The Supreme Court Gets Its Grammar on: Interpreting the Right to Postpetition Interest Under Section 506(b)

In this Throwback Thursday, piece we revisit the decision of the United States Supreme Court in U.S. v. Ron Pair Enters. In a 5-4 decision, the Supreme Court held that section 506(b) of the Bankruptcy Code permits a creditor to receive postpetition interest on an oversecured claim even if the creditor does not have the benefit of an agreement providing for interest on the claim.

As an initial matter, the Supreme Court distinguished between two types of secured claims — involuntary and voluntary. Involuntary secured claims are created by operation of law and do not require the consent of a debtor. Conversely, voluntary secured claims are created by an agreement between a creditor and a debtor. Prior to Ron Pair, the distinction between these two types of secured claims was relevant for determining postpetition interest. The claim at issue in Ron Pair was a governmental claim for unpaid taxes that was perfected by a tax lien on certain property owned by the debtor. As such, the claim was involuntary in nature.

The Supreme Court began its analysis with the plain language of section 506(b) of the Bankruptcy Code. At the time Ron Pair was decided, section 506(b) provided that, for an oversecured claim “there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.” The Supreme Court found that, according to a natural reading of section 506(b), fees, costs, or charges must be reasonable and provided for in the agreement pursuant to which the claim arose, but the right to postpetition interest is not similarly restricted. Specifically, because the phrase “interest on such claim” is offset by commas and followed by the conjunctive term “and any,” it is independent from the remainder of section 506(b).

The Supreme Court noted that the plain language of section 506(b) of the Bankruptcy Code sufficiently expresses Congress’ intent. In a quote now regularly used when a party argues that the “plain meaning” of a statute supports its position, the Supreme Court explained that the “plain meaning of legislation should be conclusive, except in the ‘rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’”  Moreover, the Supreme Court pointed out that a review of pre-Code practice would be of little use in this case.  The practice of denying postpetition interest to holders of nonconsensual liens and granting it to holders of consensual liens was adopted by only a few courts and often depended upon the facts of a particular case. The Supreme Court further found that construing section 506(b) to require payment of postpetition interest on all oversecured claims is not in conflict with any other section of the Bankruptcy Code, the legislative history of the Bankruptcy Code, or any significant state or federal interest.

The dissent in Ron Pair argued that punctuation should not dictate statutory interpretation. The majority’s reading of section 506(b) is dependent upon the comma following the phrase “interest on such claim.” When the comma is eliminated, “interest on such claim” is qualified by “provided for under the agreement the under which such claim arose.” The dissent noted that the Supreme Court has modified or disregarded punctuation in the past to give effect to Congressional intent. The dissent also argued that, according to Supreme Court precedent, bankruptcy statutes should not be interpreted to have changed pre-Code law unless Congress has indicated an intention to do so. Prior to the enactment of section 506(b) in 1978, the Supreme Court and every Court of Appeals that considered the issue declined to permit recovery of postpetition interest on nonconsensual liens. Here, no evidence existed that Congress intended to change pre-Code law to permit postpetition interest on nonconsensual liens.

Ron Pair has had a significant impact on the bankruptcy world and remains an influential decision today. In addition to resolving a dispute as to whether postpetition interest may be recovered on involuntary secured claims, Ron Pair was an important statement by the Supreme Court regarding the rules of statutory interpretation and the power of the “plain meaning” of a statute.