Editor’s Note: Law Week Colorado edits court opinion summaries for style and, when necessary, length.
Becerra v. San Carlos Apache Tribe
The Indian Self-Determination and Education Assistance Act enables a Native American tribe to enter into a “self-determination contract” with the Indian Health Service to assume responsibility for administering the health care programs that IHS would otherwise operate for the tribe.
When IHS administers such programs itself, it funds its operations through congressional appropriations and third-party insurance payments. Health care programs administered by a tribe under a self-determination contract have a parallel funding structure.
First, IHS must provide to the tribe the secretarial amount, which “shall not be less” than the congressionally appropriated amount that IHS would have used to operate such programs absent the self-determination contract. Second, like IHS when it runs the health care programs, a contracting tribe can collect revenue from third-party payers like Medicare, Medicaid and private insurers. These third-party funds are called “program income” and must be used by the tribe “to further the general purposes of the contract” with IHS.
The secretarial amount and program income, however, don’t place a contracting tribe on equal footing with IHS. That is because the tribe must incur certain overhead and administrative expenses IHS doesn’t incur when it runs the health care programs. To remedy this funding shortfall, Congress amended ISDA to require IHS to pay the tribe “contract support costs” to cover such “reasonable costs for activities which must be carried on by a [tribe] as a contractor to ensure compliance with the terms of the [self-determination] contract.”
Contract support costs eligible for repayment include “direct program expenses for the operation of the Federal program” and “any additional administrative or . . . overhead expense incurred by the [tribe] in connection with the operation of the Federal program, function, service, or activity pursuant to the contract.” But such costs are limited to those “directly attributable to” self-determination contracts. And no funds are available for “costs associated with any contract. . . entered into between [a tribe] and any entity other than [IHS].”
These cases involve self-determination contracts between IHS and two tribes — the San Carlos Apache Tribe and the Northern Arapaho Tribe. Both tribes sued the government for breach of contract, contending that although they used the secretarial amount and program income to operate the health care programs they assumed from IHS under their self-determination contracts, IHS failed to pay the contract support costs they incurred by providing health care services using program income. The 9th and 10th Circuit Courts of Appeals concluded that each tribe was entitled to reimbursement for such costs.
The U.S. Supreme Court held ISDA requires IHS to pay the contract support costs that a tribe incurs when it collects and spends program income to further the functions, services, activities, and programs transferred to it from IHS in a self-determination contract.
It affirmed the judgment of the appeals courts.
Chief Justice John Roberts Jr. delivered the opinion of the court, in which Justices Sonia Sotomayor, Elena Kagan, Neil Gorsuch and Ketanji Brown Jackson joined. Justice Brett Kavanaugh filed a dissenting opinion, in which Justices Clarence Thomas, Samuel Alito Jr. and Amy Coney Barrett joined.
The dissenting justices asserted that for the past 30 years, the executive branch has interpreted the relevant statutory provisions to require tribes to pay those overhead costs out of the third-party income collected from Medicare, Medicaid and private insurers. They noted Congress never overturned that practice.
The dissenting justices wrote they thought Congress and the president should make appropriations decisions and tradeoffs in the legislative process.
Michael Connelly and Thomas Connelly were the sole shareholders in Crown C Supply, a small building supply corporation. The brothers entered into an agreement to ensure Crown would stay in the family if either brother died. Under that agreement, the surviving brother would have the option to purchase the deceased brother’s shares. If he declined, Crown itself would be required to redeem (i.e., purchase) the shares. To ensure that Crown would have enough money to redeem the shares if required, it obtained $3.5 million in life insurance on each brother.
After Michael Connelly died, Thomas Connelly elected not to purchase his brother’s shares, thus triggering Crown’s obligation to do so. Michael Connelly’s son and Thomas Connelly agreed that the value of Michael Connelly’s shares was $3 million, and Crown paid the same amount to Michael Connelly’s estate. As the executor of Michael Connelly’s estate, Thomas Connelly then filed a federal tax return for the estate, which reported the value of Michael Connelly’s shares as $3 million. The Internal Revenue Service audited the return.
During the audit, Thomas Connelly obtained a valuation from an outside accounting firm. That firm determined that Crown’s fair market value at Michael Connelly’s death was $3.86 million, an amount that excluded the $3 million in insurance proceeds used to redeem Michael Connelly’s shares on the theory that their value was offset by the redemption obligation. Because Michael Connelly had held a 77.18% ownership interest in Crown, the analyst calculated the value of Michael Connelly’s shares as approximately $3 million ($3.86 million x 0.7718).
The IRS disagreed. It insisted that Crown’s redemption obligation didn’t offset the life-insurance proceeds and assessed Crown’s total value as $6.86 million ($3.86 million + $3 million). The IRS then calculated the value of Michael Connelly’s shares as $5.3 million ($6.86 million x 0.7718).
Based on this higher valuation, the IRS determined that the estate owed an additional $889,914 in taxes. The estate paid the deficiency and Thomas Connelly, acting as executor, sued the U.S. for a refund. The district court granted summary judgment to the government. The court held that, to accurately value Michael Connelly’s shares, the $3 million in life-insurance proceeds must be counted in Crown’s valuation. The 8th Circuit Court of Appeals affirmed.
The U.S. Supreme Court held a corporation’s contractual obligation to redeem shares isn’t necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.
The court reasoned Crown’s promise to redeem Michael Connelly’s shares at fair market value didn‘t reduce the value of those shares.
The U.S. Supreme Court affirmed.
Justice Clarence Thomas delivered the opinion for a unanimous court.
Truck Insurance Exchange v. Kaiser Gypsum Co.
Truck Insurance Exchange is the primary insurer for companies that manufactured and sold products containing asbestos. Two of those companies, Kaiser Gypsum Co. and Hanson Permanente Cement, filed for Chapter 11 bankruptcy after facing thousands of asbestos-related lawsuits. As part of the bankruptcy process, the debtors filed a proposed reorganization plan. That plan creates an asbestos personal injury trust under a provision that allows Chapter 11 debtors with substantial asbestos-related liability to fund a trust and channel all present and future asbestos-related claims into that trust. Truck is contractually obligated to defend each covered asbestos personal injury claim and to indemnify the debtors for up to $500,000 per claim.
For their part, the debtors must pay a $5,000 deductible per claim, and assist and cooperate with Truck in defending the claims. The plan treats insured and uninsured claims differently, requiring insured claims to be filed in the tort system for the benefit of the insurance coverage, while uninsured claims are submitted directly to the trust for resolution.
Truck sought to oppose the plan under the Bankruptcy Code, which permits any “party in interest” to “raise” and “be heard on any issue” in a Chapter 11 bankruptcy. Among other things, Truck argued that the plan exposes it to millions of dollars in fraudulent claims because the plan doesn’t require the same disclosures and authorizations for insured and uninsured claims. Truck also asserted that the plan impermissibly alters its rights under its insurance policies.
The district court confirmed the plan. It concluded, among other things, that Truck had limited standing to object to the plan because the plan was “insurance neutral,” i.e., it didn’t increase Truck’s prepetition obligations or impair its contractual rights under its insurance policies. The 4th Circuit Court of Appeals affirmed, agreeing that Truck wasn’t a “party in interest” because the plan was “insurance neutral.”
The U.S. Supreme Court held an insurer with financial responsibility for bankruptcy claims is a “party in interest” that “may raise and may appear and be heard on any issue” in a Chapter 11 case.
The high court asserted the law’s text, context and history confirm that an insurer like Truck with financial responsibility for a bankruptcy claim is a “party in interest” because it may be directly and adversely affected by the reorganization plan.
The high court reversed the judgment and remanded the case.
Justice Sonia Sotomayor delivered the opinion of the court, in which all other members joined, except Justice Samuel Alito Jr. who took no part in the consideration or decision of the case.