Ninth Circuit Rules That The Solvent Debtor Exception Is Alive And Well In PG&E

• Published date: 09 September 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Shearman & Sterling LLP
• Author: Mr Fredric Sosnick and Jacob Mezei

Introduction

The common law solvent debtor exception, in short, means that a solvent debtor must generally pay post-petition interest accruing during bankruptcy at the contractual or state law rates before collecting surplus value from the bankruptcy estate. Several recent bankruptcy court rulings have analyzed the solvent debtor exception, and some have called the solvent debtor exception into question.¹ On August 29, 2022, the United States Court of Appeals for the Ninth Circuit, in a divided opinion, became the first circuit court to address the question that has resulted in differing conclusions among bankruptcy courts: what rate of post-petition interest must a solvent debtor pay to creditors whose claims are designated as unimpaired under a plan pursuant to § 1124(1) of the Bankruptcy Code?

In reversing the ruling of U.S. Bankruptcy Judge Dennis Montali of the Northern District of California, the Ninth Circuit held that (i) while there may be exceptions based on the equities of each case, unimpaired creditors of a solvent debtor enjoy an equitable right to contractual or state law default post-petition interest before allocation of surplus value from a bankruptcy estate; and (ii) contrary to the holdings of some bankruptcy courts, passage of the bankruptcy code did not abrogate the solvent-debtor exception.

Background

The Pacific Gas & Electric Company (PG&E) filed for chapter 11 on January 29, 2019. At the time of filing, PG&E's assets exceeded its liabilities by approximately $20 billion, making it, by all accounts, a solvent debtor. PG&E's chapter 11 plan, however, classified the claims of the ad hoc committee of holders of trade claims (the "Ad Hoc Committee") as general unsecured claims and provided that the creditors would be paid in full plus post-petition interest at the federal judgment rate of 2.59% under 28 U.S.C. § 1961(a). The plan also classified the creditors' claims as unimpaired, meaning that they were deemed automatically to accept the plan and had no power to vote against it or argue that their treatment was not "fair and equitable" under 11 U.S.C. § 1129(b)(1).

The Ad Hoc Committee, and other similarly situated creditors, objected to confirmation of the PG&E plan and argued that PG&E had to honor its contractual obligations before its shareholders reaped a surplus from the bankruptcy estate. Prior to PG&E's bankruptcy filing, the Ad Hoc Committee claimants, and similarly situated creditors, possessed a contractual right to...