Antonin Scalia: Three Decisions on Distressed Assets

Antonin Scalia: Three Decisions on Distressed Assets

From the point of view of fund managers who seek alpha in bankruptcy courts, the late Justice Antonin Scalia was an ally.

His decisions in bankruptcy and insolvency matters tended to offer such litigants exactly what they need: clear and predictable rules of law.

Further, although Scalia’s popular reputation has been framed by decisions in which he has given voice to a dissenting view often expressed in sharp-tongued language that seems to an outsider to push the boundaries of collegiality, in the field of insolvency Scalia was the go-to guy for his colleagues, the Justice to whom they seem often to have turned to express a unanimous or near-unanimous opinion designed to offer clarity where lower courts had allowed for obfuscation.

He was the author, for example, of the majority’s decisions in RadLAX Gateway v. Amalgamation Bank (2012), in Law v. Siegel (2014), and Republic of Argentina v. NML Capital (2014).

Three Well-Crafted Opinions

They’re each worth some commemoration at this time and in this place: each is a workmanlike opinion that speaks to the late Justice’s legacy, and each is a valuable part of the judicial map of terrain in which alpha is to be sought.

In RadLAX Gateway, the Supreme Court addressed a simple question on which the Circuits had, rather surprisingly, split. The question: when a bankruptcy court auctions off the collateral of a secured creditor, (say, a mortgaged hotel) does the creditor have to pay for the asset/hotel with cash? Or can it pay by an offset against the estate’s debt?

The oral arguments in the case were full of talk about policy issues and fairness. But the actual decision, Scalia’s decision for a unanimous Court (Justice Kennedy, though, taking no part) was nearly void of policy. It was, in the words of a writer for Ronald Mann, a writer for Scotus Blog, “relentlessly textual.”  That is: it consisted of a close reading of clauses (ii) and (iii) of Section 1129(b)(2)(A).

At the time, I praised the decision here, as some of the lower courts, taking a strained and contrary view of the language, has threatened to demolish a carefully constructed statutory scheme, and this decision put an end to that threat.

Yes, Lying is Bad

Those who need clearly drawn maps to this alpha rich territory will take heart, too, from Scalia’s decision in Law v. Siegel. This case arose from the actions of just about the least sympathetic bankruptcy debtor in the annals of Supreme Court decisionsThe debtor, Stephen Law, had tried to keep creditors at bay by inventing an imaginary lien on his home.  He went quite far in executing this fraud, too, even filing fictitious pleadings in the name of his imaginary lienholder, “Lin’s Mortgage and Associates.” Lin’s Mortgage was conveniently said to be located in China, so that any creditors who wanted to challenge its claim against the house would have to spend a lot of money on research first.

Once again, though Scalia’s opinion steered away from sentiment or from the policy considerations it might suggest. The question at issue was whether the trustee could collect expenses out of the sale of the house – expenses incurred by Siegel’s attorneys as a consequence of the debtor’s free-wheeling imagination.  There were obvious policy reasons in favor of the view, taken by the Ninth Circuit, that it should be entitled so to do.

But the textual language ran the other way, as Scalia’s opinion for a unanimous court convincingly showed.

Immunity, Discovery, and the Globe

Finally, for our brief survey, there was a decision two terms back in the Argentine bond default case, upholding NML’s discovery efforts. Scalia wrote for seven Justices. Sotomayor took no part in this case, and Ginsburg dissented.

Argentina had argued that a statutory execution immunity implied immunity as well from coextensive discovery in aid of such executions of NML’s judgment against the debtor nation.

But Scalia’s opinion references the narrow wording of the pertinent section, which immunizes only foreign-state property “in the United States.” NML’s discovery request involved assets worldwide, and even though this discovery if executed may turn up information about assets in the U.S. and immune from seizure, that “does not mean that NML cannot pursue discovery of it.”

Such reasoning is simple, clear, and underwrote a consensus among Justices with very divergent jurisprudential points of view. This was Scalia at his best.

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