interest-rates-1It is the rare Chapter 7 case that ends up with sufficient estate assets to pay all claims in full, plus interest as required by 11 U.S.C. §726(a)(5).  The question addressed by Judge Sacca in In re Robinson, Ch. 7 Case No. 15-51556, 2017 WL 713571 (Bankr. N.D. Ga. February 22, 2017) (click here for .pdf) concerned the interest rate to be paid pursuant to this statute.

The issue before the Court is what does “interest at the legal rate” mean under Section 726(a)(5) of the Bankruptcy Code for purposes of a distribution on unsecured claims in a Chapter 7 case if the estate has sufficient assets to pay post-petition interest on those claims. Does the phrase mean interest at the federal judgment rate or does it mean the applicable nonbankruptcy rate on the unsecured claim that existed prepetition?

The leading case on the issue is In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002).

In that case, the Ninth Circuit Court of Appeals held that Section 726(a)(5) requires interest to be paid at the federal judgment rate for the following reasons: (1) Congress chose the more specific language of “interest at the legal rate” instead of the more general, originally proposed language of “interest on claims allowed” and the chosen language used the more definite “the” instead of an indefinite “a” or “an”, thereby indicating Congressional intent for an interest rate derived from a common, single source, that being the federal statute awarding interest on judgments; (2) the federal judgment rate is consistent with the general rule that post-petition interest is procedural in nature and, therefore, dictated by federal law, entitling a creditor to an award of interest pursuant to a federal statute; (3) a single, uniform rate is equitable to all unsecured creditors and ensures that no single creditor receives a disproportionate share of assets; and (4) trustees should not be burdened by having to determine and calculate the appropriate rate for each individual unsecured creditor.

Judge Sacca agreed with the first two reasons based on the language of §726(a)(5) and other Code sections.  However, the latter two reasons were not so compelling.  From 1982 to the present date, the federal statute for interest rates, 28 U.S.C. §1961, has been uniform. It was based on the Treasury’s 52-week United States Treasury Bills auction and, after 2000, the weekly average 1-year constant maturity Treasury yield.  However, when the Bankruptcy Code was passed in 1978, the federal judgment rate was “the rate allowed by State law.”

State laws were then and still are all over the board on how to calculate interest on judgments. Some states had and still have fixed interest rates on judgments; some had and still have post-judgment interest rates of a fixed amount unless the claim is based on a contract, in which event the contract rate would be applicable, but perhaps only up to a certain percentage; others had and still have post-judgment interest rates based on the lesser of the contract rate or a fixed percentage; and in some states, there appears to be a trend toward basing the post-judgment interest rate on a federal index or a prime rate plus a certain percentage.  The point of this is that at the time Section 726(a)(5) was drafted and became effective, although the federal judgment interest rate statute may have provided for a somewhat more uniform and somewhat less burdensome rate to administer, it really cannot be said that Congress was interested in instituting a single, uniform rate or that it was particularly interested in lessening a trustee’s burden because so many state laws did not provide for a uniform rate.

The Judge then reviewed other leading cases, and concluded that the federal judgment interest rate was, in fact, the appropriate rate.

Because Congress inserted a “the” before “legal rate,” it is apparent that it intended for courts to utilize the legal rate found in the federal statue, regardless of how Congress may decide to change the applicable rate under that statute in the future… Furthermore, as explained in Cardelucci, the application of the federal judgment rate is consistent with the general rule that post-petition interest is procedural in nature and dictated by federal law and is equitable to all creditors because unsecured claims are allowed in an amount as of the petition date and should be treated equally thereafter with respect to the distribution of estate assets regardless of the parties’ pre-petition bargain.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.