It has been said: “‘In a bankruptcy case, interest is the tail of the dog, but it is a long tail and it wags a lot.’” In re Milham, 141 F.3d 420, 421 (2d Cir. 1998) (quoting Dean Pawlowic’s 1995 article, “Entitlement to Interest Under the Bankruptcy Code,” in the Bankruptcy Developments Journal). In this regard, interest in bankruptcy cases may be allowed in predominately three circumstances: first, there is interest that accrues prior to the bankruptcy filing date (petition date), the allowance of which is determined by applicable nonbankruptcy law. See 11 U.S.C. §502(b)(1), (2); second, there is interest that must be paid during a reorganization plan, typically for the purpose of providing secured or priority tax creditors, or even general unsecured creditors for that matter, with the present value of their claims as of the effective date of the plan. See, e.g., 11 U.S.C. §§1129(a)(9)(C), 1129(b)(2)(A)(i)(II), 1129(b)(2)(B)(i), 1325(a)(5)(B)(ii); and third, there is interest that accrues postpetition, i.e., after the petition date (known as pendency interest), most commonly to a secured creditor whose collateral is greater in value than the amount of its debt—a so-called oversecured creditor.
An oversecured creditor is required to be paid pendency interest in bankruptcy cases pursuant to Bankruptcy Code §506(b), which provides that a creditor with that fortunate status is entitled to “interest on [its] claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” However, nowhere in §506(b) or elsewhere in the Bankruptcy Code does it specify the rate of interest that is supposed to accrue to the oversecured creditor. It has thus been up to the courts to make that determination, which will be governed by federal and not state law. See In re Wonder Corp., 72 B.R. 580, 588 (D. Conn. 1987) (postpetition attorneys’ fees under §506(b) determined under federal bankruptcy law); In re VMC Real Estate, LLC, 2012 WL 836724, at * 3 (Bankr. D. Conn. March 9, 2012) (postpetition fees and costs under §506(b) governed by federal law); In re Cummins Utility, L.P., 279 B.R. 195, 201 (Bankr. N.D. Tex. 2002) (standard for allowance of postpetition interest under §506(b) established by federal law).
