In re Dow Corning Corp.
| Decision Date | 01 December 1999 |
| Docket Number | Bankruptcy No. 95-20512. |
| Citation | 244 BR 678 |
| Parties | In re DOW CORNING CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
COPYRIGHT MATERIAL OMITTED
The Debtor and the Official Committee of Tort Claimants negotiated and on November 9, 1998 filed a Joint Plan of Reorganization. The plan (hereafter referred to simply as the "Plan") was subsequently amended on February 4, 1999 and modified various times. The hearing on confirmation of the Plan commenced on June 28, 1999 and closing arguments were heard on July 30, 1999. Several post-hearing briefs and other submissions were received and the Court took the matter under advisement.
On this date the Court issued its Findings of Fact and Conclusions of Law on the matter of the confirmation of the Plan. This opinion is one of several which will serve to supplement and explicate some of the findings and conclusions. At least one opinion will follow later.
A general overview of the Plan's terms is contained in the opinion on classification and treatment issues. When necessary, additional Plan terms are explained here. Except when otherwise stated, all statutory references are to the Bankruptcy Code, 11 U.S.C. § 101 et seq.
Class 4, composed of commercial claims of various sorts, is impaired by the Plan, and did not accept it. Thus the Proponents' only option is to proceed via the so-called "cramdown" provision, which states that the Court "shall confirm the plan . . . if it . . . is fair and equitable with respect to" the dissenting class. 11 U.S.C. § 1129(b)(1).
A dispute has arisen over the rate at which interest on the Class 4 allowed claims should accrue for the time frame beginning with the commencement of this case and ending on the effective date of the Plan (hereafter, "pendency" interest). Under the terms of the Plan, this rate would be equal to the federal judgment rate in effect when the Debtor filed its petition. See 28 U.S.C. § 1961(a). The Official Committee of Unsecured Creditors and several of it constituents, who together we will call the "Commercial Creditors" (a term defined in our previous opinion on interest rates, In re Dow Corning Corp., 237 B.R. 380, 384 n. 1 (Bankr.E.D.Mich. 1999)), argue that this does not satisfy the "fair-and-equitable" requirement. They say that because the estate is solvent, pendency interest should be paid at the rate which would apply under the terms of their respective contracts with the Debtor.
By way of response, the Proponents assert that the contract rate of interest cannot properly be taken into consideration when assessing plan fairness. In section I below, we explain why that assertion is unpersuasive. In section II, we conclude that the provision calling for interest at the federal judgment rate is not fair and equitable.
The Proponents advanced several different arguments in support of their contention that we cannot invoke equity to require payment of interest at the contract rate. We address those arguments in the first four subsections which follow.
A "claim . . . for unmatured interest" is disallowed. 11 U.S.C. § 502(b)(2). The Proponents assert that recognition of the contract rate would be contrary to § 502(b)(2), and therefore is not permissible. See generally, e.g., Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) (). Before weighing the merits of that assertion, we will briefly review the historical developments leading up to the enactment of § 502(b)(2).
The Bankruptcy Code was enacted in 1978. It replaced, but is largely based on, the Bankruptcy Act of 1898, 11 U.S.C. § 1 et seq. (repealed). See generally 1 Collier on Bankruptcy, ¶ 1.01 (15th ed. rev.1999). Section 63 of the Act provided:
Debts of the bankrupt may be proved and allowed against his estate which are (1) a fixed liability . . . owing at the time of the filing of the petition against him . . ., with any interest thereon which would have been recoverable at that date or with a rebate of interest upon such as were not then payable and did not bear interest; . . . (5) founded upon provable debts reduced to judgments after the filing of the petition . . ., less . . . interests accrued after the filing of the petition and up to the time of the entry of such judgments. . . .
11 U.S.C. § 103(a) (1898) (repealed).1 The effect of § 63 was to "stop, or at least suspend, interest as of the date of filing the petition." In re Norcor Mfg. Co., 36 F.Supp. 978, 979 (E.D.Wis.1941). See also, e.g., In re Rhine, 213 F.Supp. 527, 540 (D.Colo.1963) ().
The Supreme Court recognized that by virtue of § 63, the accrual of "interest on unsecured debts stops" with the filing of a bankruptcy petition. Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 55 L.Ed. 244 (1911). The parties claiming a right to postpetition interest in Sexton were secured creditors, and the Court was apparently of the view that § 63 was inapplicable under such circumstances (even though the creditors were undersecured and asserted a deficiency claim). See id. at 343-44, 31 S.Ct. 256. Instead of § 63, the Court turned to English bankruptcy law:
For more than a century and a half the theory of the English bankrupt system has been that everything stops at a certain date. Interest was not computed beyond the date of the commission. . . . This rule was applied to mortgages as well as to unsecured debts. . . . The rule was laid down not because of the words of the statute, but as a fundamental principle. We take our bankruptcy system from England, and we naturally assume that the fundamental principles upon which it was administered were adopted by us when we copied the system, somewhat as the established construction of a law goes with the words where they are copied by another state. . . .
Id. at 344, 31 S.Ct. 256. See generally C. Tabb, Rethinking Preferences, 43 S.C.L.Rev. 981, 996 (1992) ( . Because English law made no exception to "the rule" against postpetition interest for the benefit of secured creditors, the Court inferred that the Act also countenanced no such exception. See Sexton, 219 U.S. at 344-46, 31 S.Ct. 256.
But Sexton did recognize an exception of a different kind, as it permitted "interest and dividends that accrued postpetition upon some of the securities" to be "applied . . . to" post-petition interest. Id. at 346, 31 S.Ct. 256. See United States v. Ron Pair Enters., 489 U.S. 235, 246, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (). And by adverting to bankruptcy law as it had developed in England, Sexton laid the groundwork for another exception which would quickly come to be recognized by the courts.
In Johnson v. Norris, 190 F. 459 (5th Cir.1911), the Fifth Circuit was called upon to settle a dispute between creditors and the bankrupts over "the disposition of . . . a surplus left in the hands of the trustees of the bankrupts after paying the principal of all claims proved and allowed, and the interest thereon up to the date of the filing of the petition in bankruptcy." Id. at 461. The creditors argued that they should be paid postpetition interest out of this surplus, while the bankrupts claimed that such interest was not recoverable under the Act. See id.
The court noted that the Act contained "no express provision . . . allowing postpetition interest . . . to be paid out of a surplus." Id. at 463. So taking its cue from Sexton, id. at 464, the court sought guidance from English precedent:
The Fifth Circuit applied this "English rule," ordering that the surplus be used to pay creditors postpetition interest. See id. at 466. In keeping with Sexton, it justified this holding on the theory that Congress implicitly adopted the rule. See id. at 465-66. Alternatively, the Fifth Circuit reasoned that because the Act was silent on the matter of postpetition interest, it was incumbent upon the court to resolve the issue based on "general principles of equity." Id. at 466.
The "solvency exception" recognized in Norris had previously been applied in nonstatutory equity receivership proceedings.2 See American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261, 266, 34 S.Ct. 502, 58 L.Ed. 949 (1914). And in American Iron, the Supreme Court cited Norris with apparent approval for the...
To continue reading
Request your trial