547 B.R. 880
N.D. Ill.2016Background
- Dvorkin Holdings filed Chapter 11 on August 7, 2012; a Chapter 11 Trustee (Gus Paloian) was appointed after management issues. Creditor Colfin Bulls Fundings A, LLC acquired loans from MB Financial and filed a proof of claim for ~$3.5 million, later amending to add postpetition interest at contractual (regular and default) rates.
- The Joint Chapter 11 Plan proposed to pay all general unsecured claims in full plus postpetition interest at the “Legal Rate,” which the Plan Proponents identified as the federal judgment rate (28 U.S.C. § 1961) (~0.17%). The Plan disallowed untimely claims for distribution purposes via Plan §6.4.
- Creditor objected to (1) payment of postpetition interest at the federal judgment rate instead of the contract rate, and (2) the Plan’s bar on late-filed claims for distribution. Bankruptcy Court confirmed the Plan, awarded postpetition interest at the federal judgment rate, and overruled objections to §6.4 as premature.
- Creditor appealed. The district court reviewed de novo legal issues and for abuse of discretion where appropriate, and reversed in part, remanding to the Bankruptcy Court to determine the proper postpetition interest rate (considering contracts and equitable factors), to resolve timeliness of Creditor’s amended claim under §6.4, and to distribute any additional funds owed.
- The district court held that (a) §726(a)(5) authorizes postpetition interest when the estate is solvent but does not clearly mandate the federal judgment rate as the exclusive rate in surplus Chapter 11 cases, and (b) there is a presumption that contractual interest rates apply in solvent estates unless equitable considerations rebut that presumption.
Issues
| Issue | Plaintiff's Argument (Creditor) | Defendant's Argument (Plan Proponents / Trustee) | Held |
|---|---|---|---|
| Rate of postpetition interest in a solvent Chapter 11 | Creditor: solvent estate requires payment of postpetition interest at contractual (regular/default) rates | Proponents: §726(a)(5) means interest "at the legal rate" = federal judgment rate; plan lawfully pays that rate | District court: reversed Bankruptcy Court; §726(a)(5) permits postpetition interest but does not clearly fix the federal judgment rate as exclusive; contractual rate presumed unless equitable rebuttal; remand to set rate considering contracts/equity |
| Applicability of §1129(a)(7)/impairment when claims paid in full but with lower interest | Creditor: plan impairs rights by lowering contractual interest; best-interest/fair-and-equitable tests require contractual interest where solvent | Proponents: classes unimpaired because creditors receive 100% of allowed claims (Bankruptcy Rule issues); therefore §1129(a)(7)/1129(b) inapplicable | District court: impairment issue may be inferred and depends on what Code entitles creditor to; since contractual rate may be owed in surplus cases, impairment could exist; remanded for interest determination |
| Whether "interest at the legal rate" in §726(a)(5) equals federal postjudgment rate | Creditor: Code does not mandate federal judgment rate; contractual rate may govern | Proponents: Cardelucci and bankruptcy court: use federal judgment rate for administrative simplicity and uniformity | District court: disagreed that phrase unambiguously means federal judgment rate; historical pre-Code practice and Seventh Circuit precedent support enforcing contractual rates absent equitable reasons |
| Plan §6.4 disallowing late-filed claims for distribution | Creditor: §6.4 unlawfully impairs rights and may violate §1129 and §726 | Proponents: Creditor lacks standing because they timely amended and trustee did not object; §6.4 valid to bar untimely claims | District court: premature to decide §6.4; remanded for Bankruptcy Court to determine timeliness of Creditor’s amended claim and, if untimely, to consider Creditor’s equitable arguments to allow it anyway |
Key Cases Cited
- United States v. Dvorkin, 799 F.3d 867 (7th Cir. 2015) (criminal conviction of debtor-affiliated manager provided context for trustee appointment)
- In re PPI Enters. (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003) (holding a class receiving allowed amount in cash may be unimpaired when limitations derive from the Code rather than the plan)
- In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002) (interpreting §726(a)(5) to require federal judgment rate for postpetition interest in surplus cases)
- Chicago, Milwaukee, St. Paul & Pacific R.R. Co. v. United States, 791 F.2d 524 (7th Cir. 1986) (pre-Code-era decision enforcing contractual rights in solvent bankruptcies)
- In re Fesco Plastics Corp., 996 F.2d 152 (7th Cir. 1993) (recognizing exception allowing postpetition interest when debtor is solvent and locating that exception in §726(a)(5))
- Ron Pair Enters., Inc. v. United States, 489 U.S. 235 (1989) (interpretive approach: clear statutory text controls over pre-Code practice)
- In re Terry Ltd. P’ship, 27 F.3d 241 (7th Cir. 1994) (presumption in favor of enforcing contractual interest rates subject to equitable rebuttal)
- Debentureholders Protective Comm. v. Continental Inv. Corp., 679 F.2d 264 (1st Cir. 1982) (pre-Code discussion: enforce contractual postpetition interest in solvent estates)