Federal Common Law’s Long Shadow: Shedding Light on State Law Rights to Postpetition Default Interest

Historically, the law imposed harsh penalties on debtors who could not meet their obligations. One regime dismembered the debtor’s body and proportionally distributed it to creditors. Rejecting these draconian penalties, the United States Constitution empowered Congress to enact federal bankruptcy legislation. Bankruptcy laws in the United States helped the “unfortunate” debtor get a fresh start while providing creditors with “prompt and effectual” administration of the debtor’s unmet obligations.

In order to accomplish these policy objectives, Congress granted equitable powers to bankruptcy courts. These powers allow bankruptcy courts to occasionally adjust parties’ rights under non- bankruptcy law and fairly distribute the debtor’s assets among creditors. The process of balancing equities between the debtor and her creditors, as well as between creditors, is a central inquiry of bankruptcy law analysis.