Post-Petition Claims Must Use Low Interest Rate, Court Says

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By Diane Davis

A lower federal judgment rate should be used when calculating interest on distributions of unsecured claims in Chapter 7, the U.S. Bankruptcy Court for the Northern District of Georgia held Feb. 22 ( In re Robinson , 2017 BL 54489, Bankr. N.D. Ga., No.15-51556-JRS Chapter 7, 2/22/17 ).

When a bankruptcy estate has sufficient assets to pay post-petition interest, Bankruptcy Code Section 726(a)(5) requires it be calculated using “the legal rate from the date of the filing of the petition.”

The question in this case is whether that phrase means interest at the federal judgment rate, which is extremely low and generally less than 1 percent, or the applicable nonbankruptcy rate, which is 7.38 percent, according to the judgment on the unsecured claim that existed pre-petition, Judge James R. Sacca wrote.

The courts are split.

The leading case interpreting the phrase to mean the federal judgment rate is In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002). The leading case on the applicable nonbankruptcy rate is In re Dvorkin Holdings, LLC, 547 B.R. 880 (N.D. Ill. 2016), the court said.

The Ninth Circuit in Cardelucci considered the issue in the context of a Chapter 11 plan confirmation, the court said. Interest should be paid at the federal judgment rate in that case because Congress chose the more specific language of “interest at the legal rate” instead of the more general language “interest on claims allowed,” the court said.

Post-petition interest in Cardelucci is procedural in nature and dictated by federal law. A single, uniform rate is equitable to all unsecured creditors and ensures that no creditor receives a disproportionate share of assets, the court in that case said.

When there is a surplus in the estate, as in Dvorkin, which also involved a Chapter 11 plan confirmation, there is a presumption that post-petition interest should be paid under the terms of the contract, the court said.

The better reasoned case is Cardelucci because Congress expressed its intention to have the interest rate in the statute apply by choosing the more specific language, the court said. Thus, the interest rate to be applied is the federal judgment rate, the court said.

The Wright Law Office, P.C., represented Calita Elston Robinson; Goodman & Goodman, P.C., and The Murry Law Group, P.C, represented Trustee Dale R. F. Goodman; David S. Weidenbaum, Office of the U.S. Trustee, represented Office of the U.S. Trustee.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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