Justice Scalia and Bankruptcy

Justice Antonin Scalia died on Saturday. He was 79. Politics aside, he was a legal giant on the world’s most powerful court. However, we’ll leave the tributes to those who knew Justice Scalia and those who make their careers studying the Supreme Court. Instead, we chose a more modest (but still demanding) purpose for this post: To catalog the bankruptcy opinions that Justice Scalia wrote for the majority and 2 of his most significant bankruptcy dissents. Fortunately or unfortunately, there is no “jiggery-pokery,” “pure applesauce,” “argle-bargle,” or the like to be found in these opinions. Rather, Justice Scalia, as bankruptcy justice, is, if we accept Yury Kapgan’s dichotomy, more “humble rhetorician” than “scolding pedagogue.” Enjoy.

Introduction

Even a cursory review of the headlines will likely lead one to predict that Justice Scalia’s unexpected death could result in a seismic change in ideology on the Supreme Court. We’re told that everything’s now, or soon could be, in crisis, be it the GOP, the 2016 Election, the Supreme Court, the Constitution, the Government, the Nation, etc. After all, the Supreme Court was (and still is) set to consider a slew of important cases during the remainder of this term, including abortion, immigration, birth control, affirmative action, congressional redistricting, and even, as one viral article put it, the “Fate of the Earth” itself (climate change).

Of course, the source of the pandemonium is easy to trace: For nearly 30 years, Justice Scalia served as a conservative bulwark on an often-divided Court. Many assume that Justice Scalia was a conservative justice and, therefore, always voted up and down the party line. That very well might be the case on national, hot-button issues. But what about the more esoteric, statutory areas? In Theory and Practice of Statutory Interpretation, Prof. Frank Cross submits that “research has shown a very significant association between ideology and judicial votes.” However, he also points out that the “ideological” or “attitudinal” model does not “predict outcomes in numerous statutory areas” (including antitrust, ERISA, and bankruptcy).

Justice Scalia’s bankruptcy opinions, although providing a relatively small sample size, bear that point. From the 10 majority opinions inventoried below, 6 were unanimous and, of the 4 that involved dissents, 3 had 2 or fewer justices dissenting. To be sure, these are not the polemic, 5-4 decisions that Justice Scalia is so famous for. And when there is a dissent, it’s often a disagreement about statutory construction. Even Justice Scalia’s dissents were less about bankruptcy and more about interpretive approaches. Indeed, as one panel put it, bankruptcy cases “often serve as a crucible for competing theories of statutory interpretation.”

That same panel cites Prof. Robert Rasmussen’s article. In 1993, Prof. Rasmussen submitted that the “Supreme Court’s bankruptcy cases evince a definite trend toward textualist interpretation.” It’s fitting, then, that he points to Justice Scalia as “the justice most credited with the Court’s increasing reliance on statutory text.”He explains that “textualism” is based on the “notion that the text of a statute is the exclusive authority on which the Court should rely when reaching its decision. When a statute is ambiguous, the Court should ascribe to the statute that meaning which most persons would ascribe to the language at issue. Legislative history is not consulted, nor is a judge’s sense of which interpretation implements the better social policy.”

Therefore, we submit that there is no better way to understand the Supreme Court’s statutory approach in bankruptcy cases than reading Justice Scalia’s bankruptcy opinions. They provide an original treatise of sorts on textualism and the tension between it and other approaches. And in the process, the bankruptcy opinions, themselves, provide a tribute to their formidable author.

Justice Scalia’s Majority Opinions in Bankruptcy Cases

By our count, Justice Scalia wrote the majority opinion in 13 bankruptcy cases. We’ll cover the Top 10 most cited, from least to most cited.

10. RadLAX Gateway Hotel, LLC v. Amalgamated Bank (2012)

Justice Scalia wrote this unanimous confirmation-related decision for the Court.

RadLAX had purchased the Radisson Hotel at LAX. RadLAX borrowed $142 million from an investment fund for development. Amalgamated Bank was the fund’s trustee (and, arguably, has the worst bank name in the history of bank names). RadLAX and its affiliate filed Chapter 11 cases. They proposed to sell substantially all of their assets via a “stalking horse” sale with an initial $47.5 million stalking horse bid. However, the bidding procedures prohibited “credit bidding” by the bank. Rather, they required the bank to bid cash at the sale.

The Bankruptcy Court, the Seventh Circuit (on direct appeal), and then the Supreme Court rejected the proposed bidding procedures because they eliminated credit bidding. Justice Scalia rejected RaxLAX’s “hyperliteral” and nonsensical attempt to avoid one cramdown provision in favor of another. For Justice Scalia, it was just a matter of taking § 1129(b)(2)(A) for a test drive. He starts with the structure of the statute. That is, a plan can be “fair and equitable” as to a secured creditor and, thus, “crammed down” over its objection in 1 of 3 ways under § 1129(b)(2)(A).

First, secured creditors can retain all liens securing their claims and receive, as of the plan effective date, the full value of their claim (with interest as necessary).

Second, a debtor can sell the secured creditor’s collateral free and clear, subject to the creditor’s credit bid rights under § 363(k).

Third, the secured creditor can realize the “indubitable equivalent” of its claims.

RadLAX tried to fly in under the third alternative because its cash-only bidding requirement violated the second alternative. However, its attempt couldn’t withstand Justice Scalia’s lesson on statutory construction. Specifically, Justice Scalia emphasized (i) Congress’ “comprehensive scheme” and (ii) how the “specific governs the general.” “The general/specific canon explains that the ‘general language’ of clause (iii), ‘although broad enough to include it, will not be held to apply to a matter specifically dealt with’ in clause (ii).” And because the debtor couldn’t point to anything in the Code to overcome that explanation, the debtor lost.

Justice Scalia concludes that the “Bankruptcy Code standardizes an expansive (and sometimes unruly) [haha] area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction…Under that approach, this is an easy case.”

9. F.C.C. v. NextWave Personal Communications, Inc. (2003)

In the NextWave case, the Court, led by Scalia, held that § 525 of the Bankruptcy Code prohibited the FCC from revoking NextWave’s “spectrum licenses” after NextWave failed to make timely payments to the FCC on its $4.74 billion license purchase.

Section 525 prohibits certain “discriminatory treatment” by governmental units with respect to licenses, permits, and the like. In short, the Court concluded that NextWave’s obligations to the FCC under the purchase agreement were “debts” under the Code, the FCC’s “regulatory motive” in cancelling the licenses was irrelevant, and no exceptions applied to the FCC’s actions.

In typical Scalia fashion, Justice Scalia concluded that the FCC’s attempt to avoid § 525 “flies in the face of the fact that, where Congress has intended to provide regulatory exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly, rather than by a device so subtle as denominating a motive a cause.” He also scolded Justice Breyer, who dissented, for attempting to divine the “purpose” of § 525 “in splendid isolation” from its language.

8. Young v. U.S. (2002)

In Young, Justice Scalia wrote another unanimous opinion. It’s less a “Scalia opinion” than it is the Justices joining together to close a potentially abusive loophole in the Bankruptcy Code. For that reason, the facts are more interesting than the decision.

A couple filed a Chapter 13, moved to dismiss it before confirmation, filed a Chapter 7 one day before a ruling on the dismissal, and then obtained their Chapter 7 discharge. Later, the IRS attempted to collect a tax debt from the debtors. They moved to reopen their Chapter 7 case for a declaration that the tax debt had been discharged under § 523(a)(1)(A) because it pertained to a tax return due more than three years before their Chapter 7 filing.

A unanimous Court held that § 507(a)(8)(A)(i)’s lookback period is tolled during the pendency of a prior bankruptcy petition in accordance with “traditional equitable tolling principles” applicable to limitation periods. In other words, “Nice try debtors!” Tolling protected the IRS, regardless of whether the debtors filed their Chapter 13 in good faith or “solely to run down the lookback period.” We can almost hear Justice Scalia yawning at his keyboard.

7. Owen v. Owen (1991)

Owen addresses an issue that gives my colleagues and me fits: lien avoidance. And admittedly, Justice Scalia’s opinion (with Justice Stevens dissenting) is not an easy read. In fact, if it weren’t smack dab in the middle of our Top 10 list, we might leave it off. In all seriousness, Owen involved a debtor whose former spouse had obtained a $160,000 judgment against the debtor. The judgment eventually had some Florida property to attach to when the debtor later acquired a condo. The debtor filed a Chapter 7. The debtor claimed that the condo was exempt and also moved to avoid his spouse’s judgment lien pursuant to § 522(f).

Justice Scalia held that the appropriate question under § 522(f) is whether the condo would be exempt if the debtor’s spouse didn’t have lien, not whether the debtor had a right to, in light of the lien, to exempt the condo. In his words, “to determine the application of § 522(f) [courts] ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself. As the preceding italicized words suggest, this reading is more consonant with the text of § 522(f)-which establishes as the baseline, against which impairment is to be measured, not an exemption to which the debtor ‘is entitled,’ but one to which he ‘would have been entitled.'” [Insert Scalia’s maniacal laughter.]

6. Citizens Bank of Maryland v. Strumpf (1995)

Citizens Bank is another unanimous opinion written by Justice Scalia. Strumpf, a Chapter 13 debtor, was in default under his loan with Citizens when he filed. He also had a checking account with Citizens. In response to the filing, Citizens placed an administrative hold on the bank account consistent with its right of setoff. It also filed a motion for stay relief and setoff. Therefore, it refused to honor withdrawals from the account while the motion was pending.

As a reminder, the right of setoff allows entities that owe each other money to apply their mutual debts against each other. In the Citizens context, the money in the bank account is, in essence, a debt owed to the debtor by the bank. Of course, § 362 stays a creditor’s exercise of its setoff rights. The issue in Citizens was whether Citizens violated the automatic stay when, to protect its setoff right, it temporarily declined to honor the bank account withdrawal requests.

Reversing the Fourth Circuit, Justice Scalia held that Citizens’ actions did not constitute a “setoff” under § 362(a)(7) and, thus, did not violate the automatic stay. He emphasized that Citizens’ refusal to pay was not permanent or absolute. Rather, it was only temporary while Citizens pursued stay relief. Whether viewed under state law or under § 542(b) and § 553(a), an action in setoff requires an intent to permanently settle an account.

5. U.S. Bancorp Mortg. v. Bonner Mall Partnership (1994)

Bonner Mall is not so much a bankruptcy case as it is a procedure case that arose in a bankruptcy case. It’s worth including, though, if only because we’ve encountered nearly the exact facts in two of our recent Chapter 11 cases, each of which involved confirmation settlements that mooted pending appeals.

Bonner filed a Chapter 11. U.S. Bancorp was its secured lender. Bonner’s plan relied on the “new value” exception to the absolute priority rule. U.S. Bancorp filed a confirmation objection, claiming that the plan was unconfirmable on its face. The Bankruptcy Court agreed and Bonner appealed. The District Court overruled and U.S. Bancorp appealed. The Ninth Circuit affirmed. After the Supreme Court granted cert and received merits briefs, the parties settled. Their settlement resulted in the confirmation of a consensual plan. Nevertheless, U.S. Bancorp moved the Supreme Court to vacate the Ninth Circuit under 28 U.S.C. § 2106.

Writing once again for a unanimous Court, Justice Scalia denied the motion. On the one hand, he explained that the Court had the power to hear the motion to vacate. Whereas Article III prevented the Court from considering the merits of a judgment that becomes moot pending review, the Court still had the power to dispose of the whole case as justice may require. On the other hand, he explained that mootness via settlement doesn’t justify vacating a judgment. Pointing out that the “vacatur power” relies on equitable principles, Justice Scalia pointed to the principal equitable factor: Whether the party seeking vacatur is the party who caused the mootness. In short, U.S. Bankcorp forfeited the vacatur remedy when it settled.

4. BFP v. Resolution Trust Corp. (1994)

BFP was a 5-4 decision, with Justice Scalia writing for the majority, wherein the Court considered the meaning of “reasonably equivalent value” in § 548(a)(2). BFP, a Chapter 11 debtor, had its California beachfront property foreclosed on by Imperial Federal, pre-petition. In the bankruptcy case, BFP sued to avoid the pre-petition foreclosure as a fraudulent conveyance, arguing that the home was worth $725,000, not $433,00 (the amount paid at foreclosure).

On behalf of the majority, Justice Scalia concluded that a “reasonably equivalent value” for foreclosed property is the price brought at foreclosure as long as the foreclosing party complied with all of the applicable state law foreclosure requirements. In other words, “reasonably equivalent value” and “fair market value” are not necessarily synonymous under the Code.

Consistent with many of Justice Scalia’s opinions, his BFP opinion is intricate and thorough, replete with a history of fraudulent conveyance law back to the “Statute of 13 Elizabeth” and a history of foreclosure law, also back to England. And of course, Justice Scalia left no stone unturned in responding to the dissent, stating that “one searches Justice Souter’s opinion in vain for any alternative response to the question of [a] transferred property’s worth.”

Indeed, Justice Scalia was not satisfied, as he continues: “The dissent has no response, evidently thinking that, in order to establish that the law is clear, it suffices to show that ‘the eminent sense of the natural reading’ provides an unanswered question. Instead of answering the question, the dissent gives us hope that someone else will answer it, exhorting us ‘to believe that [bankruptcy courts], familiar with these cases (and with local conditions) as we are not, will give [‘reasonably equivalent value’] sensible content in evaluating particular transfers on foreclosure. While we share the dissent’s confidence in the capabilities of the United States Bankruptcy Courts, it is the proper function of this Court to give ‘sensible content’ to the provisions of the United States Code.”

[We always enjoy when the Supreme Court gives the Bankruptcy Courts a thumbs-up–sometimes it’s sincere; other times, we wonder.]

3. Hartford Underwriters Ins. Co. v. Union Planters, N.A. (2000)

Hartford is another unanimous Justice Scalia bankruptcy opinion.

Hen House Interstate, Inc. filed a Chapter 11. During the case, it obtained workers comp insurance from Hartford Underwriters. Although the debtor repeatedly failed to pay premiums, Hartford kept the insurance in place. Eventually, Hen House had its case converted to a Chapter 7. Hartford realized that the debtor has no unencumbered funds. Therefore, as an administrative claimant under § 503(b), it sought to surcharge Union Planters’ collateral for the unpaid premiums under § 506(c). Union Planters was Hen House’s secured lender. Hartford was successful until the Eighth Circuit, sitting en banc, shut it down.

Writing for a unanimous Supreme Court, Justice Scalia viewed the issue very simply: § 506(c) permits the “trustee” (and only the trustee) to recover from a secured party’s collateral. Hartford was not the trustee. Therefore, it could not surcharge the collateral. Period.

2. U.S. v. Nordic Village, Inc. (1992)

In Nordic Village, a 7-2 Supreme Court, with Justice Scalia writing for the majority, held that § 106(c) doesn’t establish “an unequivocal waiver” of government immunity from a bankruptcy trustee’s claims for monetary relief. Justice Stevens and Justice Blackmun dissented.

Nordic Village was a Chapter 11 debtor. Mr. Lah, one of its officers, withdrew $24,000 from the debtor’s bank account and paid $20,000 of it to the IRS for application against his individual liability. The Chapter 11 trustee sued to avoid the transfer. Ultimately, the Bankruptcy Court ruled that the transfer could be avoided under § 549(a) and recovered from the IRS under § 550(a). The District Court affirmed the money judgment against the IRS, as did a divided Sixth Circuit.

Justice Scalia reasoned that, whereas § 106(a) and § 106(b) constituted unequivocal waivers of sovereign immunity, 106(c) was subject to at least two competing interpretations, such that any waiver of immunity in § 106(c) was not unequivocal. The dissent accused Justice Scalia of “stubborn insistence” on “clear statements,” an insistence that the dissent believed “burdens the Congress with unnecessary reenactment of provisions that were already plain enough when read literally.” Uncharacteristically, Justice Scalia didn’t take the bait, and left the dissent alone.

1. United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd. (1988)

If there is one case that you’ve already read, then it’s likely Timbers. And if you haven’t read it, then you definitively should read it, right this second, in fact. Indeed, Timbers is so important and so much has already been written about it that we’ll simply do 2 things here.

First, remind you that Justice Scalia wrote the unanimous Timbers decision. Second, restate its holding: An undersecured creditor isn’t entitled to compensation (e.g., interest) under § 362(d)(1) for the delay caused by the automatic stay in foreclosing on their collateral.

There. Now go read or re-read Timbers.

(Bonus: The Supreme Court even quoted Timbers in last summer’s King v. Burwell (a/k/a Obamacare) decision: “A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme…because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” Don’t get us started on the “Whole Act” rule of construction!)

Justice Scalia’s Dissenting Opinions in Bankruptcy Cases

By our count, Justice Scalia wrote a dissenting opinion in 4 bankruptcy cases. We’ll cover 2 of the big ones.

1. Dewsnup v. Timm (1992)

In Dewsnup, the majority held that § 506(d) does not permit a debtor to “strip down” a creditor’s lien to the judicially-determined value of the collateral. The majority reasoned that, because the subject creditor’s claim was secured by a lien and had been fully allowed pursuant to § 502, the claim could not be classified as “not an allowed secured claim” for purposes of § 506(d)’s lien-voiding provision. Yes, Justice Scalia can get away with double negatives! Dewsnup is an important case in the canon of Supreme Court bankruptcy opinions. In fact, it played a prominent role in last summer’s junior lien-stripping case, Bank of Am., N.A. v. Caulkett, wherein the Court held that a Chapter 7 debtor could not “lien strip” junior liens that are wholly underwater.

Justice Scalia concludes that § 506(d) automatically voids a lien to the extent that the claim it secures is not both an “allowed claim” and a “secured claim.” However, his disagreement with the majority’s outcome is less interesting than his disagreement with its interpretive approach, especially in the context of this blog post where Justice Scalia’s judicial philosophy is more relevant than any discrete outcome, much less a bankruptcy outcome.

Indeed, it appears that Justice Scalia could care less about the bankruptcy policy in his Dewsnup dissent. More than any other decision addressed in this post, his Dewsnup dissent arguably sums up best his interpretive philosophy while communicating the tenacity that made him an important force to be reckoned with on the Court for nearly 30 years:

The principal harm caused by today’s decision is not the misinterpretation of § 506(d) of the Bankruptcy Code. The disposition that misinterpretation produces brings the Code closer to prior practice and is, as the Court irrelevantly observes, probably fairer from the standpoint of natural justice…The greater and more enduring damage of today’s opinion consists in its destruction of predictability, in the Bankruptcy Code and elsewhere. By disregarding well-established and oft-repeated principles of statutory construction, it renders those principles less secure and the certainty they are designed to achieve less attainable. When a seemingly clear provision can be pronounced “ambiguous” sans textual and structural analysis, and when the assumption of uniform meaning is replaced by “one-subsection-at-a-time” interpretation, innumerable statutory texts become worth litigating…Having taken this case to resolve uncertainty regarding one provision, we end by spawning confusion regarding scores of others. I respectfully dissent.

2. Till v. SCS Credit Corp. (2004)

Much has been written about Till. There’s even a Till song! It’s also one of our favorite cases to blog about. We’ve covered Till here and here. Therefore, we won’t dwell on it. Suffice it to say, Justice Scalia’s dissent in Till is arguably his most famous bankruptcy opinion. And if you haven’t read Justice Scalia’s dissent in Till, then you haven’t really read Till.

In short, Justice Scalia rejected the Till plurality’s “prime plus” approach. He writes: “Our only disagreement is over what procedure will more often produce accurate estimates of the appropriate interest rate. The plurality would use the prime lending rate-a rate we know is too low-and require the judge in every case to determine an amount by which to increase it. I believe that, in practice, this approach will systematically undercompensate secured creditors for the true risks of default.” Instead, Justice Scalia opted for the “presumptive” “contract rate.”

Did he choose the wrong approach? Yep (says these debtor lawyers). Did he care at all what we think? Nope.

Conclusion

Whether he was writing for the majority, concurring to isolate a particular point, or dissenting to keep the Court honest, Justice Scalia arguably steered a relatively young Bankruptcy Code in the courts more than any other judge or justice during his nearly 30 year term. Nevertheless, his bankruptcy opinions speak for themselves. Therefore, as I hit the 3724 (!) word mark in this post, I’ll simply close with my favorite, and doubly-fitting, Scalia quote. When a young student asked Justice Scalia what he enjoyed most about being a Supreme Court justice, Justice Scalia remarked that he doesn’t enjoy writing. Rather, he enjoys “having written.” Anyone who has ever drafted a brief or an overly long blog post can surely relate! And today, Justice Scalia “having written” takes on a special meaning.

If you’d rather hear it for yourself, then click here for a short clip: http://www.c-span.org/video/?c4580989/written