Amicus Curiae Brief — United States v. Ron Pair Enterprises, Inc.

Supreme Court, US,

FILED

No. 87-1043 AUG iL 1988

OCTOBER TERM, 1988

UNITED STATES OF AMERICA,

. Petitioner,

RON PAIR ENTERPRISES, INC..,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

BRIEF FOR UNITED REFINING COMPANY AS

AMICUS CURIAE SUPPORTING RESPONDENT

MARTIN R. BRING

LAWRENCE L. GINSBURG

LOWENTHAL, LANDAU, FISCHER

& ZIEGLER, P.C.

250 Park Avenue

New York, New York 10177

GEORGE KAUFMANN

(Counsel of Record)

PETER W. MORGAN

LAWRENCE D. GARR

JOSEPH E. KOLICK, JR.

DICKSTEIN, SHAPIRO & MORIN

2101 L Street, N.W.

Washington, D.C. 20037

(202) 785-9700

Attorneys for Amicus Curiae

WILSON - EPEs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

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TABLE OF CONTENTS

Page

INTEREST OF THE AMICUS CURIAE .................-.... 1

INTRODUCTION AND SUMMARY OF ARGU-

SRE pe Pet PS ys oe: ater Any 1

FETT TR a RIOT TOR Se ES SY ae eee 6

I. The Plain Terms of § 506(b) of the Bankruptcy

Code Do Not Provide for Postpetition Interest

to the Holders of Oversecured Claims in the Ab-

sence of an Agreement Providing for Such In-

SII cnntcscciicentiadientetuas oii ati aaia ates aeibdidee aii 6

II. The Court of Appeals Correctly Concluded That

Congress Did Not Change the Well-Settled Prin-

ciple Which Denies Postpetition Interest on

Prepetition Claims Secured by Nonconsensual

IIE cnndianeactbispaditing sian deaaiaiedbaanipniendindidentaiamtnamanianio 15

il

TABLE OF AUTHORITIES

CASES: Page

American Iron Co. Vv. Seaboard Air Line, 233 U.S.

NRE LAR Ne Re enna Cee Te 16

Barrett v. Van Pelt, 268 U.S. 85 (1925) ................. 11

Eddy v. Prudence Bonds Corp., 165 F.2d 157

(C.A. 2, 1947), cert. denied, 333 U.S. 845

ERR Cee een oe eee 16

Erie R. Co. v. United States, 240 Fed. 28 (C.C.A.

Oh ceitnsicinibtatiienh 9

Ewing v. Burnet, 11 Pet. (36 U.S.) 41 (1837)... 10

In re Best Repair Co., 789 F.2d 1080 (C.A. 4,

TIIIIT |. :.ichacthiiteeniatteieekicnpeseciabesgninnaliaabniensbhatipseshenstesictecuatane 21

In re Black Ranches, Inc., 362 F.2d 8 (C.A. 8),

cert. denied, 385 U.S. 990 (1966) ......................... 16, 19

In re Dan-Ver Enterprises, Inc., 67 B.R. 951

EEE 7

In re Deep Rock Oil Corp., 113 F.2d 266 (C.A.

I a io here cha eareldemrateacactaiehamenomaaeene 16

In re Kerber Packing Co., 276 F.2d 245 (C.A. 7,

Re Tc NTN Re OR AAW Oe AOAC RET OED 16, 17, 27

In re Macomb Trailer Coach, 200 F.2d 611 (C.A.

6, 1952), cert. denied, 345 U.S. 958 (1953) ....... 16

In re Magnus Harmonica Corp., 262 F.2d 515

I ccnmeenten 25

In re Newbury Cafe, Inc., 841 F.2d 20 (C.A. 1,

1988), Pet. for Cert. pending, No. 87-1784..1, 6, 7, 11,

18, 21

Kagan v. Industrial Washing Machine Corp., 182

ee I, i a ceesneililommenen 16

Kelly v. Robinson, —— U.S. ——, 107 S. Ct. 353

I atc 4, 5, 20, 21, 22, 23, 25, 30

Midlantic National Bank v. New Jersey Depart-

ment of Environmental Protection, 474 U.S.

MID ~ coctdncceousbcqunied 4, 5, 10, 20, 21, 22, 23, 24, 25, 30

New York v. Saper, 336 U.S. 328 (1949) ...... 16, 17, 18, 29

Nicholas v. United States, 384 U.S. 678 (1966)... 2, 15,

18, 28

Northern Pacific Ry. Co. v. United States, 227

I shane 10

Oppenheimer v. Oldham, 178 F.2d 386 (C.A. 5,

1949) ..... 16

i sua aaa

iii

TABLE OF AUTHORITIES—Continued

Page

Porto Rico Ry. Light & Power Co. v. Mor, 253

tie mtn 13, 14

Sexton v. Dreyfus, 219 U.S. 339 (1911) ............. 16, 18, 28

Simpson v. United States, 435 U.S. 6 (1978)_.....4, 11, 12

Stephens v. Cherokee Nation, 174 U.S. 445 (1899)... 4, 11

12, 14

United Savings v. Timbers of Inwood Forest, 108

S. Ct. 626 (Jan. 20, 1988) ....... ne ...4, 5, 16, 18, 20,

21, 23, 24

United States v. Bass, 271 F.2d 129 (C.A. 9,

a Ge SEE EE SRLS OR oe ae a 16, 17

United States vy. Brandenburg, 144 F.2d 656 (C.A.

I a ies 13

United States v. Harrington, 269 F.2d 719 (C.A.

ECS SIRES se Be OO a 17, 26

United States v. Mighell, 273 F.2d 682 (C.A. 10,

1959) ........ CEES AES Ee Pe ee 17

United States vy. Shreveport Grain & Elevator Co..,

Gg, eee lacie seidebitie 4,11

Vanston Bondholders Protective Committee v.

Green, 329 U.S. 156 (1946) 000000 ee. 16, 25

STATUTES

Bankruptcy Code, 11 U.S.C. (1982 ed. & Supp. IV)

aia cctncietaeipstetaaesbainemnigadibaiereemnbiel passim

AE ee nee seienimenvanensnnass 23

| Cilia jabiaibeabininatabiitnbdaaiah pti 23

A sueeppubentnaudstiesestddbunidetan 23

TTT ER setebmmeeean .... 2,17

ir. as seacemunesussnsnnsnenentonnmerss - 14

i sacrcecsinnmrercenenineere giedansieonieimeal passim

ee 28

§ 552(b) ........ F-ck EO as SO TOTTORI eeueseeenas 2,18

§ 726(a) (5) . Fi ant a iencenitaaidaimelibaimaiecs 2,18

Bankruptcy Reform Act of 1978, Pub. L. No. 95-

See, Se Sent. S568 ..................... ee ae shapes 1

Federal Tax Lien Act of 1966, Pub. L. No. 87-719,

i os snupeadeceunusonscunneosaneenes 5, 29

iv

TABLE OF AUTHORITIES—Continued

Page

Indian Appropriation Act of July 1, 1898, c. 545,

FF Ds EE Kidinsentetaknietinnmiictadinahn ier eee 12

Jones Act, March 2, 1917, c. 145, 39 Stat. 951

ID cicalnaisepsiaceiehcasinieeitbeniiieapsteaciet atic Reina eae IE 13

MISCELLANEOUS:

Brief for the United States as Amicus Curiae Sup-

porting Respondents, Nos. 84-801 and 84-805. 24

124 Congressional Record (1978) .......................... 9

L. King, Collier on Bankruptcy (15th ed. 1988)... —s-_-‘7,8

RR RAO AEE. 010. eee Le ae 22

Resnick & Wypyski, Bankruptcy Reform Act of

1978-A Legislative History (1979) .................. 8, 19, 20

C. Sands, Sutherland Statutory Construction

GE SU ED ccetiiickntbiccteieninlcnniesandtiinicla tenn sitanie 13

BRIEF FOR UNITED REFINING COMPANY AS

AMICUS CURIAE SUPPORTING RESPONDENT '

INTEREST OF THE AMICUS CURIAE

United Refining Company (“United”) is a corpora-

tion which is presently operating pursuant to a Plan of

Reorganization under Chapter 11 of the Bankruptcy

Code, confirmed by the Bankruptcy Court in the Southern

District of Texas, Case No. 87-03935-H2-5, Letter Deci-

sion dated Apr. 22, 1988. In so ruling, the court ap-

proved the reasoning of the court below in this case and

that of the First Circuit in In re Newbury Cafe, Inc.,

841 F.2d 20. The government has appealed the Bank-

ruptey Court’s decision to the district court. United

therefore submits this brief amicus cxriae with the con-

sent of the other parties. This brief responds in the full-

est detail that space permits to the argument of the

United States in this Court. We thereby avoid duplicat-

ing the respondent’s brief, which we were permitted to

see in draft.

INTRODUCTION AND SUMMARY OF ARGUMENT

The Bankruptcy Reform Act of 1978 (Pub. L. No. 95-

598, 92 Stat. 2549) enacted a new Bankruptcy Code,

Title 11 of the U.S. Code. This “comprehensive revi-

sion” (U.S. Br. 10) made important changes in the

bankruptcy laws, and in other respects, codified existing

law. The issue in this case is whether $ 506(b) of the

new Code changed prior law in order to allow postpeti-

tion interest on oversecured claims by holders of non-

consensual liens. To decide that issue, it is necessary first

to understand how bankruptey law dealt with postpe-

tition interest before § 506(b) was enacted.

' Throughout this brief, references to the opinion below will be

to the Appendix to the Petition for Certiorari (‘Pet.”): refer-

ences to the Brief for the United States in this Court will be cited

“U.S. Br.”.

2

Nicholas v. United States, 384 U.S. 678, 682, stated

the general rule:

It is a well-established principle of American bank-

ruptcy law that in cases of ordinary bankruptcy, the

accumulation of interest on claims against a bank-

rupt estate is suspended as of the date the petition

in bankruptcy is filed. Sexton v. Dreyfus, 219 U.S.

339. That rule, grounded in historical considerations

of equity and administrative convenience, was spe-

cifically made applicable to the accumulation of in-

terest on claims for taxes by the decision of this

Court in New York v. Saper, 336 U.S. 328.

This Court’s decisions “reflect{ed] the broad equitable

principle that creditors should not be disadvantaged vis-

a-vis one another by legal delays attributable solely to

the time-consuming procedures inherent in the adminis-

tration of the bankruptcy laws.” 384 U.S. at 683.

As of 1978, this rule was subject to three exceptions,

of which the third is immediately pertinent here. Post-

petition interest was allowed where the value of the col-

lateral securing the debt was sufficient to pay both the

claim and postpetition interest on that claim. As the

court below explained, “where the creditor had bargained

to become an oversecured creditor, he had an expecta-

tion of receiving interest were it necessary to sell the

security.” Pet. 7a. It was also well established, how-

ever, that the exception which allowed postpetition in-

terest to be paid if the claim was oversecured did not

apply to claims which were secured by nonconsensual

liens because the reason underlying the exception did

not apply. 7d.

The general rule denying postpetition interest, and

the first and second exceptions are codified in §§ 502

(b) (2), 726(a) (5) and 552(b) of the new Code. Sec-

tion 506(b) codifies the third exception—it unmistakably

permits postpetition interest on oversecured claims where

such interest is provided for under the agreement. But

the government contends here that §506(b) also re-

3

versed prior law by allowing postpetition interest also on

claims of nonconsensual lienholders—a class which in-

cludes federal and state taxing authorities as well as

private parties such as judicial and mechanic’s lien claim-

ants. In a carefully reasoned opinion, the Court of Ap-

peals correctly rejected the government’s position.

I. The government bases its interpretation of § 506

(b) on what it repeatedly asserts is the “plain meaning”

and “natural reading” of that provision. That “natural

reading” rests on the view that the comma and con-

junective phrase “, and any” in §506(b) separate the

phrase “interest on such claim” from the remainder of

the provision, “reasonable fees * * * provided for under

the agreement under which such claim arose.” U.S. Br.

15. This interpretation of “, and any” cannot be squared

with the legislative history of § 506(b). An earlier ver-

sion of that provision allowed to the holder of an over-

secured claim “to the extent collectible under applicable

law interest on such claim, and any reasonable fees,

costs, or charges provided under the agreement * * * ”.

H.R. 8200, 95th Cong., 1st Sess. (1977) (emphasis sup-

plied). It is undisputed that the underscored phrase was

intended to modify “fees”, because its purpose was to

subject claims for attorney fees to the limitations of

state law. Thus, the comma and conjunction “, and any”’

did not separate the phrase “interest on such claim”

from the remainder of the sentence. There is no basis

for speculating that “, and any” was intended to assume

this separating function when the underscored phrase

relating to “applicable law” was eliminated; indeed in ex-

plaining the final bill, the managers from both Houses

identified only a single change from § 506(b) of the House

bill—they had adopted the Senate’s view that claims for

attorney fees should receive uniform treatment regardless

of state law.

More generally, the government’s contention that

$ 506(b) is unambiguous, although its “plain meaning’’

4

rests in part on the presence of a comma, is untenable

because this Court has long recognized the unreliability

of punctuation in interpreting statutes, and has, where

necessary, repunctuated the statute to arrive at the cor-

rect interpretation. E.g., Simpson v. United States, 435

U.S. 6, 11-12 n.6; United States v. Shreveport Grain &

Elevator Co., 287 U.S. 77, 82-83; Stephens v. Cherokee

Nation, 174 U.S. 445. The government’s additional points

relating to the text of the statute cannot justify the as-

sertion that § 506(b) is unambiguous, since they pro-

vide, at most, a basis for construing that provision in

the government’s favor. On examination they fail to ad-

vance the government’s case even to that limited extent.

II. In Midlantic National Bank v. New Jersey De-

partment of Environmental Protection, 474 U.S. 494,

this Court declared:

The normal rule of statutory construction is that

if Congress intends for legislation to change the in-

terpretation of a judicially created concept, it makes

that intent specific. (Citation omitted.) The Court

has followed this rule with particular care in con-

struing the scope of bankruptcy codifications. [474

U.S. at 501.]

This rule of construction was followed in Kelly v. Rob-

inson, US. , 107 S.Ct. 353, 359-360 (Nov. 12,

1986), and once again in United Savings v. Tin ers of

Inwood Forest, 108 S. Ct. 626, 634 (Jan. 20, 1988).

The Court of Appeals followed these precepts in in-

terpreting § 506(b) “as incorporating the third judicially

created exception to disallowing postpetition interest on

prepetition claims, including the limitations placed on

that exception by the various circuit courts of appeals.”

Pet. lla. The Court correctly reasoned that “the place-

ment of a comma and the inclusion of the words ‘and

any’ [which it deemed to be “ambiguous”] do not evince

an intention to reject the well-established judicially cre-

ated concept,” and that the “admitted lack of legislative

5

history on this point lends further credence to our posi-

tion.” Id. 1la-12a.

To accept the government’s position, it must be as-

sumed that Congress overrode the equitable considera-

tions which were furthered by the prior law, without

leaving a trace of evidence that it was dissatisfied with

that law, and apparently wtihout prompting by any of

the classes of creditors—public or private—who would

be benefitted by the change. Significantly, the Commis-

sioner of Internal Revenue made detailed proposals to

Congress but did not urge that the law be revised to

allow postpetition interest on federal tax claims or to

nonconsensual lienholders generally.

The government attempts to limit the Midlantic-Kelly

rule of construction to “the particular context of those

eases”, viz. “the question of the impact of a general

bankruptcy provision on important issues and policies

outside the bankruptcy context,” which it seeks to con-

trast with cases where the “issue is a core bankruptcy

matter.” U.S. Br. 32. But the effort is in vain: The

proffered distinction is contrary to the explicit reasoning

in the Midlantic and Kelly opinions; fails to take account

of United Savings, which followed Kelly in a “core bank-

ruptecy matter’; and is inconsistent with the govern-

ment’s own position in its brief amicus curiae in Mid-

lantte.

Finally, the government contends that Congress could

not have intended to codify the prior law; in this regard,

it points to changes in the lending practices of private

creditors and to the Federal Tax Lien Act of 1966. As

we explain, however, it is quite illogical to suppose that

either of these events could have prompted Congress to

make the sweeping change in the law for which the

government contends—to allow holders of nonconsensual

liens to receive postpetition interest. More fundamentally,

even if it could be plausibly asserted that intervening

events might have caused Congress to reverse the prior

rule, the force of the Midlantic-Kelly rule of construc-

tion would not be overcome. Fo: under that rule, an

6

intent to make such a change will not be attributed to

Congress unless “it makes that intent specific”. 474 U.S.

at 501.

ARGUMENT

I. The Plain Terms of § 506(b) of the Bankruptcy Code

Do Not Provide for Postpetition Interest to the Hold-

ers of Oversecured Claims in the Absence of an

Agreement Providing for Such Interest.

A. Section 506(b) of the Bankruptcy Code (‘Code’)

provides in pertinent part:

To the extent that an allowed secured claim is se-

cured by property the value of which * * * is greater

than the amount of such claim, there shall be al-

lowed 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 government asserts, and reiterates throughout its

brief, that the “plain meaning” and “natural reading” of

§ 506(b) is that postpetition interest should be available

to the holders of any oversecured claim, even if such in-

terest is not provided for in an agreement between the

debtor and the lienholder, although pre-Code law allowed

such interest only where there was such an agreement.

But as Judge Bailey Aldrich wrote in Jn re Newbury

Cafe, Inc.,*> where the same argument was made by the

Massachusetts Department of Revenue (“DOR’’) :

DOR goes so far as to tell us that the limitation-

removal language is “clear and unambiguous.” If

anything seems clear, it is that that is not so. [841

F.2d at 22.]

In the words of the court below, the government’s con-

tention that “Congress intended to depart from pre-Code

2841 F.2d 20 (C.A. 1), Pet. for Cert. pending, No. 87-1784, (here-

after “Newbury Cafe”). The Court there approved the Sixth

Circuit’s analysis in this case, saying that it “needs no elabora-

tion”. Jd. at 22.

7

law with respect to only this one portion of section

506(b)” depends on “the ambiguous use of a comma and

the words ‘and any’’”’. Pet. 12a. The government’s argu-

ment in this Court confirms that its “natural reading of

the statute” depends on acceptance of the meaning which

it attributes to “, and any”:

The authorization to pay interest on the claim ap-

pears designed to stand independently; it is sepa-

rated from the remaining portion of the statute both

by a comma and by the conjunctive phrase “and

any.” The comma and the conjunctive phrase to-

gether act to separate the phrase “interest on such

claim” as one that can stand alone and to intro-

duce a second category of payments allowed to the

holders of oversecured claims, namely, “reasonable

fees, costs, or charges provided for under the agree-

ment under which such claim arose.” [U.S. Br.

15.] *

This interpretation of “, and any” cannot be squared

with the legislative history of § 506(b)—as we now dem-

onstrate.

B. The fact that the drafters of § 506(b) did not in-

tend “, and any” to have the meaning for which the

government now contends is revealed by what the gov-

ernment would pass off as a “tidbit of legislative his-

3 Since this proposed “natural reading” is based on the view

that the “comma and the conjunctive phrase together act to sepa-

rate * * *” (id., emphasis added), it is entirely accurate to say that

the government “is reduced to pinning its hopes on one, what one

court has termed ‘capricious,’ comma”. Newbury Cafe, 841 F.2d at

22, quoting In re Dan-Ver Enters., Inc., 67 B.R. 951 (W.D.Pa.

1986). Only at the end of a long footnote which was an array of

bankruptcy court decisions does the government acknowledge that

the First Circuit “and a leading commentator * * * have taken the

position that Section 506(b) codifies pre-Code law * * *”. U.S. Br.

19-20, n.7, citing Newbury Cafe, and 3 Collier on Bankruptcy

(L. King, 15th ed. 1988) § 506.05 at 506-41 to 506-44 (hereafter

“Collier’’).

8

tory”. U.S. Br. 23-24, n.9.4 As the government notes

(id.), a dispute surfaced during the debate on § 506(b)

as to whether claims for attorney fees should be limited

by state law or should receive uniform treatment in

bankruptcy regardless of state law. The bill originally

reported by the House Ways and Means Committee took

the former approach. In that version, § 506(b) read as

follows:

To the extent that an allowed secured claim is

secured by property the value of which, after any

recovery under subsection (c) of this section is

greater than the amount of such claim, there shall

be allowed to the holder of such claim, to the ex-

tent collectible under applicable law interest on such

claim, and any reasonable fees, costs, or charges pro-

vided under the agreement under which such claim

arose. [H.R. 8200, 95th Cong., Ist Sess. (1977), em-

phasis supplied. | *

4 Elsewhere, the government asserts that ‘“‘to the extent the legis-

lative history bears on the matter at all, it generally supports the

proposition that post-petition interest is available to all holders of

oversecured claims.” U.S. Br. 21. But the references which follow

provide no such “support”, and the government concludes the same

paragraph by saying: “Thus, the legislative history does not bear

directly upon the question of post-petition interest.” Jd. We agree

with neither of these mutually contradictory statements. Rather,

as we discuss in the text, the legislative history does provide evi-

dence that the “grammatical structure” on which the government’s

“plain meaning” argument rests (id. 15) was not intended to have

the effect which the government ascribes to it

5 We have set forth the language of the prior version exactly as it

is reproduced in 12 Resnick & Wypyski, Bankruptcy Reform Act of

1978—A Legislative History (1979) at 387 (Doc. 41) (hereafter

“Leg. Hist.”), and in Volume 3 of the Appendix to the Collier

treatise at 387. However, a comma appears between “applicable

law” and “interest on such claim” at U.S. Br. 23, n.9; this is an

accurate quotation from the body of that treatise, { 506.03, at 506-8,

but differs from the actual text of the bill.

While neither the presence nor absence of this particular comma

would affect our discussion of the legislative history, this discrep-

ancy vividly illustrates that “[t]he presence or absence of a comma,

according to the whim of the printer or proof reader, is so nearly

9

If the drafters had intended by the use of “, and any”

to separate the language which precedes that “comma

and conjunctive phrase” from the remaining language in

the sentence (U.S. Br. 15), $506(b) of the House bill

would not have accomplished its stated objective. For, if

that were the effect of “, and any”, the qualifying phrase

“to the extent collectible under applicable law” would

have modified only “interest on such claim’. But that

phrase was unquestionably intended also to modify “fees’’;

the legislative history leaves no doubt, and the govern-

ment correctly states (id. 23-24, n.9), that the drafters

of that bill sought thereby to limit claims for attorney

fees to those permitted by state law.

This evidence from the legislative history compels the

conclusion that the original drafters of § 506(b) did not

consider it to be natural reading of the grammatical

structure that “, and any” erects a wall separating “in-

terest on such claim” from “any reasonable fees, costs,

or charges provided for under the agreement under which

such claim arose.” The government’s interpretation of

$ 506(b) therefore depends on the unspoken assumption

that when the qualifying phrase (“to the extent that

** *") was dropped, the remaining “, and any” was

intended to assume a separating function which it did

not originally perform. There is no basis for surmising

that Congress did any such thing; indeed, in explaining

the final bill, the managers identified only a single

change from § 506(b) of the House version—that deal-

ing with attorney fees as described above. See 124 Cong.

Rec. 32398 (1978) (statement of Rep. Edwards); 124

Cong. Rec. 33997 (1978) (statement of Sen. DeCon-

cini).* Thus, the government’s interpretation of § 506

fortuitous that it is a wholly unsafe aid to statutory interpretation.”

Erie R. Co. v. United States, 240 Fed. 28, 32 (C.C.A. 6). See also

pp. 10-11, infra.

® The government proffers an entirely different lesson from the

House Committee amendment. Noting that the qualifying phrase

concerning “applicable law” was placed “before the language allow-

ing interest”, it argues that Congress’ failure to have done like-

10

(b) is refuted by the legislative history.’

C. The specific history of § 506(b) aside, the govern-

ment’s contention that § 506(b) is unambiguous, although

its proposed “plain meaning” rests in part on the pres-

ence of a comma, is untenable as a general proposition.

And the difficulties with that argument are compounded

because it depends not only on the presence of the comma

after “interest on such claim’, but also on the absence of

a comma before the modifying clause “provided for under

the agreement.” * This Court has long recognized that

“lp]unctuation is a most fallible standard by which to

interpret a writing; it may be resorted to when all other

means fail,” Ewing v. Burnet, 11 Pet. (36 U.S.) 41, 53-

54; Northern Pacific Ry. Co. v. United States, 227 U.S.

wise with the phrase “provided for under the agreement * * *”

shows that that phrase was not intended to modify “interest on

such claim”. U.S. Br. 23-24, n.9, emphasis in original. That argu-

ment is at best an inference concerning legislative intent, far re-

moved from the proposition on which the government’s position de-

pends—that the “plain meaning” of §506(b) provides for post-

petition interest to nonconsensual lienholders. The argument there-

fore cannot support the position that Congress intended to change

the pre-Code law, since such an intent must be made “specific”.

Midlantic, supra, 474 U.S. at 501.

Moreover, the proposed inference from the placement of the

qualifying phrase is entirely unwarranted. The government does

not explain why, if Congress wishes to qualify language which

appears in two phrases, it would more likely do so by inserting the

limiting language before, rather than after, the phrases which are

to be qualified, or show that this is in fact Congress’ regular practice.

7 See also pp. 18-20, infra, where we describe further evidence that

§ 506(b) was not intended to change existing law.

®’ The government observes that, if a comma appeared in § 506(b)

before the qualifying phrase “provided for under the agreement”,

this would be evidence “that the legislature intended that it not be

tied to the immediately preceding phrase, but instead should also

qualify earlier antecedents” (U.S. Br. 17, n.4)—here, “interest on

such claim.”

11

355, 360; Barrett v. Van Pelt, 268 U.S. 85, 91.° This

Court’s wariness about relying upon punctuation as a

guide to legislative intent is anchored in the common

experience that legislative draftsmen, like individuals

generally, often punctuate incorrectly, through either

oversight and ignorance. As Judge Aldrich observed in

Newbury Cafe, supra,

A comma, often a matter of personal style, is a very

small hook on which to hang a change in the law

of substantial proportions. [841 F.2d at 22.]

Accordingly, the Court has frequently repunctuated stat-

utes in order to arrive at the correct interpretation. £.v.,

Simpson v. United States, 435 U.S. 6, 11-12 n.6; '° United

States v. Shreveport Grain & Elevator Co., 287 U.S. 77,

82-83, and cases cited id.; Barrett v. Van Pelt, supra.

Stephens v. Cherokee Nation, 174 U.S. 445 (“Chero-

kee Nation’), provides an especially apt illustration of

this Court’s practice because there is a striking similar-

®In Barrett, the Court said:

The comma after the word “unloaded” is not entitled to have

any weight as evidence of the legislative intention as against

the considerations supporting the extension of the qualifying

effect of the words “by carelessness or negligence” to all claims

referred to in the second clause. [268 U.S. at 91, emphasis

added. }

10 In Simpson, the Court construed 18 U.S.C. § 2113(d), which

provides aggravated penalties for any person who, in the course of

committing or attempting to commit bank robbery,

assaults any person, or puts in jeopardy the life of any per-

son by the use of a dangerous weapon or device (emphasis

added).

This Court held—despite the comma and conjunction (“, or” )—that

“. . In order to give lawful meaning to Congress’ enactment

of the aggravating elements in 18 U.S.C. §2113(d), the

phrase ‘by the use of a dangerous weapon or device’ must be

read, regardless of punctuation, as modifying both the assault

provision and the putting in jeopardy provision.” [435 U.S.

at 12, n.6, quoting with approval Judge McCree’s separate

opinion in United States v. Beasley, 438 F.2d 1279, 1284 (C.A.

6).]

12

ity between the statute construed there and § 506(b).”

The statute at issue '* provided as follows:

Appeals shall be allowed from the United States

courts in the Indian Territory direct to the Supreme

Court of the United States to either party,[1] in all

citizenship cases, and [2] in all cases between either

of the Five Civilized Tribes and the United States

involving the constitutionality or validity of any leg-

islation affecting citizenship, or the allotment of

lands * * * [174 U.S. at 479, emphasis and brack-

eted numbers added. ]

The qualifying language emphasized above follows two

sets of possible antecedents that are connected by

a comma and the conjunction “and”. The Cherokee Na-

tion Court found this grammatical! structure to be “some-

what obscure,” and observed that the ambiguity could be

removed entirely if the comma were deleted between

antecedent [1] and antecedent [2], or a comma were

inserted before the qualifying clause. 174 U.S. at 479-

81. The Court held, on the basis of its understanding of

the “mind of Congress” in enacting the statute, that the

provision should be so repunctuated, thereby making

clear that the qualifying language restricted al/ of the

possible antecedents. Jd. This is exactly the result reached

by the Court of Appeals in this case in construing

$ 506(b).

D. In order to buttress its argument from punctua-

tion, the government invokes “the doctrine of the last

antecedent”, which it would raise to the level of a dogma.

U.S. Br. 16. The effort is self-defeating, however, be-

cause a rule of construction does not reveal the “plain

meaning” of statutory language.” As the treatise cited

1! See also Simpson, discussed at p. 11, n.10, supra, and Mor, dis-

cussed at pp. 13-14, infra.

‘2 Indian Appropriation Act of July 1, 1898, c. 545, 30 Stat.

571, 591.

'8 In the context of § 506(b), the doctrine that “* * * qualifying

words, phrases, and clauses are to be applied to the words or

13

by the government on this point cautions, this “rule” is

merely “another aid to discovery of intent or meaning

and is not inflexible and uniformly binding.” '* The fact

is that courts often conclude that a word or phrase qual-

ifies words other than its immediate antecedent. This is

so for the elementary reason that ‘fa clause modifies that

antecedent which the draftsman intended it to modify,”

regardless whether that antecedent is immediate or dis-

tant. United States v. Brandenburg, 144 F.2d 656, 660-

61 (C.A. 3). Accordingly, a counterprinciple to the “last

antecedent” rule was recognized in Porto Rico Ry., Light

& Power Co. v. Mor, 253 U.S. 345 (“Mor”). Justice

Brandeis explained:

When several words are followed by a clause which

is applicable as much to the first and other words

as to the last, the natural construction of the lan-

guage demands that the clause be read as applicable

to all. [253 U.S. at 348.]

At issue in Mor was a jurisdictional provision pro-

viding in relevant part:

Said district court shall have jurisdiction of all

controversies where all of the parties * * * are [1]

citizens or subjects of a foreign State or States, or

[2] citizens of a State, Territory, or District of the

United States not domiciled in Porto Rico, wherein

the matter in dispute exceeds, exclusive of interest

or cost, the sum or value of $3,000 * * *. [/d. at

346, emphasis and bracketed numbers added. |

phrase immediately preceding” (id., emphasis added) leads to two

possible results: The qualifying phrase “provided for under the

agreement * * *” could be applied either to the immediately

preceding word——‘charges”, or to the phrase “any reasonable fees,

costs, or charges”. The former alternative, for which no one con-

tends, is excluded only for reasons extrinsic to the “doctrine”.

142A C. Sands, Sutherland Statutory Construction § 47.33 at 245

(4th ed. 1984) (emphasis supplied), cited at U.S. Br. 16.

15 Section 41 of the Jones Act, March 2, 1917, c. 145, 39 Stat.

951, 965.

14

The qualifying language construed in Mor (“not domi-

ciled in Porto Rico”) follows two groupings of possible

antecedents that are connected by a comma and a con-

junction. This language, too, parallels that of § 506(b).

The Court held in Mor, as it had in Cherokee Nation,

that the “natural construction” of the language of the

statute in question required that the qualifying language

modify all antecedents. 253 U.S. at 348. This was deemed

to be the natural reading in both cases even though no

comma appeared before the qualifying phrase—as the

government suggests is required, p. 10, n.8, supra.

Under the Mor approach, the “natural construction”

of the parallel language of § 506(b) limits “interest

on such claim” to situations where interest is “provided

for under the agreement under which such claim arose.”

But even if this is not the “natural construction,” the

Court’s analysis in Mor and Cherokee Nation removes

any basis for the government’s contention that the text

of § 506(b) unambiguously disallows it.'*

16 The government makes two additional arguments which like-

wise contribute no insight into the “plain meaning” of § 506(»)

but, at most, proposed possible inferences concerning Congressional

intent. U.S. Br. 17-19. Both points are specious.

The government asserts that if it had intended to allow post-

petition interest only for consensual liens, “Congress likely would

have placed the provision elsewhere”, id. 18; but no more appro-

priate placement for the provision is proffered. Moreover, even

under the government’s proposed construction—that interest is al-

lowed also for nonconsensual liens—the provision would apply only

to oversecured claims and, therefore, would be equally subject to

the objection that “the context in which Section 506(b) appears

hardly indicates that the entire subsection was designed to be

limited to a particular type of secured claim.” Jd. 17. And since

§ 506 “concerns the treatment of secured claims in bankruptcy pro-

ceedings” (id. 3), the placement of the provision in that section

is unremarkable. Similarly, since § 506(b) deals with claims rather

than “lien{s] created by an agreement”, the language chosen by

Congress is at least as appropriate (we need put it no higher) as

some revision which would use the term “security interest”, as the

government suggests. /d. 18.

{ Continued ]

15

II. The Court of Appeals Correctly Concluded That Con-

gress Did Not Change the Well-Settled Principle

Which Denies Postpetition Interest on Prepetition

Claims Secured by Nonconsensual Liens.

A. In Nicholas v. United States, 384 U.S. 678, Jus-

tice Stewart stated and explained the general bankruptcy

principle which in 1978, when the Bankruptcy Code was

enacted, governed postpetition interest on prepetition

claims:

It is a well-settled principle of American bank-

ruptcy law that in cases of ordinary bankruptcy, the

accumulation of interest on claims against a bank-

rupt estate is suspended as of the date the petition

in bankruptcy is filed. Sexton v. Dreyfus, 219 U.S.

339. That rule, grounded in historical considerations

of equity and administrative convenience, was spe-

cifically made applicable to the accumulation of in-

terest on claims for taxes by the decision of this

Court in New York v. Saper, 336 U.S. 328.

* * * *

We believe that the decisions of this Court in

Sexton and Saper reflect the broad equitable prin-

ciple that creditors should not be disadvantaged vis-

a-vis one another by legal delays attributable solely

to the time-consuming procedures inherent in the ad-

ministration of the bankruptcy laws. In the context

of interest-bearing debts, the equitable principle

enunciated in Sexton and Saper rests at bottom on

an awareness of the inequity that would result if,

through the continuing accumulation of interest in

the course of subsequent bankruptcy proceedings,

obligations bearing relatively high rates of interest

16 [Continued ]

To be sure, if Congress had anticipated the argument that

§$506(b) allows nonconsensual lienholders to receive postpetition

interest—althovgh no such result was urged during consideration

of the bills, see pp. 19-20, infra—it might have used different words

or different punctuation. Even so, the drafters would have had no

assurance that they had avoided ambiguity or excluded all argument

that its intent would have been more clearly expressed by some

other formulation.

16

were permitted to absorb the assets of a bankrupt

estate whose funds were already inadequate to pay

the principal of the debts owed by the estate. [384

U.S. at 682-684, footnotes omitted. ]

See also Vanston Bondholders Protective Committee v.

Green, 329 U.S. 156, 163-164 (“Vanston Committee’) ;

United Savings v. Timbers of Inwood Forest, 108 §.Ct.

626, 631 (Jan. 20, 1988) (“United Savings”), quoted at

p. 18, n.19, infra; and the decision below, Pet. 5a-6a.

As of 1978, this general rule was subject to three ex-

ceptions whereby postpetition interest on prepetition se-

cured claims was allowed if: (1) the debtor is proven

to be solvent; (2) the property held by the creditor to

secure the debt produces income during the course of

proceedings; or (3) the value of the collateral securing

the debt is sufficient to pay both the claim and postpeti-

tion interest on the claim. The first two exceptions had

long been recognized under English bankruptcy law and

were approved by this Court; see New York v. Saper,

336 U.S. at 330, n.7, citing American Iron Co. v. Sea-

board Air Line, 233 U.S. 261, 267; Sexton v. Dreyfus,

219 U.S. at 346. The third exception had been generally

widely approved by the Courts of Appeals.'’ This third

exception

was created pursuant to the theory that postpetition

interest should be allowed where a security agree-

ment had been voluntarily executed and the creditor

had successfully bargained for specific, valuable col-

lateral to secure the principal obligation. Accord-

ingly, where the creditor had bargained to become

an oversecured creditor, he had an expectation of

17 See e.g., Kagan v. Industrial Washing Machine Corp., 182 F.2d

139, 146 (C.A. 1); Eddy v. Prudence Bonds Corp., 165 F.2d 157,

160 (C.A. 2, L. Hand, J.); Oppenheimer v. Oldham, 178 F.2d 386

(C.A. 5); In re Macomb Trailer Coach, 200 F.2d 611, 613 (C.A. 6);

In re Kerber Packing Co., 276 F.2d 245 (C.A. 7); In re Black

Ranches, Inc., 362 F.2d 8, 15 (C.A. 8); United States v. Bass, 271

F.2d 129, 130 (C.A. 9); In re Deep Rock Oil Corp., 113 F.2d 266, 269

(C.A. 10). See also Vanston Committee, supra, 329 U.S. at 164

(dictum).

8 oy a Ake ee ee ee ee

a ma We

= 2 te ee

17

receiving interest were it necessary to sell the secu-

rity. [ Pet. 6a-7a. |

However, as the court below also explained:

It was equally well established by at least four courts

of appeals that the third exception—allowing the

payment of postpetition interest if the claim was

oversecured—did not apply to liens which were non-

consensual in nature, such as tax liens, because the

underlying reason for the exception did not apply.

| Pet. 7a, emphasis added.| '*

The general principle disallowing postpetition interest

is expressly codified in § 502(b) (2), and the first and sec-

18 The court below cited Jn re Kerber Packing Co., 276 F.2d 245

(C.A. 7); United States v. Mighell, 273 F.2d 682, 684 (C.A. 10);

United States v. Bass, 271 F.2d 129 (C.A. 9); United States vy.

Harrington, 269 F.2d 719, 724 (C.A. 4).

While acknowledging that the courts had established the prin-

ciples described in the text, the government objects that Harrington

“does not truly endorse the distinction between consensual and non-

consensual liens * * *”. U.S. Br. 25, n.10. It is true that the Harring-

ton court did “not find in the decided cases sufficient support for a

third general exception.” 269 F.2d at 723. But that court observed

that the cases recognized an exception “for mortgagees or holders

of other particular collateral” and squarely embraced the distinc-

tion between nonconsensual and consensual liens. Jd. at 724, quoted

at p. 26, infra. Most to the point, the government cannot deny that

Harrington refused to allow postpetition interest even where the

government has obtained tax liens. Jd. at 721-722, 724. And that

is the rule which the government seeks to reverse in this case. See

pp. 26-27, infra.

The government’s criticism of the Court of Appeals’ citation of

Mighell (U.S. Br. 26, n.10) is likewise unwarranted. The Tenth

Circuit there expressly rejected the government’s contention that

New York v. Saper, supra, should be distinguished “on the basis

that [in Mighell] there was a pre-bankruptcy lien.” 273 F.2d at

684. Thus, the court did not, as perhaps it might have, decide

Mighell solely on the ground that the government had not there

relied on any of the three exceptions; instead, the court went fur-

ther and “agree[d] with” the reasoning of Harrington and Bass,

supra, that the presence of tax liens does not justify granting post-

petition interest on a tax claim. /d.

18

ond exceptions “were preserved intact” in §$§ 726(a) (5)

and 552(b) respectively. See Newbury Cafe, 841 F.2d

at 22. And it is common ground that § 506(b) codifies

the third exception as it was applied by the courts to al-

low postpetition interest to oversecured consensual credi-

tors.”

Thus, the only open issue is whether Congress, in that

provision, at the same time changed the law to allow

postpetition interest on oversecured claims where the

lien is nonconsensual in origin, although such interest

had consistently been disallowed by the courts. Such a

change would be sweeping, for it would allow postpeti-

tion interest to all holders of oversecured claims—to pri-

vate nonconsensual lienholders such as judgment creditors

and mechanic’s lien claimants as well as state and federal

revenue collectors. See U.S. Br. 19 and cases cited at id.

n.7. In order to accept the government’s position it must

be assumed that Congress overrode the equitable consid-

erations which underlie Sexton, Saper and Nicholas on

behalf of these categories of claimants without leaving a

trace of evidence that it was dissatisfied with existing

law. Indeed, for aught that appears, no group which

would benefit from such a reversal proposed that it be

accomplished. Significantly, the Commissioner of Inter-

1 Section 506(b) also implicitly reaffirms the general principle,

because to the extent that it permits interest it does so only with

respect to certain oversecured claims. This Court said in United

Savings:

Section 506(b)’s denial of postpetition interest to underse-

cured creditors merely codified pre-Code bankruptcy law, in

which that denial was part of the conscious allocation of

reorganization benefits and losses between undersecured and

unsecured creditors. “To allow a secured creditor interest

where his security was worth less than the value of his debt

was thought to be inequitable to unsecured creditors.” Vanston

Bondholders Protective Committee v. Green, 329 U.S. 156, 164

(1946). It was considered unfair to allow an undersecured

creditor to recover interest from the estate’s unencumbered

assets before unsecured creditors had recovered any principal.

[108 S.Ct. at 631.]

19

nal Revenue, in extensive comments on the tax aspect

of earlier versions, made specific proposals as to what

bankruptcy reform legislation should contain, but did not

urge that the bills should be revised to allow postpetition

interest on federal tax claims, or on claims of noncon-

sensual lienholders generally.”

That Congress did not intend to change existing law

in enacting $ 506(b) is evidenced also by an important

item of legislative history which apparently was not

cited to the court below. A “Table of derivation of H.R.

8200” prepared by the House subcommittee states, with

respect to §506(b), that the “Present law” is “Jn Re

Black Ranches, Inc. [362 F.2d 8, see p. 16, n.17, supra.|” *

This is a reference to a 1966 Eighth Circuit decision which

allowed postpetition interest to an oversecured creditor

where the agreement—a note—provided for such interest.

On the other hand, where a provision created “New”

law, the table so states; so too, where a provision of the

20 Commissioner Donald C. Alexander submitted identical state-

ments to the House and Senate Committees commenting on bills

which were before the 94th Congress; see 6 Leg. Hist. 1943 (Doc.

30), and 11 id. at 12 (Doc. 37). None of these bills contained a

provision relating to postpetition interest for oversecured creditors,

and Mr. Alexander did not recommend that such a provision be in-

cluded to change the existing law. Indeed, he cited Nicholas, supra,

without apparent disapproval; in this regard, he urged legislation

only to deny a tax deduction for unpaid interest to taxpayers who

are on an accrual basis:

The filing of a petition in a chapter [XI] or liquidating pro-

ceeding suspends the accumulation of interest on pre-petition

debts for purposes of distribution. Nicholas v. United States,

384 U.S. 678 (1966). However, interest continues to accrue

for tax purposes on secured debts even though it is obvious

that it will not be paid. Rev. Rul. 70-367, 1970-2 C.B. 37.

Although the Service is presently reconsidering Rev. Rul. 70-

367 it would nevertheless be desirable to have legislation to

the effect that no deduction shall be allowed with respect to

interest which accrues during a bankruptcy proceeding on pre-

petition debts unless and until such interest is actually paid.

[6 Leg. Hist. at 1987-88; 11 id. at 49.)

21 11 Leg. Hist. (Doc. 40) at 8.

—

20

prior Bankruptcy Act was revised, the table says, “Com-

pare with * * * ” (citing the pertinent section or sec-

tions of the prior Act).

B. Against the background of these well-established

principles of bankruptcy law, the question whether

$ 506(b) is to be construed to allow the government and

other nonconsensual lienholders to receive postpetition

interest is governed by the rule of construction set forth

in Midlantic National Bank v. New Jersey Depart-

st of Environmental Protection, 474 U.S. 494 (“Mid-

antic’):

* *

* [When Congress enacted $554 [of the

Bankruptcy Code], there were well-recognized re-

strictions on a trustee’s abandonment power. In

codifying the judicially developed rule of abanden-

ment, Congress also presumably included the estab-

lished corollary that a trustee could not exercise his

abandonment power in violation of certain state and

federal laws. The normal rule of statutory construc-

tion is that if Congress intends for legislation to

change the interpretation of a judicially created con-

cept, it makes that intent specific. Edmonds v.

Compagnie Generale Transatlantique, 443 U.S. 256,

266-267 (1979). The Court has followed this rule

with particular care in construing the scope of bank-

ruptey codifications. [474 U.S. at 501, emphasis

added. }

This rule of construction was followed, and Midlantic

quoted with approval, in Kelly v. Robinson, ——— USS.

, 107 S.Ct. 353, 359-360 (Nov. 12, 1986). It was

followed once again last Term in United Savings, where

the Court reaffirmed that “* * * a major change in the

existing rules would not likely have been made without

specific provision in the text of the statute, ef. Kelly v.

Robinson, 479 U.S. : (1987); it is most im-

probable that it would have been made without even any

mention in the legislative history.” 108 S.Ct. at 634.

*2 11 Leg. Hist. (Doc. 40) passim.

21

The court below correctly understood that Midlantic

and Kelly require that “in order to determine if section

506(b) changed the interpretation of a judicially created

rule, we must first understand that rule and its origins.”

Pet. 5a. Having reviewed the pre-1978 decisions, that

court correctly held “that the language of section 506(b),

when read in light of the pre-Code judicially created doc-

trine, codifies the pre-Code law on the issue of allowable

postpetition interest.” Jd. 10a.**

C. The government asserts, however, that the court

below erred in its reliance on Midlantic and Kelly. U.S.

Br. 30-35. In so doing, it misreads first, the opinion

below and, more seriously, this Court’s decisions in Mid-

lantic and Kelly.

(1) Contrary to the government’s characterization, the

court below did not say that Midlantic and Kelly “estab-

lish a general rule requiring explicit statements in the

legislative history to enact a new bankruptcy provision

that deviates from pre-Code law.” U.S. Br. 31. What the

Court of Appeals actually said in the passage to which

the government there refers is:

If Congress intended to depart from pre-Code law

with respect to only this one portion of section

506(b), particularly when several courts of appeals

were unanimous in their interpretation of the Bank-

ruptey Act, such an intent must be expressed ex-

plicitly and not through the ambiguous use of a

comma and the words “and any.” [ Pet. 12a. |

23 See also id. 12a, quoted in text, this page, and Newbury Cafe,

supra: “In light of the uniform and extensive pre-Code law, [the]

void [in the legislative history] is a serious obstacle for [the State

Revenue Authority], particularly in a bankruptcy matter.” 841

F.2d at 22, quoting Midlantic, and approving the reasoning of the

court below. We note also that the Fourth Circuit in Jn re Best

Repair Co., 789 F.2d 1080, did not attempt to reconcile its conclusion

with the Midlantic rule of construction. It may be that Midlantic

was not called to the Fourth Circuit’s attention; that case was

decided only 10 days before the argument in Best Repair; Kelly

and United Savings were decided after Best Repair.

22

The proposition that any intent to change the pre-Code

law “must be expressed explicitly” is an entirely accurate

statement of the Midlantic-Kelly rule of construction. Of

course, Congress can express such an intent “explicitly”

without resort to legislative history; it can do so “on the

face of a statute”. U.S. Br. 31-32, citation omitted. The

court below said nothing to the contrary. Rather, it de-

termined that the language and punctuation of § 506(b)

are “ambiguous,” so that the intent to change does not

appear “on the face of [the] statute”. Accordingly, the

Court of Appeals concluded that the “admitted lack of

legislative history on this point lends further credence to

[its] position.” Pet. 1la-12a.™

(2) The government attempts to limit Midlantic and

Kelly to “the particular context of those cases’, viz. “the

question of the impact of a general bankruptcy provision

on important issues and policies outside the bankruptcy

context,” which it seeks to contrast with cases where the

“issue is a core bankruptcy matter.” U.S. Br. 32. See

also id. 34-35. The government’s proffered distinction

24 In charging that the Court of Appeals “characterized the final

statements on the floor of the House and Senate by the managers

of the legislation as addressed to the differences between the lan-

guage of the House and Senate Reports” (U.S. Br. 32, n.14, em-

phasis in original), the government misreads that Court’s opinion.

The sentence which the brief criticizes, but does not quote, is: “The

statements of the committee chairmen only explain why the refer-

ence to the attorney’s fees was eliminated.” Pet. 12a, n.11. These

words plainly do not refer to the committee Reports. If it is

necessary to go further, the context, too, refutes the government’s

reading. The opening (topic) sentence of the Court’s footnote is:

“The Senate Report, the House Report, and statements of the

chairmen on the responsible subcommittees do not address the lan-

guage in section 506(b) referring to interest.” Jd. In the remain-

der of the footnote, the Court described first, what the House and

Senate Reports said about the substance of § 506(b), and then (in

the above-quoted sentence) the statements of the committee chair-

men on the same subject.

In short, the accusation that the court below was “excessively

preoccup[ied] with the legislative history” (U.S. Br. 32, n.14) is

not merely hypercritical; it is wrong. Cf. Matthew 7:3.

© Re ene 6 8 Fe WS

23

is contrary to the reasoning in the Midlantic and Kelly

opinions; fails to take account of United Savings, which

followed Kelly in “a core bankruptcy matter”; and is in-

consistent with the government’s own position in Mid-

lantic itself.

a. The major infirmity of the government’s attempt

to distinguish Midlantic and Kelly is that this Court’s

opinions do not permit the proposed limitation. The

Court declared that the “normal rule of statutory con-

struction is that if Congress intends for legislation to

change the interpretation of a judicially created concept,

it makes that intent specific” (citing a case from another

field), and then stated that the “Court has followed this

rule with particular care in construing the scope of bank-

ruptcy codifications.” Midlantic, 474 U.S. at 501, and

Kelly, 107 S.Ct. at 359, emphasis added. This statement

that the rule is applicable to legislation generally and

with special force to bankruptcy issues, simply will not

bear the government’s suggested reading that the rule is

confined to a particular class of bankruptcy issues. The

government’s brief does not quote, let alone discuss, the

critical portion of the Midlantic and Kelly opinions which

states the rationale which the Court of Appeals followed

in this case.”

b. The government’s attempt to limit the Mid/antic-

Kelly rule of construction to “the particular context of those

cases” perforce ignores the fact that that rule was fol-

lowed also in United Savings, 108 S.Ct. at 634, quoted at

p. 20, supra. The issue in United Savings was whether

an undersecured creditor is entitled to interest on its

collateral during the automatic stay provided by § 362(a)

of the Code. The case involved the construction primarily

of $$ 361, 362(d) and 506(b) of the Code; it had noth-

ing to do with the relationship between the Code and

“policies outside the bankruptcy context.” U.S. Br. 32.

*5 This omission is all the more revealing since the government

quotes liberally from other portions of the Midlantic and Kelly

opinions. U.S. Br. 33-35.

24

In the government’s terms, United Savings was “a core

bankruptcy matter.” Jd.

c. The government’s contention in this case that the

rule of construction has only a narrow scope is also con-

trary to its own submission in Midlantic. There, the gov-

ernment asserted, without qualification:

Congress is, of course, presumed to have codified

the judge-made law existing at the time of its con-

sideration and enactment of Section 554. See Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456

U.S. 353, 379-382 (1982); Lortilard v. Pons, 434

U.S. 575, 580-581 (1978). At the time that Congress

considered and enacted Section 554, the trustee’s re-

sponsibility to exercise his abandonment powers con-

sistent with federal and state police powers was well

established.**

As the government said, “of course.” This rule of con-

struction not only states established precedent but makes

eminently good sense. Were it otherwise, every previously

decided question of bankruptcy law would become res

nova whenever Congress engages in a “comprehensive

revision of the Nation’s bankruptcy laws”. U.S. Br. 10.

The same would be true with respect to “comprehensive

revisions” in other areas of the law. The result would

be chaos for the courts, to say nothing of affected par-

ties. Moreover, Congress knows what changes it wants

to make, sweeping though they may be, and the infer-

ence that it wishes to preserve that which it leaves alone

is compelling; indeed, new provisions are normally

drafted on the assumption that they will fit into an

existing legal framework.

26 Brief for the United States as Amicus Curiae Supporting Re-

spondents, Nos. 84-801 and 84-805, p. 16. See also id. at 15:

* * * Congress’s failure to elaborate on the reach of Section 554

“igs most eloquent, for such reticence while contemplating an

important and controversial change in existing law is unlikely.”

Edmonds v. Compagnie Generale Transatlantique, 443 U.S. 256,

266-267 (1979) (footnote omitted).

| eae

Die ee &

eee

25

D. The government contends also that Congress could

not have intended to codify the principles of the pre-1978

cases. U.S. Br. 26-30. These contentions are uniformly

without merit, as we now show.

(1) The government says that “it is something of an

exaggeration to characterize [the pre-1978 decisions] as

establishing a ‘rule’ that could appropriately be codified.”

U.S. Br. 26. We certainly agree that, as a general mat-

ter, “ ‘the touchstone of each decision on allowance of in-

terest in bankruptcy * * * has been a balance of equities

between creditor and creditor or between creditors and

the debtor’”. Jd., quoting Vanston Committee, supra,

329 U.S. at 165. But whereas the courts sometimes de-

nied postpetition interest to a consensual lienholder in

light of special circumstances,” discretion was not exer-

cised to grant such interest to nonconsensual lienholders.

Moreover, any suggestion that these equitable principles

could not be codified defies the reality of what Congress

did in § 506(b) itself and in the other provisions cited

at pp. 17-18, supra.

(2) Pointing to “changes in commercial lending prac-

tices and in the law governing federal tax liens”, the

government argues that “to the extent Congress focused

its attention at all on the[e] pre-Code distinction [be-

tween consensual and nonconsensual liens], it would be

expected to have regarded it as a prime candidate for

revision, not codification”. U.S. Br. 26. Of course, if

Congress did not “focus!] its attention at all on this

pre-Code distinction,” the Midlantic-Kelly rule of con-

struction compels the conclusion that no change in the

prior law was intended. Moreover, the force of that rule

“1 E.g., In re Magnus Harmonica Corp., 262 F.2d 515, 518 (CLA.

3). There, while the claim for interest was within the contract.

the secured creditor had made “overcharges against the debtor out-

side the terms of the contract and it is only because the debtor is

precluded from complaining that the trustee is bound by the debtor’s

inaction.” Therefore, “{s|uch equities as [were] apparent favor|[ed |

the trustee acting for the general creditors as against [the secured

creditor]}.” Id.

26

is not overcome by showing that intervening circum-

stances might have caused Congress to change the prior

bankruptcy law. Thus, the entire enterprise at U.S. Br.

26-30 is fundamentally flawed. Moreover, when the

changes to which the government points are examined

more closely, it is apparent that neither would have pro-

vided any reason for Congress to allow postpetition in-

terest to holders of nonconsensual liens.

a. The government’s argument builds on the rationale

of the pre-Code decisions, which are fairly exemplified

by the following paragraph from United States v. Har-

rington, cited at U.S. Br. 27 and 28. The court there

said:

The justification for this allowance to mortgagees,

ete., would seem to be that when the creditor ex-

tended credit, he relied upon the particular security

given as collateral to secure both the principal of the

debt and interest until payment and, if the coilateral

is sufficient to pay him, the contract between the

parties ought not be abrogated by bankruptcy. This

rationale has no application to tax liens. [269 F.2d

at 724.]

We begin by underscoring the obvious. The first quoted

sentence set forth the reasons why the courts had recog-

nized an exception allowing postpetition interest to over-

secured consensual lienholders; the second sentence stated

that nonconsensual liens did not come within this rationale

and, therefore, were not subject to an exception from the

general rule. Thus, Harrington makes clear—aid this is

likewise true of the other cases that state the pre-Code

rule—that the “distinction between consensual and non-

consensual liens” was established by a two-step process:

(1) Certain characteristics of oversecured loans where

interest is provided for in the agreement between the

borrower and the lender warrant recognition, on behalf

of consensual creditors, of a third exception to the gen-

eral rule that postpetition interest will not be allowed;

(2) this rationale is not applicable to tax and other non-

consensual liens, and therefore no exception from the

27

general rule is to be made with respect to claims secured

by such liens.**

Thus, in seeking to divert analysis to the “distinction

between nonconsensual and consensual liens” (U.S. Br.

24-30), the government appreaches the issue and the pre-

1978 cases from the wrong end. Those decisions began

from the “well-settled” principle that postpetition inter-

est is not allowed. To this principle three exceptions were

recognized—one in favor of oversecured consensual lien-

holders. The government’s attempt to bring tax liens

within the latter exception failed because the rationale

for that exception has no application to tax and other

nonconsensual liens. A change in practice which “almost

completely undermined” that rationale (id. 26) might

have prompted Congress to repudiate the exception to

oversecured consensual lienholders and, in that way, to

eliminate the “distinction between nonconsensual and

consensual liens” (id.), but it is wholly illogical to con-

tend, as the government urges, that such a change could

in some way have caused Congress to grant an exception

for nonconsensual lienholders.

b. Turning specifically to the government’s reliance on

“changes in commercial lending practices” (id.), the heart

of the matter is this: It was no part of the courts’ ra-

tionale for disallowing interest on claims secured by non-

28 As stated in Kerber Packing Co.:

The broad language of the Saper case appears to deny post-

bankruptcy interest on all tax claims. We do not believe that

the Supreme Court intended the application of the principles

set out therein to be restricted to non-liened taxes.

In three recent decisions, * * * the United States contended

for post-bankruptcy interest on liened tax claims. Each of

these courts rejected the post-bankruptcy interest on liened tax

claims. We agree with those decisions.

The application of the exceptions to the allowance of inter-

est on claims subsequent to filing of a petition in bankruptcy

or other insolvency proceedings should not be extended by ju-

dicial fiat. [276 F.2d at 247-248, citations omitted.]

28

consensual liens that “a lien held by a private consensual

creditor typically attached to a single asset”. U.S. Br.

27, emphasis added. Rather, that disallowance was based

on the equitable considerations articulated by this Court

in Sexton, Saper and Nicholas. See p. 15, supra. In-

deed, the government concedes that the courts’ view was

that “in the absence of such a bargain {for interest], it

would be inequitable to award interest at the expense of

the unsecured creditors.” U.S. Br. 28. These competing

equities between unsecured creditors and creditors hold-

ing nonconsensual liens could not be affected in the slight-

est by a new lending practice of consensual lienholders

“to secure their loons by obtaining a lien on virtually

every asset owned by the debtor”. Jd. 27. Since the

change on which the government relies does not pertain

even remotely to the “reasons given in the pre-Code

cases” (id.) for denying interest on nonconsensual liens,

the government is entirely unjustified in speculating that

the 1978 Congress was prompted by that change to re-

verse the prior law and allow postpetition interest on

such liens.

Conversely, since the courts relied on the prior practice

—if at all—only as a reason for allowing postpetition

interest to oversecured creditors holding consensual liens,

a change in the practices of such creditors could, at most,

have induced Congress to deny interest to holders of con-

sensual liens generally (or to those who attached more

than a single asset). Congress instead chose to codify that

exception, perhaps because it believed, as had the courts,

that it is desirable to give private creditors the benefit of

their bargain for interest.” In any event, since the change

in practice affected, at most, the rationale for allowing

°° For aught that appears, Congress was advertent only to changes

in the practices of creditors lending money to consumer debtors,

for these alone were referred to in the House Report cited at U.S.

Br. 27. Congress addressed that matter directly by enabling in-

dividual debtors to avoid liens on certain personal property, includ-

ing household goods, as specified in § 522(f)(2) of the Code, cited

id. at n.11.

ar

MSP Se. Sa

eee ae Se

So RA rena, ha od sal

29

ir’ erest secured by consensual liens (where the under-

.. ng agreement provided for interest), it is wholly il-

logical to argue from that change that Congress altered

the law with respect. to nonconsensual liens, such as those

for taxes, or on judgments.

e. The further point—based on a supposed shift in the

balance of equities between private and nonprivate se-

cured creditors due to the Federal Tax Lien Act of 1966,

which makes it more probable that private creditors will

receive notice of federal tax liens (U.S. Br. 28)—is

wholly implausible. To begin with, there was nothing in

the cases which recognized the third exception or, more to

the point, in those which denied postpetition interest to

tax collectors and other holders of nonconsensual liens,

that even remotely related to the pre-1966 law with re-

spect to notice of federal tax liens. Furthermore, and

most significantly, whereas the 1966 change dealt only

with federal tax liens, the proposed change in the bank-

ruptcy law would aid not only the federal tax collectors

but also state revenue authorities and private nonconsen-

sual lienholders. See p. 18, supra. On the other side of

the balance, the unsecured creditors who are protected by

the pre-Code law (see p. 15, supra), benefit rarely, if

ever, from the change-in-notice requirements effectuated

by the 1966 Act. The major beneficiaries of those changes

are prospective lenders who, having notice of federal tax

liens, choose not to extend credit, or to assure themselves

that the borrower has sufficient assets so that the loan

can be sure despite the federal tax lien.

The two additional points made at U.S. Br. 28-29 like-

wise assert equitable considerations which affect only the

federal government, and therefore could not possibly jus-

tify a construction of § 506(b) granting postpetition in-

terest to oversecured nonconsensual creditors generally.

Moreover, neither point has substance even as to the fed-

eral government.

The concern that “‘the government is, in important re-

spects, less able to protect its position than a private

59

creditor” (id. 28, citing H.R. Rep. 95-595 at 189-193),

was dealt with by Congress directly in provisions of the

new Code which deal with the priority nondischarge-

ability of income taxes, as the House Report there ex-

plains.

Finally, the taxing authorities could have expressed to

Congress their disagreement with the pre-1978 decisions

which allowed interest to private creditors but not to the

government. U.S. Br. 29. But since they did not do so,

it is unreasonable to suppose that Congress would have

reversed the prior law to favor nonconsensual lienholders

on its own initiative. See pp. 19-20, supra. Under these

circumstances, common sense reinforces the Midlantic-

Kelly rule that an intent to change the law will not be

attributed to Congress unless “it makes that intent spe-

cific.” 474 U.S. at 501.

CONCLUSION

For the foregoing reasons, the judgment of the Court

of Appeals should be affirmed.

Respectfully submitted,

MARTIN R. BRING

LAWRENCE L. GINSBURG

LOWENTHAL, LANDAU, FISCHER

& ZIEGLER, P.C.

250 Park Avenue

New York, New York 10177

GECRGE KAUFMANN

(Counsel of Record)

PETER W. MORGAN

LAWRENCE D. GARR

JOSEPH E. KOLick, JR.

DICKSTEIN, SHAPIRO & MORIN

2101 L Street, N.W.

Washington, D.C. 20037

(202) 785-9700

Attorneys for Amicus Curiae