A state statutory interest rate hike applicable only in bankruptcy is not “nonbankruptcy law” for purposes of establishing the interest rate under section 511(a). Metropolitan Gov’t of Nashville v. Corrin (In re Bratt), No. 16-5719 (6th Cir. Feb. 23, 2017).
In her chapter 13 plan, Mildred Bratt provided for repaying her oversecured state property tax debt at a 12% interest rate. Metro Nashville and the State of Tennessee as intervenor, argued that under state law, the plan should have provided for repayment at 18%.
Tennessee law sets an interest rate of 12% per year for overdue taxes and adds a 6% per year penalty. Tenn. Code Ann. § 67-5-2010. In response to a bankruptcy court holding that the Bankruptcy Code does not permit assessment of post-petition penalties, In re Gift, 469 B.R. 800 (Bankr. M.D. Tenn. 2012), the Tennessee legislature amended the state law to add, “For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to the section constitutes the assessment of interest.” Tenn. Code Ann. § 67-5-2010(d). Section 511(a), which is directed specifically to the interest rate for tax claims, provides that “the rate of interest shall be the rate determined under applicable nonbankruptcy law.”
The bankruptcy court found that the amendment violated the Supremacy Clause because it conflicted with the Code provision against accrual of post-petition penalties. In re Bratt, 527 B.R. 303 (Bankr. M.D. Tenn. 2015). On appeal, the BAP affirmed but for a different reason: it found that the Code applies the interest rate from “non-bankruptcy” state law and that Tennessee’s provision, which applies only in bankruptcy, did not fall under that heading. In re Bratt, 549 B.R. 462 (B.A.P. 6th Cir. 2016).
The Sixth Circuit began with the question of whether the Tennessee provision for the 6% increase in the interest rate in bankruptcy was a “nonbankruptcy law.” Metro Nashville argued that nonbankruptcy law meant any law not included in the Bankruptcy Code even if that law is directed to bankruptcy proceedings. The circuit court disagreed. Citing Richardson v. Schafer (In re Schafer), 689 F.3d 601 (6th Cir. 2012), the court noted that states have concurrent power with the federal legislature to promulgate bankruptcy law. But where, as here, the Code adopts nonbankruptcy law, it refers to laws outside the Bankruptcy Code that are “not aimed solely at bankruptcy proceedings.” Had Congress intended to make applicable any state law, whether bankruptcy-specific or no, it could have adopted laws “not included in the Bankruptcy Code.” Having found that the Tennessee provision treating the 6% increase in the interest rate as “interest” in bankruptcy, was not “nonbankruptcy law,” the court did not need to address the constitutional issue of preemption.
Tags: Interest Rate