Some cases really should not be all that difficult. However, when judges choose to divorce statutory text completely from any reference to underlying legislative intent and long standing commercial practice, inexplicable results follow.  

A few months ago, I wrote of a decision by the U.S. District Court for the Eastern District of Pennsylvania that denied secured lenders the opportunity to credit bid their loans in connection with a sale under a plan of reorganization of the collateral securing their loans. While the substantive matter at issue – the ability to exercise rights against collateral is an essential part of the protection for which a secured lender bargains – was certainly important, what was more disconcerting was the court’s use of the so-called “plain meaning” rule of statutory interpretation to strike down decades of settled commercial law practice. I stated then:   

Philadelphia Newspapers stands as a quintessential example of the anomalous results that can transpire from the “plain meaning” rule. Particularly with a comprehensive statutory scheme as deeply rooted in centuries of commercial law as the U.S. Bankruptcy Code, the ability to focus in on specific language in single provisions, without relation to the greater whole or long understood practice, leads to no end of vexatious litigation and creates uncertainties and ambiguities where none should exist. The Third Circuit Court of Appeals should use this decision as an opportunity to repudiate strongly this mode of statutory interpretation in bankruptcy cases.

Unfortunately, rather than repudiate the “plain meaning” approach, a majority of the Third Circuit panel that heard this case chose to worship at its altar. Unless overturned by en banc review, or (highly unlikely) by the Supreme Court, the majority’s approach to statutory interpretation and the anomalous result engendered here are binding law within the Third Circuit, including the influential U.S. Bankruptcy Court for the District of Delaware. 

The majority opinion in Philadelphia Newspapers noted that Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization could be confirmed without the consent of a secured lender class:

  1. lender retention of liens securing the obligations and receipt of the present value of its secured claim,
  2. sale of collateral free and clear of liens but subject to credit bidding, or
  3. the realization by the creditor of the “indubitable equivalent” of its secured claim. 

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Court held that a sale “free and clear” could also take place without allowing the lenders to credit bid under the “indubitable equivalent” prong. For the Court, the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, then the opportunity to credit bid need not be provided. 

The majority opinion in Philadelphia Newspapers was met by a lengthy dissent. Not surprisingly, this came from the leading bankruptcy expert on the Third Circuit panel, Judge Thomas Ambro, a respected practitioner of many years. In addition to pointing out the flaws in the majority’s reading of the statutory language as “unambiguous”, Judge Ambro noted that the result flies in the face of both the well established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the long standing expectations that underlie secured lending transactions. Judge Ambro strongly criticized the majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A) and consider any sense of Congressional purpose or the underlying principles of the Bankruptcy Code as evidenced by complementary Code sections. “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]”