A district judge in Chicago split with the Ninth Circuit by holding that an unsecured creditor in a chapter 11 case with a surplus is entitled to post-petition interest at the contract rate, not the lower federal judgment rate.
The chapter 11 debtor had more than enough assets to pay unsecured creditors in full, with interest. The reorganization plan was confirmed over the objection of a creditor who argued that unsecured claims in a surplus case must be paid at the contract rate, if there is one, and at the judgment rate if there is no contract rate.
Relying on a 2002 Ninth Circuit decision called Cardelucci, the bankruptcy judge ruled that unsecured creditors were only entitled to post-petition interest on their claims under Section 727(a)(5) at the federal judgment rate, which amounts to 0.17%.
The creditor appealed, contending the plan had to pay interest at a contract default rate if the claims of unsecured creditors were to be unimpaired. District Judge Robert M. Dow Jr. agreed and reversed on March 29.
Judge Dow said that “legal rate” as used in Section 727(a)(5) is not defined in the Bankruptcy Code. Neither the Supreme Court nor any court in the Seventh Circuit has defined the term. Therefore, he said it was not clear from the language of Section 727(a)(5) that Congress intended to replace pre-Code law where unsecured creditors in a surplus case were allowed to enforce their rights “according to the tenor of the contracts that created those rights.”
Judge Dow parted company with the Ninth Circuit because he wanted a reading of the statute that would “ensure equitable treatment of creditors in cases involving a surplus estate.”
In a chapter 7 case with more than enough to pay unsecured creditors in full, he held that Section 727(a)(5) entitles creditors to interest at the contract rate, if there is one. Because there was therefore no compliance with the best interest test, Judge Dow set aside confirmation.