Generally, in bankruptcy law, interest ceases to accrue on a creditor’s unsecured claims once the debtor files for bankruptcy. However, there are certain exceptions to this principle. In a recent decision resulting from an appeal in the bankruptcy proceedings of Pacific Gas & Electric, the Ninth Circuit ruled that when the debtor is solvent and the creditor is deemed “uncompromised” for the purposes of the bankruptcy plan, the creditor is entitled to interest on its claims at the contractual interest rate or the state default rate, subject to limited equitable exceptions . In re PG&E Corp.— F.4th —, 2022 WL 3712478 (9th Cir. Aug. 29, 2022).
PG&E filed for bankruptcy in 2019 to deal with potential heavy liabilities resulting from the wildfires. The interests of PG&E’s commercial creditors were represented by an ad hoc committee. Under PG&E’s bankruptcy plan, which was confirmed in 2020, trade creditors were to be paid the full amount of their claims from the date the bankruptcy petition was filed, but would only receive interest. post-petition on their claims only at the federal judgment rate, which was then 2.59%. PG&E’s plan classified commercial creditors as uncompromised.
Trade creditors argued that since their claims were not impaired, they were entitled to interest at the applicable contractual rate. In some cases, trade creditor contracts specified a rate to be paid; for silent contracts, commercial creditors have argued that California’s 10% default rate should generally apply. The bankruptcy court ruled that commercial creditors were only entitled to the federal judgment rate. The court held that the precedent of the Ninth Circuit (In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002)) required that all unsecured claims in a solvent debtor bankruptcy receive interest at the federal judgment rate, whether impaired or not. Further, the court noted that “in the absence of specific rules,” nothing in the Bankruptcy Code suggests that pre-petition rights continue post-petition. On appeal, the district court upheld.
In a split decision filed Aug. 29, the Ninth Circuit backtracked. All panel members agreed that the matter was not controlled by Cardelucci. The question in Cardelucci was the appropriate interest rate to pay with weakened faculties creditors in a solvent debtor bankruptcy. Here, however, the commercial creditors had been judged intact.
The panel disagreed, however, on whether the “solvent debtor exception” entitles commercial creditors to post-petition interest in excess of the federal judgment rate. According to the majority, the exception is a common law principle that where the debtor is solvent, unsecured creditors should receive interest at the contractual or default rate of state law, subject to compensating equitable considerations. , before the debtor receives any surplus from the estate.
The majority held that the solvent debtor exception survived the enactment of the Bankruptcy Code in 1978. The court referred the question of whether trade creditors should be entitled to the contractual rate (or the default rate of the California), or if the bankruptcy court should exercise its discretion to reduce the amount owed. The court noted, however, that given the limited record it had, it saw no reason to deviate from the contractual or state default rate. The dissent, on the other hand, argued that the solvent debtor exception had not survived the enactment of the modern Bankruptcy Code and that trade creditors were therefore not entitled to any post-petition interest.
On September 12, PG&E filed a motion for rehearing bench. PG&E argued that of the various options considered by the panel – interest at the contractual or state default rate (subject to potential equitable modification), interest at the federal judgment rate, or no interest at all – the interest-free option was the most consistent with the wording of the Code and Supreme Court jurisprudence. Alternatively, PG&E argued that the federal judgment rate should apply. PG&E noted, however, that it initially offered commercial creditors the federal judgment rate based on Cardelucciand that all members of the panel had deemed this case inapplicable to this situation.