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Friday, January 3, 2014

A Deep Dive into Till v. SCS Credit Corp -- Part V: Justice Thomas’s Concurrence

As the plurality, by definition, did not have a majority, it was Justice Thomas’s concurrence that resulted in the 7th Circuit’s decision being reversed.  However, as Justice Thomas’s views were more extreme than the plurality’s, the latter, as the narrower basis for decision, came to be the focus of subsequent interpretation (unlike, say Northern Pipeline v. Marathon, where Rehnquist’s concurrence, containing the narrower ground, was considered to be the position of the Court). Although I probably have a great deal more respect for Justice Thomas’s jurisprudence than the average law school graduate, because I find him to be both intellectually honest and consistent,  I regret that his concurrence in Till is impossible to defend.  The concurrence takes the frequently employed literalist approach to construing the statute, but unfortunately has an extremely narrow interpretation of the relevant phrase: “value, as of the effective date of the property to be distributed under the plan”.  Not only does his interpretation ignore common sense and other tools of legislative interpretation, even within literalist parameters, it ignores obvious alternative interpretations of that phrase.
Simply put, the Thomas concurrence in Till states that the statute requires the “property” to be distributed under the plan to be valued, and contrasts that with valuing the debtor’s “promise” to distribute said property.  Justice Thomas then asserts, without any detailed explanation of how he reaches his conclusion, this means that the only discounting needed is at the risk-free rate, because otherwise, the bankruptcy court would be valuing the “promise”.  The risk-free rate, in his mind, values the “property”, i.e., the cash that will be received in the future.

I find Justice Thomas’s logic far less compelling than the blunt certainty with which it is laid out.  It may be correct to observe that the other justices are valuing the debtor’s “promise to deliver property under the plan”;  but Justice Thomas fails to recognize that he too is valuing a promise. He is not valuing “the property to be distributed under the plan” because no one at plan confirmation knows exactly how much actually will be distributed.  What Justice Thomas is valuing is “the property promised to be delivered under the plan”.  He is just valuing the promise at 100% probability of performance whereas the others are assigning some lower prospect. I see nothing in the Code to suggest that only the most extreme standard was intended by Congress.

Even within the literalist framework, I can just as easily conclude that the directive to the bankruptcy court to value what is “to be distributed” calls for the bankruptcy court to take into account, not merely what the plan says on paper is going to be distributed, but also what real world outcomes can be anticipated as of “the effective date of the plan”, one of which is not making the full distribution on time, and then to pack all of that into a valuation that is fair and equitable.  The statute does not say “promise”, true[1], but it also does not say “property that is supposed to be distributed under the plan” either; it just refers what is “to be distributed”.   Even more obviously, it seems improbable that a broad, litigable term like “value” would be used without further specification if Congress intended only a single, easily specified kind of discount rate was applicable.

Stepping outside the literalist framework, and looking at the statute taken as a whole, I think a risk-aware valuation fits nicely with the feasibility finding needed for a confirmed plan.  Since a feasibility finding requires merely preponderance of the evidence, a positive finding necessarily eliminates the risk of default, as a legal obstacle, even where there is evidence in the record of that risk.  A risk-aware valuation complements the feasibility analysis in a fair and equitable manner by enabling the court to make room for both legitimately possible scenarios, as opposed to being forced into an all-or-nothing choice between finding the plan feasible and risk-free or denying confirmation altogether.  Again, one has to ask whether it is plausible to interpret Congress (a) to have intended that a feasibility finding by preponderance of the evidence triggered a risk-free valuation of the plan payouts, and no other rate was possible, while (b) using broad and litigable language to establish such a specific and narrow path for judges to follow.

Justice Thomas’s interpretation also leads to nonsensical outcomes in the real world that Congress cannot have intended.  If no debtor under a confirmed plan can be compelled to pay no more than a risk-free rate, then all debtors wind up paying less than the most creditworthy citizens, the most creditworthy businesses and pretty much all state and local governments.  Even less than members of Congress and justices on the Supreme Court probably pay on their mortgages! 

Were his interpretation extended to the chapter 11 context,  companies in chapter 11 would be entitled to turn all their debt into 30-year interest-only bonds with interest at the rate the U.S. Treasury pays on its 30–year bonds.  What a huge financing advantage it would give them over their competitors – for decades!  And, as a consequence, they would be much more likely to reduce their debt as little as possible in the reorganization, since it would be the cheapest kind of capital possible.  It is hard to believe Congress thought the public interest would be served by a reorganization process that reduced corporate debt as lightly as possible.  One also wonders why Congress bothered to provide for disclosure and voting by secured creditors in chapter 11, if a non-consensual approach was only capable of producing a risk-free rate.  Finally, since the Bankruptcy Code does not require insolvency as a prerequisite for filing an 11 or proposing a plan, this kind of interpretation would invite companies to resort frequently and  liberally to chapter 11 just to re-price their debt downward in a falling rate environment.  It is absurd to think that these outcomes were intended by Congress.

[1]           A plausible, and different, explanation of why the statute does not say “promise” is simply that the obligation of a debtor under a confirmed plan is not a contractual promise but more in the nature of a court judgment.  Does that mean the federal judgment rate should be used? Again, I would say, no – when Congress has wanted to specify its use, it has done so. The  word “value” should be read to be what it is, a very broad term that meant for judges to do case-specific valuations.