In re Dow Corning Corp.

• Decision Date: 30 July 1999
• Docket Number: Bankruptcy No. 95-20512.
• Citation: 237 BR 380
• Parties: In re DOW CORNING CORPORATION, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

237 B.R. 380 (1999)

In re DOW CORNING CORPORATION, Debtors.

Bankruptcy No. 95-20512.

United States Bankruptcy Court, E.D. Michigan, Northern Division.

July 30, 1999.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Barbara J. Houser, Craig J. Litherland, David Ellerbe, Sheinfeld, Maley & Kay, P.C., Dallas TX, for debtor.

Ogden N. Lewis, Donald S. Bernstein, Michael S. Flynn, Davis Polk & Wardwell, Sheryl L. Toby, Michael J. Friedman, Honigman, Miller, Schwartz & Cohn, New York City, for the Official Committee of Unsecured Creditors.

David S. Rosner, Kasowitz, Benson, Torres & Friedman LLP, for Creditors Angelo, Gordon & Co., Appaloosa Management, L.P., Franklin Mutual Advisors, New York City, for Creditors.

Ralph R. Mabey, LeBoeuf, Lamb, Greene & MacRae, L.L.P. Management Co. LLC and Halcyon Offshore Management Co. LLC, Kenneth H. Eckstein, Jeffrey S. Trachtman, Kramer Levin Naftalis & Frankel LLP, Salt Lake City, UT, for the Official Committee of Tort Claimants.

Mark I. Bane, Kelley Drye & Warren LLP, New York City, for Chase Manhattan Bank.

Patrick A. Murphy, Murphy Sheneman, Julian & Rogers P.C., New York City, for Bank of America NT & SA.

Alan M. Gelb, Jones Hirsch Connors & Bull P.C., New York City, for Bear, Stearns Investment Products, Inc.

Robert S. Hertzberg, Hertz, Schram & Saretsky, P.C., Bloomfield Hills, MI, for

Davidson Kempner International Advisors, L.L.C. and M.H.M. Davidson Co., Inc.

Glenn E. Siegel, Winthrop, Stimson, Putnam & Roberts, New York City, for Bank of New York.

AMENDED OPINION ON THE MEANING OF "INTEREST AT THE LEGAL RATE" IN 11 U.S.C. ? 726(a)(5)

ARTHUR J. SPECTOR, Chief Judge.

The Official Committee of Unsecured Creditors ("U/S CC") and certain creditors holding general unsecured claims of a commercial nature objected to confirmation of the plan of reorganization filed jointly by the Debtor and the Official Committee of Tort Claimants (the "Proponents").¹ One of the objections turns on the interpretation of the term "interest at the legal rate" found in 11 U.S.C. ? 726(a)(5). Because the Court agrees with the Proponents that the term refers to the federal judgment rate, 28 U.S.C. ? 1961(a), this objection is overruled.

I. Introduction

The U/S CC and a number of its constituents assert that the Joint Plan cannot be confirmed because it fails to satisfy ? 1129(a)(7)'s "best-interest-of-creditors" test. This section reads as follows:

A court may not confirm a chapter 11 plan unless:

(7) With respect to each impaired class of claims or interests ?€”

(A) each holder of a claim or interest of such class ?€”

(i) has accepted the plan; or

(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date. . . .

11 U.S.C. ? 1129(a)(7). Under this statute the bankruptcy court must compare what a dissenting claimant would receive if the estate were liquidated under the provisions of chapter 7 of the Bankruptcy Code with what the claimant would receive under the plan. If the creditor would get more in a chapter 7 liquidation, then the plan cannot be confirmed. See 7 Collier on Bankruptcy ? 1129.037b (15th ed. rev.1999). The Commercial Creditors base their assertion that the plan fails this test on the chapter 7 distribution statute, which states:

(a) Except as provided in section 510 of this title, property of the estate shall be distributed ?€”

(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section;

(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is ?€”

(A) timely filed under section 501(a) of this title;

(B) timely filed under section 501(b) or 501(c) of this title; or

(C) tardily filed under section 501(a) or this title, if ?€”

(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and

(ii) proof of such claim is filed in time to permit payment of such claim;

(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title other than a claim of the kind specified in paragraph (2)(C) of this subsection;

(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;

(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and

(6) sixth, to the debtor.

11 U.S.C. ? 726(a) (emphasis added). The parties assume, as does the Court for purposes of this opinion, that there will be sufficient funds on hand to pay interest under the fifth paragraph. While the parties agree that ? 1129(a)(7) requires the plan to provide interest on unsecured creditors' claims at the legal rate, they disagree over what such compliance entails.

The Proponents argue that ? 726(a)(5) calls for interest at the rate determined under 28 U.S.C. ? 1961(a). The Commercial Creditors vehemently disagree, arguing instead that the correct post-petition interest rate is the rate provided for in the contract or, if no contract rate exists, at the otherwise applicable statutory rate.

In resolving this conflict, there are two ways to proceed. One is to begin with 28 U.S.C. ? 1961(a), and decide whether that statute governs allowed claims in bankruptcy. See Part II. The alternative is to focus on ? 726(a)(5) and consider whether that statute incorporates 28 U.S.C. ? 1961(a). See Part III. But regardless of the road traveled, the destination is the same ?€” ? 726(a)(5) requires post-petition interest to be calculated pursuant to 28 U.S.C. ? 1961(a).

II. Reference to "Money Judgments" in 28 U.S.C. ? 1961(a) Includes Allowed Claims in Bankruptcy

A. 28 U.S.C. ? 1961(a) Applies in Bankruptcy Cases

Section 1961 provides that "interest shall be allowed on any money judgment in a civil case recovered in a district court." 28 U.S.C. ? 1961(a). The "interest shall be calculated from the date of the entry of the judgment, at a rate equal to the coupon issue yield equivalent . . . of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the judgment." Id.

As indicated, the Commercial Creditors argue that the post-petition interest rate should be determined by some source other than this statute, such as state law or the terms of the parties' contract. Courts, however, must invoke ? 1961(a) in those circumstances in which the statute applies. See Bricklayers' Pension Trust Fund v. Taiariol, 671 F.2d 988, 989 (6th Cir.1982) ("This provision mandates the imposition of post-judgment interest, thus removing the award of such interest from the discretion of the District Court."). Therefore, the Court may consider "alternatives" to ? 1961(a) only if the claims of the Commercial Creditors are not governed by the statute. And, as will be explained, we believe that the statute is in fact controlling.

Section 1961 does not specifically mention the "Bankruptcy Court." But "bankruptcy judges . . . constitute a unit of the district court" for the judicial district in which they serve. 28 U.S.C. ? 151. Thus it would seem that the reference in ? 1961(a) to the "district court" includes bankruptcy courts as well. In re Goldblatt Bros., Inc., 61 B.R. 459, 466 n. 4 (Bankr. N.D.Ill.1986).

Noteworthy in this regard is subsection (c) of ? 1961, which limits the statute's applicability with respect to certain judgments, and provides that certain other types of judgments are excluded from ? 1961 altogether. Since judgments issued by bankruptcy courts are not mentioned in this subsection, the logical inference to draw is that they are subject to the full thrust of the statute. Cf. Tennessee Valley Auth. v. Hill, 437 U.S. 153, 188, 98 S.Ct. 2279, 57 L.Ed.2d 117 (1978) ("There are no exemptions in the Endangered Species Act for federal agencies, meaning that under the maxim expressio unius est exclusio alterius, we must presume that the exemptions listed in the statute . . . were the only `hardship cases' Congress intended to exempt."). That inference is particularly appropriate here since there is no apparent reason why a judgment creditor's right to interest should turn on whether the judgment issued in the district court or a unit thereof. Cf. United States v. Ron Pair Enters., 489 U.S. 235, 243, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (concluding that non-consensual lienholders are entitled to post-petition interest under 11 U.S.C. ? 506(b), based in part on the Court's view that there was no "significant reason why Congress would have intended, or any policy reason would compel, that such creditors . . . be treated differently" from those holding consensual security interests).

And in fact, bankruptcy cases routinely hold that "? 1961(a) applies to bankruptcy proceedings." In re Pester Refining Co., 964 F.2d 842, 849 (8th Cir. 1992); Ocasek v. Manville Corp. Asbestos Disease Compensation Fund, 956 F.2d 152, 154 (7th Cir.1992); In re Resyn Corp., 945 F.2d 1279, 1284 (3d Cir.1991); Grant v. George Schumann Tire & Battery Co., 908 F.2d 874, 883 (11th Cir.1990); In re Thrall, 196 B.R. 959,...