The awarding of post-petition interest in solvent debtor cases under Chapter 11 has become a significant issue in recent years for corporate issuers, bondholders and other creditors. This article will review a recent decision in the Hertz case by Judge Mary Walrath of the United States Bankruptcy Court for the District of Delaware on the rate of interest payable to unsecured creditors who are entitled under the Bankruptcy Code to full payment. of their claims under a reorganization plan. (Judge Walrath also addressed other matters in her decision regarding the award of compensation awards, which were considered in a previous post.)
The Hertz Corporation filed for protection under Chapter 11 of the US Bankruptcy Code in May 2020, its business decimated by the Covid-19 pandemic. In just over a year, however, he had recovered so successfully that it was able to come up with a reorganization plan that was supposed to pay unsecured creditors in full.
Hertz claimed that under its plan, holders of its more than $2.7 billion in unsecured bonds were “not compromised.” Hertz’s plan proposed to pay bondholders the full principal amount of the bonds and accrued interest during the Chapter 11 case at the federal judgment rate rather than the significantly higher rate provided under the Bonds and Trust Indentures.
The bondholders disputed that their claims were not impaired because, among other things, the plan did not provide for payment at the contractual rate under the trust indentures. They also argued that an equitable doctrine predating the Bankruptcy Code, known as the “solvent debtor exception,” entitled them to full payment of interest.
Both parties agreed to let the plan proceed with the confirmation and Walrath J. then determines what bondholders were entitled to receive. After the confirmation, Hertz decided to deny the bondholders’ claims for post-petition interest at the contractual rate under the trust indentures.
Justice Walrath’s analysis
In her decision on Hertz’s motion to dismiss the claims, Judge Walrath reviewed the Bankruptcy Code to determine whether the contract rate or the federal judgment rate would apply to any permitted post-petition interest.
Non-disability – Under the Bankruptcy Code, creditors’ claims are not impaired if “the plan . . . leaves unchanged the legal, equitable and contractual rights” of the holder of this claim. Unaggrieved creditors do not have the right under the Bankruptcy Code to vote to accept or reject a proposed plan, but are rather deemed to accept. The bondholders asserted that their treatment as uncompromised creditors under the scheme entitled them to all of their rights under the trust indentures, including payment of repair premiums and interest at the contractual rate.
Justice Walrath disagreed. In most cases in Chapter 11, Section 502(b) of the Bankruptcy Code expressly rejects claims for “unmatured interest”, i.e. interest which was not yet accrued at the start of the case. She quoted a Third Circuit decision, PPI Companies, which held that a creditor’s claim was not impaired if the claim was limited or disallowed not by the plan itself, but rather by the bankruptcy code as a matter of law. Since Section 502(b) prohibits claims for unmatured interest, the fact that the plan does not provide for the payment of future unpaid interest would not constitute impairment.
Solvent debtor exception – Bondholders cited a number of pre-Bankruptcy Code rulings that where a debtor is solvent, creditors have the right to incur interest on their claims and other contractual rights before any value accrues to shareholders.
Bondholders pointed to a recent decision by Judge Marvin Isgur of the Southern District of Texas who, in the face of similar problems in the case of Ultra Petroleum Corp.ruled that the creditworthy debtor’s exception stood and effectively reversed Section 502(b)’s disallowance of unmatured interest with respect to creditworthy debtors and required payment of interest at the contractual rate.
Justice Walrath recognized the solvent debtor exception, but interpreted it more narrowly than Justice Isgur. She pointed Section 726(a)(5) of the Bankruptcy Codewhich provides for the payment of interest “at the legal rate” in cases of liquidation of the solvent debtor chapter 7, and Section 1129(a)(7) of the Bankruptcy Codewhich requires that impaired creditors be treated under a Chapter 11 plan as well as a hypothetical Chapter 7 case.
Judge Walrath determined that the weight of jurisprudential authority considered “the statutory rate” under section 726(a)(5) to be the federal judgment rate rather than the contractual interest rate. Further believing that Congress could not have intended uncompromised creditors to be treated worse than bad creditors, it held that the solvent debtor exception required payment of accrued and unpaid interest on the bonds at the judgment rate. federal.
Walrath J. recognized the solvent debtor’s exception to the disallowance of unearned interest under Section 502(b), but only to the extent that it requires payment of interest accrued after the petition at the federal judgment rate.
Fluctuations in value resulting from the disruption of the pandemic and subsequent rapid recovery, as well as continued economic volatility and uncertainty mean that more business from creditworthy debtors can be expected until ‘ in 2022. Given the influence of the Delaware bankruptcy court in major Chapter 11 cases, Judge Walrath in Hertz’s analysis will inform the calculations of debtors and bondholders during plan negotiations in such cases.