IN RE: JOSEPH R. MULLINS
Case No. 19-11574-CJP
UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS
July 13, 2021
Chapter 11
11 U.S.C. § 1129 TO OBTAIN CONFIRMATION OF SECOND AMENDED PLAN OF REORGANIZATION, AS MODIFIED, OVER THE OBJECTION OF AN IMPAIRED CLASS OF GENERAL UNSECURED CREDITORS
Before the Court is the Second Amended Plan of Reorganization of Joseph R. Mullins, as Modified (Dkt. No. 333) (the “Plan“) proposed by Joseph R. Mullins (“Mr. Mullins” or the “Debtor“) and the objection to confirmation of the Plan (Dkt. No. 478) (“Objection“) filed by Michael Corcoran, as personal representative of the estate of the late Joseph E. Corcoran (“Mr. Corcoran“), and Gary A. Jennison (“Mr. Jennison,” together with Mr. Corcoran, “C&J“). After a five-day evidentiary hearing (the “Trial“) and consideration of the Plan, the Objection, the Debtor‘s memorandum of law in support of the Plan (Dkt. No. 479) (the “Memorandum of Law“), C&J‘s reply to the Memorandum of Law (Dkt. No. 506) (the “Reply“), the Joint Prehearing Report (Dkt. No. 483) containing a list of agreed facts (the “Agreed Facts“), the Debtor‘s Proposed Findings of Fact and Conclusions of Law (Dkt. No. 544) (the “Debtor‘s Post-Trial Memorandum“), C&J Creditors’ Post-Trial Memorandum and Proposed Findings of Fact and Rulings of Law In Support of Entry of an Order Denying Plan Confirmation for Failure to Satisfy
I. JURISDICTION
This Court has jurisdiction over confirmation of a Chapter 11 plan, which arises under the Bankruptcy Code, pursuant to
II. STANDARD AND BURDEN
Section 1129 of the Bankruptcy Code sets forth the requirements to confirm a Chapter 11 plan. Where an impaired class has voted to reject a plan, as is the case here, a plan may be confirmed only if it (a) satisfies every applicable provision of
III. DISCUSSION
In a separate decision, I have found that the Debtor is “liquidation solvent” for purposes of the “best interests test” under
As will be discussed at length below, the issues to be decided in this case are not without controversy and raise the question of whether, and to what extent, the long-established “solvent debtor exception” to the general prohibition of payment of interest on unsecured claims survived the Code‘s enactment. The parties have
A. PRE-CODE APPLICATION OF THE “SOLVENT DEBTOR EXCEPTION” AND THE POSITIONS OF THE PARTIES REGARDING ITS APPLICABILITY AFTER ENACTMENT OF THE CODE
i. Historical Underpinnings of the “Solvent Debtor Exception” to the General Prohibition of Postpetition Interest
“Courts have heard disputes between solvent debtors and their creditors over the right to postpetition interest for nearly three hundred years [and o]ver the centuries, courts developed a solvent-debtor exception to the general bankruptcy rule that interest stops accruing on the petition date.” In re Ultra Petroleum Corp., 624 B.R. 178, 195-96 (Bankr. S.D. Tex. 2020). These disputes have continued since enactment of the Code, including as to whether the solvent debtor exception survived in any form beyond what may have been expressly incorporated into various provisions of the Code. While the starting point for statutory interpretation is certainly the text of the statute itself, see United States v. Charles George Trucking Co., 823 F.2d 685, 688 (1st Cir. 1987), to fully appreciate the issues presented here, where the statute‘s meaning is not plain, it is necessary to consider the history of the solvent debtor exception in bankruptcy jurisprudence as context for the language of the statute and the intent of Congress.
Prior to enactment of the Code, the long-established general rule was that interest on claims stopped accruing upon commencement of bankruptcy proceedings. See, e.g., Nicholas v. United States, 384 U.S. 678, 682 (1966) (explaining that “[i]t is a well-settled principle of American bankruptcy law that in cases of ordinary bankruptcy, the accumulation of interest on claims against a bankruptcy estate is suspended as of the date the petition in bankruptcy is
Debts of the bankrupt may be proved and allowed against his estate which are founded upon (1) a fixed liability as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition by or against him, whether then payable or not, with any interest thereon which would have been recoverable at that date . . . (5) provable debts reduced to judgments after the filing of the petition . . . less costs incurred and interest accrued after the filing of the petition ....
Bankruptcy Act of 1938, ch. 575, § 63, 52 Stat. 840 (repealed) (emphasis added).
The principle on which the rule against postpetition interest rests is the protection of the interests of other creditors. See, e.g., Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 166, (1946) (recognizing general principle that where the power of the debtor to pay its obligations is suspended by law, interest should not be paid because the delay is occasioned by the court‘s desire to preserve and protect the estate for the benefit of all interests involved). As the United States Court of Appeals for the First Circuit has noted,
Two reasons are given for the rule [against postpetition interest]: (1) interest payments are penalties or damages assessed against the debtor for his detention of the creditor‘s money . . . and therefore it would be unjust to allow the creditor to recover such penalties or damages from other creditors who were not to blame for the detention; and (2) the bankruptcy court itself, not the debtor, detained the money after the petition was filed.
Debentureholders Protective Comm. of Cont‘l Inv. Corp. v. Cont‘l Inv. Corp., 679 F.2d 264, 269 (1st Cir. 1982) (citations omitted) (applying pre-Code law).
Notwithstanding the general prohibition on the accrual of interest on unsecured claims, where the debtor possessed sufficient assets to pay all claims in full with interest, such that the payment of interest to one creditor did not affect the recovery of other creditors, principles of fairness and equity dictated that creditors be paid all the interest to which they were otherwise entitled—often at a rate determined by the terms of their contracts with the debtor. See Am. Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261, 266-67 (1914) (concluding that “in the rare instances where the assets ultimately proved sufficient for the purpose, that creditors were entitled to interest accruing after adjudication“); Ruskin v. Griffiths, 269 F.2d 827, 832 (2d Cir. 1959) (“[W]here there is no showing that the creditor entitled to the increased interest caused any unjust delay in the proceedings, it seems to us the opposite of equity to allow the debtor to escape the expressly-bargained-for”
By way of example, in a railway receivership case, the Supreme Court applied the solvent debtor exception and determined that “[e]ven in bankruptcy, and in the face of the argument that the debtor‘s liability on the debt and its incidents terminated at the date of adjudication, and as a fixed liability was transferred to the fund, it has been held, in the rare instances where the assets ultimately proved sufficient for the purpose, that creditors were entitled to interest accruing after adjudication.” Am. Iron & Steel, 233 U.S. at 266-67. In American Iron & Steel, the Supreme Court cited favorably to decision of the United States Court of Appeals for the Fifth Circuit in Johnson, which had held that the disallowance of postpetition interest provided for in Sections 63 and 65e of the Bankruptcy Act of 1898 did not apply to solvent cases, because such prohibition serves only to effect an equitable distribution among creditors in an insolvent estate. See id. at 267; see also Johnson, 190 F. at 461-62. The Johnson court noted that the rule in England dating back to the 18th century was that creditors are entitled to interest on their claims before the bankrupt receives any surplus, and further explained:
In 1743, long before the passage of our first bankruptcy act, Lord Chancellor Hardwicke, in Bromley v. Goodere, 1 Atkyns, 75, considered and decided, under the English statutes, the exact question involved here. It was a contest between the creditors and the heirs of the bankrupt over a surplus. The debts had been paid in full, principal and interest; the interest being computed, as the English statute required, up to the date of the commission. The creditors claimed the subsequently accruing interest out of the surplus, and the bankrupt‘s heirs claimed the entire surplus, pleading the bankrupt‘s discharge. The Lord Chancellor held that the creditors were entitled to have the subsequently accruing interest paid out of the surplus. This rule was approved in later English cases.
Blackstone states the usual English rule to be that all interest on debts shall cease from the time of issuing the commission, yet, in case of a surplus left after payment of every debt, such interest shall again revive. 2 Blackstone‘s Commentary, 488.
190 F. at 465; see also, generally, In re Ultra Petroleum Corp., 624 B.R. at 196 (discussing in detail the historical roots of the general rule against allowance of postpetition interest and the solvency exception recognized under 18th century English jurisprudence). Other federal circuit courts also adopted the reasoning of Johnson, requiring payment of postpetition interest in solvent debtor cases. See, e.g., Littleton v. Kincaid, 179 F.2d 848, 852 (4th Cir. 1950) (citing Am. Iron & Steel and Johnson, and concluding that the “inequality” resulting from “forced distribution in receivership [of] debts carrying different rates of interest . . . disappears when there is a surplus and then interest is allowed even while the funds are in custodia legis“); Ruskins, 269 F.2d at 832.
The First Circuit, applying pre-Code law, expressly adopted the solvent debtor exception in Debentureholders, 679 F.2d at 269. Reversing a lower court‘s approval of a plan of reorganization for a solvent debtor that did not provide for postpetition interest to the holders of convertible debentures, the First Circuit held that the plan was not fair and equitable because it failed to provide for the entire amount of postpetition interest to which claim holders were entitled under contracts valid under state law and explained:
Where the debtor is solvent, the bankruptcy rule is that where there is a contractual provision, valid under state law, providing for interest on unpaid [installments] of interest, the bankruptcy court will enforce the contractual provision with respect to both instalments due before and [installments] due after the petition was filed. This rule is fair and equitable inasmuch as the solvent debtor‘s estate will have been enriched by the bankruptcy trustee‘s use of money which the debtor had promised to pay promptly to the creditor, and, correspondingly, the creditor will have been deprived of the opportunity to use the money to his advantage. Moreover, the rule does not in any way affect any creditor other than the claimant of interest on interest. Finally, the rule is in harmony with the settled English and American law that when an alleged bankrupt is proved solvent, the creditors are entitled to receive post-petition interest before any surplus reverts to the debtor.
Id. at 269-70 (citations omitted). The First Circuit went on to state that “[e]ven if it is not the law that in the case of a solvent debtor any compulsory exchange of a creditor‘s contractual right to cash for a substitute which he did not want and which benefits only stockholders would make a reorganization plan unfair and inequitable, . . . in the case at bar [the plan is unfair and inequitable because it] does not provide in exchange for the creditor‘s contractual right just compensation.” Id. at 270 (citations omitted).
In the pre-Code solvent debtor cases, courts generally did not “weigh the equities” to determine whether to award postpetition interest or the amount to be awarded. Rather, the courts often focused on the question of solvency and, to the extent enforceable under applicable non-bankruptcy law, applied the interest rate under applicable prepetition contracts. The Seventh Circuit Court of Appeals summed up the role of courts in solvent debtor cases as follows:
The fact that a proceeding is equitable does not give the judge a free-floating discretion to redistribute rights in accordance with [the judge‘s] personal views of justice and fairness, however enlightened those views may be. The function of equitable considerations in a bankruptcy proceeding is to guide the division of a pie that is too small to allow each creditor to get the slice for which he originally contracted. Hence if the bankrupt is solvent the task of the bankruptcy court is simply to enforce creditors’ rights according to the tenor of the contracts that created those rights.
. . .
We have not forgotten the venerable principle that a bankruptcy court can refuse to award interest that accrues on a creditor‘s claim after the petition for
bankruptcy is filed. But it is designed for cases where there is not enough money to pay all the creditors-so that there is a question whether one creditor should get interest while another doesn‘t even recover principal-and not for cases like this, where the debtor is solvent.
In re Chi., Milw., St. Paul & Pac. R.R. Co., 791 F.2d 524, 528-29 (7th Cir. 1986) (citations omitted).
However, some cases interpreting pre-Code law did discuss the balancing of equities in determining entitlement to interest on claims in solvent debtor cases. For example, in United States v. Robinson (In re D.C. Sullivan & Co., Inc.), citing Debentureholders and numerous other decisions, the First Circuit observed that bankruptcy courts balance equities in awarding interest in solvent debtor cases:
The [Supreme] Court has recently reaffirmed the balancing of equities approach: “We have noted that ‘the touchstone of each decision on allowance of interest in bankruptcy ... has been a balance of equities between creditor and creditor or between creditors and the debtor.’ Vanston Bondholders Protective Committee v. Green, 329 U.S. at 165, 67 S.[]Ct. at 241.” United States v. Ron Pair Enterprises, Inc., 489 U.S. [235, 248 (1989)].
929 F.2d 1, 6 (1st Cir. 1991) (focusing on the balance of equities among creditors in a solvent debtor case, where no creditor objected to their treatment or to the payment of interest to the IRS, and determining the IRS was entitled to the interest it would otherwise be entitled to under non-bankruptcy statutory law because there were “no equities to balance here“). Looking to interpretation of the “fair and equitable” standard as applied by other courts in railroad and other cases, the First Circuit noted that:
The Seventh Circuit grappled with the same issue that confronts us in a railroad reorganization case, Matter of Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 830 F.2d 758 (7th Cir. 1987). The railroad turned out to be solvent. The government took the position that it was entitled to interest at the [higher] rates set in
26 U.S.C. §§ 6621 and6622 , and not at the rate of 7.5/8.5%, which was the interest rate determined by the district court to be fair and equitable under11 U.S.C. § 205(e) of the Bankruptcy Act. In affirming the rate of interest set by the district court, the Seventh Circuit followed the balancing of the equities teaching of the Court in Vanston Bondholders Protective Committee v. Green, 329 U.S. at 165, 67 S.[]Ct. at 241. 830 F.2d at 765-66.
In re D.C. Sullivan & Co., 929 F.2d at 6.
ii. Positions of the Parties
The parties disagree whether the solvent debtor exception survived the enactment of the Code, except as may be expressly incorporated in certain provisions of the Code. Since I have determined that the Debtor is liquidation solvent, the creditors in Class 6 are entitled to pendency interest at “the legal rate,” a term which is not defined in the Code. The Debtor argues that the “best interests” test under
C&J have also objected to confirmation of the Plan on the basis that the plan is not “fair and equitable” to the rejecting general unsecured creditors in Class 6 as required by
The Debtor argues that the statute is clear on its face and that the absolute priority rule in
For the Debtor, the inquiry should end there. The Debtor asserts that pendency interest should be calculated at the federal judgment rate and paid only if required to satisfy the “best interests test” of
Taking the opposite view, C&J argue that the statute is not clear and that
As such, the parties disagree regarding whether the “fair and equitable” requirement of
B. DOES A “SOLVENT DEBTOR EXCEPTION” APPLY IN DETERMINING WHETHER A PLAN IS “FAIR AND EQUITABLE” UNDER § 1129(b) ?
I find sufficient precedent, historical context, legislative history, and foundation in the Code to conclude that Congress intended bankruptcy courts to engage in a consideration of the equities to determine the appropriate amount of interest to be paid on general unsecured claims to afford fair and equitable treatment where a plan proposed by a solvent debtor has been rejected by that class.8 Congress‘s use of the phrase “fair and equitable” in
Congress chose [the words “fair and equitable“] with care. They originated in judicial decisions beginning at the turn of the century, and have appeared, in one act or another, in statutory reorganization law for over 70 years. They thus reflect and stand proxy for almost a century of judicial decision-making, and
over half a century of legislative guidance.
7 Collier on Bankruptcy ¶ 1129.03[4] (Richard Levin & Henry J. Sommer eds., 16th ed.); see also Bank of America Nat. Tr. and Sav. Ass‘n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 444 (1999) (describing historical understanding of pre-Code requirement that a plan of reorganization be “fair and equitable” to a dissenting class of impaired creditors in the context of discussing the “new value corollary” to the absolute priority rule).
Use of the term “includes” in the opening clause of
There does not appear to be anything in the legislative history of
Further, other legislative history can be read to indicate that Congress understood the solvent debtor exception survived enactment of the Code. In 1994, acting directly in response to the holding in In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), Congress repealed subsection (3) from
In a recent Bankruptcy Court decision in In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), unsecured creditors were denied the right to receive postpetition interest on their allowed claims even though the debtor was liquidation and reorganization solvent. The New Valley decision applied section 1124(3) of the Bankruptcy Code literally by asserting, in a decision granting a declaratory judgment, that a class that is paid the allowed amount of its claims in cash on the effective date of a plan is unimpaired under section 1124(3), therefore is not entitled to vote, and is not entitled to receive postpetition interest. In order to preclude this unfair result in the future, the Committee finds it appropriate to delete section 1124(3) from the Bankruptcy Code.
As a result of this change, if a plan proposed to pay a class of claims in cash in the full allowed amount of the claims, the class would be impaired, entitling creditors to vote for or against the plan of reorganization. If creditors vote for the plan of reorganization, it can be confirmed over the vote of dissenting class of creditors only if it complies with the “fair and equitable” test under section 1129(b)(2) of the Bankruptcy Code and it can be confirmed over the vote of dissenting individual creditors only if it complies with the “best interests of creditors” test under section 1129(a)(7) of the Bankruptcy Code.
The words “fair and equitable” are terms of art that have a wellestablished meaning under the case law of the Bankruptcy Act as well as under the
Bankruptcy Code. Specifically, courts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors’ claims must be paid in full, including postpetition interest, before equity holders may participate in any recovery.
H.R. Rep. No. 103-835 at 47-48, as reprinted in 1994 U.S.C.C.A.N. 3340, 3356-57 (emphasis added); see also In re Energy Future Holdings Corp., 540 B.R. at 120 (quoting H.R. Rep. No. 103 835, 47 48, as reprinted in 1994 U.S.C.C.A.N. 3340). The court in New Valley had held that the solvent debtor exception was limited by
The absolute priority rule imposes somewhat different requirements when a solvent debtor seeks confirmation of its plan. The legislative history of the Bankruptcy Code makes clear that equitable considerations operate differently when the debtor is solvent. “[C]ourts have held that where an estate is solvent, in order for a plan to be fair and equitable, unsecured and undersecured creditors’ claims must be paid in full, including post-petition interest, before equity holders may participate in any recovery.”
Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), (”Dow III“), 456 F.3d 668, 678 (6th Cir. 2006) (quoting 140 Cong. Rec. H10, 752-01, H10, 768 (1994) (statement of Rep. Brooks, Chairman of the Committee on the Judiciary and co-author of the Bankruptcy Reform Act of 1994)). Divining the intent of Congress in relation to specific provisions of a statute can be an imprecise and often unsatisfying exercise given the nature of the legislative process and the diverse goals of the parties involved in the process.10 Even with those
limitations, I
In Gencarelli v. UPS Capital Business Credit, 501 F.3d 1, 7 (1st Cir. 2007), the First Circuit discussed the solvent-debtor exception in a case applying
Let us be perfectly clear. This is a solvent debtor case and, as such, the equities strongly favor holding the debtor to his contractual obligations as long as those obligations are legally enforceable under applicable non-bankruptcy law. When the debtor is solvent, “the bankruptcy rule is that where there is a contractual provision valid under state law, . . . the bankruptcy court will enforce the contractual provision.” Debentureholders Protective Comm. Of Cont‘l Inv. Corp. v. Cont‘l Inv. Corp., 679 F.2d 264, 269 (1st Cir. 1982); see Dow Corning, 456 F.3d at 679 (noting that in solvent debtor cases, “courts have generally confined themselves to determining and enforcing whatever pre-petition rights a given creditor has against the debtor“); In re Chi., Milw., St. Paul & Pac. R.R. Co., 791 F.2d 524, 528 (7th Cir. 1986) (observing that “if the bankruptcy is solvent the task for the bankruptcy court is simply to enforce creditors’ rights according to the tenor of the contracts that created those rights“).
Id. The First Circuit concluded that, notwithstanding the debtor‘s arguments and the lower court‘s determination that the prepayment penalty was not “reasonable” and therefore not enforceable under
Interpreting
C. “GOOD NEWS” FOR THE SOLVENT DEBTOR OR IMPAIRED CREDITORS? ESTABLISHING AN APPROPRIATE INTEREST RATE TO BE PAID FOR THE PLAN TO BE “FAIR AND EQUITABLE” IN THIS CASE
Mr. Mullins‘s most significant assets primarily consist of fractional interests in entities that own direct and indirect interests in mature, multi-unit affordable housing developments, which produce cash distributions from rental income and refinancing proceeds. See Trial Tr. (Day 1 (Lessin)), 10:2-13, 114:6-15; Trial Tr. (Day 3 (Darr)), 48:11-24; Schedule B at 5-19, Tr. Ex. 1. Mr. Mullins began developing certain of these properties with C&J in the 1970‘s as Corcoran, Mullins, Jennison Inc. (“CMJ Inc.“). See Trial Tr. (Day 3 (Mullins)), 134:16-25. In March 1987, Messrs. Corcoran, Mullins, and Jennison entered into an agreement (the “1987 Agreement“) establishing the terms of their continued relationship in CMJ Inc. and the related operation of the business interests in which they hold percentage ownership interests, as the parties developed other projects independently of each other. 1987 Agreement, Tr. Ex. 34. Since 1987, there have been a number of disputes between the parties related to the 1987 Agreement. See Trial Tr. (Day 3 (Mullins)), 135:20-23.
The C&J claims arise out of amended judgments entered in their favor by the Suffolk Superior Court in Civil Action No. 1484-CV-02302-KWS on counterclaims asserted for breach of contract and fiduciary
During the pendency of his case, three limited partnerships in which the Debtor possesses substantial interests refinanced or obtained lender commitments to refinance affordable housing properties owned by those limited partnerships because of sizeable appreciation in value resulting from increased rents. See Trial Tr. (Day 3 (Mullins)), 162:8-19, 163:10-164:7, 164:24-165:8, 186:18-187:3. These refinancing events have resulted or will result in the distribution of millions of dollars to the Debtor. See id. at 162:14-163:17, 186:18-187:3; see also Agreed Facts ¶¶ 14-15. The Debtor‘s improved cash position has permitted him to propose a Plan that will permit payment in full of the Debtor‘s unsecured creditors in Class 6 in as little as 90 days after the effective date of the Plan, depending on the amount of interest that may be due to those creditors. The Debtor would not have to liquidate any assets, other than a vacant lot in Milton, Massachusetts, to make the payments contemplated by the Plan and would retain more than $50 million in assets. See Trial Tr. (Day 3 (Mullins)), 185:20-186:11. When asked on cross examination about these fortunate postpetition developments, the Debtor appropriately remarked, “That‘s good news.” Trial Tr. (Day 3 (Mullins)), 163:2, 7, 15-17.
The primary dispute between the Debtor and C&J involves the question of whether the Debtor‘s significant solvency and the “good news” of the enhancement
According to the Debtor‘s projections supporting confirmation of his Plan, Exhibit G to the Darr Report, in the first quarter of 2021, after the Debtor will have repaid one hundred percent of the allowed amount of the Class 6 unsecured claims, the Debtor will have $3,436,787 in cash.16 See Darr Report 201. According to those projections, the Debtor‘s only remaining liability, once he has paid back his Class 6 unsecured creditors,17 would be the liability to his secured creditors in the amount of $25,522,316.18 See id.; see also Trial Tr. (Day 2 (Lessin)), 46:6-17. By the end of 2022, the Debtor will have in excess of $6.5 million in cash and will have paid $1.9 million in 2021 and another $2.1 million in 2022 to his secured creditors. Darr Report 200. By the end of 2024, the Debtor will have in excess of $12.25 million in cash and will have paid back the secured creditors more than $8.25 million since the first quarter of 2021. Id. It seems clear that if the Debtor were required to pay interest to the Class 6 unsecured creditors at the 12% state judgment rate under his plan, the Debtor would have enough cash to do that and comfortably meet his ongoing expenses. Trial Tr. (Day 3 (Darr)), 77:14-78:21, 83:24-84:5. The Parties have stipulated that from the petition date through February 1, 2021, state law interest on the Class 6 unsecured claims is $3,961,396.94, with a per diem amount of $5,813.82 thereafter. See Stipulation by Debtor Joseph R. Mullins and Joseph Corcoran and Gary Jennison with Respect to the Calculation of Potential Pendency Interest, Dkt. No. 540.
C&J have argued that, if I determine that the solvent debtor exception is appropriately considered in determining whether a plan is fair and equitable under
Few pre-Code or post-Code cases discuss the authority of a court to determine an appropriate rate of interest in applying the “fair and equitable” standard based on the facts and circumstances of the case. See, e.g., In re Chi., Milw., St. Paul & Pac. R.R. Co., 830 F.2d 758, 764 (7th Cir. 1987) (in railroad reorganization case, affirming decision that the pre-Code “fair and equitable standard” gave the district court discretion to confirm a plan of reorganization that paid the IRS less than its statutory rate of interest and holding that the fact that the railroad proved to be solvent “was not dispositive of whether the government should receive a statutory rate of interest on its tax claim; [i]t is only a prerequisite to the award of any interest at all“); Fed. Sav. & Loan Ins. Corp. v. D & F Constr. Inc. (In re D & F Constr. Inc.), 865 F.2d 673, 675 (5th Cir. 1989) (holding that the “fair and equitable” standard requires “consider[ation of] the entire plan in the context of the rights of the creditors under state law and the particular facts and circumstances“); Debentureholders, 679 F.2d at 270 (holding in a solvent debtor case that the plan was “unfair and inequitable because [it] . . . does not provide in exchange for the creditor‘s contractual right [to compound interest] just compensation“).
It is the Debtor‘s burden to demonstrate that a plan is “fair and equitable” to holders of general unsecured Class 6 claims. See, e.g., In re Salem Suede, Inc., 219 B.R. 922, 932 (Bankr. D. Mass. 1998) (holding that the plan proponent in a non-consensual plan bears the burden of proof on confirmation requirements under
In this case, the claims of C&J are based on a final state court judgment as to which state law provides for post-judgment interest at a rate of 12% per annum. The rationale supporting application of contract rates, presumably negotiated prepetition at arm‘s length by a debtor, in solvent debtor cases does not fit as neatly with judgment interest provided by state statute. Contract interest, including default rates, is negotiated and is intended to compensate a creditor for the time value of funds that are owed by a debtor. In the case of a default rate of interest, these contractual terms provide a disincentive to default, but also compensate a creditor for additional risk and administrative burden. In this case, the Massachusetts judgment rate is substantially greater than what the evidence shows to be a market rate for the post-effective date period, assuming a payoff from available cash within 90 days, and may be higher than negotiated default rates in commercial transactions. The record in this case contains no evidence regarding a rate that would reflect an assessment of risk during the pendency period.
In assessing whether the Debtor has met his burden, I have considered evidence in the record establishing the Debtor‘s projected financial position on the effective date of the proposed plan, both on a balance sheet basis and considering available cash. The Debtor will emerge with very substantial assets and available cash. The Debtor‘s post-effective date projected cash flow is sufficient to maintain his business interests and lifestyle, even if C&J were paid in full with interest at the Massachusetts judgment rate. I have also considered (i) the conduct of the parties in relation to this case, which, while contentious, was a neutral factor in this determination and did not otherwise point to any bad faith concerns in proposal of the Plan, (ii) the damages awarded by the state court arising from the Debtor‘s breach of fiduciary duties, (iii) the delay in paying the C&J claim that allowed the Debtor to avoid liquidation of assets in order to be in a position to propose a plan that will pay his creditors in an organized manner, (iv) the source of additional cash assets from refinancing projects in which the Debtor participated as an investor, rather than being generated by actions of the Debtor; (v) the demonstrated inclination of the Debtor‘s children and related entities to assist the Debtor in avoiding liquidation of assets; (vi) the benefits of a successful reorganization to the Debtor and his children; (vii) the ability of the Debtor to operate his business and continue to enjoy the same standard of living with no material impairment or apparent risk of further reorganization if he paid interest to C&J at the Massachusetts judgment rate; and (viii) my findings that Class 6 creditors would be paid in full with interest in a hypothetical liquidation. After considering these factors, based on the record in this case, I find that the Plan does not meet the fair and equitable standard and, to satisfy this standard, the Debtor must propose an amended plan of reorganization that pays the C&J claims in full with interest
D. DID THE DEBTOR SATISFY THE “BEST INTERESTS TEST” OF § 1129(a)(7)(A)(ii)?
I have determined that the Debtor is solvent on a hypothetical liquidation basis as reflected in the Solvency Decision, finding that the proceeds of a hypothetical liquidation yield sufficient proceeds to pay holders of Class 6 claims in full. As such, the Plan may not be confirmed in its present form because it does not provide for the payment of any pendency interest on allowed general unsecured Class 6 claims.20 The Debtor has stated on the record that he would modify the Plan to
Courts are divided as to the meaning of “the legal rate.” The majority of courts that have considered the meaning of “the legal rate” as used in
In Dow I, the court concluded that the phrase “at the legal rate” in
The Ninth Circuit Court of Appeals also determined that the principles of statutory interpretation supported the conclusion that Congress intended the phrase “interest at the legal rate” to mean the federal judgment rate. See In re Cardelucci, 285 F.3d at 1234-35. The Ninth Circuit also reasoned that applying the federal judgment rate promotes bankruptcy goals of “fairness among creditors and administrative efficiency.” Id. at 1236.
In contrast, other courts have determined that “the legal rate” can mean the rate agreed in the contract between the debtor and the creditor (even the default rate if dictated by the balance of the equities in a particular case) or other rates determined by state law rights. See Dow III, 456 F.3d at 671 (applying contract rate in reconciling best interests with fair and equitable test under
For the reasons referenced by the majority of courts considering this issue, statutory interpretation principles, uniformity within federal law, equality of treatment amongst similarly situated creditors and efficiency, the term “the legal rate” used in
In considering the most logical construction of that phrase to refer to a singular rate of interest in the context of the legislative goal of uniformity in treatment of similar claims and consolidated, efficient administration of bankruptcy proceedings, it is easy to conclude Congress intended that “the legal rate” would be the federal judgment rate. The administrative burden on bankruptcy courts to determine other potentially applicable rates could be substantial and result in increased costs and delays in administration of Chapter 7 cases. Additionally, applying contract rates, judgment rates, and other potential rates determined under state law could result in disparity among similar creditors where certain creditors receive smaller distributions on
C&J argue that this Court has discretion where a debtor is determined to be solvent to interpret “the legal rate” to be the state judgment rate applicable to their claims as an extension of the “solvent debtor exception” recognized prior to enactment of the Code. Because of my rulings regarding application of the “fair and equitable” requirements of
IV. CONCLUSION
For the reasons set forth above, I will enter an order denying confirmation of the Plan in its present form and set a status conference to address ancillary objections and the filing of an amended plan of reorganization. As recognized above, other courts may have ruled differently on the legal issues presented by this case, but until controlling appellate authority or a statutory amendment dictates otherwise, I interpret the provisions of the Code to incorporate and implement the “solvent debtor exception” established over the course of hundreds of years of insolvency jurisprudence.
Dated: July 13, 2021
By the Court,
Christopher J. Panos
United States Bankruptcy Judge
Notes
After some procedural wrangling with the Senate, the House‘s version of the bankruptcy bill prevailed. But it contained a drastically different treatment of nonconsensual reorganizations which implicated the absolute priority rule. Whereas the original House bill contained only one subsection on nonconsensual confirmation that did not use the words “fair and equitable,” the bill that emerged for final consideration included two subsections on the topic, and explicitly incorporated the phrase “fair and equitable.” The first subsection harkened back to H.R. 6 by providing that a court could cram down a nonconsensual plan over the dissent of any class only if the plan were, among other things, “fair and equitable.” Although the bill did not attempt to define this concept explicitly, Congress‘s prior efforts to define it were not lost. The second subsection on cramdown retained the various treatments developed in earlier bills as examples of fair and equitable treatment.
. . .
There was no formal conference report on the resolution of differences between the House and Senate Bills. There were, however, extensive and identical remarks introduced into the Congressional Record by the respective floor managers, Representative Edwards and Senator DeConcini. As the floor remarks made clear:
Although many of the factors interpreting “fair and equitable” are specified in paragraph (2), others, which were explicated in the description of section 1129(b) in the House Report, were omitted from the House amendment to avoid statutory complexity and because they would undoubtedly be found by the court to be fundamental to “fair and equitable” treatment of a dissenting class.
These statements from the floor managers were intended to be in the nature of a conference report, and the Supreme Court has stated:
Because of the absence of a conference and the key roles played by Representative Edwards and his counterpart floor manager Senator
Returning to the present-day Code, it can readily be seen that § 502(b)(2) is nothing new, but rather is derived from—and closely analogous to-- § 63. Indeed, the Code‘s legislative history indicates that the proposal to disallow claims for unmatured interest is consistent with “present law.” H.R.Rep. No. 95-595, 95th Cong., 1st Sess. (1977), at 353. Thus, the enactment of § 502(b)(2) would not seem to be a repudiation of either the solvency exception in general, or the recognition of contract interest rates in particular. See generally, Cohen v. De La Cruz, 523 U.S. 213, 118 S. Ct. 1212 (1998) (“We . . . will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure’ . . .” (citation omitted)).In re Dow Corning Corp. (Dow II), 244 B.R. 678, 684 (Bankr. E.D. Mich. 1999); see also In re Ultra Petroleum, 624 B.R. at 198 (same, citing Dow II). Section 502(b)(2), which is analogous to § 63 of the pre-Code Bankruptcy Acts, can be viewed as no more at odds with the solvent debtor exception than were § 63 of the Bankruptcy Acts of 1898 and 1938. See, e.g., In re Ultra Petroleum Corp., 624 B.R. at 198.