Divided Ninth Circuit Rules That Unimpaired Unsecured Creditors of a Solvent Debtor May Be Entitled to Post-Petition Interest at Contract or State Default Rates

As a general matter of bankruptcy law, interest ceases to accrue on a creditor's unsecured claims once the debtor has filed its bankruptcy petition. There are certain exceptions to this principle, however. In a recent decision arising out of an appeal in Pacific Gas & Electric's bankruptcy proceedings, the Ninth Circuit ruled that, when the debtor is solvent and the creditor is deemed "unimpaired" for the purposes of the bankruptcy plan, the creditor is entitled to interest on its claims at the contractual rate of interest or the state default rate, subject to limited equitable exceptions. In re PG&E Corp., — F.4th —, 2022 WL 3712478 (9th Cir. Aug. 29, 2022).

PG&E filed for bankruptcy in 2019 to address heavy potential liabilities arising out of wildfires. The interests of PG&E's trade creditors were represented by an ad hoc committee. Under PG&E's bankruptcy plan, which was confirmed in 2020, the trade creditors were to be paid for the full amount of their claims as of the date of the filing of the bankruptcy petition, but would receive post-petition interest on their claims only at the federal judgment rate, which was then 2.59%. PG&E's plan classified the trade creditors as unimpaired. 

The trade creditors argued that because their claims were unimpaired, they were entitled to interest at the applicable contractual rate. In some cases, the trade creditors' contracts specified a rate to be paid; for contracts that were silent, the trade creditors asserted that California's default rate of 10% should generally apply. The bankruptcy court ruled that the trade creditors were entitled only to the federal judgment rate. The court believed that Ninth Circuit precedent (In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002)) required that all unsecured claims in a solvent-debtor bankruptcy receive interest at the federal judgment rate, regardless of whether they are impaired or not. In addition, the court noted that, "absent specific rules," nothing in the Bankruptcy Code suggests that pre-petition entitlements continue post-petition. On appeal, the district court affirmed.

In a split decision filed on August 29, the Ninth Circuit reversed. All members of the panel agreed that the case was not controlled by Cardelucci. The question in Cardelucci was the appropriate rate of interest to pay impaired creditors in a solvent-debtor bankruptcy. Here, though, the trade creditors had been deemed unimpaired. 

The panel disagreed, however, on whether the "solvent-debtor exception" entitled the trade creditors to post-petition interest at more than the federal judgment rate. According to the majority, the exception is a common law principle that when the debtor is solvent, unsecured creditors must receive interest at the contractual or default state law rate, subject to any countervailing equitable considerations, before the debtor collects any surplus from the estate. 

The majority held that the solvent-debtor exception survived the enactment of the Bankruptcy Code in 1978. The court remanded for consideration of whether the trade creditors should be entitled to the contractual rate (or the California default rate), or whether the bankruptcy court should exercise its discretion to reduce the amount owed. The court noted, however, that on the limited record before it, it could see no reason to deviate from the contractual or state default rate. The dissent, by contrast, argued that the solvent-debtor exception did not survive the enactment of the modern Bankruptcy Code, and that the trade creditors were thus not entitled to any post-petition interest.

On September 12, PG&E filed a petition for rehearing en banc. PG&E argued that out of the various options considered by the panel—interest at the contractual or state default rates (subject to potential equitable modification), interest at the federal judgment rate, or no interest at all—the no-interest option was the most consistent with the Code's language and Supreme Court precedent. In the alternative, PG&E argued that the federal judgment rate should apply. PG&E noted, however, that it had originally offered the trade creditors the federal judgment rate on the basis of Cardelucci, and that all members of the panel had deemed that case inapplicable to this situation.