US Savings Ass'n v. Timbers of Inwood Forest Associates

Preliminarily, I find it interesting that Scalia uses legislative history at one point to justify claiming that "value of such creditor's interest" in § 506(a) means the "value of the collateral."  Scalia is one of the most ardent opponents of legislative history that one could find.  Within the same opinion, in fact, he says, "If it is at all relevant, the legislative history tends to subvert rather than support petitioner's thesis."  The only explanation I can offer for this rare instance of hypocrisy is that it is qualified by "if at all relevant," and it is 1988, perhaps before Scalia has fully embraced his "death to legislative history" schtick.

As for the case, the issue presented is whether the Bankruptcy Code's protections for secured creditors include post-petition interest.  The justification for post-petition interest is that, but for the automatic stay against foreclosure actions, the secured creditor would have been able to invest foreclosure proceeds.  By denying the right to foreclosure, the automatic stay deprives the secured creditor of its interest in the investment value of its collateral.  On the other hand, there are textual problems with interpreting the Code in this manner.  The phrase "interest in property" ordinarily means a property interest, which is not the same as a right to foreclose.  There are numerous other instances in the Code where the property interest is described as a prepetition claim, and interest payments are discussed in other contexts, implying that Congress knew how to provide interest payments in this situation if it wanted to be explicit in its intent.

I am reminded of the Rash case, where, once again, Scalia writes about valuation of collateral.  In Rash, the Court valued collateral based on its retail replacement costs, not on the price it would fetch in a foreclosure sale.  Perhaps this outcome is required for the sake of consistency with Timbers.  Interesting that the professor did not bring up Timbers in our discussion of Rash, though perhaps he did and I just wasn't paying attention.  Anyway, this significance of both Timbers and Rash appears to be that the Court views a secured creditor's interest in collateral as if it were already in the creditor's possession, and adequate protection of this possessory interest only requires protection of its prepetition market retail value.

Its easy to see why this approach rankles so many commentators and provides controversy for the classroom.  The ability to sell property in the market is only one of the rights that accompany property interest.  What about the right to use the property?  To invest it?  By depriving secured creditors of this aspect of their property rights, the Court puts secured creditors in a worse position than they would be in if there had been no automatic stay, which is supposedly one of the fundamental principles behind absolute priority in a Chapter 11 reorganization.  (This does not take into account price reductions inherent in foreclosure sales.)

Textual support in the Code for Scalia's interpretation:

• §506(b) provides postpetition interest only for an oversecured creditor.  Thus, adequate protection in §361 would conflict with §506(b) if it required interest payments for undersecured creditors.  Further, 506a provides creditors only with security in the value of the estate's interest in the collateral.  I think (Scalia doesn't discuss this) the estate's interest is not in a foreclosure value, nor could the estate's interest referred to here include the investment proceeds of the collateral, because the estate's use of the collateral is "products of the property of the estate," which is property of the estate specifically reserved for distribution among the creditors.  An undersecured deficiency claim must be shared pro-rata with the other general creditors of the estate.
• §552(a) says that a prepetition security interest does not reach property of the estate acquired postpetition.  But there is an exception only if the security agreement specifically calls for "proceeds, product, offspring, rents, or profits" of the collateral.  Thus, 552a seems only to grant postpetition interest if the interest comes in a form anticipated by the parties prepetition in the security agreement.
• 362d1 and d2 would be inconsistent with one another if postpetition interest were allowed, because an undersecured creditor would technically never have adequate protection, so why would it matter, in 362d2, that the collateral was not necessary for the reorganization?  (I'm a little shaky on this argument.)