The Ninth Circuit states that unsecured creditors of a solvent debtor accrue post-petition interest at the contractual or applicable state law rate if not impaired.

The Ninth Circuit Court of Appeals held that in a solvent debtor case, unsecured creditors have an equitable right to post-petition interest at the applicable contractual or statutory rate in order to be deemed unimpaired. On August 29, 2022, a split Ninth Circuit panel reversed two lower court decisions in the Chapter 11 cases of PG&E Corporation and Pacific Gas and Electric Company (“PG&E”).[1] which ruled that a solvent debtor need only pay its unsecured creditors post-petition interest at the federal statutory rate for judgments rather than the underlying contractual rate as the creditors had argued.[2]

Solvent debtor exception

Under the Bankruptcy Code, interest ceases to run on claims from the date of the petition.[3] Two exceptions exist: First, the Bankruptcy Code expressly provides that oversecured creditors are entitled to post-demand interest up to the value of their security.[4] Second, courts have long recognized the “solvent debtor exception,” an equitable doctrine under which creditors of a solvent debtor may receive post-petition interest on their claims.[5] The “solvent debtor exception” is not codified. This is a common law exception to the prohibition against a creditor collecting post-petition interest. The exception ensures an equitable distribution of estate assets and stems from the common law priority rule which requires a creditor to be “redressed” before secondary interests (including interests) receive distributions of the bankruptcy estate.[6]

Courts applying the solvent debtor exception have disagreed on whether the applicable post-claim interest rate that must be paid on an unsecured debt to make it intact is the judgment rate. federal, which is generally low, or applicable state law or contract rates, which are generally higher.[7] This problem arose in PG&E’s Chapter 11 cases, where the proposed plan provided that unsecured debts would receive post-petition interest at the federal judgment rate of 2.59%.[8] Various opposing unsecured creditors argued that the plan impermissibly denied them approximately $200 million in post-petition interest, the amount creditors claimed they would have received if contractual interest rates ( or in the absence of such terms, in default of state law) applied to their claims. .[9]

Context of the relevant case

PG&E is an electric and natural gas utility company operating in California.[10] Following devastating wildfires, PG&E faced significant wildfire-related litigation and filed for bankruptcy to settle those liabilities. Other than unknown wildfire-related liabilities, PG&E was solvent at the time of its bankruptcy and has never challenged its ability to pay non-wildfire-related creditors in full.[11] PG&E proposed a Chapter 11 plan (the “Plan”) that classified non-wildfire claims as general unsecured claims and paid them in full, including payment of post-petition interest at the federal judgment rate. of 2.59%.[12] PG&E argued that the plan thereby rendered those claims intact within the meaning of Bankruptcy Code Section 1124(1) and that as such the claims were deemed to accept the plan.[13] Some of the unsecured debt holders objected to the plan’s post-demand interest rate, arguing that applying the lower federal judgment rate, rather than the creditors’ contractual interest rate or the default rate of the state law (which was 10%), deprived them of approximately $200 million. and made them corrupt.[14]

The bankruptcy court ruled against the creditors. He upheld PG&E’s plan, concluding that unsecured creditors of a solvent debtor are only entitled to post-petition interest at the federal judgment rate.[15] On appeal, the district court upheld the bankruptcy court, finding in part that “applying a single, easily determined interest rate to all post-petition interest claims ensures fair treatment of creditors “.[16]

The Ninth Circuit decision

Presiding over the appeal of the district court’s decision, a split Ninth Circuit panel vacated, finding that the common law solvent debtor’s exception entitles unsecured unsecured creditors to post-petition interest at the rate contractual or default of state law, subject to the actions of the Case.[17] Failure of a plan to provide for post-petition interest in accordance with this equitable right results in impairment.[18]

Initially, the Ninth Circuit rejected the lower courts’ interpretation of its earlier decision in Cardelucci. In Cardeluccithe parties agreed that the creditors owed post-petition interest under Section 726(a)(5) of the Bankruptcy Code[19] but disagree on the applicable rate.[20] The Ninth Circuit ruled that Congress’ reference to “legal rate interest” in Section 726(a)(5) referred to the federal judgment rate.[21] From there, the bankruptcy and district courts of PG&E Corp. concluded that Cardelucci established a general rule that all unsecured creditors of a solvent debtor are entitled to post-petition interest at this rate. The Ninth Circuit disagreed. He noted that the creditors of Cardelucci were tampered with, that the decision rested solely on the interpretation of Section 726(a)(5) of the Bankruptcy Code – a provision that does not apply to intact debts, and in fact only applies Chapter 11 cases through the best interests test – and finally, that Cardelucci provides no textual basis for applying Section 726(a)(5) to non-endangered claims.[22]

The panel then analyzed the meaning of the term “impairment” in the Bankruptcy Code and its connection with the solvent debtor exception. Section 1124(1) provides that a debt is impaired unless a bankruptcy plan “leaves unaffected the legal, equitable and contractual rights to which such debt or interest entitles the holder of such debt or interest. “.[23] Noting that this concept of impairment is extremely broad and intended to capture any impairment of rights, the Ninth Circuit considered whether PG&E’s unsecured creditors had such a legal, equitable, and contractual right to receive post-petition interest, and if so. , at what rate .[24]

The Ninth Circuit held that the longstanding solvent debtor’s exception provided unsecured creditors with an equitable right to post-petition interest at applicable contractual or statutory rates.[25] As a result, the Ninth Circuit found that PG&E’s plan – which applied the lower federal judgment rate to unsecured claims – impaired the equitable rights of unsecured creditors, rendering their claims impaired within the meaning of Section 1124(1) of the Bankruptcy Code. [26] According to the panel, PG&E was looking to “have their cake and eat it too. . . look for[ing] to pay plaintiffs the same reduced interest rate as impaired creditors, while depriving them of the legal protections enjoyed by impaired creditors.[27] The Ninth Circuit recognized that the solvent debtor exception was a fair doctrine, the application of which had to be weighed against other fair considerations, and that cases could arise where the payment of contractual or default interest could impede the ability of other creditors in a similar situation to be paid in full.[28] However, in reversing and sending the case back to bankruptcy court, the Ninth Circuit warned that it saw no sign of “compelling equitable considerations” in PG&E’s case that could rebut the presumption that unsecured creditors had entitled to post-claim interest in contract or state law default rate.[29]


In PG&E Corp., the Ninth Circuit clarified that under the solvent debtor exception (a) unsecured creditors have an “equitable right” to post-petition interest, (b) in the absence of compelling equitable considerations to the contrary, unsecured creditors were presumed to be entitled to their contractual or state right of interest rate, and (c) failure to provide for post-petition interest in accordance with such equitable right under a bankruptcy plan prejudices claims concerned. The ruling clarifies an area that other circuit courts have yet to rule on, but leaves open that another rate could apply in cases where the payment of contractual or default interest could affect the full payment of other creditors in the same position, or where other “compelling equitable considerations” might argue in favor of payment of post-petition interest at a different rate. In most cases of creditworthy debtors, however , the court clearly expects that the fair role of the bankruptcy court is simply to enforce the rights of creditors in accordance with the terms of the contract under which they were created.On September 9, 2022, the debtors filed a petition to the Ninth Circuit for a rehearing benchand the petition remains pending as of this writing.