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Cuker Interactive, LLC filed a Chapter 11 bankruptcy petition onDecember 13, 2018, in the United States Bankruptcy Court for theSouthern District of California. Because it was solvent atconfirmation, the debtor proposed to pay secured creditors in full,with interest at the contract rate, and general unsecured creditorsin full, with postpetition interest at the "legal rate,"or a rate determined by the Court that leaves the creditorsunimpaired.1 But what rate is that?

Section 1124(1) provides that where a Chapter 11 plan, and notthe Bankruptcy Code, "impairs" a claim or interest, theimpaired class is entitled to vote on the plan unless it"leaves unaltered the legal, equitable, and contractualrights" of the holders.2 In this case,unsecured creditors argued that they were "impaired"because the plan did not require the debtor to pay postpetitioninterest at the contractual rate or a higher state law judgmentrate.3 Bankruptcy Judge Adler disagreedwith the unsecured creditors' characterization of the plan,noting that the plan instead calls for either the federal judgmentrate, or a "rate determined by the Court for their claims tobe 'unimpaired.'"4

Thus, the "discrete issue here is what is the rate ofpostpetition interest that must be applied for the Creditors'unsecured claims to be unimpaired?"5 InIn re Cardelucci, 285 F.3d 1241 (9th Cir. 2002), the NinthCircuit held that the "interest at the legal rate" due togeneral unsecured creditors of a solvent chapter 11 debtor is thefederal judgment rate.6 While the generalunsecured creditors argued that In re Cardelucci isinapplicable because the Ninth Circuit addressed impairment under 726(a)(5) and 1129(a)(7), not 1124(1), JudgeAdler disagreed, noting that the "Ninth Circuit phrased itsholding broadly to apply to all unsecured claims."7 In reaching their conclusion, theNinth Circuit also relied heavily on In re Beguelin, 220B.R. 94 (BAP 9th Cir. 1998), wherein a Bankruptcy Appellate Panellikewise held that solvent debtors must pay postpetition interestto unsecured creditors at the federal judgment rate.8 Both the Ninth Circuit and the BAPstated that they favored applying the federal judgment rate becauseit promotes uniformity and efficiency.9

Further, in In re PG&E Corp., 610 B.R. 308 (Bankr.N.D. Cal. 2019), another bankruptcy court directly addressed theapplicability of In re Cardelucci to"impairment" under 1124.10There, reasoning that (1) the Ninth Circuit did not narrow theapplication of its holding to "impaired claims," and (2)a uniform rate ensures equitable treatment of creditors, thePG&E court determined that it was bound by In reCardelucci.11

The creditors argued that Judge Adler should adopt the"solvent-debtor exception" applied by several otherCircuit Courts, which "enforces the state law rights ofunsecured creditors in a solvent-debtor case, including their rightto receive postpetition interest at their contractual rate."12 On remand, the UltraPetroleum court held that "where the claims of unsecuredcreditors are 'unimpaired' they must receive postpetitioninterest at their contractual rate, or otherwise be given theopportunity to vote on the plan."13There, the bankruptcy court reasoned that the principle behind the"solvent-debtor exception" is that a "debtor mustrepay its debts in full when it has the means to do so", andthat for solvent debtors, "a bankruptcy court's role ismerely to enforce the contractual rights of the parties.14

While Judge Adler "understands the rationale forapplying" the exception, she noted both that she is bound bythe Ninth Circuit's decision in Cardelucci, and thatthe application of the solvent-debtor exception to larger casesposes a significant administrative issue.15 Asa result, Judge Adler held that the applicable "legalrate" at which a solvent debtor must repay unsecured creditorsis the federal judgment rate.16

Footnotes

1. In re Cuker Interactive, LLC, No. BR18-7363-LA11, 2020 WL 7086066, at *1 (Bankr. S.D. Cal. Dec. 3,2020).

2. Id. (citing 11 U.S.C. 1124(1)).

3. In re Cuker Interactive, 2020 WL 7086066,at *2.

4. Id.

5. Id.

6. In re Cuker Interactive, 2020 WL 7086066,at *2 (citing In re Cardelucci, 285 F.3d at1234-35).

7. Id. (citing In re Cardelucci, 285F.3d at 1234).

8. In re Cuker Interactive, 2020 WL 7086066,at *2 (citing Beguelin, 220 B.R. at101).

9. Id.

10. Id. at *3.

11. Id. (citing In re PG & E,610 B.R. at 312-13, 315).

12. Id. at *3 (citing In re UltraPetroleum Corp., 943 F.3d 758 (5th Cir. 2019) (remanding,acknowledging potential applicability of solvent-debtor exception)(additional citations omitted).

13. Id.

14. Id.

15. Id. at *4.

16. Id. at *5.

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