When interest must be paid on claims “at the legal rate,” it means the federal judgment rate, Bankruptcy Judge James R. Sacca of Atlanta said in an opinion that sides with the Ninth Circuit on an issue where the courts are divided.
The question arose in a chapter 7 case where proceeds were sufficient to pay claims in full, thus invoking Section 726(a)(5), which requires “payment of interest at the legal rate from the date of the filing of the petition.” Does that mean the federal judgment rate under 28 U.S.C. § 1961 or the rate that otherwise would be applicable, such as the contract rate or the state judgment rate on a pre-petition judgment?
In his Feb. 22 opinion, Judge Sacca decided that the Ninth Circuit’s Cardelucci opinion from 2002 is “better reasoned” than lower-court decisions using the non-bankruptcy rate that would have been in effect on each claim before bankruptcy.
Judge Sacca was persuaded to use the federal judgment rate based on the language that Congress used in Section 726(a)(5). By referring to “the” legal rate, the statute suggests there is one rate, the federal judgment rate, rather than the myriad rates that would apply by contract or state law.
He also chose the judgment rate as being “consistent with the general rule that post-petition interest is procedural in nature and, therefore, dictated by federal law.”
In a footnote, Judge Sacca noted that using the federal judgment rate diminishes the burden on trustees. “Imagine the expense” in a large case, he said, “that a trustee would incur if she had to contact each creditor to supplement their claims to provide the pre-petition interest rate and how the trustee and the court would solve the problem of what to do in the event creditors did not respond to such a request.”
Judge Sacca’s opinion includes careful analysis of the rationales in cases that reach different results.