Earl Warren: Number 694, Perry versus Commercial Loan Company -- Commerce Loan Company. Mr. Harris. Oh, we'll wait just a moment until counsel is ready. Now, Mr. Harris you may proceed with your argument.
Robert J. Harris: Mr. Chief Justice and members of the Court. This matter known as In re Perry comes for this Court to review the judgment of the Circuit Court of Appeals of the Sixth Circuit which judgment was entered on the 25th of January, 1965. Writ of certiorari was filed here and granted on October 25, 1965. If it please the Court, there's really no -- there's no question involved here except one very simple claim. The issues can be resolved to one issue. Can a wage earner be permitted to file a Chapter XIII proceeding wherein he asks for an extension of time to pay his bills in full, when he has received a prior discharge in straight bankruptcy within six years of filing the extension plan under the Chapter XIII? Now it's important to the issue to distinguish between a composition and an extension and I mean a wage earner plan by way of composition or wage earner plan by way of extension because provision is made for both proceedings under the Chapter XIII Act, but whether this is a -- for the fact that this is an extension plan, is of primary importance, the decision of this case. Composition of course is where the debtor would say, “I can't pay my debts in full. I propose to pay so much on a dollar -- 50 cents, 75 cents on a dollar. The creditors will go along with me and consent to it, then within the time limits of a Chapter XIII Act of three years. I could pay off 50 to 75 cents on a dollar,” that's a composition. He has been paying his debts in full. An extension plan is where the debtor says to the court, “I want to pay my bills in full, a 100%, I want to pay my secured creditors a 100%, my unsecured creditors a 100%, all I want is time. I want a three-year period or less in some cases to pay my bills in full. I want the protection of the court, stay suits against me and garnishments, so that I hold my job and pay my debts,” that's what an extension plan is. Now that's what Perry filed in the District Court for the Eastern District of Kentucky. He filed a wage earner plan in which he said, “I owe about $1,400 and I want to pay them -- my debts in full both secured and unsecured creditors. I make so much money a month and I have to pay my rent, food, utilities, and transportation, and etcetera. I have $60 left and this $60 a month was taken out of my wages or will pay my debts in less than the three-year period, in fact about 28 months.” And he asked the court, the referee in bankruptcy to confirm the plan. But a motion was filed by one of the secured creditors that had a mortgage on certain furniture, it was listed in the plan, it would have been paid in full. The Commerce Loan objected to confirmation, filed a motion to dismiss and deny confirmation. The referee sustained the motion, denied confirmation. The matter was taken to the district judge. The referee's opinion was affirmed subsequently it was taken to U.S. Circuit Court for the Sixth District and was affirmed, and we're here on this matter today.
Byron R. White: And what was the -- what was the prior bankruptcy?
Robert J. Harris: The prior bankruptcy was a straight bankruptcy filed about four and a half years prior to the wage earner petition. It was -- that was recited in his petition. In his Chapter XIII petition, he indicated an answer to one of the questions in the petition, had he filed any bankruptcy before and he said, “Yes. I filed a bankruptcy petition in 1959 and received the discharge in 1959” and the Chapter XIII petition was filed about four -- four and a half years later in 1963. That was a matter of record in the petition itself that he had received a discharge in straight bankruptcy within the six-year period. Now, there are many --
Byron R. White: There's no -- there's nothing in this case then that raises issue whether a prior wage earner's plan would bar a subsequent one?
Robert J. Harris: Well, --
Byron R. White: Whether a straight or prior straight bankruptcy was filed?
Robert J. Harris: Whether you could file two successive wage earner plans?
Byron R. White: Is that the --
Robert J. Harris: -- in six years. Well, Holmes -- the Holmes case decided you could, the Tenth Circuit decide --
Byron R. White: It doesn't involve here.
Robert J. Harris: That's not involved here.
Byron R. White: An earlier straight bankruptcy?
Robert J. Harris: Earlier straight bankruptcy. These are not two successive wage earner plans. Now, there's plenty of argument, if it please the Court, on a philosophical and sociological ground, but we want to meet the statutory objections head-on in this case. And all the while, we'll dwell on the sociological aspects of it, I still feel that the congressional intent as indicated by the Chapter XIII statutes was that this relief which we seek, wage earner plan by way of extension, is afforded to any wage earner regardless of the fact that he has had prior relief under the Bankruptcy Act within six years. And I don't want to burden the Court, but these statutes are technical and important and I don't want to even paraphrase them and at time to time I will be verbatim. A section of the Code, I would like to indicate first to the Court the contents of a petition in Chapter XIII, which is Section 623 of the Chapter XIII Act, and same Section 1023 of Title 11. A petition filed under this chapter shall state that the debtor is insolvent or unable to pay his bills as they may mature and he desires to effect a composition or an extension out of his future earnings. And I call the attention of the Court that here a composition or an extension is contemplated or both by the Chapter XIII Act, but in this particular case, the debtor Perry proposed to pay his bills in full and only asked for an extension of time. The treatment is the crux of the whole case. Now, it may run through the minds of the members of this Court, “Well, why is it that this debtor having had the advantage of the Bankruptcy Act and proceed to discharge some four years prior -- why is he now again in this financial dilemma?” And I say that that probably does run to the minds -- run through your minds, but I would add to this, to this question, why is it that this debtor and thousands and thousands of others throughout the country had found that bankruptcy is just not the solution to their problems and there's no question to what -- that a straight bankruptcy does not solve the financial problems of the lower one-third of a segment of our society. We're dealing with wage earners who live from one pay day to the next. They're the ones who file bankruptcy. They're the ones that over extend themselves in installment buying. They cannot resist the sales pressures for the various credit houses. They're the ones that have to have credit. If they get sick or they laid off for matter of few weeks, they need credit to survive. And of course, thousands and thousands of them find themselves in financial space where bankruptcy has been their hopeful solution. But why is it that they return to the lawyer and say, “Well, here I am again -- two years, three years, I'm back in financial trouble.” We lawyers that practicing in the bankruptcy field, find this occurs more and more. And we've sought a solution and we feel that Chapter XIII is the solution. But there are several reasons why they get back in financial trouble. In the first place, they're not of the most intelligent type of person. They're the low economic group, and they are constantly bombarded by furniture stores, appliance stores, used car dealers, that as soon as they see that bankruptcy petition in the paper, they say, “Well, here is a man that can't go bankrupt for six more years. He's a pretty good risk.” So this bankrupt is solicited by various firms selling various merchandise and he's a human being. He wants to provide things for his family that other people do and he doesn't realize that again, he's over extending himself. He doesn't look out for the rainy day, but there are two or three other considerations why he gets into trouble. He can't go to a legitimate financial institutions for help after he's been bankrupt. An emergency arises and it doesn't take very much to be in an emergency in this man's household, a few weeks off work, and the gas electric may be ready to shut off. So, where is he to go? He invariably will go back to a finance company that he has previously discharged in bankruptcy. He hasn't paid them. He hasn't paid the deficiency balance. It may be a deficiency on a car, a furniture, or a just note, well, but he hasn't paid them. But they haven't forgotten about it or they're still holding that note, the balance. So one day, he wanders in their office. He needs money. He needs a $100. Maybe it's just to buy Christmas toys for his children but he still needs a $100, maybe it's to turn on the gas electric say. So they say, “Yes, we'll loan you the $100, but you have to renew our old balance.”
Earl Warren: You have to what?
Robert J. Harris: You have to renew our old balance, our old -- the balance that you discharged in bankruptcy. If you reinstate the entire account, we'd loan you this extra money.
Earl Warren: This is after the discharge?
Robert J. Harris: That's after -- it may not even be after the discharge, maybe after his first meeting with creditors, but generally, it's after discharge. It may be a year, two, three, four years later.
Earl Warren: What was it in this case?
Robert J. Harris: In this case, I don't say that's happened in this case.
Earl Warren: Well, how is pertinent then?
Robert J. Harris: It's pertinent because I'm explaining to the Court that we're not just considering Perry case. We're considering of thousands of other cases just like Perry that's in financial trouble that needs the help of a Chapter XIII Act. Now, what relief can we afford this debtor, if Chapter XIII is not available to him? He can't go bankrupt for six years and he's still within the six-year statute. That's elementary, he can't file a bankruptcy petition except once every six years. We feel that the Congress intended that the Chapter XIII Act, the extension plan is provided there under, should be made available to any debtor regardless of the fact that he's received a discharge within six years or not and I would like to call the Court's attention to some of the pertinent statutes. Now before Chapter XIII was ever enacted, we had Section 14 (c) of Chapter III of the Bankruptcy Act or otherwise known as Section 32 (c) of Tile 11. This is been on the books. It's been amended a good many times. The statute worked long before Chapter XIII was ever enacted. It provides, if I may read the pertinent part of it, “The Court shall grant the discharge unless satisfied that the bankrupt has committed or failed to do one or more of eight different things.” Six of these implied guilt such as falsifying the schedules, concealing assets, making false financial statements. Six of them in applied guilt. The last one is failure to pay the cost, but number five, the one we're concerned about. 14 (c), paragraph 5, subsection 5, unless the Court shall grant the discharge unless satisfied that the bankrupt has any proceeding, under this title, commenced within six years prior to the date of a filing of the petition in bankruptcy, been granted a discharge or had a composition or a wage earner's plan by way of composition confirmed under this Act. Now the phrase “or had a composition or a wage earner's plan by way of composition” was added in 1938 when Chapter XIII was enacted. But it is significant, that when 14 (c) was amended because of the Chapter XIII Act, Congress eliminated the wage earner plan by way extension. It seems to me to imply that they did not intend for the so-called guilt statute as we call 14 (c) to apply to a man that wanted the protection of Court to pay his bills in full.
Abe Fortas: And is that relevant here, because as I understand your statement of the facts, the event in question here was the discharge in bankruptcy?
Robert J. Harris: Yes.
Abe Fortas: And so, is the second part of that sentence that you just read relevant here?
Robert J. Harris: I think it's relevant, Your Honor, yes. If you will permit me to refer to the other sections in the Chapter XIII Act, which I'm about to, you'll bear with me. Section 656 (a) of Chapter XIII is the confirmation section where -- when a plan shall be confirmed. Now, the section provides that the referee has to find several things before he can confirm a plan. He must find first that the provisions of this Act have been complied with. He must find the best interest of the creditors. And he must find that the plan is fair, equitable, and reasonable, and feasible. And also he must find that the debtor has not been guilty of any of the Acts or failed to perform any of the duties which would be a bar to the discharge of a bankrupt. So, in view of this section, we have to determine did Congress intend then to refer Section 656 fact, to Section 14 (c) of the Bankruptcy Act. That would be a good question, except for the provisions of Section 602 of Chapter XIII.
Hugo L. Black: Where is it printed in your brief?
Robert J. Harris: You will find Section 602 printed in the appellee's brief at page 3. Mr. Smith, I think, cites Section 602. Section 602 provides that provisions of Chapters I to VII inclusive of this Title shall insofar as they are not inconsistent or in conflict with the provisions of this chapter, apply in proceedings under this chapter. The provisions of Chapters I to VII inclusive so apply, if they're not inconsistent or in conflict with Chapter XIII. Included in Chapters I to VII, is obviously Chapter III and Section 14 (c) which is the guilt statute, the discharge sentence statute. Now it submitted that Congress certainly intended that a wage earner plan was a special proceeding. It was special remedy to cure a special ill and by placing -- by passing Section 602 they indicated that if the Bankruptcy Act, especially the discharge section within six years, is in conflict with the intent of the basic purpose of Chapter XIII than is to give way to Chapter XIII. And that is the theory upon which the Court's have reasoned in holding that the six-year bar does not apply to wage earner plan. And we feel that it's born out by the fact that in amending Section 14 (c), after the wage earner plan was placed on statute books, they purposely left out any mention of the wage earner plan by way of extension. They referred to wage earner plan by way of composition, yes. That's when where he settles his debts and doesn't pay them in full. But to encourage a man, a debtor -- a wage earner to pay his obligations in full, it was -- to me most assuredly, the congressional intent that nothing in Section 14, unless it's some fraud of course, but the other six grounds in Section 14 with no doubt, if he was guilty of any fraudulent acts, yes. But the fifth ground, having received the discharge within the six years, would not preclude him from participating in the benefits of extension plan. Now surely Congress had in mind that its better to lend assistance -- lend the assistance of the courts in staying suits, garnishments, preventing this man from losing his job. Keep him as an active and productive member of society. It's better to do that than just to flatly say, “Well, if you've been bankrupt before, you can't come into the court again even for a wage earner plan.” I submit, Your Honor, that it was the intention of Congress in view of all these statutes and of the sociological and philosophical benefits that derived here, definitely the intent was that this wage -- the wage earner is entitled to the benefits regardless of having --
Byron R. White: What the -- was this plan, that was filed, simply for an extension?
Robert J. Harris: That is right Your Honor.
Byron R. White: Well now, if he paid up -- he paid up in accordance with the plan, is he required to get a discharge?
Robert J. Harris: Well, the discharge section is ambiguous. It is true that --
Byron R. White: Because if this isn't the kind of a discharge the Act is talking about, why this section -- this doesn't apply at all because it talks about -- committed an act which would bar the discharge of this particular bankrupt.
Robert J. Harris: That's true. Your Honor --
Byron R. White: He wasn't -- wouldn't get a discharge at all while this section is holding him up?
Robert J. Harris: He gets a discharge. They call it a discharge but actually it's unnecessary. Section 1060 --
Byron R. White: Well, he gets discharge in a sense that he might have paid up all the debts within the plan, but somebody forgot to file within the times provided by 57 or something.
Robert J. Harris: Well, the wording -- The wording of Section 1060 is specifically this. When the provisions of the plan have been complied with by the debtor and all payments made under the plan are completed, the court shall enter an order discharging the debtor from all his debts provided for under the plan.
Byron R. White: Oh, “Provided for under the plan”?
Robert J. Harris: Yes.
Byron R. White: How about -- how about other cases?
Robert J. Harris: Well, --
Byron R. White: How about a fellow who didn't file?
Robert J. Harris: If he didn't file, he's still would be discharged. If he didn't accept the plan or if he -- if he was notified, he got proper notice and assumed that it did, and he didn't come in under the plan, he'd end up the majority of creditors' debt and he wanted to sit back for three years and not participate in the plan, then he would be discharged.
Byron R. White: Thank you.
Robert J. Harris: What little time I have left, Mr. Chief Justice, I would like to reserve for rebuttal.
Earl Warren: You may.
Robert J. Harris: Thank you.
Earl Warren: Mr. Smith.
R. Howard Smith: Mr. Chief Justice, may it please the Court. This case has now run the gamut of its very life existence. It started in the -- before a referee in United States Court [Inaudible] Division in Kentucky. Back in August the 1963, a decision was granted on this motion -- a motion by Commerce Loan Company to dismiss or sustained by the referee in an opinion written, as I recall, in December of the same year, 1963. Sometime later, almost a year later, Judge Swinford of the United States Court, Eastern District of Kentucky affirmed the referee's finding of dismissing the petition and also wrote an opinion in connection with it. All -- both opinions maybe found in the brief for the appellant -- appellee herein. The -- Judge Swinford's decision was appealed to the Sixth Circuit in Cincinnati. And on January 25th last year, a year ago, almost to the day, the Sixth Circuit affirmed Judge Swinford and Judge Lee. The case is now before this Court on writ of certiorari. On the last appearance before the Sixth Circuit, the Court was very patient in hearing my opponent through -- to his logical conclusion of 30 minutes and it now goes to present for the appellee, the conference use, we were advised by all those bodies that we would be hearing from them briefly. That indicates to or did indicate to me at least that the Court are pretty well satisfied [Inaudible] the law in this matter and on what decision would be. I have no way of course foretelling how this Court feels on the matter so, little by little I'll have to meet the issues as has been presented here by my distinguished opponent. First of all gentlemen, this case is here on propositions of law. The facts are pretty well admitted, facts are admitted. I don't know that the 10-year dues should be taken sociologically, politically, or commercially on this proposition. It's true and simple, simply a construction and an interpretation of the statute passed by Congress and as I see it, admits of no other construction or interpretation, but all the statutory provisions of Chapter XIII are as follows. This is on page 3 of the brief for the appellee, if you care to follow along. Section 602, the provisions of Chapters 1 to 7, dealing with Chapter XIII inclusive of this Title, shall insofar as they are not inconsistent or in conflict with, the provisions of this Chapter apply in proceedings under this Chapter, U.S.C. A. Section 1002, Section 636 as to my understanding my opponent did not contend -- did not read. Following long under the Chapter XIII provision says this, “we are not inconsistent with the provisions of this chapter,” that is Chapter XIII that is “all the rights and privileges and duties of the debtor shall be the same.” Are we to interpret from that, the question of discharge, discharge ability? Why most certainly, as if a voluntary petition for adjudication of bankruptcy have been filed under the decree of adjudication had been entered at the time the petition on this Chapter was filed, 11 U.S.C. Section 1036. Section 656 (a), the Court shall confirm the plan if satisfied that. That what? That the debtor has not been guilty of any acts or failed to perform any of the duties, because it would be a bar to discharge the bankruptcy. By the provisions of Chapter III, Section 14 (c) of the Act, a discharge is denied if the bankrupt has committed any of the offenses or failed to perform any of the duties specified in the seven numbered clauses including Clause (5) which is as follows - Section 14 -- quoting Section 14 (c), the court shall grant the discharge unless satisfied that the bankrupt has,” subsection (5), “in a proceeding under this title commenced within six years prior to the date of the filing of the petition in bankruptcy -- been granted a discharge, or had a composition or a wage earner's plan by way of composition confirmed under this Act. Now a composition under the Act of extension, are exactly one and the same for discharge purposes. There's no distinction. So if a person cannot see of the composition within a year, I mean, within six years where a previous bankruptcy -- when a person has filed a petition for bankruptcy and been discharged, then the same applies to an extension. That's not only the statute, that's the law interpreted -- that's what the decisions bear out. I would like to read a decision --
Hugo L. Black: Is the composition planned in the record?
R. Howard Smith: Sir?
Hugo L. Black: Is the composition plan in the record?
R. Howard Smith: This -- oh, the composition plan in this record?
Hugo L. Black: Yes.
R. Howard Smith: No, sir. There was no composition in this case. This is --
Hugo L. Black: But there was a plan which the --
R. Howard Smith: Oh, yes. An extension plan was --
Hugo L. Black: An extension plan was in it?
R. Howard Smith: Yes, sir. Yes. That's in the record, Your Honor. There have been two decisions squarely on the point of this case, that's Schlageter case from the Third Circuit and of course this case decided by the Sixth Circuit and there are numerous decisions from District Courts, numerous of it, all holding that you cannot.
Byron R. White: Well, would you say that you're position -- from your position, it necessarily follows that if you filed a bank -- a petition under Chapter XIII just by way of extension and paid up in full according to the plan in 1960, and then in 1964, you filed another identical petition for an extension that that such petition --
R. Howard Smith: This law --
Byron R. White: -- should be dismissed?
R. Howard Smith: This law bars it. The statute bars -- it says you can't do it.
Byron R. White: And you would disagree then with the Tenth Circuit?
R. Howard Smith: Yes, sir, positively. In the In re Nicholson page 224 Federal -- Federal, 224 F. Supp., page 773, the petitioner or wage earner, within the meaning of 11 U.S.C., Section 106, subsection (a) filed a plan for extension under the provisions of Chapter XIII of the Bankruptcy Act as amended. The plan provided for the payment in full or the petitioner's credits within three years, the statement for affairs and the petition disclosed that she had been granted discharge in bankruptcy on July 14, 1960. At the first meeting, [Inaudible] the referee found that the proposed plan of petitioner was feasible and that it had been accepted by the two secured creditors affected by the plan and by those unsecured creditors who had filed claims. Later, the petitioner made an application for confirmation of plan. Subsequently, the referee entered an order denying confirmation and dismissing the proceeding that's – on the ground that petitioner had been granted a discharge in bankruptcy within six years. The next proceeding, the filing of the identical petition. The cause before this Court on a petition for review such order describe and presents the issue of whether such discharge is barred from confirmation of the plan for an extension under the said chapter, where the proposed plan has been accepted by the creditors and meets all the requirements of such proceeding. The statutes under -- the statutes under consideration in relevant part were set forth in the margin and if -- I could read that [Inaudible]. The petitioner relies upon In re Homes, Edins versus Helzberg's Diamond Shops Incorporated. I have grave doubts as to the applicability of the decision in the Homes to the facts presented by this record. The issue there presumed was whether a wage earner, having availed himself for the plan for extension within six years next, proceeded to the filing of another plan, is barred by 11 U.S.C. subsection (c) (5). So you can see that answers Justice White, that answers your question right there. The Court points to the significant truth that the provisions of this Section are made expressly applicable to discharge in bankruptcy compositions and wage earner plans by way of composition. And that the section is noticeably silent with respect to a plan for an extension of time to which to pay this in full, which of course of what my opponent says.
Earl Warren: Mr. Smith, can't you just tell us what the case holds without reading it in entirety please --
R. Howard Smith: Well, the case holds exactly the same thing that the Sixth Circuit held, the case before here.
Earl Warren: Yes.
R. Howard Smith: And the Sixth Circuit cites this very case. Also I might say Your Honor, that in this same decision, I want to call this to your attention especially. It is not necessary for any creditor to even lieu for a dismissal of petition which of course what I didn't do. I moved specifically to dismiss this case, but in this Nicholson case, the Court held there, the District Court held there, that it is not necessary to even move, if the law is plain, that is the duty of the referee. He must do it. He must upon his own motion dismiss such proceeding. He has no discretion in the matter. Now, that's the law.
Hugo L. Black: What do you think about the provision that says, “Not inconsistent with?” You said that he's relying on.
R. Howard Smith: Well, that's the statute, Your Honor.
Hugo L. Black: Not inconsistent with this claim?
R. Howard Smith: Well, I don't know just exactly what to -- what this section means, but I can put -- I can tell you without reading the decision, you might read the dissenting opinion by Judge Hickenlooper in the Sixth Circuit. The same -- that's the same Circuit Court this case came from -- originated from. Judge Hickenlooper goes into some detail, that's in connection with the case of Goldberg, In re Goldberg, the citations in 3 F.2d Series 454. That is cited in my brief.
Hugo L. Black: Was this a plan to pay this debt in full?
R. Howard Smith: What Judge?
Hugo L. Black: All the debt?
R. Howard Smith: Your Honor, please sir, regardless what Mr. Harris says in connection with paying the full, he could pay -- the debtor could present plan in 60 days or six months. The plan could follow through and any -- he could come right back according to what he says, he could come right back with another action within six months thereafter. That's what has happened. That to me --
Hugo L. Black: What I'm asking is did he agree in this plan to pay all of the debts in full?
R. Howard Smith: Well no, he didn't make such agreement as that Your Honor. That would be a composition. This is an extension. He's asked for an extension under the wage earner plan.
Hugo L. Black: But did he agree to pay if extended, in full?
R. Howard Smith: No, sir. There was no such agreement to that effect.
Hugo L. Black: I understood him to say that he did?
R. Howard Smith: Well, regardless of what he did or what he -- he couldn't make such an agreement.
Hugo L. Black: Well --
R. Howard Smith: -- because it might be, that I don't know what the plan was -- the Court didn't determined whether or not this was feasible or not feasible. In many instances the time limit would run out.
Hugo L. Black: What it says is 100% payment upon acceptance of the plan for secured creditors.
R. Howard Smith: Well, that's --
Hugo L. Black: That should be dealt with severely for any terms, but only upon written acceptance of the plan.
R. Howard Smith: That would determine -- be determined by judge as to the number of people who accepted the plan and carried over the -- whether or not it would pay off over the period of time, within three years. If that pay out within three years, if it was over then of course, he could not pay his creditors hardly with $1600.
Hugo L. Black: Well it provides for payment in full to the secured creditors, what does it provide with the reference to the unsecured creditors?
R. Howard Smith: The same. The same situation would exist.
Hugo L. Black: Doesn't everybody get his money under this plan if he goes through --
R. Howard Smith: Not necessarily, not always Your Honor.
Hugo L. Black: Who would not get it?
R. Howard Smith: As I say, it might be that the three-year period that the plan that he had submitted would take longer than three years to pay out.
Hugo L. Black: Suppose, it took three years as it provided here, would everybody get his money? All the creditors get their money paid in full, 100%?
R. Howard Smith: I don't know whether it would or not.
Hugo L. Black: What?
R. Howard Smith: I just don't know Your Honor. I couldn't answer, whether it would or not --
William O. Douglas: You don't know whether the plan would be worked out successfully, but it contemplates full payment, doesn't it?
R. Howard Smith: It contemplates it, yes.
William O. Douglas: Yes.
R. Howard Smith: That's the answer, Your Honor.
Potter Stewart: There can be a discharge upon less than full payment, are they not?
R. Howard Smith: Absolutely.
Potter Stewart: Under an extension agreement.
R. Howard Smith: Absolutely.
Potter Stewart: Then if it turns out within a period or after a period three years, that there is inability to make full payment, there then can be a discharge?
R. Howard Smith: Exactly, correct sir.
Potter Stewart: Even under an extension plan that's originally contemplated a full payment and the statute --
R. Howard Smith: Unless (Voice Overlap) with discharge within six years previously --
Potter Stewart: Oh, yeah. Well that's the -- yes, that's the question.
R. Howard Smith: Any further question?
Hugo L. Black: Well, the point there I assume, there might possibly be a difference payment in full -- I'm not saying it would, payment in full and payment in part when he asked for his discharge, suppose it was carried out exactly as contemplated, would it pay all the debtors 100% in full, creditors a 100% in full?
R. Howard Smith: Well, this is a new proceeding Your Honor. It's been on the books for about almost seven years -- almost 20 years, but it had last three or four years since -- the fact that it has not been used and frankly I don't know whether or not any of these -- have ever paid out in full. I just don't know what it may lead.
Hugo L. Black: And you're talking about what has been done, the statute -- this plan proposes, doesn't it?
R. Howard Smith: He propose --
Hugo L. Black: It does not make any difference?
R. Howard Smith: I guess he proposed it on his own fashion. As to what is feasible or not, that's another matter. The Court in this particular instance, when I made the motion didn't determine whether it was feasible or not. He says it's against the law, or against the statute.
Hugo L. Black: Suppose he had determined -- suppose he had determined it was feasible and Pure Loan Company had not filed this objection, would they have been paid in full if the plan was carried out?
R. Howard Smith: Your Honor, it was the duty of the referee the very moment that he discover -- that he discover --
Hugo L. Black: I understand that.
R. Howard Smith: -- what my motion rather was.
Hugo L. Black: I understand that but suppose you had not been there and that you had not filed, does it propose that it would be paid out as full, a 100% on the dollar, that was his plan?
R. Howard Smith: According to his (Voice Overlap) --
Hugo L. Black: It may not make any difference --
R. Howard Smith: The proposition might be there, but the fulfillment of it maybe something else.
Tom C. Clark: But if does in fact paid the money, he doesn't get the discharge, does it? Supposed he paid the monthly payment.
R. Howard Smith: That's right he would not.
Tom C. Clark: [Inaudible]
R. Howard Smith: Also his petition would be dismissed for lack of -- of the plan.
Tom C. Clark: Why?
R. Howard Smith: Sorry?
Tom C. Clark: Well, the argument says that he followed plan that wouldn't discharge, if he didn't pay the money, that's why he get the [Inaudible]
R. Howard Smith: The decision I presume, the decision of the Circuit Court of Appeals is largely based upon the Schlageter case and the -- this very brief. However, just for the first to course in mind, I would like to read the -- I'd like to read the decision in Sixth Circuit in this case very briefly.
Earl Warren: We have that. We have the decision in the documents.
R. Howard Smith: The Schlageter case -- I'd like to read the Schlageter case --
Earl Warren: But would you just tell us what it holds so we won't have to listen the whole opinion please.
R. Howard Smith: The Schlageter case -- it says, the following of provisions of Chapter III incorporated by reference are made applicable to proceedings on Chapter XIII. Section 14 (c), The court shall grant the discharge unless satisfied that the bankrupt has, in a proceeding under this Title, commenced within six years prior to the date of the filing of the petition in bankruptcy had been granted a discharge or had a composition or an arrangement by way of composition, by wage earner's plan by way of composition, confirmed under this Title, 11 U.S.C. 8 Section 32 subsection (c). The appellant here argues that since his plan of arrangement proposed it's nothing more than an extension of time within which he'd pay his debts and not a discharged, relief under Chapter XIII is not barred in Section 14 (c) Supra. The argument is based upon the erroneous interpretation of Section 656 (a) Supra, and fails to take into consideration Section 660 and Section 661 of that Act of 11 U.S.C.1060 and 1061. The provisions of Section 656 Sub 6 --
Earl Warren: Mr. Smith, may I ask you again. Can't you tell us what the case holds and not read the whole opinion, please. Don't read.
R. Howard Smith: Well, the section -- that case holds that you definitely cannot file a Chapter XIII where there's been a previous discharge in bankruptcy within the six years previous to that time.
Earl Warren: Yes, well that's very simple.
R. Howard Smith: It's what it holds. I might also add Your Honor that --
William O. Douglas: That doesn't help us very much because they're just as many cases on the other side.
R. Howard Smith: Well, Your Honor I don't know whether -- I doubt that very much. I'm not --
William O. Douglas: Well, there are quite a few of them anyway.
R. Howard Smith: Quite a few of them. There's the decision from Macon, Georgia in the case of Arthur Hamilton written by the referee down there, I don't know whether the Court would want to hear that, it's somewhat lengthy, but it goes into dissertation of the law and the facts and it holds also the same as the Schlageter case, in fact precisely as Schlageter case and then there are five cases on appeal in the Fifth Circuit from District Court of the Middle District of Georgia. Two of the cases were dismissed by Referee Stewart, Mr. Smith, the other three were dismissed by Referee Algim Moby Jr. The referees acted on their motion and dismissing these cases because of prior bankruptcy within six years and their action in so doing was approved by the District Court in all of those instances. So, I have my doubts as to the number -- I believe that the number exceeds Your Honor in favor of the Schlageter case from those against them. We do submit that the reasoning seems to be in favor of Schlageter case. I'm sure that you're familiar with the wording of the Sixth Circuit case, it's very brief into the point. One further thing that the Court -- we believe with the Sixth Circuit that this is purely and simply a question of legislation, it's a matter for the Congress and not for this Court. There are many reasons for that. The courts are not equipped and set up to handle this kind of administration. They rather taken to do and since they have held elsewhere and they're making a mess of things. Congress can set up appropriate bureaus, provide the appropriate salaries and the proper rules and regulations. The matters under consideration right now by Congress and it had -- it was the last session. There are several bills before the Congress on this very proposition Chapter XIII. It may be that some legislation in this field is needed. We are inclined to believe that there is. We do think that the society is not wholly dependent upon this section for the reason that most state have receivership rules where you can go into state courts and ask for a relief on wage earner -- on wage earner's plans so they're not holding without relief. Now, if Your Honor please -- if Your Honor please, there's an abuse on both sides because there are many bankrupt -- repeaters of bankruptcy who've been going into straight bankruptcy six months with the year or later coming right back having the same number of debts or probably more so, seeking further relief. How long can that go on? Our court dockets are burdened or were burdened, overburdened with this classification of cases until this decision. Now it's down to where it probably should be under the Chapter XIII, the courts will have nothing to do to handle the cases, the legal cases that come before under Chapter XIII without having these extra legal laws. We respectfully urge the Court to read the cases Schlageter, also the case in the Sixth Circuit here, this particular case, the Sixth Circuit. The Nicholson case which I just read and dissenting opinion put in the Goldberg case. We would like to have you consider those citations and render your decision. So, I believe that's all I can say unless there's any further questions.
Earl Warren: Very well. Mr. Harris.
Robert J. Harris: Mr. Chief Justice, members of the Court. In answer to Mr. Smith‘s statement that for making a mess of things in Cincinnati Court through the administration of Chapter XIII, I would like to say to this Court that Mr. William Schumacher who is present in this Court and he's our trustee, disburses a $100,000 a month to creditors to Chapter XIII proceedings that would otherwise be lost and that's a $100,000 a month put into the economy and I don't call that much of a mess. Now, Justice Black in answer to your question as to whether this plan is incorporated included in the record, it is Your Honor. At pages 4, 5, and 6, the complete plan setting forth 100% payment of both secured --
Hugo L. Black: Does that provide for payment of interest?
Robert J. Harris: It provides a payment of 6% interest on secured accounts, 6% interest. Now, Justice Stewart raised the question of the discharge that provided wherein the wage earner is unable to comply with to -- through the plan within three years because of circumstances beyond his control. That is true. In the Schlageter case, I think based its opinion upon the fact that he could get a discharge. But my answer to that would be that if that situation happened and the creditor had not received a 100%, then he could make a motion to dismiss at that time or he could oppose the application for discharge if the man had gotten the discharge in bankruptcy within six years. So the -- what Schlageter is doing, they're anticipating if the creditor had not received the 100%, he could then come in to the Court and say, “Well, I'm going to oppose the discharge because I haven't gotten my 100% like he said.” And he's got another discharge within six years and this would tantamount to a second discharge. Thank you.
Earl Warren: Thank you. We'll recess.


Warren E. Burger: We will hear arguments first this morning in Heckler against Community Health Services. Mr. Geller, you may proceed whenever you're ready.
Kenneth Steven Geller: Thank you, Mr. Chief Justice, and may it please the Court: This case involves a dispute over the appropriate amount of federal financial reimbursement due a provider of medical services under the Medicare program. The Secretary of Health and Human Services and the district court concluded that reimbursement of the amount at issue was clearly precluded by the Medicare Act and the governing regulations. The Court of Appeals, on the other hand, held that the Government was estopped from relying on those statutes and regulations and must instead provide reimbursement contrary to law. We have sought certiorari because the Court of Appeals' decision is inconsistent with the repeated holdings of this Court that the Government may not be equitably estopped from enforcing the law. Respondent Community Health Services is a provider of health care under Part A of the Medicare program. Under Part A, the Federal Government, acting through private insurance companies, called fiscal intermediaries, reimburses providers for the reasonable costs of providing necessary medical services to Medicare beneficiaries. Congress set up a system under Medicare in which intermediaries make interim payments to providers on a monthly basis for the estimated cost of furnishing services, and then the providers' annual cost reports are audited later to determine the actual costs incurred and corrective adjustments are then made to account for overpayments or underpayments. In 1975 CHS began to receive grant funds from the Federal Government under the Comprehensive Employment and Training Act, or CETA, and the purpose of these grants was to provide job training and employment opportunities for unemployed workers. During the next several years, CHS hired a number of CETA workers and used the federal CETA grant funds to pay their salaries and fringe benefits. In addition, when CHS filled out its Medicare cost reports for the years in question it included the salaries it paid to the CETA workers as a reasonable cost attributable to the Medicare program. CHS did not, however, offset against those costs the amount of the federal CETA funds it received to pay those salaries. The obvious result of this bookkeeping was that CHS got reimbursed twice by the Federal Government for a single group of expenses, once by CETA and then again by Medicare. Not surprisingly, this double reimbursement was plainly contrary to Medicare regulations, which prohibit the inclusion in a provider's cost reports of expenses covered by so-called restricted grant funds, such as CETA. In fact, the published regulations expressly state that if restricted grant funds such as CETA funds were not offset from a provider's expenses, the provider would receive reimbursement for the same expenses twice, and that of course is precisely what happened here. Now, CHS included the salaries of the CETA workers in its cost reports, but did not deduct the corresponding CETA grant in part because the representative of its fiscal intermediary, Travelers Insurance Company, orally informed CHS on several occasions that the CETA grant did not have to be offset. Travelers appears to have given CHS this erroneous advice by misreading the Secretary's so-called CETA grant was not. In 1977, after CHS again asked Travelers if the CETA grants fell within the seed money exception, Travelers decided to ask the Department of Health and Human Services for its advice on the matter. A month later HHS advised Travelers that the CETA grants did not fall within the seed money exception and that the grants therefore should have been offset on CHS' cost reports for the years in question. Travelers then reopened CHS' cost reports for 1975 to 1977, as the statute required it to do, and determined that CHS had received overpayments in the amount of some 63,000. Community Health Service sought administrative and judicial review of the intermediary's determination, and after an evidentiary hearing both the Provider Reimbursement Review Board, which is the expert administrative agency, and the district court agreed with the Secretary that the amount spent on the salaries of CETA workers was plainly not reimburseable under the Medicare Act because CHS had already recovered those expenses from its CETA grant. The district court also rejected CHS' argument that the Secretary should be estopped from recovering the erroneous overpayments. The district court found that CHS had not acted reasonably in relying on the intermediary's advice and that there was no evidence that the intermediary or the Secretary had been guilty of any misconduct. As I mentioned a moment ago, a divided panel of the Court of Appeals reversed the district court's judgment. The Court of Appeals did not find that the payments CHS had received for the CETA workers were in fact reimbursable under the Medicare Act. Instead, the court held that the Government should be estopped from enforcing the governing Medicare statutes and regulations to recover the misspend funds because of what it termed the affirmative misconduct of the intermediary in giving CHS erroneous legal advice. Now, the decision of the Court of Appeals in this case is impossible to square with the repeated pronouncements of this Court on the issue of estoppel. The Court has consistently held, from the earliest days of the nation to as recently as two terms ago in Schweiker versus Hansen and last term in INS versus Miranda, that the Federal Government cannot be equitably estopped by the actions of its employees from enforcing public laws. And this rule has always been applied with particular force in the context of suits for public funds. The Court has said time and again that the lower courts must observe the conditions imposed by Congress for charging the public treasury.
John Paul Stevens: Mr. Geller, can I ask you a question right there. Supposing, instead of having an intermediary like Travelers as we have in this case, the query had been to somebody in the Department itself, perhaps to the General Counsel, and the General Counsel had given the answer that Travelers gave, and then later the General Counsel was replaced and a new General Counsel came in and said, my predecessor made a mistake. Would the case be any different?
Kenneth Steven Geller: The case would be no different, for reasons that I will get to in a little while, Justice Stevens. The case would be exactly the same.
Sandra Day O'Connor: Mr. Geller, do you see room in any case for a so-called "affirmative misconduct" kind of an exception for application of this rule?
Kenneth Steven Geller: We have argued in our brief that there is no exception, because it's inconsistent with the whole analytical framework of the rule that the Government cannot be estopped. The Court has alluded to it in the past, although it's never applied it, it's alluded to it, though never in the context of a case involving public funds. The notion seems to have arisen in suits to deprive people of citizenship, and there may well be some due process notions that lurk in cases of that sort, but not in cases of this sort involving suits for public benefits where there is no statutory entitlement. In any event, here the Court of Appeals, by invoking the doctrine of estoppel based on the alleged misconduct of Travelers Insurance Company, has prevented the Secretary from recovering amounts from CHS that are not authorized by the statute and as to which CHS has absolutely no statutory entitlement.
Byron R. White: Assuming, Mr. Geller, there is a statutory entitlement if someone had followed the correct procedure, but there was a representation by the General Counsel that this is the way to go about it and then it turns out it really wasn't?
Kenneth Steven Geller: That would be very much like Schweiker versus Hansen, where there arguably was a statutory entitlement, but the procedures were not followed, and this Court said that the procedures are a part of the statutory entitlement. Congress has required that the particular procedures be followed. So the case I think would be no--
Byron R. White: Would be the same?
Kenneth Steven Geller: --Would be the same. I think Schweiker versus Hansen holds as much.
William H. Rehnquist: Would it be correct to say that CHS was no worse off so far as what it was entitled to get from the Government after it had followed the intermediary's advice than before?
Kenneth Steven Geller: Well, I think that's correct. It got the CETA funds in any event. It just didn't get double.
William H. Rehnquist: Now it has to pay them back, and it's because it wasn't entitled to them.
Kenneth Steven Geller: Yes, that's correct. Now, Respondents understandably have made little effort to defend the Court of Appeals decision, in light of this Court's precedents. Instead, they have candidly urged the Court simply to abandon its long settled holdings in the estoppel area, calling them outmoded and socially unacceptable. And the Court of Appeals for its part, while terming this Court's estoppel decisions archaic, found in some of the decisions what it took to be an affirmative misconduct exception that it applied in this case. We have explained at some length in our brief why both of these assertions are incorrect. As to Respondents' contentions, there simply are a number of significant constitutional and policy reasons why it would be wholly inappropriate to prohibit the Government from enforcing a law concerning public benefits because of the erroneous statements of its employees. If this Court were to adopt such a rule, it would really have the effect of raising employees of the Federal Government to the status of legislators, because it would give to their actions and words the force of law, even though those actions and words were inconsistent with the actions and words of Congress. Here, for example, the Medicare Act and the regulations governing it clearly provide that the expenses covered by the CETA program are not reimbursable as reasonable costs. Yet Travelers would in effect be allowed to repeal this portion of the Act and overrule the judgments of Congress simply by giving its providers advice to the contrary. And needless to say, such a rule would create tremendous administrative burdens, opportunities for abuse and evasion of statutory mandates, especially in the context of massive social welfare providers like those under the Social Security Act. The Court noted these very considerations only recently in adhering to its estoppel rulings in the Hansen case. Let me give the Court some notion of the extent, the magnitude, of the medicare program. There are some 16,000 providers. In the last fiscal year more than $38 billion was expended. Intermediaries and providers are constantly having discussions, most of it oral, about how particular costs should be handled. If every time an intermediary orally gave a provider advice about how costs should be handled, if the Secretary were bound by that even though that advice was contrary to the Medicare statute the system would break down. And of course, providers could frequently claim that they received oral advice even if they never got it. That was, of course, one of the concerns that prompted this Court's decision in Schweiker versus Hansen. But even if this Court were otherwise disposed to reconsider its estoppel decisions, as Respondents urge, or to imply an affirmative misconduct exception, as the Court of Appeals suggested, we think this would be a wholly inappropriate case in which to do, and we think that for two reasons. First, we submit that CHS failed even to meet the requirements for estoppel under the law applicable to private persons. And second, the actions of Travelers fell far short of any showing of affirmative misconduct as that term has been construed in this Court's prior decisions. I'd like to discuss each of these points in turn. First, whatever the proper rules are for applying estoppel against the Government, it seems obvious that those rules should be at least as strict, at least as strict as the rules that would apply in private litigation. In other words, at a minimum the party seeking to estop the Government should have to meet the traditional requirements for estoppel in non-Government cases. One of those requirements has always been that the party asserting estoppel show that it reasonably relied on the other party's erroneous advice, and it's clear from the very framework of the Medicare Act that a provider such as CHS could never reasonably rely on the advice of an intermediary as being the final definitive word on legal questions that may arise under the Act. Now, Congress, as I mentioned earlier, chose to fund providers under the Medicare program on an interim reimbursement basis, making it clear that the final determinations would be made later on and there would be retroactive adjustments to take account of overpayments or underpayments. And perhaps more to the point, the Secretary under this express statutory mandate has promulgated regulations making it clear beyond any doubt that determinations by an intermediary on the treatment of costs are subject to reopening and revision by the Secretary within a three-year period. Now, the relevant regulation that covers this situation is reprinted at page 4 of our brief. It's 42 U.S.C. 405.1885, and it bears careful scrutiny in light of CHS' estoppel claims in this case, because this regulation specifically informs providers that an intermediary's determinations HHS within a three-year period notifies the intermediary that its determinations were "inconsistent with the applicable law, regulations on general instructions by the Secretary. " And this language, we submit, could not be clearer. It unambiguously notifies all providers, such as CHS, that the Secretary and the courts and not intermediaries have the final word on what payments are permissible and what payments are not permissible under the medicare programs. This statute and this regulation unambiguously notify all providers such as CHS that an intermediary simply doesn't have the authority to make any final determinations concerning the interpretation of statutes or regulations or otherwise to bind the Secretary to erroneous advice. The Respondents have never suggested how they could have reasonably relied on the intermediary's advice in this case in light of this regulation, which expressly states that every piece of advice, every determination that an intermediary makes in determining cost bases is subject to reopening by the Secretary within a three-year period. And this regulation even allows the Secretary, Justice Stevens, to reopen her own prior determinations. So that it is clear under the Medicare program the way Congress has set it up, that all determinations are subject to reopening within a three-year period if the Secretary determines that the preliminary determinations were contrary to law. Now, the Court of Appeals did not address this reasonable reliance point. It simply assumed that CHS had satisfied the traditional estoppel requirements and then it went on to discuss this more cosmic question of whether the Government can ever be estopped. As I mentioned earlier, the Court of Appeals held that this Court had given what it called tacit recognition to the theory that the Government could be estopped in the instances where there was affirmative Government misconduct. And the Court of Appeals reached this conclusion by attempting to distinguish away five of this Court's decisions and by reading the language of the Court, negative implications in the language of the Court in several of these decisions. On a number of recent occasions this Court in fact has alluded to the possible existence of an affirmative misconduct exception to the rule against estopping the Government. But the important thing is that in each of those cases the Court found it unnecessary to resolve the question because the conduct at issue did not constitute affirmative misconduct. Nonetheless, the lower courts have seized on the dictum in this Court's decisions and have branded as affirmative misconduct a number of actions that aren't really misconduct at all, such as in INS versus Miranda, much less affirmative misconduct. Here, for example, the Court of Appeals concluded that Travelers' actions in erroneously advising CHS in good faith about some legal question that arose under the Medicare Act is affirmative misconduct. But it's baffling how this sort of good faith error of judgment, giving advice of this sort, could be considered affirmative misconduct within the meaning of this Court's prior decisions. The conduct of Travelers here doesn't seem appreciably different from the Government agent's conduct in the Merrill case, where a Government agent told someone erroneously that his wheat crop would be covered by Government insurance; or in Montana versus Kennedy, where a Government agent told some woman that she needed a passport to return to the United States even though she didn't; or more recently in Schweiker versus Hansen, where a Government social security representative told a claimant that she was not entitled to social security benefits, even though she was, and told her not to even apply for them, which was in fact contrary to an internal manual. In each of those cases the Court found not merely that the Government's actions did not constitute affirmative misconduct, but they fell far short of constituting affirmative misconduct. And we think the Court's decisions in this consistent line of cases compel the conclusion that the intermediary's actions in this case also fell far short of the sort of conduct that might conceivably estop the Government if there was an affirmative misconduct exception. I'd like to turn to just one more point, because the Court of Appeals' decision... there are a couple of errors that seem to pervade the Court of Appeals' decision. I'd just like to discuss them briefly. One is this notion that CHS did everything it could here to get the right answer to its problem and therefore it acted reasonably; and second is this notion that the intermediary violated some mandatory duty in not seeking advice from HHS. As to this first point, CHS was getting double reimbursement for a single expense from two parts of the Federal Government. The district court said that should have raised a red flag. It should have proceeded with extreme caution since that's so unusual, to get double reimbursement for one set of expenses. If CHS had looked at the governing regulations and the statute, it would have had substantial doubts that what it was being told by the intermediary was correct.
John Paul Stevens: Well, why wouldn't the intermediary have the same substantial doubts?
Kenneth Steven Geller: Well, this case arises because the intermediary was negligent in construing these statutes. The point, though, is was CHS reasonable in relying on this advice to the point where the Government may be estopped as a result, even though the statute--
John Paul Stevens: You don't think there's any room at all for argument on the fact that this might have been seed money?
Kenneth Steven Geller: --Well, I think it's--
John Paul Stevens: It's perfectly clear it was not seed money?
Kenneth Steven Geller: --Well, I think we can look at the following. As soon as Travelers asked HHS for its opinion, HHS immediately wrote back and said, this is not seed money. The district court... the Provider Reimbursement Review Board had no trouble concluding in this case and in previous cases that CETA grants were not seed money. The district court said that no tortured construction of these regulations could lead one to conclude that this was seed money.
John Paul Stevens: Perhaps Travelers is just plain incompetent?
Kenneth Steven Geller: Well, the person... we don't know, for example, what CHS--
John Paul Stevens: The Secretary did hire Travelers to do this job.
Kenneth Steven Geller: --The Secretary hired Travelers, although the particular person who gave this advice I'm told was not a lawyer. And we don't know, for example, what CHS told Travelers in an effort to get this opinion.
John Paul Stevens: Well, there's no claim that they misrepresented the facts. I understood Travelers understood the whole theory.
Kenneth Steven Geller: Well, one of the problems in this area... we don't make that claim. We have no proof that there was any misrepresentation. Of course, one of the problems in this area, Justice Stevens, is that all these communications were oral. So if the Court were to allow the Third Circuit's decision to stand--
John Paul Stevens: I thought they had a written financial report that was filed each year or something like that; wasn't there?
Kenneth Steven Geller: --But the requests to Travelers for advice on whether the CETA grants were reimbursable was all done orally, and that's one of the points here. The Third Circuit--
John Paul Stevens: But you'd surely take the same position if everything was in writing, I think.
Kenneth Steven Geller: --We would, but my point is that if the Court of Appeals is correct in this case that even these sorts of informal oral conversations, as to which there's no record of what was said by any party, would be sufficient to estop the Government. Then you can imagine--
John Paul Stevens: And also no dispute as to what was said, as I understand it.
Kenneth Steven Geller: --Well, but in many cases there will be disputes, and the rule can't be that estoppel occurs only when there's no dispute. Presumably, if the Government can be estopped here there'll have to be evidentiary hearings to determine what was said, and providers will be able to claim in a number of cases that they sought informal advice and relied on the basis of it, because there are constantly conversations going back and forth between providers and intermediaries about how particular costs should be handled.
John Paul Stevens: But you seem to be arguing that the answer was plain, but I think your argument would cover a situation in which Travelers' construction was a perfectly reasonable one which most of us might have adopted the first time we looked at it.
Kenneth Steven Geller: It would, it would. But I'm trying to answer the Third Circuit's decision in this case.
John Paul Stevens: Oh, I see. I'm sorry, you're right.
Kenneth Steven Geller: The Third Circuit's opinion suggests that CHS acted completely reasonably and did everything it could do. One of my first points was that if CHS had read these regulations they would have had substantial doubts that they were getting correct advice. CHS made every inquiry orally. It never made a request in writing. It never asked Travelers to correspond and give it the advice in writing. CHS never asked Travelers, as far as we know, to pass along its inquiry to HHS. And we know that CHS never itself tried to get an answer out of HHS. So this notion that CHS did everything it could do and therefore it should not have to pay back the money that it was not entitled to under the statute simply is not borne out by this record. If there are no further questions, I'd like to reserve the balance of my time.
Warren E. Burger: Very well. Mr. Hasley.
Raymond G. Hasley: Mr. Chief Justice and may it please the Court: While the facts here are not in dispute, the emphasis placed on the facts is far different from the standpoint of CHS. If we turn the clock back to 1975 and a little bit earlier, we find that the Federal Government had a task force for the comprehensive health planning program in the United States and a local task force in western Pennsylvania. Crawford County had been designated as an underserved community medically and at this point in time the only agency that provided any Medicare services to any of the residents... these are home health services... was Community Health Services, and they provided them only in a small part of the community. Now, the Medicare Act provides, I believe, seven different types of services that might be rendered by a home health agency. At the point we begin the story CHS was only into one aspect of it, this nurse, visiting nurse thing. The other areas were not being covered for Medicare beneficiaries. Under the definition of a home health service, it has to be not only a non-profit organization; it also has to be qualified as a charitable organization. Now, under Medicare when an agency such as CHS renders a service to which Medicare beneficiaries are entitled they must also render the same service to everyone in the community. So in effect, they now have to offer charitable services identical to those which they offer to the Medicare beneficiaries. Now, faced with this situation in 1975, being unable to serve the community... and parenthetically, it is interesting to note that perhaps the Secretary of Health and Human Services had an obligation under the Public Health Act to provide the employees to do this. But at any rate, there was money available from the Department of Labor in the CETA program, and while this does provide... one part of it provides for training. Other parts provide for the expansion of public services. And it is under this aspect, the expansion of public services and particularly health services that many of the CETA people worked. Now, it also must be noted here that CHS not only was involved in providing services to Medicare beneficiaries; they were involved in providing services to non-Medicare beneficiaries. So that in the testimony it's pointed out that only about 50 percent of the CHS services were for Medicare beneficiaries. Their other services were directed to other people that did not involve Medicare. Now, how does this become important? When Mr. Wallach approaches Mr. Reeves about this problem... he has the opportunity from the grants from the Department of Labor; he needs to expand services to Medicare beneficiaries; he can see, however, the opportunities, that if you have this seed money concept applying you're going to generate additional income which you can then use in the seed money concept of the expansion of your services to fill these needs. At the time Mr. Wallach visited with Mr. Reeves, CHS didn't even have a Medicare manual. They had no bookkeeping set up. So it wasn't just a question of seed money. He was with Mr. Reeves on setting up the entire bookkeeping system for CHS so that they could account for everything in a proper manner.
Warren E. Burger: I'm not sure I got your point on the fact that they did not possess the manual. Who publishes the manual that you're speaking of?
Warren E. Burger: It's a Government manual and it would--
Warren E. Burger: Are you suggesting--
Raymond G. Hasley: --Pardon me?
Warren E. Burger: --Are you suggesting there's some obligation on the Government to see that everyone has a copy of it.
Raymond G. Hasley: Well, whether it's their obligation or the party's obligation to obtain it, they did obtain it from Mr. Reeves, Mr. Reeves at the time of the meeting, and the problem was after that. But my point is that it was not just a simple question about the seed money situation, it was concerned with setting up a whole bookkeeping program so that everything would be done in a proper fashion. But one thing that has not been analyzed here, but it's this hypothetical question: If at the time Mr. Wallach went to Mr. Reeves for the answer the answer had been to offset, at that point CHS had the opportunity to use the CETA employees for services in the community not at all involved with Medicare. In other words, one of the services that the CHS made available in the community is a homemaker service. Now, the cost for homemaking service is not covered by Medicare. Medicare covers nursing, a nurse's aid type thing which is a little different.
William H. Rehnquist: Mr. Hasley, though, that was true in Schweiker against Hansen, too, that had the person made the application the way the Government regulations provided, rather than the way she was advised to by the Government official, she probably would have been better off.
Raymond G. Hasley: But in the question of detrimental reliance, I believe Mr. Geller said that CHS was not disadvantaged, that they would nonetheless had the CETA employees. They would not have had the CETA employees in this bookkeeping problem.
William H. Rehnquist: Well, perhaps you're right in thinking there was some disadvantage along the line of your analysis. But I think if there is it is no different than the detrimental reliance in Schweiker against Hansen, which was disallowed as estopping the Government.
Raymond G. Hasley: Well, this is one, this is of course just one aspect of what happened. I mean, this is the hypothetical as to what would have occurred, the ability to use the employees on the Department of labor grants in a non-conflicting way. But at any rate, as to this question of whether this was proper, could this be interpreted as seed money grant, it was in fact interpreted as a seed money grant and acted out as a seed money grant. Seed money grants were not new. Back in the sixties in the mental health, mental retardation program, the Secretary had this rule about not deducting restricted funds. The funds for mental health and mental retardation were restricted funds and the Secretary nonetheless said that, because this was for the expansion of services, that they would not offset the mental health, mental retardation staffing grants. And so that's the history of the interpretation by the Secretary in other factual circumstances. But in this case there was certainly an arguable basis that these were seed money grants according to an interpretation of them, although people may argue about the interpretation. In any event, it was in fact treated as seed money. It was treated as seed money and used that way, and it would not have been except for this inducement to do it this way. As a consequence of what happened on this instruction of Mr. Reeves... it was repeated and repeated and repeated for nearly three years... other employees were hired, CETA people provided services to Medicare patients, which they didn't otherwise have to do, and they developed a program to try to solve the health community problem for the entire community. Now, you can't unscramble the situation three years later and go back and retroactively put CHS in the position it was. Now, there's much that's suggested in the brief that there was some excess of funds and it makes it out as if CHS was a profiteer. Far from that, as a charitable institution every time they expanded and offered a new service to help the Medicare beneficiaries they had to take in people on a charitable basis that were not eligible Medicare beneficiaries. Now, who paid that? Every year CHS ended up in a deficit situation because it was trying to do all these things for so many people.
William H. Rehnquist: Mr. Hasley, it seems to me your arguing as if the standards which would estop the Government were very much the same as are held in state law to estop private individuals: detrimental reliance, reasonable assertions, and that sort of thing. But we've said at the very least it would take affirmative misconduct on the part of the Government. How is the Travelers' representative's statement to your client any more than negligence at the most?
Raymond G. Hasley: Well, as the Court of Appeals noted, in accordance with his duties... he was under a duty to communicate... any communications from CHS were to be communicated to the Secretary. Were we not entitled to a binding answer at some point in time?
William H. Rehnquist: Well, that's just a mistake. That's negligence. That certainly isn't affirmative misconduct.
Raymond G. Hasley: Well, I don't know what affirmative misconduct would be, then. If you have a duty, if Travelers has a duty to give us a binding answer and they don't give us a binding answer, haven't they breached a duty to us?
William H. Rehnquist: Yes, and breach of duty is ordinarily negligence. Have you considered an action against Travelers?
Raymond G. Hasley: The Government says they're immune. We've raised the issue that if this is the negligence that Justice Rehnquist seeks... and I don't... first, I think when you look at the contract between Travelers and the Secretary, it seems that on the face of the contract the intermediary has expressed authority to do what he did, to set out the procedures. And if I may just briefly read, in the functions and duties to be performed by an intermediary, he's to make determination as to coverage of services, of the amounts of payments, and make payment to providers of services and eligible individuals. He's to assist providers of services in the development of procedures relating to utilization practice, and so forth, and to make studies. He's supposed to do all these things, and if this doesn't put him in a position where he has to do something that is binding, not as opposed to something that's not binding... on this question about reopening, you see, there is never any new fact that comes into light three years later. The facts are always the same. You're not talking about going back and adjusting estimated payments that were made. In the course of the year, the intermediary comes in and does a desk audit of everything that's gone on and makes a resolution of the correct figures.
William H. Rehnquist: But the regulation doesn't require any mistake of fact to reopen, does it? It says the Secretary can reopen if the decision is inconsistent with applicable law.
Raymond G. Hasley: Well, when you look back at Medicare there is no law in Medicare as Congress enacted it that said you had to offset any grants. There's nothing in Medicare that says this. This whole offsetting problem goes back to once upon a time when hospitals were charitable and people... the money that came into them came for restricted purposes. The ladies guild or something would raise the money for an X-ray machine or a new wing or so many new beds. And Blue Cross in its history, in order to minimize the cost to its subscribers and with a position of leverage over hospitals, was able to make that arrangement so they got the benefit of restricted money that went into charitable institutions. And when Medicare was set up, the Congressional part of it puts the responsibility on the Secretary to determine reasonable costs. There's no suggestion in this reasonable cost matter that a provider has to give free services. And what you have here is the Department of Labor's money for its purposes, its budget purposes, and then you have the Medicare funds. If the Secretary's correct, what you're doing is siphoning money from the budget of the Department of Labor over into the benefit of Medicare beneficiaries, to some of them. You're siphoning money over into something that was never budgeted. In fact, interestingly enough, in one aspect of cost reimbursement relating to hospitals--
Thurgood Marshall: But it's still my money, isn't it?
Raymond G. Hasley: --It's not the same money.
Thurgood Marshall: I mean my tax money.
Raymond G. Hasley: Well, the money that's in the Department of Labor is everybody's tax money, the corporations' and everybody's tax money.
Thurgood Marshall: That's what I'm talking about.
Raymond G. Hasley: But the money in the Medicare are the specific beneficiaries. You know, it's earmarked for the individuals.
Thurgood Marshall: Well, what we're interested in here is my money?
Raymond G. Hasley: Well, I think--
Thurgood Marshall: We're interested in the tax money, aren't we.
Raymond G. Hasley: --Yes, we are. We all are. But all that tax money... all that tax money was put to use in furthering the purposes for which it was intended. There isn't any suggestion here, Justice Marshall--
Thurgood Marshall: What's the magic of the phrase "seed money"?
Raymond G. Hasley: --If we go back into the--
Thurgood Marshall: Is it that you can just do whatever you want with it?
Raymond G. Hasley: --Pardon me?
Thurgood Marshall: That you can just do whatever you want with it?
Raymond G. Hasley: No, no, no, no, no, no, no, no. If we go back into the 1960's, when the effort was to examine the problem of the state of mental health, mental retardation, and the care of those people in the sixties... and late President Kennedy was a strong advocate for legislation in that area... it was apparent that new ideas in health care had to be instituted, but there was no way... they wanted them to be self-sufficient, but there was no way to get them started. And so the concept of the seed money evolved on the basis that, yes, you are getting a little more money right now, but you are going to take that money and you are going to develop new services that we want developed. So this is the seed. We are planting the seeds for growth. And in this case, that's exactly what happened to the money. It went to provide new services to Medicare beneficiaries. So in terms of any raid on the Treasury, it could hardly be said to be a raid on the Treasury when the money was used to generate the services that Medicare wanted and that Congress dictated. One of the unfortunate things, Justice Marshall, is that at this period in time Medicare did not advance any money, so that there was a delay of maybe four months between when services would be rendered and when any money could come back.
Thurgood Marshall: Don't be misled that I don't know what seed money means.
Raymond G. Hasley: Pardon me?
Thurgood Marshall: Don't be misled by thinking I don't know what seed money... I just wanted to know what you say it means.
Raymond G. Hasley: Well, I hope that our views are consistent.
Thurgood Marshall: Oh, not necessarily.
Raymond G. Hasley: It was in fact treated as seed money by Community Health Services in the expansion of services for the community and for the Medicare beneficiaries. And it did serve the purposes of CETA, too, because as the testimony shows new jobs were created, people were put into permanent jobs. So all these purposes were accomplished.
Warren E. Burger: Mr. Hasley, in the colloquy I think you may have overlooked that there was a question about whether Travelers is immune, and if so why are they immune.
Raymond G. Hasley: Yes. Well, we raised this question. Initially we said, now, if Travelers isn't authorized to bind you, then they surely must be negligent for all this problem and under any common law principles we'd have been entitled to indemnity in this situation. And the Government says: Well, no, they have the same immunity that we do. So they're perfectly protected and you can recover nothing from them. So we were caught between a rock and a hard place.
Harry A. Blackmun: Have you accepted that or do you go ahead on your own?
Raymond G. Hasley: We have raised that issue in this case, but Third Circuit did not reach these issues of Travelers because of the disposition on an estoppel grounds. Justice Blackmun, you see, if you view Travelers as having this breach of duty to us and if you want to call it negligence, call it negligence only, then weren't we entitled to take a federal tort claim type concept of negligence which would give us a right against Travelers to get back this money if we had to pay it to the Federal Government?
Harry A. Blackmun: Have you instituted suit against Travelers and the answer was no?
Raymond G. Hasley: That's part of this, that's part of this case.
Harry A. Blackmun: You have?
Raymond G. Hasley: Yes. Travelers is a defendant in the case. We have the two different lawsuits and Travelers is a defendant, and we raised this issue. The lower court, the lower court said that Travelers enjoyed the same immunity, they were the agent of the Government and enjoyed the immunity, and this issue then was never reached in the Court of Appeals. I want to make it clear that we raised many issues in the Court of Appeals, any one of which would have turned this case in favor of CHS, including this issue on Travelers. But the Court of Appeals didn't reach the issue. And if you do not agree with the Court of Appeals and our position on the estoppel in this case, we certainly would like to go back and argue that matter about Travelers. I've tried to just touch the estoppel, confine myself to the estoppel, but historically in the context of the case all these things were going on. There perhaps have been 200 or more cases in the country in the district courts and the Courts of Appeals dealing with this subject of estoppel and when might the Government be estopped, and the consensus in all the circuits and all the district courts is the Government should be estopped in some circumstances, but the issue has been raised by the district court and by the appellate courts, what are those circumstances.
William H. Rehnquist: Well, what's the consensus in this Court?
Raymond G. Hasley: Well, as I read it would be estoppel may... in the affirmative misconduct situation. But if you look at the broad spectrum of cases that have been litigated in the country about Government misconduct, I would suggest that to the extent that there is some overwhelming need to protect the Federal Government in some way, that that ought to be the Federal Government's burden to show why the ordinary rules of estoppel should not apply to them. They can be protected if they bring in the evidence to justify the position. It's a question of shifting burdens.
William H. Rehnquist: None of our cases, Mr. Hasley, suggests that the ordinary rules of estoppel do apply to the Government. From Federal Crop Insurance against Merrill on, we have said the ordinary rules of estoppel do not bind the Government.
Raymond G. Hasley: Well, I guess this is a case where the issue will be addressed further as to whether it would be no estoppel against the Government in any circumstances, in which event the Government can literally destroy people like CHS, who have in good faith relied on it, and wipe them out.
Warren E. Burger: I suppose you would agree, Mr. Hasley, that the meaning of a statute or a regulation is ultimately and finally for this Court, would you not?
Raymond G. Hasley: Yes, yes.
Warren E. Burger: In the meantime, does your position not amount to saying that some clerk in some Government agency can reach a contrary conclusion and that that's binding until we set it aside?
Raymond G. Hasley: It would amount to that, Justice Burger. But bear in mind today that the Federal Government is larger in its activities than the Fortune 500 list of industrial companies.
Warren E. Burger: That's one of the problems, the millions of employees who can make decisions from day to day.
Raymond G. Hasley: Yes. But can you really interface, can Government really interface with the private segment on a basis of nothing but uncertainties in the way in which they conduct business?
Warren E. Burger: It's certainly a heavy burden in individuals, on citizens. But the old rule of thumb is that every person is presumed to know the law, which puts them in a pretty difficult position, of course.
Raymond G. Hasley: But we as lawyers know that's not a practical rule in today's society.
Warren E. Burger: But it's still the rule, is it not, of the law?
Raymond G. Hasley: Yes, Your Honor. But when we're dealing with an equitable concept, we're going for equity, and estoppel is a rule of law, too. It's older than our Constitution. It's inherent in the American jurisprudence system that--
Warren E. Burger: Except as applied to the Government, generally.
Raymond G. Hasley: --Well, I can argue no more than that every circuit court in this country has looked at this issue in different factual contexts and, while they recognize the position of the sovereign and these distinctions and have acted with restraint, as this Court has on the problem, nonetheless could you really have an effective Constitution that did not guarantee the private sector the right of estoppel in some circumstances in some circumstances? Otherwise, as you see here, when this case started the Federal Government was actually recouping the matter through self-help. Since they don't pay their bills for three or four months, or at least they didn't at that time, they simply went to deduct the money that they claimed they were entitled to. So the situation was at that point that CHS couldn't meet a payroll and its doors were going closed. And you know, if those aren't circumstances where equity comes into play even against the Federal Government, even against the Federal Government... this is not a case where there's been any profiteering. It's not a case of fraud or misrepresentation.
Thurgood Marshall: Do you believe that a Government officer can violate a rule on equitable principles?
Raymond G. Hasley: I think in some circumstances. But here you have a question... you had a question--
Thurgood Marshall: No, no. Let's answer that question.
Raymond G. Hasley: --I think that he could do something that was inequitable and that the Government should be estopped from doing otherwise.
Thurgood Marshall: Well, you talk a lot about equity. Would the Government have squeaky-clean hands?
Raymond G. Hasley: Does the Government have clean hands? In this case they have dirty hands.
Thurgood Marshall: In your case does if it has dirty hands is it equity?
Raymond G. Hasley: We contend that we have clean hands. It's the Government that has dirty hands.
Thurgood Marshall: I mean, in your case you just said that where he's going to give this equitable relief to this person he knew better.
Raymond G. Hasley: Maybe I misunderstood.
Thurgood Marshall: Well, if he deliberately violated a rule to do what he thought was right, would that excuse him and the Government?
Raymond G. Hasley: Not if the other person was not privy or knowledgeable, if the other party would be totally innocent, and yes, I would bind the Federal Government in that case. But this would be a factual question as to evidence.
Thurgood Marshall: How low down would that go in the governmental offices? Would that be a person that's sitting behind a desk? In other words, he could give you $20 and give me $5 and give somebody else $2?
Raymond G. Hasley: No, no. He'd have to be in a managerial, I would say at the managerial level, Justice Marshall. I don't... I mean, I think you would reach, just as in any corporation, you reach the realm of ridiculousness as to whether the janitor binds the corporation because he happens to be present in the circumstances. You have to deal with--
Thurgood Marshall: What rule gives--
Raymond G. Hasley: --you know, reasonable scope of authority.
Thurgood Marshall: --What rule gives a federal employee that right to violate the rules? I guess he could also violate a statute, couldn't he, on equitable principles?
Raymond G. Hasley: I guess that's the argument, as to whether in this case he did or did not.
Thurgood Marshall: You think he could?
Raymond G. Hasley: Our position... we've had alternative positions. Our position was that he was authorized and did make the interpretation and bound the Government. Then... that's the first position. Alternatively, he was duty-bound to give us a binding answer to the inquiry. His negligence, if it is negligence... and it could be... is in his failure to follow the lines of communications to the Secretary, et cetera, and come back. On the other hand, he may contend, well, it was the Secretary's duty to publish all this information and put it out and to have a policy, and in the absence of any policy what was I to do? I might note here that one of our contentions below was that in 1975 when Mr. Reeves made the decision, he has testified that there was no policy by the Secretary, and he had searched high and low and there was none. When he testified later before the Provider Benefit Review Board, he said he still wasn't aware of any that had ever existed back at that period of time. So this is--
Warren E. Burger: Then he was making the policy himself.
Raymond G. Hasley: --So he in effect did what he thought was right.
Warren E. Burger: He made the policy.
Raymond G. Hasley: Right, he made the... well, I think the policy had already been made on seed money grants in the administration of the mental health, mental staffing grants as to what seed money was and its application.
Warren E. Burger: Suppose... in this case you emphasize that this is a nonprofit corporation, the Respondent, doing very worthy services. But if the rule you advocate were adopted, wouldn't that apply to Dupont and General Motors and Guaranty Trust of New York?
Raymond G. Hasley: Well, to be a worthwhile rule it would have to be a general rule. But I'm looking for an affirmance of the Third Circuit in this case, and I'm happy to go with the affirmative misconduct rule. But as you read all these cases and you see all the problems that have come up over the country, you do have to wonder, isn't there a solution in terms of this policy? Shouldn't there be... should our system of jurisprudence today he brought up to the point where, if the Government has a serious contention that someone's raiding the Treasury... and I don't mean for the money here... that they would prove that, that they would prove why a court would not grant equitable relief. That's my contention, that if you use the ordinary principles of estoppel... that is, full knowledge of the facts to the other party, detrimental reliance, change of position, et cetera, et cetera... where is the Government harmed by that if they have the opportunity to show that a court of equity under the circumstances that they contend exist should not give equitable relief?
Thurgood Marshall: The red light's on.
Warren E. Burger: Do you have anything further, Mr. Geller?
Kenneth Steven Geller: I'd just like, if I could, to clear up a few points made in Mr. Hasley's argument. The first, as I understand it the Respondent claims that the affirmative misconduct here was Travelers' violation of this mandatory duty it apparently had to communicate with HHS about this question it had gotten. There's nothing in the statute or the Medicare regulations or in the contract that intermediaries sign with HHS that in any way imposes a mandatory duty to communicate every question they get from the provider. Obviously, an intermediary can't consult HHS on everything or else the whole system would break down. There'd be no reason to have intermediaries if every time an intermediary got a question it had to pass it along to HHS. Obviously, an intermediary has to use some discretion, and perhaps here bad judgment was exercised, but it was not a violation of a mandatory duty. And I might add that some perhaps some duty would arise to pass along to HHS a question when the provider specifically asks the intermediary to do so. But once again, I repeat here, there's no evidence that CHS ever asked Travelers to get an interpretation from HHS.
Sandra Day O'Connor: Mr. Geller, if the intermediary is negligent in some way, is it your thought that it could be held liable?
Kenneth Steven Geller: Now, there the Government has taken the position that intermediaries are agents of the Government and therefore they have no independent liability. There is in fact a regulation, 42 CEP 421.5, which explains that the Administrator of the Health Care Financing Administrator is the real party in interest in any suit arising under the Medicare Act. As Mr. Hasley mentions, however, they have sued Travelers in this case and that is an issue that the Third Circuit has not yet adjudicated. But Respondents claims here time and again that it has an entitlement to a binding answer of any question it has under the Medicare program. That's what it perceives as the affirmative misconduct here, a violation of this entitlement to a binding answer. But there obviously can't be under the Medicare Act, where there are only interim payments and subsequent adjustments, a binding answer. And the regulation that I read earlier, 405.1885, is conclusive that an intermediary can't give a binding answer and that an answer that even the Secretary gives can be reopened within a three-year period. It is, once again, quite instructive that the Respondent has not yet explained what that regulation means or how it could have reasonably relied on the intermediary's advice in the face of it. The Respondent says it all boils down to the scope of authority of an agent, and as this Court has said on many occasions, employees of the Executive Branch, it is not within their authority to amend Acts of Congress; they are subject to Acts of Congress. Thank you.
Warren E. Burger: Thank you, gentlemen. The case is submitted.