Ron Pair Enterprises, Inc., In re

• Decision Date: 04 September 1987
• Docket Number: No. 86-1785,86-1785
• Citation: 828 F.2d 367
• Parties: -5717, 87-2 USTC P 9521, 17 Collier Bankr.Cas.2d 642, 16 Bankr.Ct.Dec. 730, Bankr. L. Rep. P 71,972 In re: RON PAIR ENTERPRISES, INC., Debtor, UNITED STATES of America, Plaintiff-Appellee, v. RON PAIR ENTERPRISES, INC. d/b/a Midwest International Environmental Division and d/b/a Industrial Environmental Supply Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 367

828 F.2d 367

60 A.F.T.R.2d 87-5717, 87-2 USTC P 9521,

17 Collier Bankr.Cas.2d 642, 16 Bankr.Ct.Dec. 730,

Bankr. L. Rep. P 71,972

In re: RON PAIR ENTERPRISES, INC., Debtor UNITED STATES of America, Plaintiff-Appellee, v. RON PAIR ENTERPRISES, INC. d/b/a Midwest International Environmental Division and d/b/a Industrial Environmental Supply Company, Defendant-Appellant.

No. 86-1785.

United States Court of Appeals, Sixth Circuit.

Argued June 18, 1987.

Decided Sept. 4, 1987.

I. William Cohen, Hertzberg, Jacob, and Weingarden, P.C., Detroit, Mich., Jo Ann Stevenson, argued, for defendant-appellant.

David H. Dickieson, Dept. of Justice, Washington, D.C., Mark E. Rizik, Detroit, Mich., Michael L. Paup, Lead Counsel, Roger M. Olsen, Tax Div., Dept. of Justice, Washington, D.C., Wynette J. Hewett, Martha B. Brissette, argued, for plaintiff-appellee.

Before: KENNEDY and MILBURN, Circuit Judges; and CONTIE, Senior Circuit Judge.

CONTIE, Senior Circuit Judge.

Debtor Ron Pair Enterprises, Inc. appeals from the district court's order awarding postpetition interest on an oversecured prepetition federal tax lien. The district court, in reversing the bankruptcy court's ruling, held that section 506(b) of the 1978 Bankruptcy Code, 11 U.S.C. Sec. 506(b), provides for the payment of such interest by its plain terms. We conclude that the language of section 506(b) does not clearly provide for the payment of such interest and, in fact, it fails to explicitly overrule the pre-Code judicially created concept disallowing the payment of postpetition interest on nonconsensual prepetition oversecured claims. We therefore reverse the judgment of the district court.

I.

Debtor filed a bankruptcy petition pursuant to Chapter 11 of the Bankruptcy Code on May 1, 1984, in the United States Bankruptcy Court for the Eastern District of Michigan. The Government filed timely proof of a prepetition claim in the amount of $53,277.93, comprised of assessments for unpaid withholding and social security taxes, penalties and prepetition interest. The Government's claim was properly perfected through a tax lien.

Debtor's First Amended Plan of Reorganization was filed on October 1, 1985. The Plan provided for the payment of the Government's prepetition tax claim, including prepetition interest which had accrued on that claim, but it did not provide for the payment of postpetition interest on that claim. Accordingly, the Government filed a timely objection to the Plan claiming, among other things, that section 506(b) of the 1978 Bankruptcy Code allows for the payment of postpetition interest since the assets securing the Government's claim exceeded the amount of the principal debt. ¹ A hearing was held before the Bankruptcy Court on December 3, 1985, at which time the parties stipulated that the collateral securing the Government's claim was adequate to pay that claim as well as postpetition interest on that claim; in other words, they stipulated that the claim was oversecured.

On December 6, 1985, the Bankruptcy Court denied the Government's objection, concluding that section 506(b) did not authorize the payment of postpetition interest on the Government's prepetition tax claim. The district court reversed the Bankruptcy Court's judgment on June 30, 1986, concluding that the "plain language" of section 506(b) entitled the Government to such interest, relying on the Fourth Circuit's decision in In re Best Repair Co., 789 F.2d 1080 (4th Cir.1986), and this court's decision in In re Colegrove, 771 F.2d 119 (6th Cir.1985). This timely appeal followed.

II.

The sole issue before this court is whether section 506(b) of the 1978 Bankruptcy Code, 11 U.S.C. Sec. 506(b), authorizes the payment of postpetition interest on an oversecured prepetition claim when that claim is nonconsensual in nature. Section 506(b) provides in full:

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, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.

(Emphasis added). Debtor argues that the emphasized clause above modified both "interest on such claim" as well as "any reasonable fees, costs, or charges," thereby codifying the judicially created pre-Code rule regarding postpetition interest on oversecured prepetition claims. Debtor asserts that there is no indication that Congress intended to deviate from the judicially created rule that postpetition interest could not be awarded on nonconsensual prepetition claims, arguing that the language in section 506(b) is too ambiguous to be considered an explicit departure from a well-established doctrine.

The Government counters by arguing that the language of section 506(b) is unambiguous in that the emphasized clause above only modifies "any reasonable fees, costs, or charges." The Government relies on the fact that the phrase "interest on such claim" is set off by commas and is followed by the words "and any," indicating that interest is to be treated differently from fees, costs, or charges. The Government argues that since the language is unambiguous and allows for postpetition interest to be awarded on any allowed secured prepetition claim regardless of whether it is consensual or not, this Court should not refer to pre-Code law to interpret section 506(b). The Government suggests further that even if this Court is inclined to review pre-Code law, the punctuation, phraseology and grammatical structure of section 506(b) plainly and unambiguously express Congress' intent to depart from pre-Code law. This is a case of first impression in this Circuit. ²

We first reject the Government's contention that pre-Code law should not be relied on in interpreting section 506(b) since the provision appears to be unambiguous. While the language of a statute is always the starting point when its construction is at issue, see Landreth Timber Co. v. Landreth, 471 U.S. 681, 685, 105 S.Ct. 2297, 2301-02, 85 L.Ed.2d 692 (1985), it is only the starting point. As in Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986), and Kelly v. Robinson, --- U.S. ----, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), pre-Code law should be reviewed in order to better understand the context in which the provision was drafted and therefore the language itself. Midlantic, 106 S.Ct. at 759-60; Kelly, 107 S.Ct. at 358. ³ In fact,

[t]he normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific. The Court has followed this rule with particular care in construing the scope of bankruptcy codifications.

Midlantic, 106 S.Ct. at 759-60 (emphasis added) (citation omitted). See also Kelly, 107 S.Ct. at 358-61 & n. 12 (Congress was not permitted to "silently abrogate" a judicially created bankruptcy rule). ⁴ We believe, therefore, 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.

Under pre-Code bankruptcy law, it was a well-established general rule that interest on both secured and unsecured prepetition claims ceased to accrue upon the filing of a bankruptcy petition. Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 163, 67 S.Ct. 237, 240, 91 L.Ed. 162 (1946); Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 257, 55 L.Ed. 244 (1911). This general rule applied to tax liens, City of New York v. Saper, 336 U.S. 328, 337-38, 69 S.Ct. 554, 559-60, 93 L.Ed. 710 (1949); United States v. Mighell, 273 F.2d 682 (10th Cir.1959), and had its foundation primarily in the equitable principle that the delays necessitated by bankruptcy proceedings should not place one creditor at an advantage or disadvantage in contrast to other creditors:

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 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.

Nicholas v. United States, 384 U.S. 678, 683-84, 86 S.Ct. 1674, 1679, 16 L.Ed.2d 853 (1966) (footnote omitted).

Over time, the federal courts created exceptions to this general rule to allow for postpetition interest on prepetition secured claims under the following circumstances: (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 the proceedings; or (3) the value of the collateral securing the debt is sufficient to pay both the claim and postpetition interest on the claim. See, e.g., In re Boston & Maine Corp., 719 F.2d 493, 496 (1st Cir.1983), cert. denied, 466 U.S. 938, 104 S.Ct. 1913, 80 L.Ed.2d 461 (1984); ⁵ In re Kerber Packing Co., 276 F.2d 245, 246 (7th Cir.1960); United States v. Bass, 271 F.2d 129, 130 (9th Cir.1959); In re Macomb Trailer Coach, Inc., 200 F.2d 611, 613 (6th Cir.1952), cert. denied, 345 U.S. 958, 73 S.Ct 940, 97 L.Ed. 1378 (1953). The third exception above was created pursuant to the theory that postpetition interest should be allowed where a security agreement had been voluntarily executed and the creditor had successfully bargained for specific, valuable collateral to secure the principal obligation. Accordingly, where the creditor had bargained to become an oversecured creditor, he had an expectation of receiving interest were it necessary to sell the security. See Kerber Packing Co., 276 F.2d at 247; Bass, 271...