UNITED STATES OF AMERICA, PETITIONER V. RON PAIR ENTERPRISES, INC. No. 87-1043 In the Supreme Court of the United States October Term, 1987 The Solicitor General, on behalf of the United States of America, petitons for a writ of certiorari to review the judgment of the United States Court of Appeals for the Sixth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statute involved Statement Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-12a) is reported at 828 F.2d 367. The opinion of the district court (App., infra, 15a-16a) and the opinions of the bankruptcy court (App., infra, 17a-19a, 20a-25a) are not yet reported. JURISDICTION The judgment of the court of appeals (App., infra, 13a-14a) was entered on September 4, 1987. On November 24, 1987, Justice Scalia extended the time for filing a petition for a writ of certiorari to and including December 24, 1987. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE INVOLVED Section 506 of the Bankruptcy Code (11 U.S.C. (& Supp. IV)) is set out in a statutory appendix (App., infra, 25a). QUESTION PRESENTED Whether Section 506(b) of the Bankruptcy Code (11 U.S.C. (& Supp. IV)) entitles a creditor to receive postpetition interest on an oversecured claim allowed in a bankruptcy proceeding. STATEMENT 1. Section 506 of the Bankruptcy Code (11 U.S.C. (& Supp. IV)) concerns the treatment of secured claims in bankruptcy proceedings. Section 506 was enacted, together with the rest of the Bankruptcy Code, in the comprehensive overhauling of the bankruptcy laws accomplished by the Bankruptcy Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549. Section 506(b) addresses the situation of an "oversecured claim," i.e., the situation where the value of the security exceeds the amount of the allowed secured claim (and certain administrative costs of preserving or disposing of the property for the creditor's benefit). In the case of 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" (11 U.S.C. (Supp. IV) 506(b)). 2. On May 1, 1984, respondent petitoned the United States Bankruptcy Court for the Eastern District of Michigan for a reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. (& Supp. IV) 1101 et seq. The government filed a timely proof of claim for $53,278 in assessed and unpaid withholding and social security taxes, penalties, and interest that had accrued prior to the filing of the petition in bankruptcy. The claim was secured by tax liens on property owned by respondent for which notice had been properly filed. The parties stipulated that the value of the collateral securing the tax claim was sufficient to pay this claim, along with any post-petition interest that was due on the claim. App., infra, 2a. On October 1, 1985, respondent filed its First Amended Plan of Reorganization. This plan provided for the payment of the government's claim, including the portion allocable to pre-petition interest, but it did not provide for the payment of post-petition interest on that claim. The government filed a timely objection to the plan, arguing, inter alia, that Section 506(b) entitled it to receive post-petition interest on its oversecured claim. App., infra, 2a. 3. On December 6, 1985, the bankruptcy court denied the government's objection and ordered that the plan, which had previously been confirmed (see App., infra, 20a-25a), could be completed without payment of post-petition interest to the government (id. at 17a-19a). The court relied upon several "pre-Code" court of appeals decisions decided under the prior statute (Bankruptcy Act of 1898, ch. 541, 30 Stat. 544), noting that it saw "no reason to deviate from the sound reasoning of the various Courts of Appeal (sic) that have already disposed of this issue" (App., infra, 18a). These cases had held that the Bankruptcy Act did not require the payment of post-petition interest on nonconsensual liens, i.e., liens that were not voluntarily established by the debtor, such as a federal tax lien. See, e.g., United States v. Harrington, 269 F.2d 719, 724 (4th Cir. 1959). The district court reversed (App., infra, 15a-16a). The court held that "the plain language of Section 506(b) entitles the United States to such post-petition interest" (App., infra, 16a). The court further stated that this interpretation had been upheld in In re Best Repair Co., 789 F.2d 1080 (4th Cir. 1986), and In re Colegrove, 771 F.2d 119 (6th Cir. 1985) (App., infra, 16a). 4. The court of appeals reversed and reinstated the order of the bankruptcy court (App., infra, 1a-12a), holding that Section 506(b) does not require that post-petition interest be paid on oversecured claims founded upon nonconsensual liens. The court found that the language of Section 506(b) was not so unambiguous as to preclude further inquiry (App., infra, 4a). Citing Kelly v. Robinson, No. 85-1033 (Nov. 12, 1986), and Midlantic Nat'l Bank v. New Jersy Dep't of Envtl. Protection, 474 U.S. 494 (1986), the court stated that the Bankruptcy Code provision should be interpreted with reference to pre-Code law "in order to better understand the context in which the provision was drafted and therefore the language itself" (App., infra, 4a-5a). In this case, the court explained, judicial decisions under the Bankruptcy Act had established the rule that post-petition interest was not available on nonconsensual liens because the creditor had not bargained for the security (id. at 5a-7a). The court concluded that, in the absence of any affirmative indication in the legislative history that Congress intended to depart from existing case law, Section 506(b) should be interpreted as "codif(ying) the pre-Code law on the issue of allowable post petition interest" (App., infra, 10a). The court acknowledged that its "interpretation results in a conflict with the Fourth Circuit and with many bankruptcy courts" (ibid. (footnote omitted)). /1/ REASONS FOR GRANTING THE PETITION The court of appeals has decided a significant bankruptcy law issue in a manner that directly conflicts with the decision of another court of appeals. Moreover, the court's decision is erroneous because it unjustifiably disregards the plain language of the governing statute, Section 506(b) of the Bankruptcy Code. The question presented is a frequently- recurring one that is of considerable administrative importance. Accordingly, it is appropriate for this Court to grant certiorari in order to eliminate the uncertainty and disparity in treatment in different circuits that has been created by the court of appeals' error. 1. As the court of appeals frankly acknowledged (App., infra, 10a), its decision directly conflicts with In re Best Repair Co., 789 F.2d 1080 (4th Cir. 1986). The facts in Best Repair were essentially indistinguishable from those of the instant case. The government filed a timely proof of claim in a Chapter 11 proceeding for delinquent taxes, and the debtor acknowledged its liability and the fact that the value of the property securing the federal tax claim exceeded the total amount claimed by the government. The government and the debtor disagreed, however, on whether Section 506(b) required the payment of post-petition interest to the government since the claim was oversecured. The debtor contended that the statute should be interpreted as a codification of pre-Code law by reading the statutory allowance of post-petition interest for oversecured claims as limited to interest "provided for under the agreement under which such claim arose" (Section 506(b)). /2/ The Fourth Circuit, however, flatly rejected this contention. The court in Best Repair held that the debtor's argument "strains the plain meaning of the language and grammar of the provision" (789 F.2d at 1082). The court explained that the phrase "interest on such claim" was set off -- by both a comma and a connecting conjunction -- from the later list of other items covered by an agreement between the parties. "The effect of this usage," the court continued, "is to make 'interest on such claim' a separate and distinct clause to which 'provided for under the agreement' does not apply" (ibid.). The court concluded that "the natural meaning of (Congress's) chosen words is to permit post-petition interest on nonconsensual oversecured claims" (ibid. (footnote omitted)). The court added that the legislative history provided "no reason to depart from the natural import of the language itself" (ibid.). Thus, the decision below and the decision in Best Repair are irreconcilable, and they will lead to disparate results in the Fourth and Sixth Circuits whenever the government holds an oversecured tax claim in a Chapter 11 proceeding. In addition, as the court of appeals also acknowledged, the decision below conflicts with the decisions of "many bankruptcy courts" (App., infra. 10a (footnote omitted)). /3/ This conflict is not restricted to tax lien cases. The opinion below does not suggest that the result turns on the fact that the claimant is the government or that the claim involved is for delinquent taxes. Rather, the court of appeals quite explicitly held that Section 506(b) should be read to embody pre-Code law and that post-petition interest cannot be collected on an oversecured claim unless the interest was "provided for under the agreement under which (the) claim arose" (Section 506(b)). Thus, the decision below also conflicts with the decisions of numerous bankruptcy courts that have permitted private nonconsensual lienholders, such as judgment lien creditors and mechanic's lien claimants, to collect post-petition interest under Section 506(b). See, e.g., In re Charter Co., 63 Bankr. 568 (Bankr. M.D. Fla. 1986); In re Romano, 51 Bankr. 813 (Bankr. M.D. Fla. 1985); In re Morrissey, 37 Bankr. 571 (Bankr. E.D. Va. 1984); In re Bormes, 14 Bankr. 895 (Bankr. D.S.D. 1981); see also In re Loveridge Machine & Tool Co., 36 Bankr. 159, 162 (Bankr. Utah 1983); contra, In re Dan-Ver Enterprises, 67 Bankr. 951 (W.D. Pa. 1986). 2. a. The decision of the court of appeals mistakenly fails to apply the plain terms of the statute. The basic rule of statutory construction is that the plain meaning of a statute should be followed, 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." Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982). See also, e.g., United States v. Clark, 454 U.S. 555, 560 (1982); United States v. Turkette, 452 U.S. 576, 580 (1981). This is not one of these rare cases. Rather, the court of appeals departed from the apparent meaning of the statutory language without any substantial basis for believing that the plain meaning did not reflect the intention of Congress. The natural reading -- indeed, the only facially plausible reading -- of Section 506(b) is that it permits all holders of oversecured claims to collect post-petition interest and, in addition, reasonable fees and costs provided for in the agreement giving rise to the claim. The authorization to pay interest on the claim is designed to stand independently; it is separated from the remaining portion of the statute both by a comma and by the conjunctive phrase "and any," which introduces a second category of payments allowed to the holders of oversecured claims. The concluding phrase -- "provided for under the agreement" -- cannot plausibly be read as modifying anything more than the immediately preceding list of payments, i.e., "reasonable fees, costs, or charges." The court of appeals' proffered construction that the 'provided for" phrase is a limitation on the interest award tortures the structure of the provision and amounts to an "effort to circumvent the plain meaning of the statute by creating an ambiguity where none exists" (Escondido Mutual Water Co. v. La Jolla Band of Mission Indians, 466 U.S. 765, 781 (1984))). The fact that pre-Code decisional law had set forth a different rule from that indicated by the language of Section 506(b) provides no reason to question whether that language faithfully embodies congressional intent. The Bankruptcy Code was designed as a comprehensive revision of the substantive and procedural law governing bankruptcy proceedings. Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 52-53 (1982). Congress stated (H.R. Rep. 95-595, 95th Cong., 1st Sess. 3 (1977) (footnotes omitted)): The major purpose of this bill is the modernization of the bankruptcy law. The substantive law of bankruptcy and the current bankruptcy system was designed in 1898, in the horse and buggy era of consumer and commercial credit, and was last overhauled in 1938, nearly 40 years ago. Extensive consideration was given both to tax collection in bankruptcy proceedings and to the treatment of secured claims. Since the motivation for the comprehensive bankruptcy reform was to change the law, there is no reason to assume that this major revision intended to retain decisional law under the old regime. This is particularly true with respect to the oversecured claim issue presented here. One of Congress's goals in enacting the new Bankruptcy Code was to strike a balance between the competing interests of debtors, private creditors, and the government as a tax collector. See S. Rep. 95-989, 95th Cong., 2d. Sess. 14 (1978); S. Rep. 95-1106, 95th Cong., 2d Sess. 2 (1978). Given the substantial changes in commercial lending practices following the adoption of the Uniform Commercial Code in the 1960s and the modernization of the treatment of federal tax liens in the Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1125, Congress would have been expected to strike a different balance in the Bankruptcy Code from that found in Bankruptcy Act case law that antedated these changes. Indeed, the changes wrought by the modernization of commercial practices have almost entirely eviscerated the reasons given by the court below, and by the earlier decisions that it followed, to justify a ban on payment of post-petition interest to the holders of nonconsensual oversecured claims. For example, one of the reasons given by the court of appeals for the rule it adopted is that the government should not be entitled to post-petition interest because a tax lien is a general lien that encumbers all property belonging to the taxpayer, while a private creditor's lien reaches only a single asset (App., infra, 7a). See also, e.g., In re Kerber Packing Co., 276 F.2d 245, 247 (7th Cir. 1960); United States v. Bass, 271 F.2d 129, 131-132 (9th Cir. 1959). While this distinction might have been valid when it was first suggested, under modern commercial lending practices it is no longer the case that private lienholders limit their security to a single asset. See, e.g., United States v. Security Indus. Bank, 459 U.S. 70, 71 (1982); In re American Mariner Indus., Inc., 734 F.2d 426, 427 (9th Cir. 1984) (bank loan secured by security interest in "basically all of the (debtor's) assets"). The court's other rationale for its rule -- that allowing interest to the holders of oversecured claims unfairly disadvantages general unsecured creditors who have no power to compel the debtor to pay its taxes in a timely fashion (see App., infra, 7a n.6; In re Boston & Maine Corp., 719 F.2d 493, 497 (1st Cir. 1983), cert. denied, 466 U.S. 938 (1984) -- has similarly been weakened by more recent developments. The government now must file notice of its tax lien in order to become a secured creditor, and unsecured creditors have the opportunity to discover the tax liens and to choose to withhold credit if they cannot obtain adequate security. The government, on the other hand, is an "involuntary creditor" that lacks the ability easily to enforce collection or to prevent further extensions of "credit" in the form of additional unpaid withholding taxes. See generally H.R. Rep. 95-595, 95th Cong., 1st Sess. 189-193 (1977); id. at 193 ("it is a frequent occurrence that the business will stop paying its taxes before it stops paying its other creditors because the officers of a business know that detection of nonpayment is more difficult for the taxing authority than it is for the supplier or lender, and that an unpaid supplier quickly stops shipping goods, though an unpaid taxing authority is usually unable to take collection action for months"). In sum, no rational congressional purpose would be served by reading Section 506(b) to embody pre-Code law, in defiance of its plain meaning. b. The court of appeals relied on no legislative history or other evidence that would even suggest that the plain meaning of Section 506(b) does not reflect the intent of Congress, much less evidence that would show that this is one of those "rare cases (in which) the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters" (Griffin v. Oceanic Contractors, Inc., 458 U.S. at 571). Instead, the court relied on two recent decisions of this Court for what it viewed as a general rule of construction -- namely, that a provision of the Bankruptcy Code should be assumed to embody pre-Code decisional law in the absence of a very explicit indication by Congress of an intent to abandon that prior decisional law. The court erred both in deducing such a general rule of construction from these cases and in applying it here. Both of the cases relied upon concerned the effect of a general bankruptcy provision on important issues and policies outside the bankruptcy context. Because it appeared likely that Congress had not considered these nonbankruptcy issues in the bankruptcy revision, it was not unreasonable for the Court to look to pre-Code law, among other things, in an attempt to divine congressional intent. But those cases have little bearing here where the Bankruptcy Code provision is specifically addressed to the issue at hand, and that issue is a core bankruptcy matter. In short, there is simply no basis for concluding that pre-Code decisional law is embodied in Section 506(b). In Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494 (1986), the Court held that the Bankruptcy Code's provision generally authorizing the trustee to abandon property (11 U.S.C. (Supp. IV) 554(a)), did not give him the right to abandon property in contravention of state or local laws designed to protect public health or safety. The Court explained that "(n)either the Court nor Congress has granted a trustee in bankruptcy powers that would lend support to a right to abandon property in contravention of state or local laws designed to protect public health or safety" (474 U.S. at 502). Indeed, the Court stated, Congress has "repeatedly expressed its legislative determination that the trustee is not to have carte blanche to ignore nonbankruptcy law," especially when issues of public health and safety are involved (ibid.). The Court also stated that there had been well-recognized restrictions on the trustee's abandonment power when Congress enacted Section 554(a) (474 U.S. at 500-501). Characterizing Section 554 as a "codif(ication of) the judicially developed rule of abandonment," the Court further stated that it was a normal rule of statutory construction, particularly in bankruptcy codifications, that Congress makes its intent specific if it intends to change the interpretation of a judicially created concept (474 U.S. at 501). Finding that the exemption from state law sought by the trustee was an "extraordinary" one (ibid.), the Court concluded that an intent to establish such an exemption would have been expressly manifested by Congress. In Kelly v. Robinson, No. 85-1033 (Nov. 12, 1986), the Court held that the Bankruptcy Code did not provide for the discharge of restitution obligations to crime victims ordered by the state's criminal justice system. Citing Midlantic, the Court noted that the 1978 Code provision, which did not on its face make such obligations nondischargeable, was enacted "against the background of an established judicial exception to discharge for criminal sentences, including restitution orders" (slip op. 9-10). The Court explained that this judicial exception had been established in the face of relatively "clear statutory language" (id. at 8) that would have rendered such debts dischargeable, and therefore it was reasonable to read the 1978 statute as embodying the same exception, rather than silently clashing with the "deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings" (id. at 10). The Court did not purport in these cases to establish a general rule that the Bankruptcy Code necessarily must be construed to preserve pre-Code judicial rules in the absence of specific statement of contrary congressional intent. Indeed, that proposition cannot be squared with this Court's decision in United States v. Whiting Pools, Inc., 462 U.S. 198 (1983). The Court there held that, with respect to property seized by levy to satisfy a federal tax lien, the government, just like other secured creditors, is subject to the general requirement of 11 U.S.C. 542(a) that it turn over secured property to the bankruptcy trustee. The Court recognized (Phelps v. United States, 421 U.S. 330 (1975)) that pre-Code law has held that property seized by the IRS pursuant to a levy was not subject to the bankruptcy court's jurisdiction (see 462 U.S. at 206 n.13). But the Court in Whiting Pools held that this previously-established limitation was not "irrelevant because of the expanded jurisdiction of bankruptcy courts under the Bankruptcy Code" (id. at 210 n.18). The Court explained that "(t)he Service is bound by Section 542(a) to the same extent as any other secured creditor" and that "(n)othing in the Bankruptcy Code or its legislative history indicates that Congress intended a special exception for the tax collector in the form of an exclusion from the estate of property seized to satisfy a tax lien" (462 U.S. at 209). By the same token, however, nothing in the Bankruptcy Code or the legislative history had indicated an intent to overrule Phelps. The Court thus rejected the premise that pre-Code judicial law is assumed to have been embodied in the Bankruptcy Code in the absence of a specific contrary statement by Congress. In sum, Midlantic and Kelly do not establish any general presumption that the Bankruptcy Code embodies pre-Code judicial law; rather, they simply hold that pre-Code law was relevant in the circumstances of those cases. This case, however, differs from Midlantic and Kelly in several important respects. Those cases involved the effect of a fairly general bankruptcy law provision upon a question implicating important governmental interests unrelated to bankruptcy -- state health and safety laws and the continued effectiveness of requirements imposed in state criminal proceedings -- that were not the focus of congressional attention during the drafting of the Bankruptcy Code. The issue here, be contrast, relates only to a core matter of bankruptcy -- the extent of distributions to secured creditors in bankruptcy proceedings (see 28 U.S.C. (Supp. III) 157(b)(2)(B)). The resolution of this issue depends upon the balance struck among the interests of competing creditors in bankruptcy proceedings, which was one of the principal issues considered by Congress in 1978. /4/ Moreover, the statute here is specifically directed at the question of recovery of post-petition items arising from oversecured claims. In contrast to Midlantic and Kelly, the rule adopted by the court of appeals cannot be regarded as remedying what may have been a minor oversight in the statute on an issue upon which Congress did not focus its attention; rather, the court of appeals' decision is directly antithetical to what Congress explicitly said about an issue that was the very subject of the relevant provision. Thus, the exceptional circumstances that induced the Court to depart in Midlantic and Kelly from what the statute standing alone appeared to suggest are absent here. Rather, as in Whiting Pools, the language of the new statute should be construed in accordance with normal rules of statutory construction, not by adopting decisional law developed under the old statute. Congress here enacted a major change in the bankruptcy laws and specifically addressed a particular issue in broad language that covers the government's tax claim. There is no suggestion in the legislative history that the federal government (or other nonconsensual lienholders) should be excepted from the statute. Accordingly, there are no exceptional circumstances present that could justify departing from the plain meaning of the statute -- the specific terms of which clearly indicate that Congress did not intend to retain pre-Code decisional law on the questions at issue. /5/ 3. The conflict in the circuits created by the decision below warrants this Court's attention because the question presented is one of considerable importance to the administration of the bankruptcy laws. Most bankruptcies involve secured claims, often including claims in which the value of the security exceeds the amount of the claim. The Internal Revenue Service's statistics show that, during the 1982-1986 period, the IRS filed secured claims in bankruptcy proceedings totalling more than $730 million, including $186 million in 1986 alone. While the figures do not indicate the precise amount of these claims that were oversecured, the number is plainly substantial. Moreover, the issue presented here affects not only oversecured claims filed by the federal government, but also those filed by state and local governments and by private creditors whose liens are nonconsensual. Clearly, a uniform nationwide rule is required on an issue that recurs so frequently, and the Court therefore should act to resolve the conflict in the circuits. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. CHARLES FRIED Solicitor General WILLIAM S. ROSE, JR. Assistant Attorney General ALAN I. HOROWITZ Assistant to the Solicitor General WYNETTE J. HEWETT MARTHA B. BRISSETTE Attorneys DECEMBER 1987 /1/ The Sixth Circuit disavowed as dicta its prior statement that Section 506(b) "provides for interest on all allowed secured claims where the value of the security is greater than the claim" (In re Colegrove, 771 F.2d at 122). App., infra, 4a n.2. /2/ As we have noted (page 3, supra), several court of appeals decisions under the old Bankruptcy Act had followed the rule that post-petition interest could be recovered on oversecured claims only where the liens were consensual, which would not include federal tax liens. See In re Boston & Maine Corp., 719 F.2d 493 (1st Cir. 1983), cert. denied, 466 U.S. 938 (1984); In re Kerber Packing Co., 276 F.2d 245 (7th Cir. 1960); United States v. Mighell, 273 F.2d 682 (10th Cir. 1959); United States v. Bass, 271 F.2d 129 (9th Cir. 1959); United States v. Harrington, supra. /3/ Several bankruptcy courts have awarded post-petition interest on claims oversecured by tax liens, for both federal (see, e.g., In re Gilliland, 67 Bankr. 410 (Bankr. N.D. Tex. 1986); In re Hoffman, 28 Bankr. 503, 508 (Bankr. D. Md. 1983)) and state and local taxes (see, e.g., In Brandenburg, 71 Bankr. 719 (Bankr. D.S.D. 1987); In re Busone, 71 Bankr. 201 (Bankr. E.D.N.Y. 1987); contra In re Granite Lumber Co., 63 Bankr. 466 (Bankr. D. Mont. 1986); In re Venable, 48 Bankr. 853 (S.D.N.Y. 1985)). /4/ The House Report on the 1978 Act noted in its overview of the bill (H.R. Rep. 95-595, 95th Cong., 1st Sess. 4-5 (1977) (footnote omitted)): This is not primarily a debtor's bill * * *. The bill codifies creditors' rights more clearly than the case law, which is in many ways just developing. It defines the protections to which a secured creditor is entitled, and the means through which the court may grant that protection. /5/ Indeed, even under the court of appeals' reading, Section 506(b) cannot be said to embody pre-Code law. Under prior law, the question whether attorney's fees provided for in the agreement would be allowed was governed by state law. Section 506(b), however, does not include this state law requirement. See Unsecured Creditors' Comm. v. Walter E. Heller & Co., 768 F.2d 580, 582-585 (4th Cir. 1985). APPENDIX