Today, the Supreme Court issued two decisions, described below, of interest to the business community.

  • Employment Discrimination—Reasonable Accommodation of Religious Observance or Practice
  • Bankruptcy—Voidability Of Underwater Mortgage Liens

Employment Discrimination—Reasonable Accommodation of Religious Observance or Practice

Equal Employment Opportunity Commission v. Abercrombie & Fitch Stores, Inc., No. 14-86 (previously described in the October 2, 2014, Docket Report)

Title VII of the Civil Rights Act of 1964 makes it an unlawful employment practice for an employer to discharge or refuse to hire an individual because of the individual's religious observance or practice unless the employer demonstrates that it is unable to accommodate the practice without undue hardship in the conduct of its business. Today, in Equal Employment Opportunity Commission v. Abercrombie & Fitch Stores, Inc., No. 14-86, the Supreme Court held that an applicant raising a disparate-treatment claim under Title VII need not show that the employer had actual knowledge of the applicant's need for accommodation of a religious practice, but need show only that the need for a religious accommodation was a motivating factor in the employer's decision.

The EEOC claimed that Abercrombie violated Title VII when it failed to hire a prospective employee, Samantha Elauf, because of her religious practice without offering her a reasonable accommodation. Elauf, a Muslim, interviewed for a sales position at Abercrombie while wearing a black hijab (headscarf), a practice inconsistent with Abercrombie's policy prohibiting sales employees from wearing black clothing or "caps." Although the assistant manager interviewing Elauf assumed that Elauf wore her hijab because she was Muslim, Elauf did not say that she needed to wear it for religious reasons or request a religious accommodation. There was evidence that Abercrombie did not hire Elauf because of her attire. The district court granted the EEOC's motion for summary judgment on liability and denied Abercrombie's motion for summary judgment. It concluded that the EEOC had established all elements of a prima facie case of discrimination, including Abercrombie's awareness of Elauf's need for a religious accommodation, and held that Abercrombie had failed to rebut the EEOC's showing on those elements. The Tenth Circuit reversed and granted summary judgment for Abercrombie, holding that an employer was required to have actual knowledge of the applicant's need for a religious accommodation to be subject to liability.

In an opinion by Justice Scalia, the Supreme Court reversed the Tenth Circuit. The Court explained that, under Title VII's prohibition against disparate treatment, applicants need show only that their need for an accommodation was a motivating factor in the employer's failure to hire. The Court concluded that the statute thus prohibits discharge or failure to hire based on certain motives, regardless of actual knowledge. It explained that motive and knowledge are separate concepts. Thus, an employer that has actual knowledge of an applicant's need for an accommodation does not violate Title VII by deciding not to hire the applicant if the need for an accommodation did not motivate the decision. Conversely, an employer who acts with the motive of avoiding an accommodation violates Title VII even if the employer has no more than an unsubstantiated suspicion that the accommodation would be needed. In other words, the Court stated, "[a]n employer may not make an applicant's religious practice, confirmed or otherwise, a factor in employment decisions."

Although holding that Title VII imposes no knowledge requirement, the Court noted that the motive requirement arguably could not be met unless the employer at least suspected that the practice at issue was religious. But the Court declined to decide whether an employer that lacks even an unsubstantiated suspicion that a practice is a religious practice requiring accommodation may be subject to liability, concluding that the issue was not before it.

Justice Alito concurred in the judgment. In his view, an employer may not be held liable for disparate treatment unless it knows that the practice at issue is religious. He concluded, however, that there was sufficient evidence in the record to show that Abercrombie had this knowledge, and would have instructed the Tenth Circuit on remand to evaluate whether the EEOC was entitled to summary judgment on that issue. Justice Thomas concurred in part and dissented in part, arguing that mere application of neutral policy cannot constitute intentional discrimination under Title VII even if an employer fails to hire an applicant based on a belief that the applicant may require an accommodation.

Because the Supreme Court's decision sets forth an unequivocal prohibition against making adverse employment decisions based on even the unconfirmed belief that an applicant's religious practice requires an accommodation, it is important to all employers.

Any questions about the case should be directed to Miriam Nemetz (+1 202 263 3253) in our Washington office.

Bankruptcy—Voidability Of Underwater Mortgage Liens

Bank of America, N.A. v. Caulkett, No. 13-1421 (previously described in the November 17, 2014, Docket Report)

Section 506(a) of the Bankruptcy Code provides that a creditor's claim is a "secured claim to the extent of the value of such creditor's interest in the estate's interest in such property"—that is, it is a secured claim for an amount equal to the present value of the collateral—and is an "unsecured claim" for the remainder. Section 506(d) provides that, "[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void."

Lower courts were divided over whether a Chapter 7 debtor with multiple mortgages may void, or "strip off," a junior mortgage lien in its entirety under section 506(d) when the value of the senior mortgage lien exceeds the current value of the property—that is, when the junior lien is entirely underwater and thus unsecured within the meaning of section 506(a). In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court held that a Chapter 7 debtor could not "strip down" a partially underwater lien to the present value of the collateral, but the Court did not address whether the same rule applied to a wholly unsecured lien. In the decisions below, the Eleventh Circuit limited Dewsnup to partially underwater liens and held that Chapter 7 debtors may strip off a wholly underwater junior mortgage lien; the Fourth, Sixth, and Seventh Circuits have reached the opposite conclusion.

Today, in the consolidated cases of Bank of America, N.A. v. Caulkett, No. 13-1421, and Bank of America, N.A. v. Toledo-Cardona, No. 14-163, a unanimous Supreme Court reversed the Eleventh Circuit.

In an opinion written by Justice Thomas, the Court acknowledged that a "straightforward reading of the statute" favored the Eleventh Circuit's interpretation. Because the value of a wholly underwater junior lien is "zero," it is unsecured within the meaning of section 506(a). And given that section 506(d) uses the same term—"secured claim"—as section 506(a), "one would think" that the wholly underwater lien would also be unsecured, and thus voidable, within the meaning of section 506(d).

The Court concluded, however, that Dewsnup "forecloses this textual analysis." Dewsnup "defined the term 'secured claim' in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim." Under this reading, the function of section 506(d) "is reduced to 'voiding a lien whenever a claim secured by the lien itself has not been allowed'" under the Bankruptcy Code. Because the bank's claims in these cases were "both secured by liens and allowed under" the Bankruptcy Code, they could not be "voided under the definition given to the term 'allowed secured claim' by Dewsnup."

Finally, the Court rejected the debtors' arguments that Dewsnup should be limited to partially underwater liens. The Court noted that treating a junior lien that is one dollar shy of being completely underwater differently from a junior lien that is wholly underwater "could lead to arbitrary results." The Court suggested that the policy arguments proposed by the debtors were better addressed to Congress.

The Supreme Court's resolution of the lien-stripping issue is of significant interest to the business community because it is of central importance to the administration of Chapter 7 bankruptcies and the treatment of home mortgages in particular.

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