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6th Cir. Affirms Lower Bankruptcy Ruling, Punts Constitutionality

By Jonathan R. Tung, Esq. on May 02, 2016 | Last updated on March 21, 2019

A case of some interest to appellate attorneys came out of the Sixth Circuit recently that invoked the Constitutional Avoidance Doctrine -- avoiding questions of constitutionality when the validity of a law can be determined on other grounds.

Though the case is filed under bankruptcy law, it is instructive in several key areas of law practice including statutory construction, affirmation on erroneous reasoning, and the above mentioned "avoidance" doctrine.

The Facts Matter Less

The debtor in this case was Mildred Josephine Bratt of Tennessee. Mrs. Bratt filed for chapter 13 bankruptcy and disclosed all of her property pursuant to bankruptcy law. The debtor's claim was stipulated to be "oversecured" -- that is, worth less than the collateral that secured the debt. As such, bankruptcy law allows interest to be paid on the oversecured portion of the debt.

State or Federal Law of Bankruptcy?

Bratt's repayment plan sought a 12 percent interest on the delinquent tax debt and pointed to local Tennessee law to justify this number. The creditor rebuffed the 12 percent number and instead suggested that state law actually mandated a 18 percent interest payment on the debt. Both debtor and creditor cited Tenn. Code Ann sec. 67-5-2010, but both cited different sections of the law.

The district court agreed with Mrs. Bratt that the interest rate should have been capped at 12 percent finding that the section cited by the creditor was preempted under the Supremacy Clause.

Constitutional Avoidance Doctrine

But on appeal the circuit court went even further. Though the circuit court agreed with the result the district court had reached (12 percent was the correct rate of interest), it disagreed with the lower court's rationale. Specifically, it turned to the bankruptcy code itself and looked to sec. 511 of USC 11. Under that provision, it is determined that the correct rate of interest should be applied under "applicable nonbankruptcy law."

And this was the key point. The lower court had taken the view while provisions within the Bankruptcy Code are clearly "bankruptcy law," it is equally reasonable to conclude that laws outside of bankruptcy law are not bankruptcy law.

This, said the circuit, is too far. Such a line of reasoning is incorrect, even though it happened to guide the lower court erroneously to the right conclusion. Even though the creditor's chosen subsection of Tennessee was inapposite for purposes of the case, this did not make debtor's section any less inapplicable so far as bankruptcy was concerned. The creditor's theory didn't work not because there was conflict between state and federal law, but simply because state law should not have applied under a plain reading of the bankruptcy code.

Thus, under the view that federal courts should not decide on a law's constitutionality if it can be decided on other grounds, the circuit court decided simply on the view that federal statute disposed of this case. 12 percent interest would stand.

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