DECISION AND ORDER
This cause comes before the Court upon the Trustee’s Objection to the Proof of Claim submitted by Mr. Baumeister, a creditor of the above captioned debtor. The relevant facts of this case, which the Parties do not dispute, are briefly as follows:
Mr. Baumeister and other entities under Mr. Baumeister’s control were the holders of various unsecured claims against the Debtor’s bankruptcy estate. Pursuant to theses claims, Mr. Baumeister filed a proof of claim in the amount of Thirteen Thousand Seven Hundred Ninety-eight and 40/100 dollars ($13,798.40), against which the Trustee did not interpose an objection. Thereafter, pursuant to an order entered by this Court, an immediate partial distribution from the Debtor’s bankruptcy estate was authorized, which subsequently resulted in Mr. Baumeister, and the Debt- or’s other unsecured creditors being paid in full on their proofs of claim. However, not long after this distribution was made, it became apparent that additional funds would likely become available to pay all of the Debtor’s unsecured creditors at least some postpetition interest in accordance with 11 U.S.C. § 726(a)(5). Accordingly, Mr. Baumeister filed an additional proof of claim (Claim No. 112) seeking postpetition interest on his original claim at an annual rate of twelve percent (12%), the amount of which represents the interest rate the Debtor originally agreed to pay Mr. Bau-meister. The Trustee, however, has objected to Mr. Baumeister’s entitlement to interest at the rate of twelve percent (12%) on the grounds that § 726(a)(5) does not permit a party to recover interest in accordance with their original contract or agreement. Instead, according to the Trustee, § 726(a)(5) limits a creditor’s recovery of postpetition to the federal judgment rate established under 28 U.S.C. § 1961. 1
LEGAL ANALYSIS
The sole issue raised in this proceeding is whether a creditor, pursuant to § 726(a)(5), is entitled to receive a distribution of postpetition interest at the rate provided for in the parties’ contractual agreement, or whether a creditor must accept the interest rate provided for in 28 U.S.C. § 1961. With regards to this issue, which is a matter of first impression for this Court, the Court necessarily begins its analysis by examining the language of the statute itself.
Director, OWCP v. Perini North River Associates,
Section 726(a)(5) of the Bankruptcy provides that:
(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection[.]
Section § 726(a)(5) thus sets forth the general rule that unsecured creditors are entitled to receive postpetition interest on their claim after all the classes of creditors listed in paragraphs one (1) through four (4) of § 726(a) have been paid in full on their allowed claims.
2
Such a situation, although rare, normally arises when a solvent debtor files for bankruptcy relief.
In re Kentucky Lumber Co.,
The lack of a precise definition for the term “legal rate” in § 726(a)(5) has lead, as might be expected, to divergent views as to how much interest a creditor can recover under § 726(a)(5). In particular, there presently exist what are essentially two different approaches as to how § 726(a)(5) should be applied with respect to the issue raised in this proceeding. First, there exists the state law approach, which holds, in conformance with the view espoused by Mr. Baumeister, that in implementing § 726(a)(5) Congress did not intend to change the pre-Code practice which allowed postpetition interest at either the parties’ contract rate, the statutory rate (if a specialized statute establishes a specialized rate of interest for a particular creditor), or, if there is no applicable statute and no rate was contracted for, at the state judgment rate.
In re Schoeneberg,
In enacting § 726(a)(5) Congress chose to use the definite article “the” in front of the term “legal rate” rather than an indefinite article such as “a” or “an,” which strongly suggests that Congress intended that a single rate of interest be used, as opposed to multiple rates of interest which would necessarily result if a contractual rate of interest was applied.
In re Melenyzer,
First, utilizing one unified rate for any distribution made under § 726(a)(5) provides a predictable and easily ascertainable rate to apply to a creditor’s claim, and thereby facilitates administration of the debtor’s bankruptcy estate. Second, by applying one rate to all creditors entitled to a distribution under § 726(a)(6), the prime bankruptcy goal of providing creditors with an equitable and ratable distribution of a debtor’s assets is furthered.
See Begier v. IRS,
The problem with the state law approach is that different creditors will have different rates of interest, depending upon their contracts or the applicable statutory rate. One contract might provide for interest at 18%, another at 9%. One state statute might set the rate at 10%, another applicable statute a rate of 6%.
Quite often, though, there are only enough assets to pay some interest to creditors, not enough to pay all creditors all the interest they claim at their contract or statutory rates. Using those rate [sic], some creditors would receive adisproportionately large percentage of the remaining assets compared to their underlying unsecured claims, to the prejudice not of the debtor, but of other, otherwise equally situated, unsecured creditors.
Consequently, based upon the foregoing analysis, it seems evident that a creditor’s right to receive postpetition interest at the contractual rate originally provided for in the parties’ agreement is not supported in law. Accordingly, this Court holds that in implementing § 726(a)(5), Congress, by using the term “legal rate,” intended that one uniform rate apply to any distribution made under this section. In adopting this view, the Court acknowledges, as Mr. Bau-meister has pointed out, that utilizing one uniform rate for purposes of a distribution under § 726(a)(5) does deprive a creditor of the benefit of his or her bargain. However, bankruptcy by its very nature deprives creditors of the benefit of their agreement with a debtor. Consequently, such a factor, standing alone, does not persuade this Court to adopt a different view. However, the Court, although not making a ruling on the matter, does observe that a different result may be mandated, under principles of equity, if the debtor, and not the debtor’s other creditors, were the entity receiving a distribution. (§ 726(a)(6) of the Bankruptcy Code provides that after postpetition interest has been paid to the unsecured creditors, any remaining funds are returned to the debtor.)
Before concluding, one final issue must be addressed; namely, what uniform interest rate should be applied when a distribution is made under § 726(a)(5)? In this respect, the Trustee has requested that the Court apply the interest rate for federal judgments as found in 28 U.S.C. § 1961.
In the case of
In re Dow Corning Corp.,
the bankruptcy court, in a very in-depth analysis, addressed this issue, and held, in conformity with the Trustee’s assertion, that the federal judgment rate, as defined in 28 U.S.C. § 1961, constituted the “legal rate” as used in § 726(a)(5).
In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Decision.
Accordingly, it is
ORDERED that the Trustee’s Objection to the Proof of Claim submitted by Leroy Baumeister (Claim No. 112) be, and is hereby, SUSTAINED, and that the claim of Leroy Baumeister be, and is hereby, DISALLOWED.
It is FURTHER ORDERED that if sufficient funds are available in this case to make a disbursement under § 726(a)(5), that Leroy Baumeister be permitted to receive such a disbursement, pro-rata with the other allowed claims, at the federal judgment rate established in 28 U.S.C. § 1961.