareholders would only incur tax liability when a foreign corporation distributed

earnings and the shareholders repatriated those gains. But the MRT tried something new: deeming the foreign corporation’s retained earnings as shareholder “income” and taxing shareholders according to their proportional ownership stake.

Charles and Kathleen Moore are minority shareholders in KisanKraft, a company that imports and distributes affordable farming equipment to impoverished areas of India. Between 2006 and 2017, KisanKraft reinvested its earnings to grow its business, without distributing earnings to its shareholder. The Moores learned that due to the MRT, they had over $130,000 in taxable “income.” They paid up but then sought a refund for the taxes on this unrealized income.

The U.S. District for the Western District of Washington and the U.S. Court of Appeals for the Ninth Circuit rejected the Moores’ claim that MRT is an unapportioned direct tax because it taxes them on ownership of personal property (their shares) rather than on income they had realized. The courts held that realization of income is not constitutionally required in order for Congress to levy a tax consistent with the Sixteenth

Amendment. Judge Patrick Bumatay dissented from the U.S. Court of Appeals for the Ninth Circuit's refusal to rehear the case en banc. Y'all know Anastasia and I are suckers for a good dissent. He worried that by "dispensing with the realization requirement for income without offering any other limiting principle, we open the door to expansion of the federal taxing power beyond the limits placed by the Constitution."

At the Supreme Court, the Moores maintain that the Sixteenth Amendment’s reach is limited to “taxes on incomes,” and “[r]ealization is not only what distinguishes income

from property in general, but what makes income income.” The United States argues that MRT is an income tax and realization is not a constitutional requirement but merely "founded on administrative convenience."

The government maintains that MRT is constitutional on the alterntaive ground that it's an excise tax (which seems like having your cake and eating it too!). The Moores contend that excise taxs turn on the taxpayer's activities, not their mere ownership, and the government's theory would "apply with equal force to all investors in stocks or bonds, effectively abrogating the entire body of the Court’s Sixteenth Amendment decisions on investor income." If you're interested in a deeper dive, check out this Federalist Society discussion I moderated with two legal historians.

DISCLAIMER: Anastasia's employer, the Cato Institute, filed an amicus brief supporting the Moores.


Last but not least, the Court will hear Muldrow v. St. Louis, which raises the question of whether Title VII of the Civil Rights Act of 1964 prohibits discrimination in transfer decisions absent a separate court determination that the transfer decision caused a significant disadvantage. Title VII bars employers from making employment decisions (hiring, firing, and everything in between) based on an individual's race, color, religion, sex, or national origin.

Jatonya Clayborn Muldrow alleges that her employer, the City of St. Louis Police Department, discriminated against her based on her sex when it transferred her from the department's intelligence division to a different job. During her time with the intelligence division, Muldrow worked a traditional 9 to 5, Monday-Friday scheduled. She was also deputized by the FBI as an officer with its human trafficking unit, which offered a number of benefits including the ability to earn up to $17,500 in annual overtime pay.

Dolly Parton Dallas cowboys half time
Did someone say 9 to 5? (photo: Ron Jenkins/Getty Images)

When Muldrow was transfered to a mostly administrative position, she was no longer eligible for the FBI overtime pay, her schedule changed, and a male sargeant filled her previous post. She filed a discrimination charge with Missouri's Commission on Human Rights and was issued a right to sue letter. She subsequently filed suit in state court, which was removed to federal court. The U.S. District for the Eastern District of Missouri and U.S. Court of Appeals for the Eighth Circuit ruled for the City, finding that a job transfer, absent proof of "significant disadvantage" resulting from that transfer, is insufficient to constitute an adverse employment action.

At the Supreme Court, Muldrow contends that Title VII and the Court's related jurisprudence do not mandate a showing of significant disadvantage or other heightened harm. The United States filed an amicus brief supporting Muldrow (a good friend to have!), maintaining that Title VII prohibits "all discriminatory job transfer decisions, not just those that a court concludes constitute a demotion or otherwise result in a significant disadvantage." The City of St. Louis argues Title VII does not regulate trivial, de minimis harms and that Muldrow's transfer was part of a routine staffing realloation that affected nearly two dozen officers (male and female).

And that's it. Check back next week for a recap of these arguments as well as a tribute to Justice Sandra Day O'Connor.


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