In today’s low interest rate environment, the difference between a contractual interest rate and the federal judgment rate can be quite significant. It is not surprising, therefore, that this issue has become hotly litigated in cases involving solvent Chapter 11 debtors. Recently, the U.S. District Court for the Northern District of Illinois, in Colfin Bulls Funding A v. Paloian (In re Dvorkin Holdings), 547 B.R. 880 (N.D. Ill. 2016), determined that the interest rate provided for in the creditor’s contract should be the presumptive applicable interest rate in cases involving solvent Chapter 11 debtors. While the opinion addresses several related issues, this article focuses on the court’s analysis related to whether a creditor, in a solvent bankruptcy case, should receive interest at the contract rate or the federal judgment rate.
In Dvorkin, the court addressed a creditor’s appeal of a confirmation order. Pursuant to that order, the bankruptcy court confirmed the debtor’s plan which provided for payment in full of all unsecured claims, together with interest at the federal judgment rate. In reversing the bankruptcy court’s confirmation order in part, the Dvorkin court held that where a debtor’s estate is solvent, unsecured creditors should be presumptively entitled to the interest rate provided in the creditors’ respective contracts, subject to a debtor’s ability to rebut this presumption on equitable grounds.
Facts
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