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.)

History and the Law

We are not learning the way things are. We are learning where the law has come from. As Oliver Holmes put it, the law consists of predictions about what courts will do. This conception of law has deep implications for its study.

There are those who emphasize their attention on legal principles and analysis of the intricacies of issues that are presented by particular fact patterns. Those who subscribe to this method are pragmatists who want to learn only the information that will be on their test. Their method involves identifying material that will yield points on an exam, and, more importantly, ignoring material that will not be tested on the exam. There is much to be said for such a technique while a 1L. Grades reign supreme at this stage.

If only there was a list of material that will be tested, and a list of material that will not! In the absence of such a list, a student who wishes to only focus on tested material will have to rely on his/her ability to distinguish these two categories of information from each other. And what basis does the 1L have for distinguishing? None!

But there is something similar to this imaginary list of tested material--history. Almost all of the major principles and rules of the common law are over 300 years old, and students and academics have been grappling with the issues presented by them for at least this long. By studying the evolution and historical debates of the laws (including the study of laws that are obsolete), one gets an intuitive sense of which sorts of problems are more intractable than others. In addition, one sees the analytical tools of legal scholarship in action. More importantly, one is able to see the professor presenting problems of legal history, so that one gets an intuitive sense of which sorts of problems are of most interest to a professor.

Reading cases is not enough. Each case is a treasure trove of arguments, disputes and sub-issues, each of which is fodder for future exam questions. The key is to dig through history and collect each important issue and organize it into a functional history. The diligent reader must not be allowed to passively read each case, guess at the general jist of the issue, and copy and paste the most authoritative line of the opinion into the "reasoning" section of a brief. It does not have to take a long time, but it must be done right. There are no answers in the opinions, but there are tons of questions.

And each of these questions is worth a point on the exam. Hopefully, this blog will help me to practice articulating the questions presented in each case.

Judicial Interpretation of Statutes Codifying Common Law

After quoting Oregon's statutory codification of the Parol Evidence Rule, Howell (C. J. of Oregon Sup. Ct., 1978) notes:

"This court, however, has never read the statute in such a manner, but instead has treated the statute as a codification of the common law parol evidence rule . . . Although [our] decisions may be inconsistent with a literal reading of the statute, which has been in effect since 1862, they can be justified under the general rule that statutes codifying the common law are to be construed in a manner consistent with the common law . . ."

Fascinating. What if a legislature wants to overturn judicial precedent by deliberately codifying a common law rule in a manner that is inconsistent with the precedent? A legislature must be careful in drafting a bill to make sure that it explicitly states its intent if it conflicts with judicial precedent.