Allowing Claims

Question 1

What is the interest relevant provision for Ch 11? Ch 7?

Answer 1

502(b)2 excludes claims for unmeasured interest

726 allows for payment of post-petition interest at the legal rate before $ goes to the debtor

Question 2

Can unsecured creditors collect post-petition interest in Ch11? At what rate?

Answer 2

Generally no - 502(b)2
If the principal of unsecured debts can be paid (debtor is solvent) most courts will allow collection of post-petition interest before the debtor gets $.
The rate is probably either the rate set by state statute or the contract rate

Question 3

Can unsecured creditors collect post-petition interest in Ch7? At what rate?

Answer 3

Yes (if there is enough $ to pay all of the allowed claims and $ is about to go to the debtor under 726)
The “legal rate” is allowed which is usually the rate set by state statute for judgments but if that’s too low courts will use the contract rate

Question 4

Can senior creditors collect post-petition interest from subordinated creditors?

Answer 4

Yes - some circuits still require King Resources’ clear statement despite 510(a) in the new bankruptcy code

Question 5

Can guarantors be forced to pay interest due on guaranteed debt?

Answer 5

Yes (at least of the guaranty agreement is as strong as the one in Bruno)

Question 6

Can over secured creditors collect interest/fees post-petition? What rate?

Answer 6

Yes - to the extent of the over security.
Ron Pair says the contract rate is not required, but there is a presumption in favor of the contract rate, penalty rates are also allowed if common for the industry

Question 7

Can underscured creditors collect post-petition interest as an adequate protection payment?

Answer 7

No - Timbers

Question 8

What is the end game solution to collecting post-petition interest?

Answer 8

Use an SPV

Question 9

Is OID allowed as a bankruptcy claim?

Answer 9

No - unless Chateaugay

Question 10

Can make whole provisions increase the bankruptcy claim?

Answer 10

Circuit split hinging on if the bankruptcy’s acceleration is the equivalent to a redemption and if the redemption was voluntary

Question 11

What interest rate is used to discount the value of a cramdown?

Answer 11

In Till SCOTUS said a prime plus formula applied in the context of individual bankruptcies
In MPM Sillicones the 2nd circuit said a prime plus rate was too low for corporate bankruptcies and deferred to the market rate as long as there is an efficient market

Question 12

What does bankruptcy do to all claims?

Answer 12

accelerates them. Equitable claims have to be monetized

Question 13

Given an example of how the definition of senior debt in an indenture is very important

Answer 13

In drum financial the senior debt provision was opt-in, but in WT Grant it was opt-out which makes a huge difference if substantively consolidated

Question 14

What is the value of a secured creditor’s allowed claim?

Answer 14

See 506. The REPLACEMENT VALUE of the collateral per SCOTUS (not obvious from the text). Any debt in excess of the replacement value is unsecured

Question 15

Would you rather be secured or senior?

Answer 15

Might rather be senior because if the collateral value has declined significantly pre-bankruptcy, most of the claim could be unsecured. Could also be Senior Secured

Question 16

why is setoff out of place in bankruptcy?

Answer 16

It makes the estate the loser and distorts a pro rata distribution of unsecured claims. Encourages firms to extend more credit to the debtor if they know they can set off (and these may not actually benefit the estate)

Question 17

What are the two limitations to set off?

Answer 17

The debt owed to the debtor cannot be acquired within 90 days of bankruptcy while the debtor is insolvent or after the commencement of the case