PG&E CORPORATION V. AD HOC COMMITTEE OF HOLDERS, No. 21-16043 (9th Cir. 2022)
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Pacific Gas & Electric Company (“PG&E”), sought chapter 11 protection in a bid to proactively address massive potential liabilities related to a series of wildfires in Northern California. But PG&E was solvent. Its assets at the time of the bankruptcy filing exceeded its known liabilities by nearly $20 billion. As a result, several creditors—including Plaintiffs, the Ad Hoc Committee of Holders of Trade Claims—claimed PG&E must pay post-petition interest at the rates required by their contracts in order for their claims to be “unimpaired” by the reorganization plan
The Ninth Circuit reversed the district court’s order. The panel held that under the “solvent-debtor exception,” the creditors possessed an equitable right to receive post-petition interest at the contractual or default state rate, subject to any other equitable considerations before PG&E collected surplus value from the bankruptcy estate. The solvent-debtor exception is a common-law exception to the Bankruptcy Act’s prohibition on the collection of post-petition interest as part of a creditor’s claim.
The panel concluded that Cardelucci merely interpreted 11 U.S.C. Section 726(a)(5), which requires that creditors of a solvent debtor receive post-petition interest at “the legal rate.” Section 726(a)(5), however, applies only to impaired chapter 11 claims, and the panel concluded that Cardelucci, therefore, did not address what rate of post-petition interest must be paid on the Ad Hoc Committee’s unimpaired claims. The panel reversed and remanded to the bankruptcy court to weigh the equities and determine what rate of interest the creditors were entitled to.
Court Description: Bankruptcy. The panel reversed the district court’s order, which affirmed the bankruptcy court’s ruling that in the chapter 11 proceeding of solvent debtor Pacific Gas and Electric Co., unsecured creditors whose claims were designated as unimpaired were limited to recovery of postpetition interest at the federal judgment rate, rather than the higher rates required by their contracts with PG&E and by California law governing contractual obligations not paid. The chapter 11 plan classified the claims of these creditors, known as the Ad Hoc Committee of Holders of Trade Claims, as general unsecured claims and provided that the creditors would be paid the full principal amount of their claims plus postpetition interest at the federal judgment rate of 2.59 percent under 28 U.S.C. § 1961(a). The plan classified the creditors’ claims as unimpaired, meaning that they were deemed to automatically accept the plan and had * The Honorable Carlos F. Lucero, United States Circuit Judge for the U.S. Court of Appeals for the Tenth Circuit, sitting by designation. IN RE PG&E CORP. 3 no power to vote against it or argue that their treatment was not “fair and equitable” under 11 U.S.C. § 1129(b)(1) (providing that when a class of impaired creditors votes against a plan, the bankruptcy court may confirm the plan only if it is fair and equitable with respect to that class). Because the claims were designated as unimpaired, under 11 U.S.C. § 1124, the creditors’ “legal, equitable, and contractual rights” were required to be “unaltered” by the reorganization plan. Joining other circuits, the panel held that under the “solvent-debtor exception,” the creditors possessed an equitable right to receive postpetition interest at the contractual or default state rate, subject to any other equitable considerations, before PG&E collected surplus value from the bankruptcy estate. The solvent-debtor exception is a common-law exception to the Bankruptcy Act’s prohibition on the collection of postpetition interest as part of a creditor’s claim. The panel disagreed with the bankruptcy court’s conclusion that In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002), was controlling because it established a broad rule that all unsecured claims in a solvent-debtor bankruptcy are entitled only to postpetition interest at the federal judgment rate, regardless of impairment status. The panel concluded that Cardelucci merely interpreted 11 U.S.C. § 726(a)(5), which requires that creditors of a solvent debtor receive postpetition interest at “the legal rate.” Section 726(a)(5), however, applies only to impaired chapter 11 claims, and the panel concluded that Cardelucci therefore did not address what rate of postpetition interest must be paid on the Ad Hoc Committee’s unimpaired claims. 4 IN RE PG&E CORP. The panel also disagreed with the bankruptcy court’s alternative holding that the Bankruptcy Code limited the Ad Hoc Committee to postpetition interest at the federal judgment rate. The panel held that passage of the Bankruptcy Code did not abrogate the solvent-debtor exception. Rather, the Code’s text, history, and structure compelled the conclusion that creditors like the Ad Hoc Committee continue to possess an equitable right to bargained-for postpetition interest when a debtor is solvent. 11 U.S.C. § 502(b)(2) prohibits the inclusion of “unmatured interest” as part of an allowed claim, codifying the longstanding rule that interest as part of a claim stops accruing once a bankruptcy petition is filed. That bar is subject to a statutory exception under § 726(a)(5). The panel held, however, that § 726(a)(5) applies only to impaired creditors and therefore did not unambiguously abrogate the equitable solvent-debtor exception. The panel concluded that the statutory history of § 1124 and the Bankruptcy Code’s structure also supported its conclusion that the solvent-debtor exception survived. The panel concluded that under the solvent-debtor exception, the creditors had an equitable right to receive postpetition interest pursuant to their contracts. However, PG&E’s plan did not compensate the creditors accordingly, but rather provided for interest at the lower federal judgment rate. The panel reversed and remanded to the bankruptcy court to weigh the equities and determine what rate of interest the creditors were entitled to. Dissenting, Judge Ikuta wrote that the text of the Bankruptcy Code is clear that unsecured creditors holding unimpaired claims in bankruptcy under 11 U.S.C. § 1124(b) are not entitled to postpetition interest on their claims when the debtor is solvent. Judge Ikuta wrote that the majority IN RE PG&E CORP. 5 erroneously held that pre-Code practice is binding unless the Code clearly abrogates it. Rather, the Supreme Court has directed the courts to take the exact opposite approach: so long as the Code is clear, the courts do not refer to pre-Code practice. Judge Ikuta wrote that Congress chose not to make an exception entitling unimpaired creditors to postpetition interest at the contract or state default rates, and the statutory language provided no basis for the majority’s theory that a creditor’s “claim,” which may not include postpetition interest, is nevertheless deemed “impaired” if the debtor turns out to be solvent and the creditor does not obtain postpetition interest at the end of the bankruptcy case.
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