The Bankruptcy Code Needs an Advocate for Its Interests at U.S. Supreme Court — The Solicitor General is Not Adequate

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An advocate?

By: Donald L Swanson

The Bankruptcy Code is in a precarious position.  It is a “transformative piece of legislation,” but it is without a strong agency in the Executive Branch to interpret it, enforce it, and promote its interests. [Fn. 1]

Each Federal agency is part of the Executive Branch and has an area of responsibility that it oversees, administers, guards and protects.

Bankruptcy has no such agency and no such advocate devoted to the development of a broad and coherent bankruptcy system. Any articulation of what’s best for the Bankruptcy Code must, therefore, come from sources that often “collide” with it, such as the Solicitor General. [Fn. 2]

Solicitor General As Inadequate Advocate

When the Solicitor General appears before the U.S. Supreme Court, it does so (ostensibly) as a disinterested person promoting the best interests of the U.S.A. in general.

In a bankruptcy case, however, the Solicitor General can be acting, instead, to protect a narrow set of interests. [Fn. 3] The Solicitor General, for example, often focuses on protecting the interests of the U.S.A. as a secured creditor in bankruptcy—instead of advocating for the best interests of the Bankruptcy Code.

Here’s how that works:

In a business bankruptcy, the overriding need of the Bankruptcy Code—for all parties of every stripe—is to maximize value of the business, either as a going concern or through liquidation;

A secured creditor, however, may want to maximize it’s own leverage in a bankruptcy, rather than to maximize value; and

When the Solicitor General appears for the U.S.A. as secured creditor, will it argue for the best interests of the Bankruptcy Code or for the best interests of secured creditors?

The answer to such question is this:

  • When the Solicitor General appears in support of its secured creditor interests in bankruptcy, the best interests of the Bankruptcy Code generally lose out.

Secured creditors, for example, “won seven of the eight cases” where the Solicitor General “argued on their side.”  [Id.]

An Illustration of Inadequacy

Here’s an illustration of how the Solicitor General’s advocacy is inadequate: credit bidding by an under-secured creditor at a bankruptcy sale of collateral.

I’ll try to explain.

–Maximizing Value

Business bankruptcy cases have two parts:

1. All constituencies must work together to maximize the value of debtor’s assets, through continued operations and/or liquidation; and
2. Meanwhile, the same constituencies fight over who gets the money, when they get it and how.

The dickens is that, if parties fail in their efforts to maximize value, they can forget about fighting over the money—because there isn’t any.

So . . . when an under-secured creditor insists on its right to credit bid the under-secured portion of its lien, it is working against everyone else. The effect is to chill bidding, to assure that value is NOT maximized and to obtain an unfair advantage. Such efforts are contrary to the best interests of the bankruptcy system.

–A Specific Case of Bias

Working to maximize credit bidding rights for under-secured creditors is precisely what the Solicitor General did in briefing and oral arguments before the U.S. Supreme Court in Radlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012).

The question presented in Radlax is whether credit bidding rights could be curtailed in bankruptcy.

Although the U.S.A. was not a party to the case, the Solicitor General filed a brief and made oral arguments anyway. Its position in the case favored maximizing secured creditor rights—not maximizing value for everyone. That’s no surprise because the U.S.A. is, frequently, a secured creditor in bankruptcy.

Here are telling portions of the Solicitor General’s brief in Radlax:

“Although the Bankruptcy Code does permit a court, through plan confirmation, to modify some rights of a secured creditor . . . the Code largely preserves a secured creditor’s essential right to insist upon either retaining its lien, being paid the full allowed amount of its claim, or taking the property”; and

A contrary proposal “is not ‘fair and equitable’ to an objecting secured creditor because it abrogates the creditor’s bargained-for rights in a manner not contemplated or permitted by the Bankruptcy Code.”

Such statements are garden-variety positions that any secured creditor would make. Yet, the statements come from the Solicitor General and are full of bias, partiality and selfishness, instead of a disinterested guardianship of the Bankruptcy Code.

–Bias and Partiality are Harmful

The Solicitor General is not a garden-variety participant before the Supreme Court. It purports to represent the interests of the U.S.A., generally. And it evokes an aura of impartiality—of looking out for the interests of all.

But that is not the Solicitor General’s posture in Redlax—there, it advocates for a narrow, biased and partial position.

And the Supreme Court adopts the Solicitor General’s position in Redlax hook, line and sinker. Here, for example, is part of the Supreme Court’s rationale in the case:

“We find the debtors’ reading of §1129(b)(2)(A) [which is contrary to the Solicitor General’s position] . . . to be hyperliteral and contrary to common sense.”

Keep in mind that this “hyperliteral and contrary to common sense” statement comes from a Court that ordinarily focuses on the meaning of words of a statute as a primary point of decision—they simply reject that focus in this case.

It would be nice if:

An independent and disinterested participant could appear before the U.S. Supreme Court, consistently, in bankruptcy cases to explain how the Bankruptcy Code is important and what the best interests of the bankruptcy system might be in the situation before the Court;

The Solicitor General would acknowledge its bias and partiality when it appears before the U.S. Supreme Court in bankruptcy cases—and shed its aura of independence and disinterestedness on the occasions when that aura is false; and

The Supreme Court would discount the Solicitor General’s arguments when the Solicitor General is advocating a narrow position of bias.

Conclusion

The Bankruptcy Code has no advocate in the Executive Branch to promote and protect its interests.

The Solicitor General is the closest thing to such an advocate. But in many bankruptcy cases, the Solicitor General is biased and advocates a narrow view of the Bankruptcy Code. That’s because it frequently represents the U.S.A. as a secured creditor in bankruptcy cases—and the interests of the entire bankruptcy system are much broader than that.

This lack of a consistently-impartial advocate impedes the development of a broad and coherent bankruptcy system. And it suppresses the identification and promotion of the best interests of the Bankruptcy Code as a whole and of the entire bankruptcy system.
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Footnote 1: This is a central proposition of Ronald J. Mann in his book, “Bankruptcy and the U.S. Supreme Court,” at 12.7 (Cambridge University Press, 2017).
Footnote 2: Id.
Footnote 3: Id. at 12.5

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