Bill proposes an intelligent approach to judicial financial disclosure

Most practicing litigators know that judges have an ethical obligation to disqualify themselves from any case where the judge has a financial interest in one of the parties. For federal judges, this charge is statutory (28 U.S.C. Section 455). Supplemental details are provided by federal regulations (U.S. Guide to Judicial Policy, Ethics and Judicial Conduct, Part D -- Financial Disclosures). More specifically, the regulations require disqualification where a judge has a disposable financial interest in any "asset" held by a party exceeding $1,000 in value, or generating more than $200 in annual income. "Assets" are broadly defined to include (without limitation) interests in real estate, stocks, bonds, commodities (such as livestock and crops), antiques, or art held for investment for resale, cash in banks, pensions, retirement accounts, annuities, mutual funds, college education funds, and ownership interest in any business or partnership, including any assets that are brokered or managed on the judge's behalf. The regulations also impose a reporting obligation, which requires the judge to prepare and file an annual statement setting forth all such financial interests.

Although the filing of a financial interest report once a year may not at first blush seem a particularly onerous task, the Wall Street Journal nonetheless reported recently that 131 federal district court judges had failed to disqualify themselves in cases where they did have a material financial interest in one of the parties to a case. It was further discovered that in two-thirds of these cases the judges had ruled in favor of the party with whom they had such a connection -- certainly a tilted majority, but no analysis was made of the extent to which this was mere coincidence or due to partiality spawned by a financial interest. Even so, the number of judges who failed to disqualify themselves, standing alone, is undeniably significant, since there are only 673 federal district court judges in the entire country.

Not surprisingly, the WSJ's report caught the attention of the Senate Judiciary Committee. Prefacing their action with a politico-speak description of the problem as a "massive failure of the entire system," Committee Chair Dick Durbin (D-Ill.) and ranking member Chuck Grassley (R-Iowa) have introduced a bipartisan bill currently titled the "Courthouse Ethics and Transparency Act," which would modify the above-mentioned financial reporting and disqualification requirements on federal judges in at least two important ways: First, under the new bill judges would be required to publicly report on their financial interests every 45 days instead of annually. Second, they would have to publish those reports online to give parties an up-to-date database for investigating the financial interests of a judge who had been assigned to their case. Follow up bills are also in the works, including a bill sponsored by Rep. Jerry Nadler (D-N.Y.), called the "21st Century Courts Act," which would authorize the imposition of sanctions for a judge who failed to meet these more stringent reporting requirements.

One might be tempted to conjure up from the WSJ article images of judges surreptitiously withholding disclosure of financial interests as part of some malicious strategy to prop up an ill-gotten return on investment in one of the parties, but in all likelihood, this would be an overreach (leaning in the direction of conspiratorial theorists on the JFK assassination). The fact is that being a federal district judge is a tough and noble duty, thanks to a never-ending, often crushing case load. So, in the first instance, a judge certainly doesn't need to withhold disclosure of a financial interest in a party just to get another case.

Further, it is difficult to construct a scenario where ruling in favor of a party in which the judge has an interest would somehow enhance his or her investment in one of the parties. If a federal judge holding IBM stock eschews disqualification and decides a case between IBM and a distributor in favor of IBM, can he or she rationally expect IBM stock to rise as a result?

The more likely story is that the judges in question either didn't do adequate diligence to determine all the financial interests which should have been included in their annual reports, or inadvertently left out some financial interests out of the report that they did know about. For example, in this investment world, where diversification is all the rage, a judge might have to base his or her annual report on a summary of investments from his financial consultant, who in turn might mistakenly leave something out of the summary which the judge fails to catch. With annual reporting, a judge also might not think to check on his or her financial interests until the end of the year, when a new annual report would fall due, not whenever a new case were assigned to him; and thus might fail to list in the report any financial interests which were sold off during the year. A number of realistic scenarios like this could be constructed to debunk the notion that the federal judges in question might have acted with some type of scienter by failing to disclose or recuse themselves based on financial interests.

The 45-day reporting period proposed by the new bill appears to be a good thing. It would solve the problem of judges failing to keep track of their financial interests during the course of a year until the time drew nigh for filing an annual financial report. Also, posting financial interest reports online every 45 days would give the parties an adequate resource to check financial interests themselves to see if disqualification is required in any particular case. Of course, it is possible that inadvertent failure to disclose a financial interest could occur even with a 45-day reporting requirement, or that a judge might get so busy that he or she simply misses a reporting deadline altogether. But these possibilities don't seem close to outweighing the benefits that more stringent financial reporting requirements would have in upholding the ethical responsibilities of federal judges with respect to their financial interests.

Assuming the bill will pass, how strict is the new law intended to be, and how strictly should it be read? A requirement to prepare a financial report every 45 days and post it online would be easy to enforce by the letter -- i.e., any failure to meet it, for any reason, would subject a federal judge to sanctions. But case law interpreting current financial reporting requirements suggests a more flexible approach. The U.S. Supreme Court, in Lifeberg v. Health Services Acquisition Corp., 486 U.S. 847, 858 (1988), held that disqualification of a judge under Section 455 is to be determined according to an "objective test" to avoid "even the appearance of impropriety whenever possible." Yet the court also suggested a "harmless error rule" for disqualification, recognizing that it is not uncommon for judges to "inadvertently overlook a disqualifying circumstance."

The 8th U.S. Circuit Court of Appeals has held that the standard for disqualification of a judge, for any reason, is "if a reasonable person, who knew the circumstances would question a judge's impartiality, even though no actual bias or prejudice has been shown." Fletcher v. Conoco Pipeline Co., 323 F.3d 661, 664 (8th Cir. 2003). And the 9th Circuit has held that the question is "to be judged objectively as a reasonable person with knowledge of all the facts would judge." Feminist Women's Help Center v. Codispoti, 69 F.3d 399, 400 (9th Cir. 1995).

These cases provide some wiggle room for a judge's inadvertence in keeping track of or reporting his or her financial interests. For example, assume that under the new bill a judge buys and sells shares of stock in a company within a 45-day reporting period, and because of this the judge does not include the stock in his or her report, and does not disqualify himself or herself from a case in which the company is a party assigned to him or her after the stock has been sold. Although this may be a technical violation of the reporting requirement, it is difficult to argue, under the reasonableness/harmless error standard defined by the courts, that the judge's impartiality would be brought into question in such circumstances. Inclusion of the reasonableness/harmless error standard established by federal courts in any new legislation resulting from the bill would account for the fact that judges, at the end of the day, are human, without undermining the force of the new reporting requirements.

The requirement in the bill for judges' financial reporting to be posted online should also have a beneficial effect. As the law now stands, a party wishing to disqualify a judge who has allegedly failed to disclose a material financial interest or failed to disqualify himself, must act promptly. Federal law (28 U.S.C. Section 144) requires a party to take such action by filing a timely affidavit 10 days before the term in which the party's case is to be heard, or, alternatively, to show good cause for a later filing. Federal case law is in accord. The 9th Circuit requires that a party moving to disqualify a judge must do so with "reasonable promptness." Preston v. U.S., 923 F.2d 731, 733 (9th Cir. 1991). And the 2nd Circuit has held that a party may not hold back on an application for disqualification pending a decision by the judge in question. In re IBM Corp., 45 F.3d 641, 643 (2d Cir. 1994). Nonetheless, cases exist in which a party has not brought a disqualification motion until substantial proceedings in the case have transpired, such as in Preston.

In combination with the statutory requirement for a party to act promptly on a disqualification motion, the requirement for judge's financial reports to be posted online could implicitly impose a responsibility upon any party to a federal lawsuit to check online reports of a judge once he or she has been assigned to the case to see if any grounds exist for disqualification based on a financial interest, and then follow up periodically to the date of trial on future reports. As such, online reporting could effectively put a party on "constructive notice" of a disqualifying financial interest. This would trigger the need for prompt action on a disqualification motion, and eliminate the possibility of the motion not being made, for whatever reason, until after the judge had performed considerable work on the case.

The Courthouse Ethics and Transparency Act is a bipartisan bill -- an all-too-uncommon phenomenon in today's political environment -- which presents an intelligent and readily enforceable approach to the financial disclosure issue uncovered by the WSJ. 