In re Cuker Interactive, LLC

• Decision Date: 03 December 2020
• Docket Number: Bk. No. 18-7363-LA11
• Citation: 622 B.R. 67
• Court: U.S. Bankruptcy Court — Southern District of California
• Parties: IN RE: CUKER INTERACTIVE, LLC, Debtor.

622 B.R. 67

IN RE: CUKER INTERACTIVE, LLC, Debtor.

Bk. No. 18-7363-LA11

United States Bankruptcy Court, S.D. California.

Signed December 3, 2020

Robert R. Barnes, The Broken-Bench Law Firm, Michael D. Breslauer, Solomon Ward Seidenwurm & Smith, LLP, San Diego, CA, for Debtor.

MEMORANDUM DECISION

LOUISE DE CARL ADLER, JUDGE

I.INTRODUCTION

On November 18, 2020, the Court held a hearing on Cuker Interactive, LLC's ("Debtor") contested Fourth Amended Plan of Reorganization dated September 15, 2020 ("Plan"). The Court adopted its Tentative Ruling [ECF 442] confirming the Plan and finding that the Federal Judgment Rate (at 2.69%) is the "legal rate" at which postpetiton interest must be applied to unsecured claims in a solvent estate from the date of filing to the Plan's effective date. As stated in the Tentative Ruling, the Court writes this Memorandum Decision to augment that ruling on the discrete issue of the appropriate "legal rate" of postpetition interest for this time period.

II.FACTUAL BACKGROUND

Debtor's estate is solvent. Debtor's Plan proposes leaving all creditors "unimpaired" under 11 U.S.C. § 1124(1)¹ by paying: (i) fully secured creditors 100% of their allowed claims with contractual interest; and (ii) general unsecured creditors 100% of their allowed claims with postpetition interest at the "legal rate" (defined by the Plan as the Federal Judgment Rate), or the rate determined by the Court for their claims to be unimpaired. Because all creditors are "unimpaired," they are conclusively deemed to have accepted the Plan per § 1126(f).

Creditors, Pillsbury Winthrop Shaw Pittman LLP ("Pillsbury") and Wolfe Legal Group, PC ("Wolfe") (collectively "Creditors"), objected to Plan confirmation contending that to remain "unimpaired" for purposes of § 1124(1), the Plan must pay postpetition interest on their unsecured claims at their contractual rate, not the Federal Judgment Rate.² After thorough analysis of the case law and the parties' arguments, and for the reasons more thoroughly set forth below, the Court holds that the "legal rate" of interest to be applied postpetition to Creditors' unsecured claims is the Federal Judgment Rate.

III.LEGAL ANALYSIS

Section 1124(1) provides that a claim or interest is "impaired" under a chapter 11 plan, thereby entitling the impaired class to vote, unless "the plan" leaves unaltered the legal, equitable, and contractual rights to which the claim or interest entitles the holder of such claim or interest. 11 U.S.C. § 1124(1). It is important to note that impairment, for the purposes of § 1124(1), only occurs where the plan itself alters the creditors' rights. In re PG&E Corp., 610 B.R. 308, 315 (Bankr. N.D. Cal. 2019) ; see also In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019) (recognizing that a claim is impaired only if the plan does the altering of creditors' rights, not the Code). Where the alteration of the creditor's legal rights is a consequence of the Bankruptcy Code itself, and not of the plan, the creditors are not "impaired" for purposes of § 1124(1). In re PG&E Corp., 610 B.R. at 315 ; In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 204 (3rd Cir. 2003). Creditors that are "unimpaired" are conclusively deemed to have accepted the plan and not permitted to vote on the plan. 11 U.S.C. § 1126(f).

Here, the Creditors contend they are "impaired," primarily, because the Plan does not require Debtor to pay postpetition interest on their unsecured claims at their contractual rates or at the State Law Judgment Rate (10%). Their characterization of the Plan is incorrect. In fact, the Plan requires Debtor to pay creditors postpetition interest on their unsecured claims at the Federal Judgment Rate (2.69%); or at whatever rate determined by the Court for their claims to be "unimpaired." [See Plan, Art. IV.A.2, Art. II. A.2(b), Art. IV.A.2(e), and Art. IV.A.2(h) ] As such, the discrete issue here is what is the rate of postpetition interest that must be applied for Creditors' unsecured claims to be unimpaired?

It is settled law that where a chapter 11 debtor is solvent, the debtor generally must pay postpetition interest to its general unsecured creditors. In re Cardelucci, 285 F.3d 1231, 1234 (9th Cir. 2002) ; see also Matter of Beverly Hills Bancorp, 752 F.2d 1334, 1339 (9th Cir. 1984) (recognizing that postpetition interest should be paid on allowed unsecured claims in a solvent-debtor case). However, the Federal Circuit Courts of Appeal are split as to whether the Federal Judgment Rate or the parties' contract rate applies in the foregoing situation.

This Court is not writing on a clean slate. It must consider In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002) because it also involved the rate of postpetition interest to be paid to general unsecured creditors in a solvent-debtor's chapter 11 case. The Ninth Circuit began by recognizing that where a debtor is solvent, unsecured creditors are entitled to be paid postpetiton "interest at the legal rate." Id. at 1234 (citing § 726(a)(5), which is incorporated into chapter 11 by § 1129(a)(7)). It examined whether the phrase "interest at the legal rate" in § 726(a)(5) is the Federal Judgment Rate or a rate to be determined by the parties' contract or state law. Id. at 1234. The Ninth Circuit determined that the principles of statutory interpretation strongly support the conclusion that Congress intended the phrase "interest at the legal rate" to mean the Federal Judgment Rate. Id. at 1234-35. Additionally, it reasoned that applying the Federal Judgment Rate promotes uniformity within federal law; that applying a single, easily determined interest rate to all claims for postpetition interest ensures equitable treatment and fairness between creditors; and that using the Federal Judgment Rate is the most judicially efficient and practical manner of allocating the estate's remaining assets. Id. at 1235-36.

Creditors argue that Cardelucci is inapplicable here. They point out that the Ninth Circuit solely addressed § 726(a)(5), which applies to "impaired" claims in a chapter 11 case only by virtue of the best interests test in § 1129(a)(7); whereas this case involves "unimpairment" under § 1124(1). They are correct that Ninth Circuit's decision in Cardelucci never cited to § 1124, and it never addressed the rate of interest for unimpairment to be conclusively deemed to have accepted the plan. Nevertheless, the Court is not persuaded that Cardelucci is inapplicable. The Ninth Circuit phrased its holding broadly to apply to all unsecured claims, and it relied heavily on the decision of the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in In re Beguelin, 220 B.R. 94 (BAP 9th Cir. 1998). See Cardelucci, 285 F.3d at 1234 (relying on, and even quoting, the rationale in Beguelin in adopting the Federal Judgment Rate).

Specifically, the BAP in Beguelin held that a solvent-debtor must pay postpetition interest to ail unsecured creditors at the Federal Judgment Rate. Beguelin, 220 B.R. at 101. The BAP reasoned that applying the uniform Federal Judgment Rate promotes universal resolution in bankruptcy courts across the country; and it is the practical, efficient and inexpensive means to calculate the amount of interest to be a paid to each creditor. Id. at 100-101. Likewise, in Cardelucci the Ninth Circuit broadly stated that it favored applying the Federal Judgment Rate "to all claims for postpetition interest" because it ensures uniformity, equitable treatment among creditors and efficiency. Cardelucci, 285 F.3d at 1235-36. It concluded that it must apply this rate even where there are "sufficient assets to fully pay all claims for all interest," and even in instances where "a debtor may receive a windfall" from the lower Federal Judgment Rate. Id. at 1236.

The question of Cardeluccís application to "impairment" under § 1124 was directly addressed in In re PG & E, Corp., 610 B.R. 308 (Bankr. N.D. Cal. 2019), a case that is factually on point. The bankruptcy court in PG & E read Cardelucci expansively and ultimately adopted its holding as applying to all unsecured creditors in a solvent-debtor case. In re PG & E, 610 B.R. at 310. The bankruptcy court considered that the Cardelucci decision had addressed a narrower issue, and it did not discuss impairment under § 1124. Id. at 312-13. It concluded that the Cardelucci holding must be broadly applied to "all unsecured claims" for two reasons: (1) the Ninth Circuit did not narrow the application of its holding to "impaired" claims, and so it applied broadly given the structure of the Code, and the clear and plain meaning of its applicable provisions; and (2) a single, easily determined rate for all postpetition interest ensures equitable treatment of creditors. Id. at 312-13, 315. Consequently, the PG & E court held it was bound by the sweeping holding of Cardelucci in a situation that is factually on point with this case.

In discussing the issue of "impairment" under § 1124 and a creditor's right to vote on the plan, the PG & E court distinguished between the provisions of the Bankruptcy Code and the plan. It explained that limiting an unsecured claim to postpetition interest at the Federal Judgment Rate is a function of the Bankruptcy Code, not the plan. Id. at 315-16. Therefore, when a plan treats unsecured creditors as provided by the Bankruptcy Code (by paying them postpetition interest at the Federal Judgment Rate in a solvent-debtor case), the plan does not "impair" creditors in the manner contemplated by § 1124. Id. (citing In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019), and In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3rd Cir. 2003) ).

Creditors urge that In re PG & E was wrongly decided. They urge this Court to adopt the "solvent-debtor exception" recognized by several other Circuit Courts of Appeal. This exception enforces the state law rights of unsecured creditors in a solvent-debtor case, including their right to receive postpetition interest at their contractual...