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Act §§ 366(2) and 472(2). The 1984 amendments to Code § 1129(a)(7) clarified that the best interests test applies only to impaired claims and interests. In determining whether the Chapter 7 liquidation amount for comparison, the court must consider the applicable Chapter 7 rules of distribution,56 as well as the liquidation costs.
This includes not only the priority rules of § 726, but also the special rules for recoveries against general partners, § 723, and the tax lien subordination rules of § 724. If the debtor has contingent claims against third parties, expert testimony may be necessary to determine their liquidation value.57
One of the consequences of the liquidation analysis is that if the estate is solvent, unless unimpaired under § 1124, unsecured creditors are to receive postpetition interest at the legal rate before the debtor receives any distribution.58 This is so even though such interest is not allowable under § 502(b)(2) (which disallows interest that is unmatured as of the date of the petition), since the holders of such claims would be entitled to postpetition interest in the event of chapter 7 liquidation, pursuant to § 726(a)(5).59
Until 1994 even a solvent debtor could avoid paying interest on unsecured claims by paying the full allowed amount of the claims in cash on the effective date. Prior to the Bankruptcy Reform Act of 1994, § 1124(3) provided that payment of the allowed amount of the claim, in cash on the effective date, rendered the claim unimpaired and, as noted above, the best interests test of § 1129(a)(7) applies only to impaired claims. This was changed for cases filed after October 22, 1994, however, by the Reform Act's repeal of § 1124(3). The stated purpose of this amendment was to reverse a case that properly held that this method of unimpairing unsecured claims would permit a solvent debtor to avoid interest on unsecured
56
H.R. Rep No. 95-595, 95th Cong, 1st Sess 412-13 (1973).
57
In re Texas Extrusion Corp., 844 F.2d 1142 (5th Cir. 1988); Kane v. John Manville, 843 F.2d 636 (2d Cir. 1988).
58
In re Dow Corning Corporation, 237 B.R. 380 (Bankr. E.D. Mich. 1999).
59
See, e.g., In re Kentucky Lumber Co., 860 F.2d 674 (6th Cir. 1988) ("Section 726 does not apply directly to Chapter 11 cases. It does, however, apply indirectly through the 'best interests of creditors' test found in § 1129(a)(7)." But where debtor was insolvent on date of confirmation, unsecured creditors are not entitled to receive postpetition interest even though debtor subsequently received a large and unexpected structured settlement of contingent and unliquidated claims against third parties, and creditors did not object to confirmation of the plan that failed to provide for interest payments.); In re Gaines, 1995 WL 75874 (Bankr. W.D. Va. 1995)(solvent debtors must pay postpetition interest on unsecured claims, notwithstanding that § 726(a)(5) does not directly apply in chapter 11, and same analysis applies to attorneys' fee obligations in loan documents).
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