Divided Ninth Circuit Rules that unsecured unsecured creditors of a solvent debtor may be entitled to post-petition interest at contract or state default rates – Insolvency / Bankruptcy

In short

The situation: Bankruptcy courts have divided the interest rate after petition that uncompromised creditors of a solvent debtor are entitled to receive. Bankruptcy courts have variously held that these creditors are entitled to the contractual interest rate, interest at the federal judgment rate (approximately the rate on a one-year Treasury bill) from the date of the petition bankrupt, or at an equitable rate. Another possibility is that no interest is payable at all.

The result: A divided panel of the United States Court of Appeals for the Ninth Circuit recently ruled that unsecured unsecured creditors of a solvent debtor are entitled to post-petition interest at the contractual rate (or default rate of the State in the absence of an express contractual rate), in the absence of limited equitable exceptions. The court remanded the case to determine if a fair exception applied. The dissenting judge would have concluded that uncompromised creditors of a solvent debtor are not entitled to receive post-petition interest.

Look forward: No other appellate court has squarely addressed this issue, but the Ninth Circuit panel’s ruling is highly unlikely to be the final word. The debtor requested a new hearing bench of the full Ninth Circuit, and the matter is also argued in the Fifth Circuit. Parties on both the creditor and debtor side should be aware that this issue remains contested.

Generally, in bankruptcy law, interest ceases to accrue on a creditor’s unsecured claims once the debtor files for bankruptcy. However, there are certain exceptions to this principle. In a recent decision resulting from an appeal in the bankruptcy proceedings of Pacific Gas & Electric, the Ninth Circuit ruled that when the debtor is solvent and the creditor is deemed “uncompromised” for the purposes of the bankruptcy plan, the creditor is entitled to interest on its claims at the contractual interest rate or the state default rate, subject to limited equitable exceptions . In re PG&E Corp.— F.4th —, 2022 WL 3712478 (9th Cir. Aug. 29, 2022).

PG&E filed for bankruptcy in 2019 to deal with potential heavy liabilities resulting from the wildfires. The interests of PG&E’s commercial creditors were represented by an ad hoc committee. Under PG&E’s bankruptcy plan, which was confirmed in 2020, trade creditors were to be paid the full amount of their claims from the date the bankruptcy petition was filed, but would only receive interest. post-petition on their claims only at the federal judgment rate, which was then 2.59%. PG&E’s plan classified commercial creditors as uncompromised.

Trade creditors argued that since their claims were not impaired, they were entitled to interest at the applicable contractual rate. In some cases, trade creditor contracts specified a rate to be paid; for silent contracts, commercial creditors have argued that California’s 10% default rate should generally apply. The bankruptcy court ruled that commercial creditors were only entitled to the federal judgment rate. The court held that the precedent of the Ninth Circuit (In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002)) required that all unsecured claims in a solvent debtor bankruptcy receive interest at the federal judgment rate, whether impaired or not. Further, the court noted that “in the absence of specific rules,” nothing in the Bankruptcy Code suggests that pre-petition rights continue post-petition. On appeal, the district court upheld.

In a split decision filed Aug. 29, the Ninth Circuit backtracked. All panel members agreed that the matter was not controlled by Cardelucci. The question in
Cardelucci was the appropriate interest rate to pay
with weakened faculties creditors in a solvent debtor bankruptcy. Here, however, the commercial creditors had been judged
intact.

The panel disagreed, however, on whether the “solvent debtor exception” entitles commercial creditors to post-petition interest in excess of the federal judgment rate. According to the majority, the exception is a common law principle that where the debtor is solvent, unsecured creditors should receive interest at the contractual or default rate of state law, subject to compensating equitable considerations. , before the debtor receives any surplus from the estate.

The majority held that the solvent debtor exception survived the enactment of the Bankruptcy Code in 1978. The court referred the question of whether trade creditors should be entitled to the contractual rate (or the default rate of the California), or if the bankruptcy court should exercise its discretion to reduce the amount owed. The court noted, however, that given the limited record it had, it saw no reason to deviate from the contractual or state default rate. The dissent, on the other hand, argued that the solvent debtor exception had not survived the enactment of the modern Bankruptcy Code and therefore commercial creditors were not entitled to any post-petition interest.

On September 12, PG&E filed a motion for rehearing bench. PG&E argued that among the various options considered by the panel – interest at the contractual or state default rate (subject to possible equitable modification), interest at the federal judgment rate, or no interest at all – the interest-free option was the most consistent with the wording of the Code and Supreme Court jurisprudence. Alternatively, PG&E argued that the federal judgment rate should apply. PG&E noted, however, that it initially offered commercial creditors the federal judgment rate based on
Cardelucciand that all members of the panel had deemed this case inapplicable to this situation.

Three takeaways

  1. The Ninth Circuit is the first appellate court to rule that unsecured unsecured creditors of a solvent debtor are generally entitled to receive post-petition interest at the contractual or state default rate. It remains to be seen whether the case will be reconsidered. bench and, if so, what will be the result. Furthermore, it is almost certain that this issue will continue to be litigated in bankruptcy, district and appellate courts elsewhere in the country, including in a case (Ultra OilNo. 21-20008) currently pending before the Fifth Circuit.

  2. Creditors and debtors in solvent debtor cases should be aware that this remains an unresolved issue. As long as there is uncertainty about the interest to which unsecured unsecured creditors are entitled in solvent debtor cases, all parties should carefully consider their exposure and potential risks and plan accordingly.

  3. Potential creditworthy debtors considering deposits to settle large debts should also consider the implications of this decision.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Janet E. Fishburn