Supreme Court Makes Life More Difficult for Bankrupt Farmers

I am not an expert in bankruptcy, so I confess that I may be missing something, but this morning's opinion in Hall v. United States leaves me puzzled.  In short, farmers with continuing income may file for reorganization under Chapter 12 of the Bankruptcy Code.  When they do so, their secured debts are entitled to preference (up to the value of the collateral) and certain priority claims (section 507 claims) are also entitled to priority payment.  Everything else is treated as an unsecured debt, and holders of those claims get a pro rata share of what's left over after the secured and priority claims are paid.  However, the Code provides that certain section 507 priority claims (essentially, taxes incurred by the estate) are to be treated as unsecured claims.  In Hall, the debtor farmers filed under Chapter 12, then sold the farm and proposed to use the sales proceeds to pay their debts.  They recognized a capital gain on the sale, and thus incurred a capital gains tax of $29,000.  The Court ruled that this tax liability was not incurred by the estate and thus was a personal liability of the debtors.  The Court's reasoning, in an opinion written by Justice Sotomayor, joined by CJ Roberts and Justices Scalia, Thomas, and Alito, was essentially rooted in the "plain meaning" of the text.  As an outsider to the intricacies of bankruptcy, it seems evident that a tax that is incurred by the debtor on the disposal of an asset that is part of the estate is a tax that is incurred by the estate.  And that seems to have been the intention of Congress as well. 

As for methodology, the fact that Justice Sotomayor employed the "plain meaning of text" approach raises the questionof whether she is a convert to the Justice Scalia approach to statutory interpretation, or whether this is just an aberration that is peculiar to bankruptcy. 

Bankruptcy experts should feel free to correct any errors or misimpressions I may have created. 

Comments

[Pryorthoughts.blogspot.com]

The policy arguments advanced in the post are unimpeachable but fall afoul not only of the "plain meaning" of the statutory text but also historical tax practice. An improvident result, to be sure, but I'd have to join the majority.

Speaking of matters of statutory interpretation, I think it's instructive that Justice Sotomayor's opinion relied not only on "plain meaning" but also past practice. What will happen with the two collide a la the RadLAX case, also pending before the Court?