Solvent Debtors Must pay the Contractual Post-Petition Interest Rate on Unimpaired Claims

Rayla Aberman 

St. John's University School of Law 

American Bankruptcy Institute Law Review Staff


In In re PG&E Corp., the United States Court of Appeals for the Ninth Circuit held that solvent-debtors are required to pay unimpaired creditors their bargained for post-petition interest rate.[1] In January 2019, PG&E Corp. filed for chapter 11 bankruptcy due to the potential liabilities they were facing following the California wildfires.[2] In addition to the wildfire related claims, PG&E Corp. faced liabilities related to outstanding contractual obligations.[3] At the time of filing, PG&E Corp. was solvent, but the company maintained that bankruptcy was required to sustain operations after resolving the wildfire liabilities.[4] PG&E’s reorganization plan specified that non-wildfire claims would receive the full principal amount, and the federal judgment rate for post-petition interest.[5] The reorganization plan classified these claims as “unimpaired,”[6] and consequently, such creditors were deemed to accept the plan and not entitled to vote on the plan.[7]

Generally, under the Bankruptcy Code, once a debtor files for bankruptcy, an unsecured claim no longer accrues interest.[8] However, there is a solvent-debtor exception, taken from common law, which requires solvent debtors to pay interest that has accrued on claims after the filing for bankruptcy before the debtors are able to collect from the bankruptcy estate.[9] This exception was incorporated by American courts, under the theory that “the purpose of bankruptcy law [is] to ensure an equitable distribution of assets.”[10] Under section 1124(1) of the Bankruptcy Code, “a claim is impaired unless the bankruptcy plan ‘leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.’”[11] Due to the fact that unimpaired creditors are deemed to be receiving what they bargained for, unimpaired creditors are not afforded the ability to vote on the reorganization plan, or to invoke the “fair and equitable” requirement.[12] The Court in Cardelucci explained that “Section 726(a)(5) requires that creditors of a solvent debtor receive postpetition interest at ‘the legal rate . . . ,’” and that “the legal rate” refers to the federal post-petition interest rate.[13] However, the Court here explains that Cardelucci does not control, as “Section 726(a)(5) only applies to impaired chapter 11 claims . . . .”[14] Additionally, the Court held that the 1978 Bankruptcy Code did not retract the solvent-debtor exception.[15] The enactment of the Bankruptcy Code was not meant to “‘erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’”[16] In this case, there was no such clear indication.[17] Thus, the Ninth Circuit found that the bankruptcy court “erred in holding that the [Bankruptcy] Code limits plaintiffs to recovery of postpetition interest at the federal judgment rate.”[18] Additionally, the Court explained that the solvent-debtor exception fits with the equity requirement outlined in the Bankruptcy Code.[19] Even though “no [Bankruptcy] Code provision legally entitles supposedly unimpaired creditors to postpetition interest, pre-Code practice conclusively establishes creditors' equitable entitlement to contractual postpetition interest when a debtor is solvent, subject to any other countervailing equities.”[20] Therefore, “the equitable solvent-debtor exception—and its core principle that creditors should be made whole when the bankruptcy estate is sufficient—persists under the Code.”[21] Accordingly, “unsecured creditors of a solvent debtor retain an equitable right to postpetition interest pursuant to their contracts, subject to any other equities in a given case,” and “[a] failure to compensate creditors according to this equitable right as part of a bankruptcy plan results in impairment.”[22]

Finally, the Ninth Circuit recognized that only in “compelling equitable” circumstances, not present at bar, may a court deviate from the rule requiring solvent debtors to pay creditors their contractual post-petition interest rates.[23] To date, no other circuit court has addressed the applicable post-petition interest rate for determining impairment under section 1124 of the Bankruptcy Code.[24] Thus, solvent debtors are left with two options, either “compensate creditors in full pursuant to the solvent-debtor exception or designate them as impaired claimants entitled to the full scope of the Code's substantive and procedural protections.”[25]

[1] See Ad Hoc Comm. Of Holders of Trade Claims v. PG&E (In re PG&E Corp.), No. 21-16043, 2022 U.S. App. LEXIS 24269, at *35–36 (9th. Cir. Aug. 29, 2022).

[2] See id. at *6.

[3] See id. at *7.

[4] See id.

[5] See id. at *7–8.

[6] See id. at *8.

[7] See id. at *8 (citing 11 U.S.C. § 1126(f)).

[8] See id. at *12 (citing Sexton v. Dreyfus, 219 U.S. 339, 344 (1911); 11 U.S.C. § 502(b)(2)).

[9] See id.

[10] Id. at *13.

[11] Id. at *15 (quoting 11 U.S.C. § 1124(1)).

[12] See id. at *16–17 (citing 11 U.S.C. § 1126(a)). “[A] class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.” 11 U.S.C. § 1126(f).

[13] Id. at *16–17 (citing In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002).

[14] Id. at *18 (citing 11 U.S.C. § 103(b); In re Ultra Petroleum Corp., 624 B.R. 178, 202 (Bankr. S.D. Texas 2020); In re Energy Future Holdings Corp., 540 B.R. 109, 123–24 (Bankr. D. Del. 2015)).

[15] See id. at *21–22.

[16] Id. at *22 (quoting Cohen v. de la Cruz, 523 U.S. 213, 221 (1998)).

[17] See id.

[18] Id.

[19] See id. at *27 (citing 11 U.S.C. § 1124(1)).

[20] Id.

[21] Id. at *29–30.

[22] Id. at *30 (citing 11 U.S.C. § 1124(1)).

[23] See id. at *37.

[24] See id. at *10.

[25] Id. at *29.