In Short

The Situation: Bankruptcy courts have split on what rate of post-petition interest unimpaired creditors of a solvent debtor are entitled to receive. Bankruptcy courts have variously ruled that such creditors were entitled to the contractual rate of interest, interest at the federal judgment rate (about the rate on a one-year Treasury bill) as of the bankruptcy petition date, or an equitable rate. Another possibility is that no interest is payable at all.

The Result: A divided panel of the U.S. Court of Appeals for the Ninth Circuit recently ruled that unimpaired unsecured creditors of a solvent debtor are entitled to post-petition interest at the contractual rate (or the state default rate in the absence of an express contractual rate), absent limited equitable exceptions. The court remanded the case for a determination of whether an equitable exception applied. The dissenting judge would have held that unimpaired creditors of a solvent debtor are not entitled to receive any post-petition interest.

Looking Ahead: No other appellate court has squarely addressed this issue, but the Ninth Circuit panel's decision is very unlikely to be the last word. The debtor has sought rehearing en banc from the full Ninth Circuit, and the issue is also being litigated in the Fifth Circuit. Parties on both the creditor and the debtor sides should be aware that this issue remains contested.

As a general matter of bankruptcy law, interest ceases to accrue on a creditor's unsecured claims once the debtor has filed its bankruptcy petition. There are certain exceptions to this principle, however. In a recent decision arising out of an appeal in Pacific Gas & Electric's bankruptcy proceedings, the Ninth Circuit ruled that, when the debtor is solvent and the creditor is deemed "unimpaired" for the purposes of the bankruptcy plan, the creditor is entitled to interest on its claims at the contractual rate of interest or the state default rate, subject to limited equitable exceptions. In re PG&E Corp., — F.4th —, 2022 WL 3712478 (9th Cir. Aug. 29, 2022).

PG&E filed for bankruptcy in 2019 to address heavy potential liabilities arising out of wildfires. The interests of PG&E's trade creditors were represented by an ad hoc committee. Under PG&E's bankruptcy plan, which was confirmed in 2020, the trade creditors were to be paid for the full amount of their claims as of the date of the filing of the bankruptcy petition, but would receive post-petition interest on their claims only at the federal judgment rate, which was then 2.59%. PG&E's plan classified the trade creditors as unimpaired.

The trade creditors argued that because their claims were unimpaired, they were entitled to interest at the applicable contractual rate. In some cases, the trade creditors' contracts specified a rate to be paid; for contracts that were silent, the trade creditors asserted that California's default rate of 10% should generally apply. The bankruptcy court ruled that the trade creditors were entitled only to the federal judgment rate. The court believed that Ninth Circuit precedent (In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002)) required that all unsecured claims in a solvent-debtor bankruptcy receive interest at the federal judgment rate, regardless of whether they are impaired or not. In addition, the court noted that, "absent specific rules," nothing in the Bankruptcy Code suggests that pre-petition entitlements continue post-petition. On appeal, the district court affirmed.

In a split decision filed on August 29, the Ninth Circuit reversed. All members of the panel agreed that the case was not controlled by Cardelucci. The question in Cardelucci was the appropriate rate of interest to pay impaired creditors in a solvent-debtor bankruptcy. Here, though, the trade creditors had been deemed unimpaired.

The panel disagreed, however, on whether the "solvent-debtor exception" entitled the trade creditors to post-petition interest at more than the federal judgment rate. According to the majority, the exception is a common law principle that when the debtor is solvent, unsecured creditors must receive interest at the contractual or default state law rate, subject to any countervailing equitable considerations, before the debtor collects any surplus from the estate.

The majority held that the solvent-debtor exception survived the enactment of the Bankruptcy Code in 1978. The court remanded for consideration of whether the trade creditors should be entitled to the contractual rate (or the California default rate), or whether the bankruptcy court should exercise its discretion to reduce the amount owed. The court noted, however, that on the limited record before it, it could see no reason to deviate from the contractual or state default rate. The dissent, by contrast, argued that the solvent-debtor exception did not survive the enactment of the modern Bankruptcy Code, and that the trade creditors were thus not entitled to any post-petition interest.

On September 12, PG&E filed a petition for rehearing en banc. PG&E argued that out of the various options considered by the panel—interest at the contractual or state default rates (subject to potential equitable modification), interest at the federal judgment rate, or no interest at all—the no-interest option was the most consistent with the Code's language and Supreme Court precedent. In the alternative, PG&E argued that the federal judgment rate should apply. PG&E noted, however, that it had originally offered the trade creditors the federal judgment rate on the basis of Cardelucci, and that all members of the panel had deemed that case inapplicable to this situation.

Three Key Takeaways

  1. The Ninth Circuit is the first appellate court to rule that unimpaired unsecured creditors of a solvent debtor are generally entitled to receive post-petition interest at the contractual or state default rate. It remains to be seen whether the case is reheard en banc and, if so, what the result will be. In addition, this issue is almost certain to continue to be litigated in bankruptcy, district, and appellate courts elsewhere in the country, including in a case (Ultra Petroleum, No. 21-20008) currently pending before the Fifth Circuit.
  2. Both creditors and debtors in solvent-debtor cases should be aware that this remains an unsettled issue. So long as there is any uncertainty about what interest unimpaired unsecured creditors are entitled to in solvent-debtor cases, all sides should carefully study their potential exposure and risks and plan accordingly.
  3. Potential solvent debtors considering filings to address large liabilities should also consider the implications of this ruling.