633 B.R. 1
Bankr. D. Mass.2021Background
- Debtor Joseph R. Mullins (Chapter 11) proposed a Second Amended Plan to pay unsecured creditors in full; impaired unsecured creditors (Corcoran and Jennison — “C&J”) objected to confirmation.
- The core dispute: what postpetition (pendency and post-effective date) interest rate must be paid to allowed general unsecured claims when the debtor is liquidation/balance-sheet solvent.
- C&J hold state-court judgments accruing post-judgment interest at Massachusetts’ 12% judgment rate; they seek that rate for pendency and post-confirmation periods.
- Mullins proposed to pay allowed claims in full but initially provided no pendency interest and offered post-effective date interest at a market/adjusted rate (3.25%); he argued the federal judgment rate (28 U.S.C. § 1961) should govern pendency interest and that §502(b)(2) limits the allowed claim amount.
- After a five-day trial the Bankruptcy Court found Mullins solvent and concluded the Plan, as filed, failed the §1129(a)(7) best-interests test and the §1129(b) fair-and-equitable requirement; the court held the solvent-debtor principles remain relevant and ordered that the Plan be amended to pay C&J postpetition interest at Massachusetts’ judgment rate (12%).
Issues
| Issue | Mullins (Debtor) | C&J (Objecting Creditors) | Held |
|---|---|---|---|
| Whether the pre-Code "solvent-debtor exception" survives the Bankruptcy Code and can influence §1129(b) cramdown fairness | Exception abrogated or limited by Code; inquiry should focus on statutory text (§502(b), §1129(b), §726) and federal judgment rate for pendency interest | Exception survives; where debtor is solvent, creditors should receive postpetition interest at applicable non-bankruptcy (contract or state statutory) rate | Court: solvent-debtor principles remain relevant and §1129(b)’s "fair and equitable" language permits courts to consider equitable principles including solvent-debtor results |
| Proper rate for "pendency" (postpetition pre-confirmation) interest under §1129(a)(7)/§726(a)(5) (i.e., "legal rate") | Federal judgment rate (28 U.S.C. §1961) should apply uniformly; §502(b)(2) fixes allowed claim amount | "Legal rate" means applicable state judgment/contract rate for the specific claim (here MA 12%) | Court: recognized split in authority; many courts treat "legal rate" as federal rate, but it was unnecessary to adopt a universal rule here — nonetheless, on these facts the court required pendency interest at the Massachusetts judgment rate |
| Whether the Plan satisfied the §1129(a)(7) best-interests test and §1129(b) fair-and-equitable standard without paying state judgment interest | Plan provides present-value payments equal to allowed claims (per §502(b)); paying federal-rate/post-effective market interest satisfies absolute priority and best-interests | Absent full state- law/statutory/contract interest, plan is not fair and equitable because debtor is solvent and creditors should receive full postpetition statutory/contract interest | Court: Plan, as filed, failed §1129(a)(7) and §1129(b); Debtor must amend Plan to pay C&J pendency and post-effective date interest at MA 12% to obtain confirmation |
| Whether §502(b)(2)’s bar on unmatured interest forecloses postpetition interest recovery in solvent cases | §502(b)(2) limits "allowed" claim amount (exclude unmatured interest); once allowed amount set, compliance with §1129(b) requires only present-value under §1129(b)(2)(B) | §502(b)(2) does not eliminate solvent-debtor equitable requirement to pay postpetition interest where estate is solvent | Court: §502(b)(2) disallows unmatured interest for purposes of "allowed amount," but that does not foreclose courts from requiring postpetition interest under §1129(b) equitable analysis in solvent-debtor situations |
Key Cases Cited
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012) (confirmation requires satisfaction of §1129(a) and §1129(b) when classes reject)
- Vanston Bondholders Protective Committee v. Green, 329 U.S. 156 (1946) (courts balance equities in awarding interest; delay by court justifies suspension of interest absent equities favoring payment)
- American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261 (1914) (early Supreme Court recognition that creditors may receive post-adjudication interest in solvent cases)
- Debentureholders Protective Comm. of Cont’l Inv. Corp. v. Cont’l Inv. Corp., 679 F.2d 264 (1st Cir. 1982) (First Circuit applied solvent-debtor exception and required enforcement of contractual interest in solvent reorganizations)
- Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002) (held §726(a)(5) "legal rate" equals federal judgment rate under §1961 for pendency interest)
- Official Committee of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668 (6th Cir. 2006) (discussed solvent-debtor treatment and legislative history of §1129)
- United States v. Ron Pair Enterprises, Inc., cited via Czyzewski, 137 S. Ct. 973 (2017) (Supreme Court instruction that courts must follow Code’s text and cannot alter statutory balance via equitable powers)
- United States v. Robinson (In re D.C. Sullivan & Co.), 929 F.2d 1 (1st Cir. 1991) (First Circuit discussed balancing equities and postpetition interest in solvent cases)
- In re Chi., Milw., St. Paul & Pac. R.R. Co., 791 F.2d 524 (7th Cir. 1986) (solvent debtor cases commonly enforce prepetition contractual rights; equities may nevertheless affect rate)