The Court began by noting that the plain language of section 502(b)(2) of the Bankruptcy Code is incompatible with the notion that UMB's claim could contain postpetition interest. That section specifically prohibits the allowance of "unmatured interest" as part of an allowed unsecured claim, and is the general rule. Furthermore, section 726(a) of the Bankruptcy Code distinguishes between unsecured claims and postpetition interest on these claims, and supports the plain meaning interpretation of section 502(b)(2). Section 726(a) contains the waterfall provisions in Chapter 7 proceedings. Section 726(a)(2) governs payment of allowed unsecured claims while section 726(a)(5) provides for the payment of postpetition interest on allowed unsecured claims.

The Court noted "a distinction between the payment of interest on an allowed claim as opposed to as an allowed claim" (, at *2) (emphasis in original). This distinction is critical, as the receipt of postpetition interest "does not arise as part of the allowed amount of the claim but, rather, as a requirement of confirmation" (, at *2). Section 502 defines the amount of the claim while section 1129 and its other related provisions govern confirmation of a plan.

The provisions of section 1129 of the Bankruptcy Code provide a variety of alternatives whereby creditors can agree to virtually any treatment of claims by voting, as a class, to accept the plan. However, under the "best interests of creditors" test in section 1129(a)(7) the holder of an impaired claim that votes to reject the plan, even if the class votes to accept the plan, must receive or retain under the plan "property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7" (emphasis added).

The Court noted that whether viewing sections 726(a) and 1129(a)(7) singularly or in tandem, nothing in either section "alters the allowed amount of the unsecured claim, which excludes unmatured, i.e., postpetition, interest" (, at *3). Those sections merely provide the possibility that postpetition interest could be due at the legal rate if an impaired class would have received payment of such interest in a hypothetical liquidation.

Given the hypothetical possibility for the payment of postpetition interest, the Court next examined what the "legal rate" of interest would be for purposes of the best interests of creditors test, and held it to be the federal judgment rate, rather than the specified contract rate. In doing so, the Court adopted the reasoning in In re Washington Mutual, Inc. (see 461 B.R. 200 (Bankr. D. Del. 2011)). The court in Washington Mutual relied on support from many factors, including:

Next, the Court addressed section 1129(b)(1) which provides for certain plans to be "crammed down" on a rejecting impaired class "if the plan does not discriminate unfairly, and is fair and equitable." Section 1129(b)(2)(B) provides that a plan is fair and equitable concerning unsecured creditors if either:

UMB argued that in the context of a solvent debtor's reorganization, payment to unsecured creditors of postpetition interest at the contract rate is an additional requirement for a plan to be fair and equitable. Specifically, UMB looked to the introductory text of section 1129(b)(2) which states that "the condition that a plan be fair and equitable with respect to a class includes the following requirements" (emphasis added) and argued that the word "includes" means there are other unenumerated requirements to the "fair and equitable" test (meaning, for a plan to be fair and equitable, it must satisfy either prong (i) or (ii) of section 1129(b)(2)(B) plus any other applicable unenumerated requirements). The Court rejected this argument on several grounds. First, it noted that the placement of the word "includes" applies to all three types of claims contemplated by section 1129(b)(2) (secured claims, unsecured claims, and interests). Given that the provision for secured claims specifically provides for postpetition interest at the contract rate (and that postpetition interest is something that could never apply to interests), the Court could not agree that postpetition interest for unsecured claims is required as an unenumerated requirement when it does not also apply to secured claims and interests.

The Court also found UMB's reliance on the US Supreme Court's pre-Code decision in Consolidated Rock Products Co. v. Du Bois problematic, as it dealt only with secured creditors receiving postpetition interest and was thereafter codified in sections 1129(b)(2)(A) and 506(b) (but not in section 1129(b)(2)(B), which governs the treatment of unsecured creditors) (see 312 U.S. 510 (1941)). The Court dismissed similar pre-Code cases, and UMB's reliance on the post-Code Dow Corning line of cases, In re Dow Corning Corp, 224 B.R. 678 (Bankr. E.D. Mich.1999) and In re Dow Corning Corp., 456 F.3d 668 (6th Cir. 2006), which the Court explained did not hold that the payment postpetition interest to unsecured creditors at the contract rate is required for a plan to be fair and equitable. Relying on Dow Corning, the Court held that "the plain meaning of section 1129(b)(2) does not require the payment to unsecured creditors of postpetition interest when a junior class is receiving a distribution for a plan to be fair and equitable. Rather, the Court has the discretion to exercise its equitable powers to require, among other things, the payment of post-petition interest. . . [which] may be the contract rate or such other rate as the Court deems appropriate" (, at *7) (emphasis in original).

Lastly, the Court examined the possibility that unsecured creditors could be protected by section 1129(a)(10) of the Bankruptcy Code, which provides if a class is impaired under a plan, it can only be confirmed if "at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider." Therefore, a plan that fails to pay unsecured creditors postpetition interest at the contract rate is unconfirmable unless a class of impaired creditors votes to accept the plan. The Court explained that when no other impaired classes exist, the only way the Debtor can avoid the problem of section 1129(a)(10) is by unimpairing its creditors. Section 1124(1) of the Bankruptcy Code provides that a class is not impaired under the plan if the plan "leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest." While the proposed plan purported to leave UMB's claims unimpaired under section 1124(1), UMB nevertheless argued that in addition to the allowed principal, fees, and interest due as of the petition date, the plan must also include postpetition interest at the contract rate (rather than the federal judgment rate) that has accrued as of the effective date of the plan in order for its class to be unimpaired.

The Court relied on the its earlier analysis of impairment in In re PPI Enterprises (U.S.), Inc., where it drew a distinction between "(i) plan impairment, under which the debtor alters the 'legal, equitable, and contractual rights to which [their] claim entitles the holder of such claim' and (ii) statutory impairment, under which the operation of a provision of the Code alters the amount that the creditor is entitled to under nonbankruptcy law" (228 B.R. 339, 353 (Bankr. D. Del. 1998)). The Court in that case noted that the language of section 1124(1) does not address a creditor's claim under nonbankruptcy law, suggesting that a creditor's claim must be ascertained with regard to applicable statutes. As the Court stated in that case, "a creditor's claim outside of bankruptcy is not the relevant barometer for impairment; we must examine whether the plan itself is a source of limitation on a creditor's legal, equitable, or contractual rights" (, at *10 (citation omitted)). Statutory impairment under section 502(b)(2) excluding postpetition interest from an allowable unsecured claim does not equate to plan impairment under section 1124(1).