United States: Of Interest: Bankruptcy Court Has Equitable Power To Award Postpetition Interest To Unsecured Creditors Under Cramdown Chapter 11 Plan

Last Updated: February 26 2016
Article by Mark G. Douglas

In In re Energy Future Holdings Corp., 540 B.R. 109 (Bankr. D. Del. 2015), the bankruptcy court ruled that, although a chapter 11 plan proposed by solvent debtors need not provide for the payment of postpetition interest on unsecured claims to render the claims unimpaired, the plan must provide that the court has the discretion to award such interest at an appropriate rate "under equitable principles." The ruling highlights the important distinction between the allowance of a claim in bankruptcy and the permissible treatment of the claim under a chapter 11 plan.


In 2012, Energy Future Intermediate Holding Co. LLC and EFIH Finance Inc. (collectively, the "debtors") issued approximately $1.4 billion in unsecured notes. The note indenture provided for the payment of postpetition interest on overdue principal at the contract rate.

In April 2014, the debtors filed for chapter 11 relief in the District of Delaware. They proposed a chapter 11 plan under which holders of general unsecured claims, including the noteholders, would receive payment in full in cash of the allowed amount of their claims "or other treatment rendering such Claim[s] unimpaired." The proposed plan further provided that allowed claims would include accrued principal, fees, and interest due as of the petition date, plus "accrued postpetition interest at the Federal Judgment Rate."

The proof of claim filed by the indenture trustee on behalf of the noteholders included a claim for postpetition interest at the contract rate. The debtors objected, contending that: (i) postpetition (i.e., "unmatured") interest on an unsecured claim is disallowed under section 502(b)(2) of the Bankruptcy Code; and (ii) to the extent that a claim for postpetition interest is allowed, it should be limited under sections 726(a)(5) and 1129(a)(7)(A)(ii) to "interest at the legal rate," which the debtors argued is the federal judgment rate.

Unmatured Interest Disallowed

Initially, the bankruptcy court held that, even though the debtors were solvent, the claim for amounts due under the notes was limited to unpaid principal, interest, and fees as of the bankruptcy petition date. Any claim for postpetition interest at the contract rate specified in the indenture, the court explained, must be disallowed under section 502(b)(2) as "unmatured interest."

However, the court noted, "[T]o say that [the indenture trustee's] allowed claim excludes post-petition interest is the beginning of the analysis[,] not the end." According to the court, because the debtors filed for relief under chapter 11, the Bankruptcy Code's plan confirmation requirements dictate what the unsecured noteholders and other stakeholders must receive under a confirmable chapter 11 plan. This is a "critical distinction," the court wrote.

"Best Interests" Test May Require Payment of Postpetition Interest on Unsecured Claims

The chapter 11 plan confirmation requirements include section 1129(a)(7) of the Bankruptcy Code—the "best interests" test—which mandates that, unless each claimant in an "impaired" class (discussed elsewhere in this article) accepts a chapter 11 plan, the claimant must receive at least as much under the plan as it would receive in a chapter 7 liquidation of the debtor. Thus, because the chapter 7 distribution scheme under section 726 of the Bankruptcy Code designates as fifth, in priority of payment, interest on allowed unsecured claims "at the legal rate," a chapter 11 plan for a solvent debtor may have to provide for the payment of postpetition interest on unsecured claims to satisfy section 1129(a)(7).

The court emphasized that these provisions do not conflict with section 502(b). Although section 502(b)(2) disallows unsecured claims for postpetition interest, the court explained, a chapter 11 plan for a solvent debtor (due to the "best interests" test) may be confirmable only if it provides for the payment of interest "at the legal rate" on the unsecured claim. The court concluded that "the legal rate" should be the federal judgment rate.

"Fair and Equitable" Does Not Mean Payment of Postpetition Interest on Unsecured Claims

The court also considered the application of the plan cramdown provisions set forth in section 1129(b)(2) of the Bankruptcy Code. That subsection specifies the requirements which a cramdown chapter 11 plan must meet to be "fair and equitable" with respect to each dissenting class of secured claims, unsecured claims, or interests.

On the basis of its examination of the text of the statute and relevant case law, the bankruptcy court ruled that section 1129(b)(2)—despite its nonexclusive language—does not require a chapter 11 plan providing value to a junior class to pay postpetition interest to a more senior class of objecting unsecured creditors. Instead, the court held, section 1129(b)(2) permits (but does not require) a court to exercise its equitable powers to direct the payment of postpetition interest at whatever rate of interest the court deems appropriate.

Failure to Pay Postpetition Interest Impairment?

Finally, the court examined the concept of "impairment" under section 1124 of the Bankruptcy Code. Only impaired classes of creditors are entitled to vote on a chapter 11 plan. Section 1124 provides that a class is impaired under a plan unless, among other things, the plan: (1) "leaves unaltered the legal, equitable, and contractual rights" to which the claimant is entitled; or (2) cures any defaults (with limited exceptions), reinstates the maturity and other terms of the obligation, and compensates the claimant for resulting losses.

Section 1124 originally included a third option for rendering a claim unimpaired—by providing the claimant with cash equal to the allowed amount of its claim. In In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), the court ruled that a solvent debtor's chapter 11 plan which paid unsecured claims in full in cash, without postpetition interest, did not impair the claims. Under the New Valley rationale, a solvent debtor could avoid paying postpetition interest to "unimpaired" unsecured creditors by paying them in full in cash, even if the plan provided a distribution to a junior class, while the same solvent debtor would be obligated to pay postpetition interest to an "impaired" dissenting class of unsecured creditors.

Due to the perceived unfairness of New Valley, Congress removed this option from the Bankruptcy Code in 1994. Since then, most courts considering the issue have held that, if an unsecured claim is paid in full in cash with postpetition interest at an appropriate rate, the claim is unimpaired under section 1124(1).

According to the Energy Future court, because postpetition interest on an unsecured claim is disallowed by statute—section 502(b)—rather than a chapter 11 plan, such "statutory impairment" may not constitute impairment under section 1124(1). According to the court, this is a logical extension of In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3rd. Cir. 2003). In PPI, the Third Circuit held that a landlord's future rent claim capped under section 502(b)(6) of the Bankruptcy Code was not impaired because the text of section 1124(1) mandates that the relevant barometer for impairment is whether the plan itself, as distinguished from another provision of the Bankruptcy Code, limits the claimant's legal, equitable, or contractual rights. However, the Energy Future court noted that this extension of PPI resurrects the inequity which Congress sought to excise in amending section 1124 in 1994.

To reconcile this, the court explained that section 1124(1) also provides that a plan must leave equitable rights unaltered to render a claim unimpaired. It further noted that allowing postpetition interest on an allowed claim to unimpaired unsecured creditors in a solvent debtor case might be appropriate to preserve such equitable rights.

Ultimately, the bankruptcy court ruled that the debtors' chapter 11 plan need not provide for the payment of postpetition interest on the unsecured noteholder claims to render the claims unimpaired. However, the court held that the plan must provide for the payment of postpetition interest at an appropriate rate "under equitable principles." According to the court, "[T]he fair and equitable test as applied to unsecured creditors in solvent debtor cases . . . must also be met in solvent debtor cases for such creditors to be unimpaired." Whether such interest would be awarded and at what rate in this case, the court wrote, "cannot be determined at this time."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Mark G. Douglas
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.