United States: Another Bankruptcy Court Weighs In On Postpetition Interest

Cuker Interactive, LLC filed a Chapter 11 bankruptcy petition on December 13, 2018, in the United States Bankruptcy Court for the Southern District of California.  Because it was solvent at confirmation, the debtor proposed to pay secured creditors in full, with interest at the contract rate, and general unsecured creditors in full, with postpetition interest at the "legal rate," or a rate determined by the Court that leaves the creditors unimpaired.¹   But what rate is that?

Section 1124(1) provides that where a Chapter 11 plan, and not the Bankruptcy Code, "impairs" a claim or interest, the impaired class is entitled to vote on the plan unless it "leaves unaltered the legal, equitable, and contractual rights" of the holders.²  In this case, unsecured creditors argued that they were "impaired" because the plan did not require the debtor to pay postpetition interest at the contractual rate or a higher state law judgment rate.³  Bankruptcy Judge Adler disagreed with the unsecured creditors' characterization of the plan, noting that the plan instead calls for either the federal judgment rate, or a "rate determined by the Court for their claims to be 'unimpaired.'"⁴

Thus, the "discrete issue here is what is the rate of postpetition interest that must be applied for the Creditors' unsecured claims to be unimpaired?"⁵  In In re Cardelucci, 285 F.3d 1241 (9th Cir. 2002), the Ninth Circuit held that the "interest at the legal rate" due to general unsecured creditors of a solvent chapter 11 debtor is the federal judgment rate.⁶  While the general unsecured creditors argued that In re Cardelucci is inapplicable because the Ninth Circuit addressed impairment under § 726(a)(5) and § 1129(a)(7), not § 1124(1), Judge Adler disagreed, noting that the "Ninth Circuit phrased its holding broadly to apply to all unsecured claims."⁷  In reaching their conclusion, the Ninth Circuit also relied heavily on In re Beguelin, 220 B.R. 94 (BAP 9th Cir. 1998), wherein a Bankruptcy Appellate Panel likewise held that solvent debtors must pay postpetition interest to unsecured creditors at the federal judgment rate.⁸  Both the Ninth Circuit and the BAP stated that they favored applying the federal judgment rate because it promotes uniformity and efficiency.⁹ 

Further, in In re PG&E Corp., 610 B.R. 308 (Bankr. N.D. Cal. 2019), another bankruptcy court directly addressed the applicability of In re Cardelucci to "impairment" under § 1124.¹⁰  There, reasoning that (1) the Ninth Circuit did not narrow the application of its holding to "impaired claims," and (2) a uniform rate ensures equitable treatment of creditors, the PG&E court determined that it was bound by In re Cardelucci.¹¹ 

The creditors argued that Judge Adler should adopt the "solvent-debtor exception" applied by several other Circuit Courts, which "enforces the state law rights of unsecured creditors in a solvent-debtor case, including their right to receive postpetition interest at their contractual rate."¹²  On remand, the Ultra Petroleum court held that "where the claims of unsecured creditors are 'unimpaired' they must receive postpetition interest at their contractual rate, or otherwise be given the opportunity to vote on the plan."¹³  There, the bankruptcy court reasoned that the principle behind the "solvent-debtor exception" is that a "debtor must repay its debts in full when it has the means to do so", and that for solvent debtors, "a bankruptcy court's role is merely to enforce the contractual rights of the parties.¹⁴ 

While Judge Adler "understands the rationale for applying" the exception, she noted both that she is bound by the Ninth Circuit's decision in Cardelucci, and that the application of the solvent-debtor exception to larger cases poses a significant administrative issue.¹⁵  As a result, Judge Adler held that the applicable "legal rate" at which a solvent debtor must repay unsecured creditors is the federal judgment rate.¹⁶ 

Footnotes

1. In re Cuker Interactive, LLC, No. BR 18-7363-LA11, 2020 WL 7086066, at *1 (Bankr. S.D. Cal. Dec. 3, 2020). 

2. Id. (citing 11 U.S.C. § 1124(1)). 

3. In re Cuker Interactive, 2020 WL 7086066, at *2. 

4. Id. 

5. Id. 

6. In re Cuker Interactive, 2020 WL 7086066, at *2 (citing In re Cardelucci, 285 F.3d at 1234-35). 

7. Id. (citing In re Cardelucci, 285 F.3d at 1234). 

8. In re Cuker Interactive, 2020 WL 7086066, at *2 (citing Beguelin, 220 B.R. at 101). 

9. Id.

10. Id. at *3. 

11. Id. (citing In re PG & E, 610 B.R. at 312-13, 315). 

12. Id. at *3 (citing In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019) (remanding, acknowledging potential applicability of solvent-debtor exception) (additional citations omitted). 

13. Id.

14. Id.

15. Id. at *4. 

16. Id. at *5. 

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