Article courtesy of David P. Simonds and Edward J. McNeilly (both of Hogan Lovells US LLP)
In re Cuker Interactive, LLC, 622 B.R. 67 (Bankr. S.D. Cal. 2020)
In In re Cuker Interactive, LLC, 622 B.R. 67 (Bankr. S.D. Cal. 2020), Bankruptcy Judge Louise Adler confirmed the plan of reorganization of a solvent chapter 11 debtor that provided for unsecured claims to receive postpetition interest at the federal judgment rate. Applying the Ninth Circuit’s decision in In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002), and following other recent cases within the Ninth Circuit, Judge Adler held that a creditor who received payment in full in cash plus postpetition interest at the federal judgment rate was “unimpaired” and thus conclusively presumed to have accepted the plan. Judge Adler declined to follow cases from other circuits that have found that a creditor of a solvent debtor is “impaired” unless postpetition interest is paid at the state law contract or judgment rate.
Under section 1126(a) of the Bankruptcy Code, each holder of an allowed claim may vote on a plan of reorganization. However, if a class of claims is not “impaired” under a plan, such class, and each holder of a claim of such class, is conclusively presumed to have accepted, and is not permitted to vote on, the plan. 11 U.S.C. § 1126(f). Section 1124(a) of the Bankruptcy Code provides that a claim or interest is “impaired” under a chapter 11 plan, thereby entitling the holder of such claim to vote, unless “the plan” leaves unaltered the legal, equitable and contractual rights to which the claim or interest entitles the holder of such claim or interest. 11 U.S.C. § 1124(1). Several courts have held that a claim is impaired only if the terms of the plan, not the Bankruptcy Code, alters the creditor’s legal, equitable or contractual rights.
Cuker Interactive, LLC (the “Debtor”) filed a plan of reorganization (the “Plan”) that provided for unsecured claims to be paid in full in cash with postpetition interest (i.e., interest for the period between the bankruptcy filing date and the effective date of the Plan) at the federal judgment rate (the “FJR”) of 2.69% or whatever rate was required to render their claims unimpaired. The Debtor did not solicit acceptances of the Plan from holders of unsecured claims, asserting that they were unimpaired. Certain creditors objected to the Plan, arguing that they were “impaired” because postpetition interest should be paid at the contract rate or the California State Law judgment rate of 10% per annum, not the FJR.
The United States Bankruptcy Court for the Southern District of California (the “Bankruptcy Court”) held that it was settled law that a solvent chapter 11 debtor must generally pay postpetition interest (i.e., interest on claims for the period between the filing of a bankruptcy petition and confirmation of a plan of reorganization) to unsecured creditors. However, the United States Circuit Courts of Appeal are split as to whether the FJR or the parties’ contract rate (or some other rate) governs.
The leading Ninth Circuit case on this issue is In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002), in which the Ninth Circuit Court of Appeals held that, where a debtor is solvent, an unsecured creditor is entitled to “payment of interest at the legal rate from the date of the filing of the petition” prior to any distribution of remaining assets to the debtor. The court in Cardelucci held that the phrase “payment of interest at the legal rate,” which is found in section 726(a)(5) of the Bankruptcy Code, means the FJR, not a rate determined by the parties’ contract or state law. The court in Cardelucci also found that applying the FJR to all claims for postpetition interest ensured uniformity, equitable treatment among creditors and efficiency.
The objecting parties argued that Cardelucci did not apply because the Ninth Circuit in Cardelucci solely addressed section 726(a)(5) of the Bankruptcy Code, which applies to “impaired” claims in a chapter 11 case only by virtue of the “best interests” test of section 1129(a)(7) of the Bankruptcy Code, whereas the present case involved “unimpairment” under section 1124(1) of the Bankruptcy Code, which Cardelucci does not address.
The Bankruptcy Court overruled the objections, holding that Cardelucci phrased its holding broadly to apply to all unsecured claims. Judge Adler also relied on the Ninth Circuit Bankruptcy Appellate of In re Begeulin, 220 B.R. 94 (9th Cir. BAP 1998), which was heavily cited and relied upon by Cardelucci. In Begeulin, the Ninth Circuit Bankruptcy Appellate Panel held that a solvent debtor must pay postpetition interest at the FJR, finding that it promoted uniformity and was a practical, efficient and inexpensive way means of calculating the amount of interest to be paid to each creditor. Finally, Judge Adler followed the recent case of In re PG&E, Corp., 610 B.R. 308 (Bankr. N.D. Cal. 2019), in which Judge Dennis Montali of the United States Bankruptcy Court for the Northern District of California read Cardelucci expansively to apply to all solvent debtor cases and applied it directly in the context of a dispute over “impairment” under section 1124(1). In particular, the PG&E court distinguished between the provisions of a plan and the Bankruptcy Code. Because limiting an unsecured claim to postpetition interest at the FJR is a function of the Bankruptcy Code, not the plan, a claim that receives interest only at the FJR is not “impaired” in the manner contemplated by section 1124(1).
In overruling the objecting creditors’ objection to the Plan, Judge Adler expressly declined to follow decisions in other circuits, such as In re Ultra Petroleum, 624 B.R. 178 (Bankr. S.D. Tex. 2020), that have held that the “solvent debtor exception” requires a solvent debtor to pay postpetition interest under state law. Judge Adler held that Cardelucci bound her to limit postpetition interest to the FJR. Moreover, she explicitly endorsed the uniformity, efficiency and fairness rationale to apply the FJR. Judge Adler also held that, because the Bankruptcy Code required application of the FJR, the claims of the objecting creditors were not “impaired.”
The PG&E and Cuker decisions are not only at odds with recent decisions from other circuits on section 1124(1), but also appear to distinguish between section 1124(1) and section 1124(2) of the Bankruptcy Code. In summary, section 1124(2) provides that a debtor can render a creditor that holds an accelerated debt obligation “unimpaired” by curing defaults, reinstating the debt on its original maturity, compensating the creditor for contractual damages, and not otherwise altering the creditor’s legal, equitable or contractual rights. In In re New Investments, Inc, 840 F.3d 1137, 1142 (9th Cir. 2016), the Ninth Circuit Court of Appeals held that, in the context of reinstatement under section 1124(2), the debtor was required to pay postpetition interest at the default contract rate to render the creditor’s claim unimpaired. Unlike in PG&E (which cited New Investments) and Cuker (which did not cite New Investments), the New Investments case involved secured rather than unsecured debt, although section 1124(2) on its face makes no distinction between secured and unsecured claims. Therefore, until the Ninth Circuit explicitly addresses whether Cardelucci applies to section 1124(1), whether a creditor is entitled to receive postpetition interest at the contract rate or FJR may depend on whether the debtor proposes to render the creditor unimpaired under section 1124(1) or reinstate a defaulted debt under section 1124(2).
 The “best interests” test provides that, with respect to an impaired class of claims, a chapter 11 plan cannot be confirmed unless each member of that class has accepted the plan or will receive or retain at least as much property as in a hypothetical chapter 7 liquidation.