by Shirley Palumbo, Greenspoon Marder LLP
There is a trend in bankruptcy courts across the nation of distinguishing between impairment resulting from a plan and impairment caused by statute. Depending on the interpretation given by the bankruptcy court, a post-petition interest rate in unsecured contract claims against solvent chapter 11 estates may restrict a creditor’s recovery to the lower federal judgment rate of interest under 28 U.S.C. § 1961, regardless of the agreed terms.
Generally, § 1961 governs civil and bankruptcy adversary judgment interest. See Tow v. Speer, 2015 WL 12765414, *5 (S.D. Tex. Aug. 17, 2015). By its plain language, § 1961 would be inapplicable in cases where no recovery of a monetary judgment in a district court is involved. Nevertheless, it has been used for non-judgment claims because, comparable to post-petition interest, it is procedural in nature and, thus, determined by federal law. See In re Cardelucci, 285 F.3d 1231, 1235 (9th Cir. 2002). The only exception to using § 1961 rate in bankruptcy is where the underlying contract expressly provides for a different post-judgment interest rate by explicitly stating the contract rate applies post judgment. See Tricon Energy Ltd. V. Vinmar Int’l Ltd., 718 F. 3d 448, 457 (5th Cir. 2013). Consequently, the parties may agree to a different interest rate for the period after entry of judgment, if this is done in “an explicit and unequivocal manner.” Id.; see also Newmont U.S.A. Ltd. v. Ins. Co. of N. Am., 615 F.3d 1268, 1276 (10th Cir. 2010); Westinghouse Credit Corp. v. D’Urso, 371 F.3d 96, 101 (2nd Cir. 2004); Cent. States, Se. & Sw. Areas Pension Fund v. Bomar Nat’l, Inc., 253 F.3d 1011, 1020 (7th Cir. 2001); Citicorp Real Estate v. Smith, 155 F.3d 1097, 1107–08 (9th Cir. 1998).
That is, if the language in the contract is general, such as “until paid” or “shall accrue interest until payment,” the language may be insufficient to overcome applicability of § 1961. See Tricon Energy, 718 F. 3d at 457; Johnson v. Riebesell (In re Riebesell), 586 F 3d. 782, 794-95 (10th Cir. 2009); In re Trigeant Holdings, Ltd., 523 B.R. 273, 279 (Bankr. S.D. Fla. 2015). In Florida, after reviewing an arbitral award, the Southern District of Florida, in particular, followed the majority opinion that the parties in a solvent estate are entitled to contract out of the federal post-judgment interest rate as long as it was clearly, unambiguously, and unequivocally stated. Trigeant, 523 B.R. at 279. However, the Eleventh Circuit Court of Appeals has made it clear that an allowed claim in bankruptcy is neither an arbitral award nor a federal judgment, and, therefore, not entitled to federal judgment interest rate unless allowed under a confirmed plan. See In re Celotex, 613 F. 3d 1318, 1322 (11th Cir. 2010). Accordingly, in Florida, non-judgment creditors may be awarded post-petition interest solely if a) stated specifically under the contract and b) included under a confirmable plan.
Yet, if Florida bankruptcy courts were to follow the rationale under the recent Ninth Circuit bankruptcy court decision in bankruptcy case of PG&E Corporation (“PG&E Corp.”), a creditor may be limited to a lesser recovery, albeit the agreed terms. See In re PG&E Corp., 610 B.R. 308 (Bankr. N.D. Cal. 2019). PG&E Corp. and its primary operating subsidiary, Pacific Gas and Electric Company (together, the “Debtors”), were forced to file for bankruptcy protection as a result of disastrous wildfires that occurred in Northern California in 2017 and 2018 which gave rise to billions of dollars in liabilities against the power giant.
The Debtors’ chapter 11 plan listed unsecured claims as unimpaired claims that would be paid in full, in cash, including post-petition interest at the federal judgment rate provided in 28 U.S.C. § 1961(a), which as of the filing of the petition was at 2.59%. In essence, if the plan leaves a creditor “unimpaired,” the creditor is deemed to have accepted the plan, whereas an impaired creditor would have the ability to “reject” the plan. Thus, a finding of impairment would allow unsecured creditors the power to potentially block confirmation of the proposed restructuring plan. Various unsecured creditor committees in the case objected to the plan, arguing that that the rate set under their various contracts was the proper rate to apply and the plan’s failure to provide the contract rate impaired their claims. At stake was over $5 billion in higher distributions to these claimants, a powerful incentive to assert the contract rate.
The district court denied the creditors’ efforts to appeal the bankruptcy court’s interlocutory ruling. See Ad Hoc Comm. of Holders of Trade Claims v. PG&E Corp., No. 20-CV-01493-HSG, 2020 WL 1865135 (N.D. Cal. Apr. 14, 2020). In considering the merits, the district court followed the Ninth Circuit Court of Appeals’ milestone decision in In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002) as dispositive and “unequivocal,” finding that the application of the federal interest rate does not impair the unsecured creditor’s claims. In further beholding Cardelucci, the Bankruptcy Court reasoned that 11 U.S.C. § 726(a)(5) was conducive to a single source of rate, which promotes uniformity among claims, compensates, ensures equitable treatment and avoids disparity between creditors. See In re PG&E Corp., 610 B.R. at 313 (citing to Cardelucci, 285 F.3d at 1235-36). As a consequence, the Bankruptcy Court went on to conclude that the Plan did not impair the creditors’ claims; rather the Bankruptcy Code did, which made allegations of impairment of claims unsubstantial.
On a positive angle, Florida bankruptcy courts may be able to follow this reasoning which effectively allows for uniformity and equitable treatment, especially in large bankruptcy filings where a Debtor proposes to pay post-petition interest. Yet, the PG&E court’s reasoning clearly adopts a) a legal rate use in Chapter 7 priority tier for chapter 11 cases; b) a codified rate of post-judgment interest in districts courts as also being applicable to pre-judgment creditors; c) (c) regardless of a state or contractual rate that may have been agreed on prior to a bankruptcy filing. It seems overreaching. Nothing in the language of either provision allows for the use of such rates in a chapter 11 reorganization dealing with pre-judgment claimants or restricts a rate the contracting parties agreed to. The PG&E decision’s effect in Florida will depend on the interpretation bankruptcy courts give to 11 U.S.C. § 502(b)(2) express disallowance of unmatured interest, the judicial doctrine excepting solvent estates in chapter 11, and the appropriate method of calculating post-petition interest. A contractual clause with unequivocal rate of post-judgment interest language would defy this decision, especially in a smaller reorganization setting.