540 B.R. 109
Bankr. D. Del.2015Background
- UMB Bank, N.A. filed Proof of Claim No. 6347 on behalf of holders of 11.25%/12.25% PIK Notes issued by EFIH debtors, seeking principal plus interest, fees, expenses and post-petition amounts.
- Debtors objected (Partial Objection) to claim elements seeking post-petition interest and a make-whole payment; this opinion resolves only the post-petition interest dispute.
- Section 502(b)(2) excludes "unmatured" (post-petition) interest from the allowed amount of unsecured claims; UMB contends post-petition interest at the contract rate should be paid.
- Court explains difference between (a) allowance of a claim (amount fixed under §502) and (b) what must be paid under a confirmed plan (confirmation rules under §1129 may require additional consideration).
- Court concludes allowed claim is limited to principal and pre-petition interest/fees as of the petition date; post-petition interest is not part of the allowed claim but may be paid under plan confirmation doctrines or equitable discretion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post-petition interest is includable in the allowed unsecured claim | UMB: contract and indenture entitle PIK Noteholders to post-petition interest as part of claim | Debtors: §502(b)(2) bars unmatured (post-petition) interest from allowed claim | Court: Post-petition interest is excluded from the allowed claim under §502(b)(2) |
| If post-petition interest must be paid under confirmation, what is the applicable "legal rate" | UMB: contract rate should govern (or courts may impose equitable relief to award contract rate) | Debtors: if any legal-rate interest applies under §726(a)(5)/§1129(a)(7), it is the Federal judgment rate | Court: For purposes of §726(a)(5) and §1129(a)(7), the Federal judgment rate is the legal rate; §726/§1129 do not change the allowed claim amount |
| Whether §1129(b)(2) requires unsecured creditors to receive post-petition interest at contract rate to cram down a plan when junior classes get distributions | UMB: §1129(b)(2) ‘‘includes’’ additional requirements (equitable protections) so contract-rate post-petition interest may be required, especially in solvent cases | Debtors: §1129(b)(2)(B) by its plain terms does not mandate contract-rate post-petition interest for unsecured creditors | Court: §1129(b)(2) does not categorically require contract-rate post-petition interest; court has equitable discretion to award post-petition interest on a case-by-case evidentiary basis (rate may be contract rate or another rate) |
| Whether a plan that pays allowed claim without contract-rate post-petition interest can render the unsecured class unimpaired | UMB: excluding contract-rate post-petition interest alters contractual rights and causes impairment | Debtors: exclusion follows §502(b)(2) and is a statutory limitation, not plan alteration | Court: A plan need not pay contract-rate (or any) post-petition interest to render the class unimpaired provided the plan leaves the creditor’s entitlements as defined by the Bankruptcy Code; however, the plan must permit the court to award post-petition interest under equitable principles if appropriate (so unimpaired creditors must be able to seek interest by court discretion) |
Key Cases Cited
- In re W.R. Grace & Co., 475 B.R. 34 (D. Del. 2012) (§502(b)(2) prohibits allowance of unmatured post-petition interest as part of an unsecured claim)
- In re Washington Mut., Inc., 461 B.R. 200 (Bankr. D. Del. 2011) (federal judgment rate is appropriate "legal rate" under §726(a)(5))
- In re Dow Corning Corp., 237 B.R. 380 (Bankr. E.D. Mich. 1999) (discussion interpreting §502(b)(2), §726(a)(5) and court discretion over post-petition interest)
- Dow Corning Corp. v. Federal Ins. Co., 456 F.3d 668 (6th Cir. 2006) (court considered equitable factors and noted a presumption in solvent cases favoring contractual rate but remanded for evidentiary development)
- PPI Enterprises (U.S.), Inc. v. Halberstam (In re PPI Enterprises), 324 F.3d 197 (3d Cir. 2003) (statutory impairment vs. plan impairment; rights measured under bankruptcy law)
- Consolidated Rock Prods. Co. v. Du Bois, 312 U.S. 510 (1941) (absolute priority principles in reorganization jurisprudence)
- Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (1946) (equitable balancing is central to allowance of interest in reorganizations)