On January 29, 2019, PG&E Corporation (“PG&E”) and its primary operating subsidiary, Pacific Gas and Electric Company (“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.[2]
The chapter 11 Debtor-utility’s propose restructuring plan filed on September 9, 2019[3] listed unsecured funded debt claims and general unsecured claims as unimpaired, providing that these were allowed, 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), the federal judgment rate from the petition date to the effective date of the plan, which as of the filing of the petition was at 2.59%.
PG&E bondholders, including Elliott Management Corp, Pacific Investment Management Co. and Oaktree Capital Management with about $17.5bn in notes that PG&E had issued pre-bankruptcy, together with other unsecured claimants composed of the Unsecured Committee, the Ad Hoc Senior Committee, and the Ad Hoc Holders of Trade Claims argued that the rate as set under the various contracts was the proper rate to apply and the plan’s failure to provide the contract rate impaired their claims. 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. At stake was approximately over $5 billion higher distribution to these claimants, a powerful incentive to assert the contract rate.
Creditors in general do not expect to collect on post-petition interest when a debtor files for bankruptcy. Section 502(b)(2) of the Bankruptcy Code explicitly disallows claims on ‘unmatured interest’.[4] Notwithstanding section 502(b)'s bar against payment of post-petition interest to unsecured creditors, courts have determined that the Bankruptcy Code may award post-petition interest to all unsecured creditors where the debtor proves solvent.[5] Notably, chapter 11 is silent on the subject, unlike chapter 7’s express provision for payment of interest in the event of a surplus. Yet, under its judiciary discretion, courts have awarded post-petition interest to unsecured claims in chapter 11 in that nothing [emphasis added], in the Bankruptcy Code prohibits payment of post-petition interest in chapter 11.[6]
There is a split of authority with regards to the meaning of “legal rate” for payment of post-petition interest. Federal Judgment Rate under 28 U.S.C. §1961(a) has been used as the ‘legal’ rate. Generally, § 1961 governs civil and bankruptcy adversary judgment interest.[7] 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.[8] 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.[9] 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.”[10] 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.[11]
On December 30, 2019, the Bankruptcy Court in PG&E issued a memorandum of law determining that the post-petition interest rate applicable to unsecured claims under the chapter 11 plan is the Federal Judgment Rate. The judge first analyzed section 502(b)(2), which bars payment of post -petition interest, together with section 1124 (impairment of claims), under Timbers[12] to conclude that a claim is impaired unless the plan [emphasis added], alters the rights of the claimant. As the claimant’s rights in the case are being altered by the applicable “law”, i.e., legal rate under 726(a)(5), then the claims are not impaired by reason of applying section 1961 rate instead of the contractual rate.
The Court also found the Ninth Circuit’s decision under In re Cardelucci[13], relied by the Debtors, as dispositive. Under In re Cardelucci the Ninth Circuit held that in a solvent estate, a post-petition interest rate at ‘the legal rate’, pursuant to 11 U.S.C. § 726(a)(5), meant interest under 28 U.S.C. § 1961 as the applicable rate to use for all claims as opposed to the contract or state law rate[14] in order to maintain “legitimate interests in efficiency, fairness predictability, and uniformity within the bankruptcy system”.[15] In further beholding Cardelucci the Court stated that § 726(a)(5) was conducive to a single, source of rate; that promotes uniformity among claims; compensates, ensures equitable treatment and avoids disparity between creditors.[16] As a consequence, the Bankruptcy Court went on to conclude that the Plan did not impair; rather the Bankruptcy Code did, which made allegations of impairment of claims unsubstantial.
On April 14, 2020, the Ad Hoc Committee of Holders of Trade Claims filed for leave to appeal the interlocutory order regarding post-petition interest entered on February 6, 2020 and Memorandum Decision entered on December 30, 2019. The District Court of California denied leave to appeal on April 14 2020.[17] Thus, adhering to precedent as binding.
Ultimately, it seems that bankruptcy courts may be able to follow PG&E’s 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) regardless of a state or contractual rate that may have been agreed on prior to a bankruptcy filing. It seems an overreach. 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 other districts 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.
[1] Shirley Palumbo is senior counsel with Greenspoon Marder, LLP. A Board Certified in Consumer Bankruptcy law by the American Board of Certification, Ms. Palumbo concentrates her practice in the areas of Bankruptcy and Financial Services, including loan workouts, foreclosures, consumer and business reorganizations and insolvency. She oversees cases in the national and international scope.
[2] In re PG&E Corp., Case No. 19-30088 (Bankr. N.D. Cal. 2019), Memorandum Decision Regarding Postpetition Interest, ECF # 5226.
[3] Id. at ECF # 3841, recently amended on January 31, 2020, ECF # 5590.
[4] 11 U.S.C. § 502(b) (2019).
[5] See Thompson v. Ky. Lumber Co. (In re Ky. Lumber Co.), 860 F.2d 674, 676-77 (6th Cir. 1988) (citing Matter of Walsh Constr., Inc., 669 F.2d 1325, 1330 (9th Cir. 1982) (stating the three particular circumstances post -petition interest may be awarded to be: (1) to all unsecured creditors where the debtor proves solvent; 2) to a secured creditor where the collateral produces income after filing of the petition; and (3) to a secured creditor where the collateral is sufficient to pay interest as well as the principal amount of the claim.
[6] See Matter of Johns-Manville Corp., 68 B.R. 618, 637 (Bankr. S.D.N.Y. 1986). See also, In re David Green Prop. Mgmt., 164 B.R. 92, 95, 99 (Bankr. W.D. Mo. 1994) (holding post-petition interest may be paid on unsecured claims in chapter 11 if there is surplus); In re Crowthers McCall Pattern, Inc., 120 B.R. 279, 299 n.13 (Bankr. S.D.N.Y. 1990) (stating right to post-petition interest arises under 11 U.S.C. § 1129(a)(7)(A)(ii) and 726(a)(5)).
[7] See Tow v. Speer, 2015 WL 12765414, *5 (S.D. Tex. Aug. 17, 2015).
[8] See In re Cardelucci, 285 F.3d 1231, 1235 (9th Cir. 2002).
[9] See Tricon Energy Ltd. v. Vinmar Int’l Ltd., 718 F. 3d 448, 457 (5th Cir. 2013).
[10] 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).
[11] 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).
[12] Id. at ECF # 5226, page 2, (citing to United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 371, 108 S.Ct. 626,98 L.Ed.2d. 740 (1988)).
[13] In re Cardelucci, supra, note 5.
[14] In re Cardelucci, supra, note 5 at 1234.
[15] In re Cardelucci at 1236.
[16] See In re PG&E Corp., note 9 at page 9.
[17] Ad Hoc Committee of Holders of Trade Claims v. PG&E Corporation, et al., 2020 WL 1865135, April 14 2020.