Agency Fees and the Earmarking Doctrine

Published January 16th, 2018 -  - 01.16.189

Wes Turner is a J.D. candidate at Washington University School of Law.

In the upcoming case Janus v. AFSCME, the Supreme Court appears poised to hold that agency fees in the public sector violate the First Amendment. The argument runs, in short, that an automatic deduction from an employee’s pay check to their union represents the government compelling the employee’s speech.

As Professor Benjamin Sachs points out, this analysis relies on the assumption that the agency fees are the employee’s property. He argues in his forthcoming paper Agency Fees and the First Amendment, that agency fees pass through employee paychecks as an accounting formalism and are better understood as direct payments from the employer to the union. This would no longer invoke First Amendment concerns because the government is not compelling any action by the employee.

Sachs draws an apt analogy with another line of First Amendment cases regarding whether government payments made to individual families and then paid, by those families, to religious schools violate the Establishment Clause. Sachs points out that:

The answer to this First Amendment question turns on whether the payments to the religious schools are treated as coming from the families or from the government.  The Court has held that this answer depends on whether the families have a “genuine choice” about paying the money to a religious school or a secular school. Where there is “true private choice” then the “circuit between government and religion [is] broken” and there is no First Amendment violation.  Where such choice is lacking, the fact that the monies pass through the hands of families becomes irrelevant and must be treated as “a government program of direct aid to religious schools.”

Thus, there is a circuit that connects government payments to their destination that is broken by genuine choice.  The analogy to agency fees is clear, the employees do not have a genuine choice and “the fact that employer payments pass through employee paychecks does not ‘break the circuit’ between the employer and the union.”

The American Center for Law and Justice (ACLJ) filed an amicus brief critiquing Professor Sachs. They argue that Professor Sachs actually has the circuit breaking analogy backwards because the religious school funding cases protect an individual from being coerced to violate their conscience. Here, the ACLJ argues, Professor Sachs is using the circuit breaking analogy to enable the government to violate an individual’s conscious by automatically deducting union dues.

The circuit breaking analogy, however, has other homes that do not turn on the individual’s conscience. The religious school funding example is not a unique doctrine but rather simply the court importing a traditional idea into the First Amendment context. An analysis of another application of the circuit breaking doctrine shows how the individual’s conscience is irrelevant, contrary to the ACLJ’s claim. The most prominent example of the idea that monies that pass through an individual to a predetermined destination are never considered the individual’s property is the earmarking doctrine in bankruptcy.

The earmarking doctrine is a judge made, common law defense to voidable preferences. To provide some background, a voidable preference occurs when a debtor pays one creditor, at the expense of other creditors, within 90 days prior to declaring bankruptcy. The payment is considered void because we presume that the debtor gave preferential treatment to one creditor over the others in violation of the equality principals at the heart of the bankruptcy code.

The earmarking doctrine is a notable exception to voidable preferences. When a lender makes a loan to enable a debtor to pay a different, but specified, creditor those funds are earmarked for that creditor and are not considered preferences. The exception rests on the requirement that a preference must be a “transfer of an interest of the debtor in property.” 11 U.S.C. § 547(b). Although the funds pass through the debtor’s account, the lack of control over the usage results in courts finding that the funds were never the debtor’s property. For example, the Eight Circuit Bankruptcy Appellate panel stated, “If the earmarking doctrine applies, no avoidable transfer is made because the loaned funds never become part of the debtor’s property.” In re Calvert, 227 B.R. 153, 157 (B.A.P. 8th Cir. 1998). The Second Circuit adopted the same approach, ruling that whether the funds passed through the debtor’s account is irrelevant, but rather whether he “obtained control of the funds in the sense of being able to control how they were ultimately distributed,” determined if the funds became part of the debtor’s property. Similar to how a “genuine choice” breaks the circuit between the government funding and religious schools, “dispositive control” breaks the circuit between the new lender and old creditor. If the debtor has a choice of how to spend the funds, even which old creditor to pay off, then the debtor’s choice breaks the circuit and the transfer is a voidable preference.

The comparison between the earmarking doctrine and agency fees in the public sector is also quite clear. When the employee receives a paycheck with a dues checkoff already listed, the employee had no control over that money – it had been earmarked for the union – and therefore no property interest was established. The question then becomes, should the application in the First Amendment context differ. As Professor Sachs has pointed out, the answer is no. The Supreme Court has already accepted the circuit breaking analogy with the Establishment Clause and the First Amendment. The ACLJ argues that the religious school funding cases can be differentiated from agency fees because the individual’s conscience may run in opposite directions. An analysis of the circuit breaking analogy, however, in other contexts show that where the individual does not have control of the funds, he does not have a property interest in them. The religious school funding cases simply show that this basic idea can be imported into a First Amendment analysis.

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