Creating a Calamity
USC Gould School of Law
September 15, 2006
Vanderbilt Law and Economics Research Paper No. 06-18
Vanderbilt Public Law Research Paper No. 06-17
This essay is part of a symposium where the contributors were asked to identify their "favorite" commercial calamity. It takes a lot to create a calamity in the commercial arena. Transactional attorneys spend a good deal of their time drafting around the calamities of the past. The Supreme Court's decision in Till v. SCS Credit Corp., 541 U.S. 465 (2004), nevertheless deserves the label. The issue before the Court was straight-forward - how should bankruptcy courts ascertain the appropriate interest rate in a Chapter 13 plan. At one level the case is a calamity in that the Court failed to produce a majority opinion. This issue simply called for a clear rule. While some rules may be better than others, the overriding concern should have been to provide definitive guidance on this oft recurring issue. Here, the Court simply failed.
Till bids for calamity status on a second score as well. The opinions show little regard for commercial law. To be sure, Justice Scalia's opinion demonstrates that he at least understood the basic functioning of bankruptcy law and credit practices. The same cannot be said for the remaining opinions. Justice Thomas, accusing all of textual infidelity, authored an opinion which adopted a measure that no court of appeals had endorsed. He argued that, though virtually unnoticed, the Bankruptcy Code mandated that Chapter 13 debtors pay the same rate of interest as the country's most solvent financial institutions. Justice Stevens did little better. His opinion suggests that, for those in Chapter 13 who are seeking to repay their secured debts over time, one should start with the prime rate, and then add 1% to 3%. To be sure, one could articulate a rational for this formula approach that comports with the dynamics of Chapter 13. (We need an easy-to-implement rule; we know that collateral tends to be valued too high, so a rule that sets interest too low may achieve a rough balance.) Unfortunately, this is not the tact that Justice Stevens took. His opinion rests on the assertion that Chapter 13 provides sufficient safeguards so that a modest increase in the prime rate represents the true risk to creditors. This reasoning cannot be squared with what we know about Chapter 13 practice. Moreover, by suggesting that courts can provide a more accurate assessment of default risk than markets, Justice Stevens's opinion creates the possibility for mischief across the Bankruptcy Code.
Number of Pages in PDF File: 13
Date posted: September 18, 2006
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