On Saturday, February 13, Antonin Scalia, Associate Justice of the United States Supreme Court, passed away.  Although there has been no shortage of media coverage (and brouhaha regarding Justice Scalia’s successor and the process for appointing same), we at the Weil Bankruptcy Blog want to take a moment to pay our respects.  

Justice Scalia, already a respected judge on the United States Court of Appeals for the District of Columbia Circuit, was appointed to the Supreme Court in 1986. To put that into context, Justice Scalia’s appointment was confirmed a week before ALF and Matlock first debuted on television.  And when Justice Scalia took his seat on the highest Court, John Gotti was on trial, Crocodile Dundee (the first one) was in theaters, Stephen King’s Itwas a best-seller, the U.S. Prime Rate was 7.5%.

In nearly three decades on the Court, Justice Scalia was unquestionably a force to be reckoned with.  His bankruptcy decisions prompted rewriting sections of the Bankruptcy Code, foreshadowed major disputes years in the making, spurred significant debate, and shaped the markets in very real ways.  Some highlights of those decisions, dissents, and concurrences are noted below, together with some brief reflections. We can think of no better tribute than to study Justice Scalia’s decisions, to continue to learn from them, and to become better lawyers as a result.

The country and its laws have changed in many significant ways since Justice Scalia first took the Bench, but there is no doubt that throughout this time, Justice Scalia cared deeply about the Court and this country.  We extend our deepest condolences to his family, friends, clerks, and colleagues.

United Savings Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd.,: Timbers is undoubtedly a critical Supreme Court decision in the bankruptcy world, making it to the Final Four of our 2011 March Madness competition on the most important bankruptcy cases of all time.  As we noted then:

[Timbers] interpreted the “adequate protection” requirement of section 362(d) of the Bankruptcy Code. The Court held that although secured creditors have a protected right to payment from their collateral, this does not include a right to immediate possession of their collateral.  Thus, “adequate protection” does not require a debtor to make payments to creditors (and thereby compensate them for the time value of money) solely because a debtor retains the creditors’ collateral.  Moreover, the Court drew a clear line in the sand between oversecured and undersecured creditors, finding that only the former are entitled to postpetition interest, and only to the extent the value of their collateral exceeds their lien.  When it came down, Timbers rocked the business world and fueled the use of so-called “bankruptcy remote” SPEs as creditors sought to isolate collateral that would otherwise be part of the bankruptcy estate and maintain cash flows even in the face of bankruptcy.  Still today, reverberations of Timbers can be seen in the ongoing battle to value collateral that underlies many business reorganizations.

Granfinanciera, S.A. v. NordbergGranfinanciera was a critical decision in the still-developing theories of the authority of the bankruptcy courts.  The Court held that, when a debtor asserts fraudulent transfer claims against a third party who has not filed a claim against the estate, the defendant is entitled to assert a demand for a jury trial pursuant to the Seventh Amendment.  Laying the foundation for Stern v. Marshall, Justice Scalia observed:

The notion that the power to adjudicate a legal controversy between two private parties may be assigned to a non-Article III, yet federal, tribunal is entirely inconsistent with the origins of the public rights doctrine. The language of Article III itself, of course, admits of no exceptions; it directs unambiguously that the “judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.”  

Begier v. IRS:  The Court concluded that payroll and excise taxes are held in “trust” by the debtor and that payment of such taxes in the 90 days prior to the commencement of a bankruptcy case does not constitute a preference.  Justice Scalia agreed with the Court’s decision but took issue with the majority’s reasoning. In applying his famous theories of statutory interpretation, Justice Scalia noted:

I think it both demeaning and unproductive for us to ponder whether to adopt literal or not-so-literal readings of Committee Reports, as though they were controlling statutory text. Moreover, even applying the lax legislative-history standards of recent years, this Committee Report should not be considered relevant. …

It was certainly thoughtful of whoever drafted the report to try to clear up the issue of what kind of an estate, legal or equitable, the debtor possesses in trust-fund taxes that are paid, but that discussion is a kind of legislative-history “rider” that even the most ardent devotees of legislative history should ignore.

If the Court had applied to the text of the statute the standard tools of legal reasoning, instead of scouring the legislative history for some scrap that is on point (and therefore ipso facto relevant, no matter how unlikely a source of congressional reliance or attention), it would have reached the same result it does today. . . .

Dewsnup v. Timm: Justice Scalia, joined by Justice Souter (!), vigorously disputed the Court’s conclusion that a “secured claim” pursuant to section 506(d) of the Bankruptcy Code includes claims that are “supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”

Patterson v. Shumate: The Court concluded that funds held in certain retirement plans are not “property of the estate” pursuant to section 541 of the Bankruptcy Code and are therefore not subject to distribution to creditors.  As in Begier, Justice Scalia agreed with the outcome, but sharply disagreed with the majority’s reasoning in one key respect, observing:

When the phrase “applicable nonbankruptcy law” is considered in isolation, the phenomenon that three Courts of Appeals could have thought it a synonym for “state law” is mystifying. When the phrase is considered together with the rest of the Bankruptcy Code (in which Congress chose to refer to state law as, logically enough, “state law”), the phenomenon calls into question whether our legal culture has so far departed from attention to text, or is so lacking in agreed-upon methodology for creating and interpreting text, that it any longer makes sense to talk of “a government of laws, not of men.”

United States v. Nordic Village, Inc.: Section 106 of the Bankruptcy Code (as then-effective) was not sufficiently explicit to waive federal immunity with respect to actions seeking monetary recovery in bankruptcy.  Nordic Village, together with Hoffman v. Conn. Dept. of Income Maintenance, precipitated the redraft of section 106 of the Bankruptcy Code, explicitly abrogating state and federal immunity with respect to bankruptcy causes of action.

BFP v. Resolution Trust Corp.: The price received at a foreclosure sale (if such sale complies with state law) is necessarily “reasonably equivalent value” for the property, even if the forced nature of the sale results in a price below fair market price.  BFP usefully traced the history of fraudulent transfer laws to the year 1570 and concluded that “reasonably equivalent” does not mean “equal,” but “approximately equivalent.” See more on BFP here.

Citizens Bank of Md. v. Strumpf: Writing for a unanimous Court, Justice Scalia concluded that a bank’s imposition of a temporary administrative hold on a debtor’s deposit account does not constitute a setoff and does not violate the automatic stay. See our analysis here.

Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.: In Hartford Underwriters, Justice Scalia, writing for a unanimous Court, wrote that only the “trustee” of a bankruptcy estate (and not other administrative claimants) may assert the right to surcharge collateral pursuant to section 506(c) of the Bankruptcy Code.  The decision left open the question of whether a secured creditor may consent to such surcharges.  Regardless, such implied consent remains “alive and well.”

Till v. SCS Credit Corp.:  Dissenting in the much-maligned Till, Justice Scalia agreed with the bulk of the Court’s majority opinion, but led four justices in taking issue with the use of the prime rate to cram down plans. As Justice Scalia wrote:

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. I would instead adopt the contract rate – i.e., the rate at which the creditor actually loaned funds to the debtor – as a presumption that the bankruptcy judge could revise on motion of either party. Since that rate is generally a good indicator of actual risk, disputes should be infrequent, and it will provide a quick and reasonably accurate standard.

Ransom v. FIA Card Servs., N.A.: The Court addressed a circuit split regarding the allowance of the cost of car ownership in connection with the means test in Chapter 13.  Justice Scalia, the lone dissenter, challenged Justice Kagan’s first judicial decision, observing that the Court’s job “is not to eliminate or reduce the[ ] ‘oddities’ [inherent in bright line tests], but to give the formula Congress adopted its fairest meaning.”

RadLAX Gateway Hotel v. Amalgamated Bank: Again writing for a unanimous Court, Justice Scalia upheld secured creditors’ right to credit bid, concluding that the bankruptcy court may not approve cramdown plans that provide for the sale of collateral free and clear of secured creditors’ liens without permitting those creditors to credit bid at the sale. See our analysis here.