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Bankruptcy – Post- Petition Interest – Judgment Rate – Ch. 7

A bankruptcy court did not err in applying the federal judgment rate under 28 U.S.C. Sect. 1961(a), not the pre-petition contract rate, to an award of post-petition interest pursuant to 11 U.S.C.Sect. 726(a)(5).

A bank held four unsecured claims against debtor’s bankruptcy estate, totaling $122,515.91. It became clear during the course of debtor’s Chapter 7 bankruptcy proceedings that her estate was solvent, so the bankruptcy trustee proposed to make post-petition interest payments under Sect. 726(a)(5). The bank objected to use of the federal judgment rate and argued it should receive interest at the rate established by its pre-petition contract with debtor. The bankruptcy court overruled the bank’s objection and approved use of the federal judgment rate.

Courts have divided on this question. Some courts have applied a pre-petition contract rate in cases similar to this one. Other courts, and at least one leading commentator, have determined the “legal rate” under Sect. 726(a)(5) is the federal judgment rate provided by 28 U.S.C. Sect. 1961(a). Having reviewed each line of cases, the court is persuaded that “the legal rate” refers to the federal judgment rate, and does not encompass, as the bank contends, any lawful pre-petition contract rate.

Courts which choose to apply a pre-petition contract rate do so to avoid creating a windfall for a solvent debtor. Even if this court believed Congress struck the wrong balance in this case, and did not adequately consider the potential creation of windfalls for solvent debtors, the court is not at liberty to substitute its policy judgment for that of Congress.

Judgment of bankruptcy court affirmed.

Branch Banking & Trust Co. v. McDow (Payne, J.) No. 3:06cv559, Aug. 16, 2007; USDC at Richmond, Va. VLW 007-3-343, 7 pp.

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