Opinion ID: 382765
Heading Depth: 2
Heading Rank: 2

Heading: Pre-petition Interest

Text: 32 The bankruptcy court did not determine whether any portion of the sum claimed by the IRS comprised pre-petition interest on the principle tax debt. Plaintiffs contend that some portion of the claim is of this character. The doctrine of equitable estoppel has considerable merit as applied to any claim for pre-petition interest asserted by the IRS against the debtors. Pre-petition interest, unlike pre-petition penalties and post-petition interest, is recoverable against the debtor's estate in a Chapter XI proceeding. 14 Indeed, it is our understanding that as part of the plan of arrangement entered into by Becker's and Needham's in 1976, the IRS collected some pre-petition interest, together with the full principal debt. 33 Courts that have considered the personal liability of an arranged debtor have not extended the obligation of payment to claims for pre-petition interest. Allowing claims for pre-petition interest could work to the debtor's detriment in several respects. Inasmuch as the creditors who participated in the plan of arrangement might have agreed to accept a lower distribution rate per dollar from the estate to accommodate the claim for pre-petition interest if it had been filed under the plan, the debtor might be required to pay a greater amount if the claim is asserted after the plan has been consummated. This potential for increased debtor liability should not be permitted. 34 Furthermore, the debtors here borrowed a substantial amount in order to effectuate the arrangement. They entered into the plan relying on a calculation, which justifiably omitted a sum for additional pre-petition interest. But for the legitimate assumption that completion of the plan would represent satisfaction of any claim for pre-petition interest that the IRS could have asserted, the debtors might not have entered into the loan agreement. If collection of the pre-petition claim after consummation would render continued business operations impracticable, the debtors would be in a worse position than if the claim had been satisfied by distribution of the estate, because they would not in the latter circumstance have incurred repayment obligations on the loan. 35 Under the case law, the plaintiffs were justified in assuming that the IRS had asserted all pre-petition interest claims in the proceedings begun in 1974. In view of their reliance on this assumption and the potential for economic injury that would result from allowing the government to collect such interest at this stage, we hold that the district court did not err in affirming the judgment of the bankruptcy court insofar as that judgment declared that the IRS was estopped from collecting pre-petition interest from the arranged debtors. 15