Opinion
Bk. No. 18-7363-LA11
12-03-2020
IN RE: CUKER INTERACTIVE, LLC, Debtor.
Robert R. Barnes, The Broken-Bench Law Firm, Michael D. Breslauer, Solomon Ward Seidenwurm & Smith, LLP, San Diego, CA, for Debtor.
Robert R. Barnes, The Broken-Bench Law Firm, Michael D. Breslauer, Solomon Ward Seidenwurm & Smith, LLP, San Diego, CA, for Debtor.
MEMORANDUM DECISION
LOUISE DE CARL ADLER, JUDGE I.
INTRODUCTION
On November 18, 2020, the Court held a hearing on Cuker Interactive, LLC's ("Debtor") contested Fourth Amended Plan of Reorganization dated September 15, 2020 ("Plan"). The Court adopted its Tentative Ruling [ECF 442] confirming the Plan and finding that the Federal Judgment Rate (at 2.69%) is the "legal rate" at which postpetiton interest must be applied to unsecured claims in a solvent estate from the date of filing to the Plan's effective date. As stated in the Tentative Ruling, the Court writes this Memorandum Decision to augment that ruling on the discrete issue of the appropriate "legal rate" of postpetition interest for this time period.
II.
FACTUAL BACKGROUND
Debtor's estate is solvent. Debtor's Plan proposes leaving all creditors "unimpaired" under 11 U.S.C. § 1124(1) by paying: (i) fully secured creditors 100% of their allowed claims with contractual interest; and (ii) general unsecured creditors 100% of their allowed claims with postpetition interest at the "legal rate" (defined by the Plan as the Federal Judgment Rate), or the rate determined by the Court for their claims to be unimpaired. Because all creditors are "unimpaired," they are conclusively deemed to have accepted the Plan per § 1126(f).
Hereinafter, all section and chapter references are to the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., unless otherwise specified.
Creditors, Pillsbury Winthrop Shaw Pittman LLP ("Pillsbury") and Wolfe Legal Group, PC ("Wolfe") (collectively "Creditors"), objected to Plan confirmation contending that to remain "unimpaired" for purposes of § 1124(1), the Plan must pay postpetition interest on their unsecured claims at their contractual rate, not the Federal Judgment Rate. After thorough analysis of the case law and the parties' arguments, and for the reasons more thoroughly set forth below, the Court holds that the "legal rate" of interest to be applied postpetition to Creditors' unsecured claims is the Federal Judgment Rate.
Creditors are participating in post-confirmation proceedings that will determine the secured and unsecured status of their claims. Currently both Creditors have an unsecured claim.
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III.
LEGAL ANALYSIS
Section 1124(1) provides that a claim or interest is "impaired" under a chapter 11 plan, thereby entitling the impaired class 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). It is important to note that impairment, for the purposes of § 1124(1), only occurs where the plan itself alters the creditors' rights. In re PG&E Corp., 610 B.R. 308, 315 (Bankr. N.D. Cal. 2019) ; see also In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019) (recognizing that a claim is impaired only if the plan does the altering of creditors' rights, not the Code). Where the alteration of the creditor's legal rights is a consequence of the Bankruptcy Code itself, and not of the plan, the creditors are not "impaired" for purposes of § 1124(1). In re PG&E Corp., 610 B.R. at 315 ; In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 204 (3rd Cir. 2003). Creditors that are "unimpaired" are conclusively deemed to have accepted the plan and not permitted to vote on the plan. 11 U.S.C. § 1126(f).
Here, the Creditors contend they are "impaired," primarily, because the Plan does not require Debtor to pay postpetition interest on their unsecured claims at their contractual rates or at the State Law Judgment Rate (10%). Their characterization of the Plan is incorrect. In fact, the Plan requires Debtor to pay creditors postpetition interest on their unsecured claims at the Federal Judgment Rate (2.69%); or at whatever rate determined by the Court for their claims to be "unimpaired." [See Plan, Art. IV.A.2, Art. II. A.2(b), Art. IV.A.2(e), and Art. IV.A.2(h) ] As such, the discrete issue here is what is the rate of postpetition interest that must be applied for Creditors' unsecured claims to be unimpaired?
It is settled law that where a chapter 11 debtor is solvent, the debtor generally must pay postpetition interest to its general unsecured creditors. In re Cardelucci, 285 F.3d 1231, 1234 (9th Cir. 2002) ; see also Matter of Beverly Hills Bancorp, 752 F.2d 1334, 1339 (9th Cir. 1984) (recognizing that postpetition interest should be paid on allowed unsecured claims in a solvent-debtor case). However, the Federal Circuit Courts of Appeal are split as to whether the Federal Judgment Rate or the parties' contract rate applies in the foregoing situation.
This Court is not writing on a clean slate. It must consider In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002) because it also involved the rate of postpetition interest to be paid to general unsecured creditors in a solvent-debtor's chapter 11 case. The Ninth Circuit began by recognizing that where a debtor is solvent, unsecured creditors are entitled to be paid postpetiton "interest at the legal rate." Id. at 1234 (citing § 726(a)(5), which is incorporated into chapter 11 by § 1129(a)(7)). It examined whether the phrase "interest at the legal rate" in § 726(a)(5) is the Federal Judgment Rate or a rate to be determined by the parties' contract or state law. Id. at 1234. The Ninth Circuit determined that the principles of statutory interpretation strongly support the conclusion that Congress intended the phrase "interest at the legal rate" to mean the Federal Judgment Rate. Id. at 1234-35. Additionally, it reasoned that applying the Federal Judgment Rate promotes uniformity within federal law; that applying a single, easily determined interest rate to all claims for postpetition interest ensures equitable treatment and fairness between creditors; and that using the Federal Judgment Rate is the most judicially efficient and practical manner of allocating the estate's remaining assets. Id. at 1235-36.
Creditors argue that Cardelucci is inapplicable here. They point out that the Ninth Circuit solely addressed § 726(a)(5), which applies to "impaired" claims in a chapter 11 case only by virtue of the best interests test in § 1129(a)(7); whereas this case involves "unimpairment" under § 1124(1). They are correct that Ninth Circuit's decision in Cardelucci never cited to § 1124, and it never addressed the rate of interest for unimpairment to be conclusively deemed to have accepted the plan. Nevertheless, the Court is not persuaded that Cardelucci is inapplicable. The Ninth Circuit phrased its holding broadly to apply to all unsecured claims, and it relied heavily on the decision of the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in In re Beguelin, 220 B.R. 94 (BAP 9th Cir. 1998). See Cardelucci, 285 F.3d at 1234 (relying on, and even quoting, the rationale in Beguelin in adopting the Federal Judgment Rate).
Specifically, the BAP in Beguelin held that a solvent-debtor must pay postpetition interest to ail unsecured creditors at the Federal Judgment Rate. Beguelin, 220 B.R. at 101. The BAP reasoned that applying the uniform Federal Judgment Rate promotes universal resolution in bankruptcy courts across the country; and it is the practical, efficient and inexpensive means to calculate the amount of interest to be a paid to each creditor. Id. at 100-101. Likewise, in Cardelucci the Ninth Circuit broadly stated that it favored applying the Federal Judgment Rate "to all claims for postpetition interest" because it ensures uniformity, equitable treatment among creditors and efficiency. Cardelucci, 285 F.3d at 1235-36. It concluded that it must apply this rate even where there are "sufficient assets to fully pay all claims for all interest," and even in instances where "a debtor may receive a windfall" from the lower Federal Judgment Rate. Id. at 1236.
The question of Cardeluccís application to "impairment" under § 1124 was directly addressed in In re PG & E, Corp., 610 B.R. 308 (Bankr. N.D. Cal. 2019), a case that is factually on point. The bankruptcy court in PG & E read Cardelucci expansively and ultimately adopted its holding as applying to all unsecured creditors in a solvent-debtor case. In re PG & E, 610 B.R. at 310. The bankruptcy court considered that the Cardelucci decision had addressed a narrower issue, and it did not discuss impairment under § 1124. Id. at 312-13. It concluded that the Cardelucci holding must be broadly applied to "all unsecured claims" for two reasons: (1) the Ninth Circuit did not narrow the application of its holding to "impaired" claims, and so it applied broadly given the structure of the Code, and the clear and plain meaning of its applicable provisions; and (2) a single, easily determined rate for all postpetition interest ensures equitable treatment of creditors. Id. at 312-13, 315. Consequently, the PG & E court held it was bound by the sweeping holding of Cardelucci in a situation that is factually on point with this case.
In discussing the issue of "impairment" under § 1124 and a creditor's right to vote on the plan, the PG & E court distinguished between the provisions of the Bankruptcy Code and the plan. It explained that limiting an unsecured claim to postpetition interest at the Federal Judgment Rate is a function of the Bankruptcy Code, not the plan. Id. at 315-16. Therefore, when a plan treats unsecured creditors as provided by the Bankruptcy Code (by paying them postpetition interest at the Federal Judgment Rate in a solvent-debtor case), the plan does not "impair" creditors in the manner contemplated by § 1124. Id. (citing In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019), and In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3rd Cir. 2003) ).
Creditors urge that In re PG & E was wrongly decided. They urge this Court to adopt the "solvent-debtor exception" recognized by several other Circuit Courts of Appeal. This exception enforces the state law rights of unsecured creditors in a solvent-debtor case, including their right to receive postpetition interest at their contractual rate. See In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019) (remanding the impairment issue to the bankruptcy court to determine the rate of postpetition interest to be paid to unsecured creditors, and acknowledging that the "solvent-debtor exception" could apply); see also In re Dow Corning Corp., 456 F.3d 668, 679 (6th Cir. 2006) ; Debentureholders Protective Comm., of Cont'l Inv. Corp. v. Conti. Inv. Corp., 679 F.2d 264, 269 (1st Cir. 1982) (both recognizing that the solvent-debtor exception requires a court to enforce the parties' state law contractual rights, even for unsecured creditors).
On remand, the Ultra Petroleum bankruptcy court addressed the same question as the PG & E court: What interest rate should be applied postpetition to "unimpaired" claims in a solvent-debtor case? While the bankruptcy court in Ultra Petroleum acknowledged that the Cardelucci court was legally correct to apply the Federal Judgment Rate in cases where creditors are "impaired," it read the Ninth Circuit's decision narrowly and departed from it. In re Ultra Petroleum Corp., No. 16-32202 et. al. , 2020 WL 6276712, *21-22 (Bankr. S.D. Tex. Oct. 26, 2020). The court explained that it was deciding the different issue of the rate of postpetition interest where unsecured creditors are "unimpaired." Ultra Petroleum, 2020 WL 6276712 at *21. After analyzing the continuing viability of the "solvent-debtor exception," it held that where the claims of unsecured creditors are "unimpaired" they must receive postpetition interest at their contractual rate, or otherwise be given the opportunity to vote on the plan. Id. at *21-22. The bankruptcy court explained that the underlying purpose of the "solvent-debtor exception" is that a debtor must repay its debts in full when it has the means to do so. Id. at *22. Thus, when a debtor is solvent, "a bankruptcy court's role is merely to enforce the contractual rights of the parties." Id. at *21 (quoting In re Dow Corning, 456 F.3d at 679 ).
While this Court understands the rationale for applying the "solvent-debtor exception," it is not writing on a clean slate. The Court agrees that it is bound by the Ninth Circuit's holding in In re Cardelucci , which imported the "legal rate" language of § 726(a)(5) into chapter 11 cases for all unsecured creditors and clearly held that the "legal rate" is the Federal Judgment Rate. In re PG & E, 610 B.R. at 312-13. Therefore, assuming the Creditors are unsecured, they must receive postpetition interest at the Federal Judgment Rate to be unimpaired by the Plan. The Debtor is correct that this alteration of the Creditors' rights is a function of the Bankruptcy Code, not the Plan.
The Court sees no reason to diverge from the well-reasoned decision in PG & E . While the "solvent-debtor exception" would work in cases with only a few creditors, the Court agrees that application of this exception poses a significant threat to the bankruptcy court's administrative efficiency in larger cases. See In re Cardelucci, 285 F.3d at 1236 (recognizing that even on occasions when a debtor may receive a windfall, the uniform approach of applying the Federal Judgment Rate to calculate postpetition interest to unsecured creditors is a more efficient and fair and equitable outcome than applying each creditors' contractual rate or the applicable state law judgment rate, which varies state-by-state). If the "solvent-debtor exception" were applied to a debtor with hundreds or thousands of creditors, the estate might be compelled to carry on indefinitely, at a huge administrative expense, determining the individual contractual rights of each individual unsecured creditor; and perhaps, resulting in different treatment to creditors of the same class. The Court agrees with the Ninth Circuit in Cardelucci that there is no reason Congress would have intended to create such a costly administrative inefficiency in the bankruptcy courts.
Finally, the Court does not agree with the view that the bankruptcy court's role in a solvent-debtor case is merely that of an "enforcer" of creditors' contractual rights. See Dow Corning, 456 F.3d at 679 (expressing its view that in a solvent-debtor case, the bankruptcy court should enforce whatever prepetition contractual rights a given creditor has against the debtor). This view taken literally would arguably mean a court would have to abandon the Code itself. For instance, § 502(b)(6) caps a landlord's claim in bankruptcy for damages resulting from the termination of a real property lease. 11 U.S.C. § 502(b)(6). If an estate were solvent and the bankruptcy court's role was merely to enforce the contract, there would be no limit to the damages a landlord could recover from termination of a real property lease. The bankruptcy courts would be required to abandon the intent of Congress to cap lease rejection claims, and ultimately disregard portions of the Code. The Ninth Circuit has found that such a repercussion was not the intent of Congress, and this Court is bound by that precedent.
IV.
CONCLUSION
Debtor's estate is solvent, so, for the reasons set forth above and given the binding Ninth Circuit precedent, the Court finds that Debtor must pay postpetition interest under its Plan at the "legal rate": The Federal Judgment Rate (2.69%). This Memorandum Decision shall be incorporated into the Court's Findings of Fact and Conclusion of Law confirming the Plan, to be prepared by Debtor.