If a creditor obtains a judgment after trial in bankruptcy court finding a debt nondischargeable for fraud, shouldn’t the court award prejudgment interest at the federal rate because the award was made under federal law, Section 523(a)(2)(A)?
Answer: Not necessarily. The Ninth Circuit held that the bankruptcy court properly exercised discretion in awarding prejudgment interest at the higher state rate.
After litigating for two years in state court, the debtor filed bankruptcy on the eve of trial. The creditors sued in bankruptcy court, where they ultimately prevailed on their nondischargeability complaint when the bankruptcy judge awarded them damages plus prejudgment interest at the California rate of 7% rather than the 0.4% federal rate.
The Ninth Circuit Bankruptcy Appellate Panel upheld the larger interest award, and the debtor appealed again.
To no avail, the debtor contended that the bankruptcy court was obliged to award prejudgment interest, if any, at the lower federal rate because the claim was based on federal law, namely Section 523(a)(2)(A). The Ninth Circuit disagreed in a non-precedential, per curiam opinion on June 18, upholding the bankruptcy court’s exercise of discretion.
The circuit court recited the general proposition that prejudgment interest is left to the sound discretion of the trial court, informed by “substantial evidence” regarding “considerations of fairness,” with the goal of making “the wronged party whole.”
The appeals court said the record “well supports” the bankruptcy court’s exercise of discretion.
Relevant factors included the filing of bankruptcy on the eve of a trial that would have been held in state court, where the judge would have imposed prejudgment interest at the state rate. Moreover, the elements of fraud under California law “are much like the elements that must be shown in a nondischargeability proceeding,” the circuit court said.
Were the case in federal court under diversity jurisdiction, the circuit court noted that “the California rate would have applied.”
In April, we reported Hamilton v. Elite of Los Angeles Inc. (In re Hamilton), 584 B.R. 310 (B.A.P. 9th Cir. April 17, 2018), where the Ninth Circuit BAP held that a creditor who obtains a pre-petition judgment on a debt that is later declared nondischargeable is entitled to post-judgment interest at the state rate throughout. To read ABI’s discussion of Hamilton, click here.