Don’t Delay, Avoid Prejudgment Interest
03.19.24
In a recent Delaware Bankruptcy Court ruling, Judge Craig T. Goldblatt awarded prejudgment interest in avoidance actions initiated by a plan trustee to recover the amounts the Debtor paid to Defendants to acquire its own shares.[1] The Bankruptcy Court disposed of three salient points of disagreement submitted by the parties after they were unable to agree on an order’s form:
- Prejudgment Interest. The Third Circuit in In re Hechinger explained that “prejudgment interest should be awarded unless there is a sound reason not to do so.”[2] These awards are appropriate for compensating the estate for the period for which it was deprived of the use and possession of the transferred value. Accordingly, Judge Goldblatt awarded prejudgment interest in the Drivetrain Neither Judge Goldblatt nor the Hechinger Court refrained from exercising their discretion based on a lack of wrongdoing and legitimately raised defenses.
- Interest Rate. The purpose of prejudgment interest is to compensate the estate for the funds it lost from the time it made a demand to the date of judgment. Judge Goldblatt followed the majority approach and granted prejudgment interest at the statutory post-judgment interest rate in effect at the time the demand was made on Defendants. The Bankruptcy Court did not exclude the possibility that it could have reached a different conclusion if it was presented with evidence demonstrating the actual commercial effect on the estate of having been without the transferred funds for the at-issue period.
- Raising A Defense Under § 548(c). The Drivetrain Defendants claimed to have raised a defense under § 548(c) of the Bankruptcy Code. Judge Goldblatt rejected this argument as it involved certain shares that the Court determined were worthless when Defendants offered them back to the Debtor. As a result, the Court concluded that a defense did not arise under § 548(c).
The Court’s letter opinion leaves us with several takeaways. One, parties should resolve their preference claims as soon as possible or risk getting stuck with a large amount of pre-judgment interest. This point is particularly important as the Trustee could have argued for a floating interest rate per footnote 6 and earned more money than it did. Two, a defendant should demonstrate that the Trustee could not have earned the amount it asserted if it had the cash. The Trustee may keep cash in certain accounts that earn less than the federal funds rate.
Co-authors Dominic Pacitti, co-chair, and Alyssa Radovanovich, associate, are members of the Bankruptcy and Restructuring Department at Klehr Harrison.
[1] Drivetrain, LLC v. DDE Partners, LLC, Adv. Proc. No. 22-50439, D.I. 43 (Bankr. D. Del. Feb. 22, 2024).
[2] 489 F.3d 568, 580 (3d Cir. 2007).