In Re Oakwood Homes Corp.

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit

6-9-2006

In Re: Oakwood Homes
Precedential or Non-Precedential: Precedential

Docket No. 05-2032

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 05-2032 & 05-2033

IN RE: OAKWOOD HOMES CORPORATION,
Debtor

JEFFERSON-PILOT LIFE INSURANCE
COMPANY; JEFFERSON-PILOT
FINANCIAL INSURANCE; TYNDALL
PARTNERS, LP and TYNDALL
INSTITUTIONAL PARTNERS, LP
Appellants in No. 05-2032

(D.C. Civil Nos. 04-cv-00835, 04-cv-00836,
04-cv-00837, 04-cv-00838 and 04-cv-00839)

*(Amended in accordance with Clerk’s Order dated 7/22/05)

IN RE: OAKWOOD HOMES CORPORATION,
Debtor

JP MORGAN CHASE BANK,
Appellant in No. 05-2033

(D.C. Civil Nos. 04-cv-00835, 04-cv-00836,
04-cv-00837, 04-cv-00838 and 04-cv-00839)

On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Nos. 04-cv-00835, 04-cv-00836, 04-cv-00837,
04-cv-00838 and 04-cv-00839)
District Judge: Honorable Joseph J. Farnan, Jr.
 Argued February 21, 2006

Before: McKEE, SMITH, and VAN ANTWERPEN, Circuit
Judges.

(Filed : June 9, 2006)

G. Eric Brunstad, Jr. (Argued)
Timothy B. DeSieno
Rheba Rutkowski
Bingham McCutchen LLP
One State Street
Hartford, CT 06103

Russell C. Silberglied
Jason M. Madron
Richards, Layton & Finger, P.A.
One Rodney Square, P.O. Box 551
Wilmington, DE 19899

John J. Galban
Seward & Kissel LLP
One Battery Park Plaza
New York, NY 10004

Counsel for Appellants in 05-2032 & 05-2033

Robert J. Dehney
Gilbert R. Saydah, Jr.
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
Wilmington, DE 19801

Robert J. Stark
Brown Rudnick Berlack Israels
7 Times Square
New York, NY 10036

Counsel for OHC Liquidation

Michael B. Fisco (Argued)

2
Faegre & Benson LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402

Karen C. Bifferato
Connolly Bove Lodge & Hutz LLP
The Nemours Building
1007 N. Orange Street, P.O. Box 2207
Wilmington, DE 19899

Counsel for Appellee U.S. Bank National Association
____

OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

Consolidated before us are two appeals by JP Morgan Chase
Bank (“JP Morgan”). JP Morgan challenges the District Court’s
order affirming the Bankruptcy Court’s decision to reduce claims
filed by JP Morgan, the trustee for the holders of certain
certificates, after objections were filed by the U.S. Bank National
Association (“U.S. Bank”), the indenture trustee for the holders of
certain more senior notes. The Bankruptcy Court’s dual, but
related, rulings first disallowed any part of JP Morgan’s claims for
unmatured interest arising under a Guarantee on the certificates,
then further discounted the principal of the claims to present value.
JP Morgan alleges that discounting the principal of the claims to
present value is unauthorized by the Bankruptcy Code, and results
in inequitable treatment of like creditors. JP Morgan does not
appeal the District Court’s affirmance of the Bankruptcy Court’s
disallowance of claims for unmatured interest. We will reverse the
order of the District Court with respect to present value discounting
of principal.

I. FACTUAL BACKGROUND AND PROCEDURAL
HISTORY

A. Oakwood and the Trusts

3
 These appeals arise from the bankruptcy proceedings of
Oakwood Homes Corporation (“Oakwood”), a builder and seller
of prefabricated homes. Oakwood’s subsidiaries frequently
extended credit to home-buyers under long-term mortgage
arrangements, then securitized these mortgages by selling them to
trusts set up for this purpose (“the Trusts”).1 The Trusts issued
various certificates in order to raise the money to pay Oakwood for
the mortgages. The certificates were serviced by the Trusts with
the funds paid by customers under their mortgages. The buyers of
the certificates were entitled to periodic payments of principal and
interest.

At issue here are certain low-priority certificates issued by
several of the Trusts over the course of three years. The certificate
holders represented by JP Morgan bought approximately $100
million of these certificates, known as “B-2 Certificates,” from
underwriters. With such low payment priority relative to other
issued certificates, the B-2 Certificates were understandably
difficult to market. Oakwood therefore provided a Guarantee of
payment for the B-2 Certificates, whereby Oakwood promised to
cover any shortfalls in payments by the Trusts of principal or
interest. For example, in the Guarantee for one of the Trusts at
issue here, Oakwood agreed to “unconditionally and absolutely
guarantee[] the full and prompt payment to the Trustee on or prior
to the Remittance Date relating to each Distribution Date of the
Limited Guarantee Payment Amount.”

The B-2 Certificates, and distributions thereon, were
governed by the Pooling and Servicing Agreement for each Trust.
One Trust at issue here, the 1997-D Trust,2 issued certificates with
a total principal value of over $250 million, of which about $10
million were B-2 Certificates. The Pooling and Servicing
Agreement explicitly provided for “the distribution of the principal

1
The Trusts were known as Real Estate Mortgage
Investment Conduit securitization trusts, or REMIC trusts.
2
We, like the parties, will use the Guarantee and Pooling and
Service Agreement applicable to the 1997-D Trust as
representative of the documents defining all of the Trusts at issue.

4
of and interest on the Certificates in accordance with their terms.”
The agreement specified the applicable interest rates, distribution
dates, and priorities for each of the classes of issued certificates,
including the B-2 Certificates. On each distribution date, the
trustee of the Trust was instructed to distribute principal and
interest payments to each class, in order of priority. Distribution
dates stretched almost to the year 2030.

The distributions from the Trusts fundamentally depended
on the mortgage customers making their scheduled mortgage
payments to the Trusts. This did not happen in many cases. The
future ability of the Trusts to make principal and interest payments
to the B-2 Certificate holders, who had the lowest payment priority,
therefore came into doubt. Such nonpayment would trigger
Oakwood’s obligation under the Guarantees to ensure full payment
of principal and interest to the B-2 Certificate holders.

B. Bankruptcy Proceedings

Oakwood filed for Chapter 11 bankruptcy protection on
November 15, 2002, in the United States Bankruptcy Court for the
District of Delaware. Various creditors filed proofs of claim with
the Bankruptcy Court. U.S. Bank, for example, filed proofs of
claim as indenture trustee for holders of $300 million of more
senior notes issued directly by Oakwood. JP Morgan filed proofs
of claim on behalf of B-2 Certificate holders, seeking over $1
billion. The holders of $605 million of these claims, covered under
different Guarantees than those at issue here, settled their claims,
leaving about $400 million in claims remaining.

JP Morgan alleged that because the Trusts were unable to
fully service the B-2 Certificates, Oakwood was, and would
continue to be, liable for the principal and interest shortfalls on the
Certificates by virtue of the Guarantee. Of the $400 million in
claims, about $116 million was attributable to future shortfalls in
the Trusts’ payment of principal to the B-2 Certificate holders.
Another $1 million was attributable to shortfalls in the Trusts’
payment of interest, due before Oakwood filed its bankruptcy
petition (“pre-petition interest”). The remainder was attributable
to future shortfalls in interest payments, that would come due after
the petition date (“post-petition interest” or “unmatured interest”).

5
 U.S. Bank filed objections to JP Morgan’s claims on
October 10, 2003, and November 21, 2003, pursuant to the
objection provisions of 11 U.S.C. § 502. U.S. Bank alleged (1) JP
Morgan’s claims should not include post-petition interest; and (2)
JP Morgan’s remaining claims for principal payments should be
discounted to present value as of the bankruptcy petition date. The
parties stipulated to the shortfalls in principal and interest payments
that Oakwood, as Guarantor, would be obligated to pay at various
distribution dates on each Trust’s B-2 Certificates.

Following several hearings, the Bankruptcy Court issued
two rulings relevant here. First, the Bankruptcy Court at a hearing
on November 26, 2003, disallowed any portion of JP Morgan’s
claims attributable to post-petition interest, totaling hundreds of
millions of dollars, pursuant to 11 U.S.C. § 502(b)(2) (“allow such
claim . . . except to the extent that . . . such claim is for unmatured
interest”). Second, the Bankruptcy Court at a hearing on January
23, 2004, ruled without discussion or explanation that the portion
of the claims attributable to principal shortfalls ($116,370,915)
should be discounted to present value pursuant to language in 11
U.S.C. § 502(b) directing a court to “determine the amount of such
claim . . . as of the date of the filing of the petition.” The
Bankruptcy Court entered orders on May 6, 2004, reflecting these
rulings, ultimately allowing JP Morgan’s claims for pre-petition
interest and $30,491,930 in principal claims.3

While immaterial to this appeal, we note that the
Bankruptcy Court approved a reorganization plan for Oakwood on
April 16, 2004. JP Morgan will ultimately receive a distribution
equal to between 37.4% and 50% of its allowed claims.

C. Appeals and Collateral Litigation

3
$30,491,930 represents the $116,370,915 in principal
shortfalls, discounted to present value using a discount rate of
7.74% chosen by the Bankruptcy Court on March 12, 2004. The
parties stipulated to the principal and interest shortfalls, and the
corresponding discounted amounts, while reserving their right to
appeal the discounting.

6
 Acting now on behalf of the holders of B-2 Certificates
allegedly entitled to $95.5 million (of the $116 million at issue in
the Bankruptcy Court) in future principal shortfall payments, JP
Morgan appealed the Bankruptcy Court’s Orders to the District
Court for the District of Delaware on May 17, 2004. The District
Court affirmed both of the Bankruptcy Court’s rulings –
disallowing interest and discounting principal – on February 22,
2005.

The District Court rejected JP Morgan’s argument that 11
U.S.C. § 502(b) did not require discounting an interest-bearing
unmatured principal claim to present value on top of disallowing all
post-petition interest, and that such a further reduction would be
“double discounting.” In so doing, the District Court held that §
502(b) was clear and unambiguous in its instruction to discount a
claim to present value. The District Court stated that it was “not
persuaded that the distinction between interest-bearing claims and
non-interest-bearing claims is significant to the issue at bar.”
Although the Bankruptcy Court had provided no explanation for its
rulings, the District Court concluded that the Bankruptcy Court’s
previous holding in In re: Loewen Group International, Inc., 274
B.R. 427 (Bankr. D. Del. 2002), was “persuasive.” The District
Court also agreed with the Bankruptcy Court that § 502(b)(2)
explicitly disallowed post-petition interest.

JP Morgan appealed the District Court’s Order in three
separate appeals (representing various B-2 Certificate holders),
which this Court consolidated on April 12, 2005. JP Morgan
appealed only the decision to discount the principal shortfalls to
present value, and did not challenge the disallowance of post-
petition interest. This Court dismissed one of the appeals, docketed
at No. 05-2034, on December 20, 2005, pursuant to a joint
stipulation of the parties. Remaining before us are claims for
roughly $30 million (undiscounted) in principal shortfalls for
which Oakwood will be liable.

Following the filing of JP Morgan’s notices of appeal, the
parties continued to litigate collateral effects of the claims issues in
the courts below. The Bankruptcy Court ordered the Oakwood
estate to reserve $61 million to cover JP Morgan’s claims appeals
if JP Morgan posted a bond; JP Morgan declined to post the bond,

7
and both the District Court and this Court refused to stay
distributions from the estate. The District Court later granted such
a stay without bond, then rescinded the stay and affirmed the
Bankruptcy Court’s ultimate setting of a $0 cash reserve absent
posting of a bond. On December 19, 2005, we stayed the appeals
of the latter order pending our resolution of the instant appeals.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Court had jurisdiction over Oakwood’s
Chapter 11 filing pursuant to 28 U.S.C. § 157. The District Court
had jurisdiction to hear an appeal from a ruling of the Bankruptcy
Court pursuant to 28 U.S.C. § 158(a). This Court has jurisdiction
over this appeal pursuant to 28 U.S.C. §§ 158(d), 1291.

The parties do not dispute the Bankruptcy Court’s factual
findings. We exercise plenary review over the Bankruptcy Court’s
legal decisions, and application of law to fact. In re Telegroup,
Inc., 281 F.3d 133, 136 (3d Cir. 2002). “Because the District Court
sat below as an appellate court, this Court conducts the same
review of the Bankruptcy Court’s order as did the District Court.”
Id.

III. ANALYSIS

Because JP Morgan did not appeal the District Court’s
affirmance of the Bankruptcy Court’s ruling disallowing any claim
for post-petition interest under 11 U.S.C. § 502(b), the only issue
before us is whether the Bankruptcy Court erred by “double
discounting” when it discounted the principal component of the
claims to present value after also having disallowed the post-
petition interest portion of the claims. We hold that this was,
indeed, error, and we will reverse for the reasons set forth below.

Given the complexity of the issue at hand, we will set out up
front the parties’ main contentions and our conclusions. JP Morgan
alleges that the Bankruptcy Court should not have “double
discounted” its claims by disallowing that part of the claims
attributable to post-petition interest, and then further reducing the
claims by discounting the remainder to present value. U.S. Bank
argues that discounting to present value is required by the clear and

8
unambiguous language of 11 U.S.C. § 502(b), which instructs a
court to “determine the amount of such claim . . . as of the date of
the filing of the petition,” regardless of whether the court has
already reduced the claim by disallowing post-petition interest
under § 502(b)(2). U.S. Bank also argues that § 502(b)(2) is
irrelevant to the issue of discounting because the claims only arise
under a Guarantee, and not from an obligation to pay separable
interest plus principal.

We conclude that JP Morgan’s claims involve separable
interest and principal, and not merely a single future liability on
Oakwood’s part that would be discounted to reflect the time-value
of money. We find that 11 U.S.C. § 502(b) is far from clear and
unambiguous in light of other sections of the Bankruptcy Code, and
the admitted different plain meanings of the words “amount” and
“value.” Inquiry into the legislative history of the provision shows
that the Bankruptcy Court could have either disallowed post-
petition interest or discounted the entire claim to present value –
but not both. We note that our colleague in dissent is in agreement
on the latter part of this proposition – that both disallowing post-
petition interest and discounting the claim to present value would
be impermissible and inequitable double discounting.

A. The Claims

On appeal, appellee U.S. Bank attempted to fill in and
defend the Bankruptcy Court’s silent reasoning by alleging that the
documents providing the foundation for JP Morgan’s claims – the
Guarantee and the Pooling and Servicing Agreement – show a
simple agreement to receive money in the future, and that basic
economics and the Bankruptcy Code require money received in the
future to be discounted to present value. U.S. Bank also contends
that because the claims are being made only on the Guarantee, and
not on the B-2 Certificates themselves, the claims should be treated
similarly as a mere future liability. JP Morgan responds that the
documents, as well as the Bankruptcy Court’s approach to the
claims and U.S. Bank’s own litigation strategy and admissions,
prove that the claims are for future payments of separable principal
and interest. We agree.

We begin with the documents themselves. The Pooling and

9
Service Agreement, which governs the B-2 Certificates at issue
here, clearly defined the Certificates in terms of principal and
interest distributions at set dates. See, e.g., 1997-D Pooling and
Service Agreement, at § 3 (defining the certificate classes, their
pass-through rates, and initial principal balances); id. at § 5 (setting
out the order of priority for principal and interest payments on each
distribution date); id. at § 10 (stating that “[i]nterest on the . . .
Class B-2 Certificates will be computed on the basis of a 360-day
year consisting of twelve 30-day months”). Based on their
governing documents, the B-2 Certificate holders were intended to
be entitled to both principal and interest payments throughout the
certificate lifetime.

The fact that the claims here arise only because of
Oakwood’s obligations under the Guarantee does not change the
fundamental economic nature of the B-2 Certificate holders’
bargained-for transaction. The Guarantee applicable to the 1997-D
Trust B-2 Certificates states that Oakwood “unconditionally and
absolutely guarantees the full and prompt payment . . . of the
Limited Guarantee Payment Amount (as such term is defined in the
Pooling and Service Agreement), if any” for each scheduled
distribution date. Turning back to the Pooling and Service
Agreement, we see that “Limited Guarantee Payment Amount” is
defined as follows:

“With respect to any Distribution Date, the amount after
giving effect to the allocation of the Available Distribution
Amount for such date, equal to the amount of shortfalls in
collections on the Assets otherwise distributable on such
Distribution Date not in excess of the sum of (a) any unpaid
Interest Distribution Amount, Carryover Interest
Distribution Amount, Writedown Interest Distribution
Amount and Carryover Writedown Distribution Amount
distributable on such Distribution Date . . . and (b) any
unpaid principal amounts payable on such Distribution
Date . . . .”

1997-D Pooling and Service Agreement, at § 2 (emphases added).
After parsing this rather dense language, the Guarantee reduces to

10
the following: Oakwood promised to cover any shortfall resulting
from the Trust’s inability to make distributions of interest and
principal to the B-2 Certificate holders.4

We note that the approach of the Bankruptcy Court
throughout this litigation illustrates JP Morgan’s claims for future,
separable, payments of principal and interest, and not simply for a
lump sum of money payable in the future, as U.S. Bank would have
us believe. The Bankruptcy Court allowed the portion of JP
Morgan’s claims attributable to pre-petition interest; disallowed the
portion attributable to post-petition interest; and then treated the
principal portion separately. The Bankruptcy Court similarly stated
that it was irrelevant whether the claim arose against a guarantor
instead of a primary obligor. Hearing, Bankruptcy Court,
November 26, 2003. U.S. Bank itself urged this approach –
separating interest and principal – throughout proceedings in this
Court, the District Court, and the Bankruptcy Court.

We do not accept U.S. Bank’s argument that simply because
the claims technically arise from the Guarantee, we should not treat
them like normal claims based on an instrument obligating the
payor to make periodic distributions of principal and interest. The
Guarantee itself refutes this stance, and U.S. Bank has consistently
taken the contrary position. As we have noted above, the
Guarantee obligates Oakwood to take over payment of principal
and interest to B-2 Certificate holders in the event of any shortfalls.
This places Oakwood, the guarantor, in exactly the same position
as the Trusts, the primary obligors, with respect to the obligation
to make these principal and interest payments.

4
We also take note of the Declaration of Oakwood’s
Executive Vice President, filed with the Bankruptcy Court, setting
forth his understanding of the Guarantee as the supervisor of
Oakwood’s securitization operations. The Declaration repeatedly
states that the Guarantees were intended to ensure the distribution
of principal and interest to the B-2 Certificate-holders in the event
of a shortfall. Moreover, according to the Declaration, Oakwood’s
financial statements listed liability under the Guarantees in an
amount that “reflects potential payments [by Oakwood] of both
principal and interest on the B-2 Certificates.”

11
 We conclude that as a matter of economics based on the
governing B-2 Certificate documents, JP Morgan’s claims consist
of separable interest and principal components, and do not merely
represent a singular future liability. We must still decide, though,
whether 11 U.S.C. § 502(b) requires discounting the principal
component of those claims after the interest component has already
been disallowed under § 502(b)(2).

B. 11 U.S.C. § 502(b)

The Bankruptcy Court held, and the District Court affirmed,
that even after JP Morgan’s claims for post-petition interest were
disallowed, the principal owed under the Guarantee should be
discounted to present value as of the petition date. In this limited
appeal,5 we express no view on whether the Bankruptcy Court

5
JP Morgan did not appeal the 11 U.S.C. § 502(b)(2) interest
disallowance portion of the District Court’s Order. Unlike our
dissenting colleague, we do not believe that this strategic decision
to appeal only the discounting substantially affects this appeal.
Each court below addressed JP Morgan’s claims in terms of two
successive inquiries – whether any post-petition interest should be
disallowed, and whether the principal should then be discounted.
The answer to the former inquiry has not been challenged here by
JP Morgan. Our colleague in dissent concludes, just as do we, that
as a legal matter once § 502(b)(2) is applied to disallow post-
petition interest, further reduction by discounting the remaining
claim to present value is not permitted. Dis. Op. at 13. This legal
conclusion does not hinge on the factual question resolved by the
courts below – that the claims did involve post-petition interest –
and can be decided independently in JP Morgan’s favor.
We must therefore express our confusion at our dissenting
colleague’s conclusion, Dis. Op. at 1-2, that the courts below “did
not otherwise err in holding that the B-2 Certificate holders’ claims
should be discounted to present value,” and therefore that reversal
is not required. The courts below determined that legally, it was
permissible to discount a claim to present value after applying §
502(b)(2) to disallow any post-petition interest. The dissent
appears to wholeheartedly disagree with this holding, as we read
the dissent’s conclusion that § 502(b)(2) necessarily implies

12
correctly disallowed post-petition interest pursuant to 11 U.S.C. §
502(b)(2). We must decide only the narrower issue before us,
whether further reduction of the claims by discounting is required
or allowed by the Bankruptcy Code. We hold that it is not, but our
rationale for so holding will require inquiry into various portions
of the Bankruptcy Code and their legislative history.

Stated simply, 11 U.S.C. § 502(b) speaks in terms of
determining the “amount” of a claim “as of” the petition date.
However, given that the remainder of the Bankruptcy Code uses
the term “value, as of” to signify discounting to present value, and
“amount” and “value” are not synonymous, we cannot say that §
502(b) clearly and unambiguously requires discounting to present
value in all situations.

We begin as we must with the plain language of the statute.
United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989).
First, though, we find it necessary to briefly explain how the
Bankruptcy Code processes and allows claims. 11 U.S.C. §
101(5)(A) defines a “claim” as a “right to payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secure, or unsecured.” We have often said that “claim”
was intended to be read very broadly. E.g., In re: PPI Enters.
(U.S.), Inc., 324 F.3d 197, 203 (3d Cir. 2003). A “creditor or
indenture trustee” seeking to make a claim on a bankruptcy estate
is instructed to file a proof of claim pursuant to 11 U.S.C. § 501.
All claims are presumptively “allowed” in full unless another party
in interest in the proceedings files an objection. 11 U.S.C. §
502(a). If such an objection is made, as here, the Bankruptcy Court
holds a hearing and reduces the allowable amount of the claim
pursuant to the remainder of § 502. Specifically, the Bankruptcy
Court would look to a specific subsection of § 502(b), and as U.S.
Bank argues, § 502(b) itself.

This brings us to the minutiae of 11 U.S.C. § 502(b). The
Bankruptcy Court appears to have relied first on § 502(b)(2) for the

reduction to present value, and therefore that § 502(b) should not
be read to require a second discounting. See Dis. Op. at 11-14

13
proposition that post-petition interest should be disallowed, and
then on § 502(b) overall6 for the proposition that the principal
remainder of the claims should be discounted to present value. JP
Morgan contends that this ruling constituted impermissible “double
discounting” of its claims. 11 U.S.C. § 502(b) states in pertinent
part, with emphases added where relevant to the case at hand:

“(b) Except as provided in subsections (e)(2), (f), (g), (h)
and (i) of this section, if such objection to a claim is made,
the court, after notice and a hearing, shall determine the
amount of such claim in lawful currency of the United
States as of the date of filing of the petition, and shall allow
such claim in such amount, except to the extent that –

(1) such claim is unenforceable against the debtor
and property of the debtor, under any agreement or
applicable law for a reason other than because such
claim is contingent or unmatured;

6
We say “appears to have relied on” because the Bankruptcy
Court did not place its reasoning on the record. At the November
26, 2003 hearing, the Bankruptcy Court noted after argument that
“[w]ith respect to the interest, it is my view that Section 502(b)
does apply and interest is not allowable as part of the claim.” With
respect to discounting to present value, the Bankruptcy Court’s sole
action on the record was to cut off argument and state “[w]ell, look,
my ruling is that they’re going to be discounted. So let’s just
debate how – what rate to apply or the discount rate.” Hearing,
January 23, 2004.
The parties argued the case to the Bankruptcy Court in terms
of 11 U.S.C. § 502(b) and § 502(b)(2), however, and we will
assume that these were the bases for that court’s holdings. We also
note that the primary case cited by U.S. Bank in this dispute, In re:
Loewen Group International, Inc., 274 B.R. 427 (Bankr. D. Del.
2002), relied on § 502(b) for the decision to discount the relevant
claims to present value, and was issued by the same Bankruptcy
Court.

14
 (2) such claim is for unmatured interest;”

In response to JP Morgan’s arguments, U.S. Bank contends the
Bankruptcy Court, and the District Court in affirming, correctly
held that the plain language of § 502(b), ordering a court to
“determine the amount of such claim . . . as of the date of filing of
the petition,” requires a Bankruptcy Court to discount a claim to
present value regardless of whether § 502(b)(2) has already led the
Bankruptcy Court to disallow the interest portion of the claim. JP
Morgan responds that § 502(b) is far from clear and unambiguous
when read holistically with the rest of the Bankruptcy Code, and
that the legislative history behind § 502(b)(2), along with basic
economics, shows the Bankruptcy Court erred.

1. Clear and Unambiguous?

Contrary to U.S. Bank’s assertions, and the District Court’s
conclusion below, we do not believe 11 U.S.C. § 502(b) is clear
and unambiguous. Inquiry into the rest of the Bankruptcy Code
and the legislative history of 11 U.S.C. § 502(b) is therefore
appropriate. In re Price, 370 F.3d 362, 369 (3d Cir. 2004) (citing
United States v. Fisher, 6 U.S. (2 Cranch) 358, 386 (1805)). The
Supreme Court has instructed us to view the Bankruptcy Code
holistically, instead of in isolated sections. United Sav. Ass’n of
Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371
(1988).

Viewed against the remainder of the Bankruptcy Code,
“amount of such claim . . . as of the date of the filing of the
petition” simply does not clearly and unambiguously require
discounting a claim to present value. Rather, “the full face amount
of a debt instrument is the proper amount of claim in a bankruptcy
case” where, as here, original issue discount is not at issue.7 4-502

7
Original issue discount reflects the fact that a claimant
might have paid less than the face value on a note, and could
therefore only recover in bankruptcy up to the amount actually
paid. The interest portion of such a note would need to be similarly
pro-rated for purposes of disallowing post-petition interest. To the
extent that the B-2 Certificate holders may have similarly paid less

15
COLLIER ON BANKRUPTCY ¶ 502.03 (5th rev. ed. 2005) (emphases
added).

We are not convinced that a plain reading of § 502(b)
supports the Bankruptcy Court’s conclusion. “The plainness or
ambiguity of statutory language is determined by reference to the
language itself, the specific context in which that language is used,
and the broader context of the statute as a whole.” Robinson v.
Shell Oil Co., 519 U.S. 337, 341 (1997). Neither “amount” nor
“value” is defined in the Bankruptcy Code. See 11 U.S.C. § 101
(definitions). At argument, however, U.S. Bank conceded that
“amount” does not mean the same thing as “value.”8

Most significant is how the Bankruptcy Code itself uses
“amount” and “value.” U.S. Bank argues that “as of the date of the
filing of the petition” axiomatically requires that a present value
calculation be performed on the “amount” of a claim. However, as
JP Morgan correctly notes, where the Bankruptcy Code intends a
court to discount something to present value, the Code clearly uses
the term “value, as of” a certain date. See, e.g., 11 U.S.C. §§ 1129
(“value, as of the effective date of the plan”), 1173 (same), 1225
(same), 1325 (same), 1328 (same). Many sources support the use
of the term “value” for this purpose; none support U.S. Bank’s
contention that “amount . . . as of” also implies a present value
calculation.9 For example, Collier on Bankruptcy, in describing
another section of the Bankruptcy Code, states that:

than the face value for their notes, the parties do not dispute the
principal shortfall amounts stipulated to and at issue here.
8
“Amount” is defined by one dictionary as “the total
number or quantity; a principal sum and the interest on it.”
WEBSTER’S THIRD NEW INT’L DICTIONARY (unabr. 1965).
“Value,” in contrast, is defined as “the monetary worth or price of
something; the amount of goods, services, or money that something
will command in an exchange.” BLACK’S LAW DICTIONARY (8th
ed. 2004).
9
U.S. Bank has not directed this Court to any other section
of the Bankruptcy Code where discounting to present value was
intended, and the term “amount” was used.

16
 “In three places in section 1129(b)(2), and in at least two
other places in section 1129, confirmation requires that a
creditor or interest holder receive property ‘of a value, as of
the effective date of the plan’ equal to some amount, usually
the allowed amount of the participant’s claim. Congress
was clear that the use of this term meant that courts were to
calculate the ‘present value’ of the property.”

7-1129 COLLIER ON BANKRUPTCY ¶ 1129.06 (emphasis added); id.
at n.3 (“This contemplates a present value analysis that will
discount value to be received in the future.”) (quoting H.R. Rep.
No. 95-595, at 414 (1977)). Thus, 11 U.S.C. § 502(b) does not
contain the language used elsewhere in the Bankruptcy Code to
require a present value calculation.

U.S. Bank is correct that in each of the Bankruptcy Code
sections cited above, the Code refers only to the process by which
the holders of already-allowed claims are paid from the bankruptcy
estate. These sections permit a court, for example, to confirm a
reorganization plan only if a holder of an impaired claim has
accepted the plan or “will receive or retain under the plan on
account of such claim or interest property of a value, as of the
effective date of the plan, that is not less than the amount that such
holder would so receive or retain if the debtor were liquidated
under chapter 7 of this title on such date.” 11 U.S.C. §
1129(a)(7)(A) (emphasis added). However, these same sections
also refer to the discounting of future cash installment payments to
present value – virtually the exact financial situation we address
today – by using the language “deferred cash payments of a value,
as of the effective date of the plan,” or “regular installment
payments in cash – of a total value, as of the effective date of the
plan.” 11 U.S.C. §§ 1129(a)(9)(B)(i)–(C)(i). Where the Code
speaks of discounting cash streams to present value, it speaks in
terms of “value, as of” a certain date. It does not use “amount . . .
as of.”

Viewing the Bankruptcy Code holistically, we cannot say
that the language of 11 U.S.C. § 502(b) clearly and unambiguously
requires the same discounting to present value as is required in

17
other sections of the Code.10 See also 7-1129 COLLIER ON
BANKRUPTCY ¶ 1129.06 (emphasis added) (“The relevant date for
all determinations of present value required by the Code is the
‘effective date’ of the plan.”).

We do not hold here that 11 U.S.C. § 502(b) never
authorizes discounting a claim to present value, but instead that the
statute does not clearly and unambiguously require it for all claims
evaluated under § 502.11 In general, we of course acknowledge that
money received today is more valuable than money negotiated to
be received in the future, and reduction in recognition of that basic

10
Where Congress has explicitly mandated such discounting,
commenters have taken note. Collier on Bankruptcy is replete with
references to the present value calculations required by the Code
sections mentioned above. See, e.g., 7-1129 COLLIER ON
BANKRUPTCY ¶ 1129.03; id. ¶ 1129.04; id. ¶ 1129.06; 8-1225
COLLIER ON BANKRUPTCY ¶ 1225.02; 8-1325 COLLIER ON
BANKRUPTCY ¶ 1325.06. Yet, in discussion of 11 U.S.C. § 502(b),
we learn that it means something far different. The task of
“determin[ing] the amount of such claim” is straightforward if the
claim is liquidated; if unliquidated or contingent, the claim is
estimated under 11 U.S.C. § 502(c), a provision not at issue here,
or liquidated by the court. 4-502 COLLIER ON BANKRUPTCY ¶
502.03. Nowhere is discounting to present value mentioned. The
second element of 11 U.S.C. § 502(b), determining the amount of
the claim “as of the date of the filing of the petition,” is explained
very simply: “This requirement coincides with other Code sections
that make it clear that section 502 applies to a proof of claim only
if it reflects a prepetition claim. . . . Accordingly, a proof of claim
should contain only claims as of the petition date . . . .” Id.
Contrary to U.S. Bank’s assertions, we do not believe Congress
used code in § 502(b) to require discounting to present value where
a far more simple meaning to the section accords with general
principles of bankruptcy law.
11
We note that finding a statute does not clearly and
unambiguously order action X does not necessarily lead to the
conclusion that action X is inappropriate – merely that further
inquiry into other sources is needed.

18
economic fact may sometimes be appropriate. The subsections of
§ 502(b) encompass various financial circumstances, however, as
our colleague in dissent points out; therefore we must look at the
interplay between the subsection at issue here, § 502(b)(2), and §
502(b) as a whole.

C. 11 U.S.C. § 502(b)(2)

The Bankruptcy Court treated the two facets of its ruling as
separate and distinct – (1) post-petition interest was disallowed
under 11 U.S.C. § 502(b)(2), and then (2) the claims (now
consisting only of principal)12 were discounted to present value,
presumably under the direction of § 502(b). JP Morgan argues that
the two cannot be separated. We agree. Once the Bankruptcy
Court disallowed post-petition interest pursuant to § 502(b)(2), the
legislative history of the provision, the economic reality of the
transaction, and fundamental tenets of bankruptcy law do not
permit further discounting of the principal.

By its terms, 11 U.S.C. § 502(b)(2) applies only to claims
involving interest in addition to principal. A note providing for
payments of principal plus interest is fundamentally more valuable
than a note involving the same principal payments, but no interest.
A buyer of a note that includes interest surely knows he is
bargaining for a more valuable instrument, as does the seller.
Contrary to the District Court’s assertion, then, “the distinction
between interest-bearing claims and non-interest-bearing claims”
is highly significant. U.S. Bank could not cite this Court to a single
case from any court that applied discounting to an interest-bearing
instrument after the post-petition interest had been disallowed

12
U.S. Bank did not object to the portion of JP Morgan’s
claims attributable to pre-petition interest, and as that portion of the
claims arose in full before the petition date, the Bankruptcy Court
did not discount it in any way. For this portion of our analysis,
therefore, we will refer to JP Morgan’s claims as involving solely
post-petition interest and principal coming due after the petition
date.

19
under § 502(b)(2).13

11 U.S.C. § 502(b)(2) disallows, according to its terms, any
portion of a claim attributable to “unmatured interest.” We will set
out the applicable portion of the legislative history for the
Bankruptcy Act of 1978:

“A proof of claim or interest is prima facie evidence of the
claim or interest. Thus it is allowed under subsection (a)
unless a party in interest objects. The Rules and case law
will determine who is a party in interest for purposes of
objection to allowance. . . .

Subsection (b) prescribes the grounds on which a claim may
be disallowed. The court will apply these standards if there
is an objection to a proof of claim. The burden of proof on
the issue of allowance is left to the Rules of Bankruptcy
Procedure. . . .

Paragraph (2) requires disallowance to the extent that the
claim is for unmatured interest as of the date of the petition.

13
Instead, U.S. Bank cited myriad cases that discounted to
present value non-interest-bearing claims. See, e.g., In re Trace
Int’l Holdings, Inc., 284 B.R. 32 (Bankr. S.D.N.Y. 2002) (deferred
compensation without interest); In re O.P.M. Leasing Servs., Inc.,
79 B.R. 161 (S.D.N.Y. 1987) (non-interest-bearing lease); In re
CSC Indus., Inc., 232 F.3d 505 (6th Cir. 2000) (non-interest-
bearing unfunded benefit liability of debtor to Pension Benefit
Guaranty Corp.); In re CF&I Fabricators of Utah, Inc., 150 F.3d
1293 (10th Cir. 1998) (same). We acknowledge that several of
these courts made sweeping statements declaring 11 U.S.C. §
502(b) to require discounting all claims to present value. However,
these courts either conducted no inquiry at all into the issue, or
concluded (contrary to our holding above) that § 502(b) was clear
and unambiguous. Also, because the courts addressed only non-
interest-bearing claims, any statements impacting § 502(b)(2)’s
effect on discounting would be dicta.

20
 Whether interest is matured or unmatured on the date of
bankruptcy is to be determined without reference to any
ipso facto or bankruptcy clause in the agreement creating
the claim. Interest disallowed under this paragraph includes
postpetition interest that is not yet due and payable, and any
portion of prepaid interest that represents an original
discounting of the claim, yet that would not have been
earned on the date of bankruptcy. . . .14

Section 502(b) thus contains two principles of present law.
First, interest stops accruing at the date of the filing of the
petition, because any claim for unmatured interest is
disallowed under this paragraph. Second, bankruptcy
operates as the acceleration of the principal amount of all
claims against the debtor. One unarticulated reason for this
is that the discounting factor for claims after the
commencement of the case is equivalent to [the]
contractual interest rate on the claim. Thus, this paragraph
does not cause disallowance of claims that have not been
discounted to a present value because of the irrebutable
presumption that the discounting rate and the contractual
interest rate (even a zero interest rate) are equivalent.”

H.R. Rep. No. 95-595, at 352-54 (1977) (emphases added); see also
S. Rep. No. 95-989, at 62-65 (1978) (same).

We make several observations regarding this legislative
history. To the extent that the Code in any way contemplates
discounting to present value, such discounting is not permitted
where the claim is for principal plus interest, and the interest has

14
This portion of the legislative history, and the omitted
portion that follows, refers to original issue discounting (“OID”),
discussed above supra note 7, but not at issue in this appeal. We
therefore do not accept the dissent’s attempt to lessen the weight of
the legislative history by claiming it does not address the impact of
OID. Dis. Op. at 10-11. The snippet of legislative history quoted
by the dissent does not, it is true, mention OID – simply because
OID is addressed by the previous paragraph, which the dissent does
not quote.

21
already been disallowed pursuant to § 502(b)(2).

As a matter of economics, the legislative history recognizes
that it is irrelevant whether a court applies § 502(b)(2) to disallow
unmatured interest, or discounts the entire amount (i.e., principal
plus interest) to present value – as long as the court performs only
one such operation and not both, the result is the same.15 “Although
potentially complex, present value can be simplified if a deferred
promise to pay bears a market rate of interest; after the math is
done, such a note will have a present value equal to its face
amount.” 7-1129 COLLIER ON BANKRUPTCY ¶ 1129.03.

A (relatively) simple mathematical example shows the
equivalence of the two methods. A $1,000 face value note bears an
interest rate of 5%, and pays out annually over 10 years. At the end
of the 10 years, the buyer/creditor would have received $1,628.89
in principal and interest (i.e., the note’s “future value”). Assuming
that the seller/debtor filed for bankruptcy on the day of issuance,
however, disallowing all post-petition interest pursuant to §
502(b)(2) would yield a principal claim for $1,000. Similarly,
discounting the entire claim ($1,628.89) to present value using the

15
We understand our dissenting colleague’s observation that
contractual interest often encompasses not only a discounting rate,
which accounts for the time value of money, but also compensation
for the risk of debtor default. Dis. Op. at 11-13. For the purpose
of the case at bar, however, this “extra” interest factor is irrelevant,
as the dissent implicitly recognizes. See Dis. Op. at 27 (noting that
once the Bankruptcy Court had disallowed post-petition interest
pursuant to § 502(b)(2), “it effectively performed not just a
discounting operation, but also an operation to eliminate a
hypothetical interest rate premium”). The latter interest rate
premium reduction was not appealed by JP Morgan. See supra
note 5. For our purposes today, then, that a discounting operation
was performed at all during the disallowance of interest under §
502(b)(2) means that a second discounting under § 502(b) is
unwarranted.

22
contractual rate of interest (5%) also yields a claim for $1,000.16
By contrast, the Bankruptcy Court’s approach below (both
disallowing interest and then discounting to present value) yields a
claim for only $613.91.

The point is to recognize what the creditor bargained for,
while avoiding a windfall. The key difference between interest-
and non-interest-bearing debt is in that bargain – the holder of a
non-interest-bearing note bargained to receive only his $1,000,
spread out over the 10 years. The holder of interest-bearing debt,
however, bargained for much more than the $1,000 – $1,628.89, in
fact. Giving him $1,000 today, then, means that by the end of what
would have been the note’s 10-year lifetime, he could have
reinvested at the same theoretical rate of interest, and earned his
$1,628.89. A creditor who bargained to receive only the $1,000 in
principal, without interest, would be fully compensated by $613.91,
which he would be able to grow into his $1,000 by the end of the
10 years; not so for the creditor who bargained to receive interest,
who is shortchanged by only receiving $613.91.

We emphasize that our holding in this case in no way yields
a windfall for creditors such as JP Morgan. Instead, the interplay
between § 502(b) and § 502(b)(2), as reflected in both the
legislative history and basic economics, acknowledges that once
unmatured interest has been disallowed, discounting the remainder
of the claim to present value would inequitably twice penalize the
creditor for the time value of money. We wholeheartedly agree that
future liabilities must be reduced in some way to reflect the time
value of money, but doing so twice is the “double discounting”
complained of by JP Morgan in this case.

16
One of the cases cited by U.S. Bank, In re O.P.M. Leasing
Services, Inc., 79 B.R. 161 (S.D.N.Y. 1987), actually supports JP
Morgan’s argument that disallowing postpetition interest and
discounting principal to present value is impermissible and
inequitable “double discounting.” The O.P.M. court rationalized
discounting a non-interest-bearing lease to present value because
it would accomplish the same economic function as disallowing
post-petition interest under 11 U.S.C. § 502(b)(2). Id. at 167.

23
 We acknowledge, but reject, U.S. Bank and the District
Court’s near-total, but misplaced. reliance on In re: Loewen Group
International, Inc., 274 B.R. 427 (Bankr. D. Del. 2002)
(“Loewen”). Loewen, a Bankruptcy Court case, dealt only with
non-interest-bearing instruments, and concluded that they should be
discounted to present value. We reject, as detailed above, the
Loewen court’s baseline conclusion that 11 U.S.C. § 502(b) is clear
and unambiguous. We decline to follow the approach of Loewen.17

17
Loewen is, of course, not binding on this Court or the
District Court. At issue in Loewen were “long-term, non-interest
bearing, unsecured promissory notes” and non-interest-bearing debt
obligations. Loewen, 274 B.R. at 429. Contrary to U.S. Bank and
the District Court’s assertions, the instruments in Loewen were
non-interest bearing – a distinction repeated frequently by the
Loewen court itself. See, e.g., Loewen, 274 B.R. at 430-31
(detailing the installment payment structures as all being “without
interest”); id. at 435 (“claims asserted in respect to non-interest
bearing promissory notes”); id. at 440 (“[P]art of the parties’
economic agreement was that Claimants would receive regular
payments over time without interest.”); id. at 442 n.31 (“The
Promissory Notes giving rise to the Claims are non-interest
bearing.”). The only “interest” mentioned by Loewen was interest
triggered in the event of default. Id. at 429 n.4. The instrument
holders did not bargain to receive principal plus interest on the
notes. Id. at 440.
The Loewen court determined that 11 U.S.C. § 502(b)
“clear[ly] and unambiguous[ly]” required discounting to present
value, id. at 433, a contention we have already rejected above.
Crucially, however, while the District Court believed differently,
even the Loewen court understood that interest-bearing obligations
should be treated dissimilarly from non-interest bearing
obligations. Loewen refused to consider the legislative history to
§ 502(b)(2), which we have cited above, in part because it related
only to § 502(b)(2) and “§ 502(b)(2) is not at issue in this dispute.”
Id. at 433 n.15. We also note that Loewen understood the crucial
economic distinction, concluding that it was economically
appropriate to discount the non-interest-bearing claims because the
parties had bargained to receive less than the face value of the
notes by not building interest into the bargain. Id. at 440. Here, in

24
 As appealing as it is, we must also reject our dissenting
colleague’s theory that the reason interest-bearing debt would not
be discounted to present value is because future principal is
accelerated (once post-petition interest is disallowed under §
502(b)(2)), and becomes presently due debt. Dis. Op. at 7.18 We

contrast, the parties bargained to receive interest.
18
Our dissenting colleague asserts that courts have
“traditionally” followed this approach and simply accelerated post-
petition principal instead of discounting it to present value in §
502(b)(2) situations. Dis. Op. at 5, 13. The three bankruptcy
cases found by the dissent have indeed correctly not discounted
principal to present value, but as the dissent notes, these courts
“have not specified that they were not discounting the principal
payments to present value.” Dis. Op. at 5 n.1. We, unlike those
bankruptcy courts, do not have the luxury of this approach, and
instead bear the burden of reaching this otherwise correct result by
reasoning based on the statutory text and legislative history.
Moreover, the bulk of cases cited in the dissent simply do
not stand for the proposition asserted. Most importantly, the cases
dealt only with the ability of a creditor to forcibly accelerate a debt
for purposes other than determining an allowable claim under §
502(b). In one of the first cases cited, the Bankruptcy Court never
once mentioned the concept of discounting a claim to present value
under § 502(b), and in fact rejected the contention that the debt
there was accelerated for the purpose of an usurious interest-
spreading analysis. In re: Auto Int’l Refrigeration, 275 B.R. 789,
812-14 (Bankr. N.D. Tex. 2002), rev’d in part sub nom. Mims v.
Fid. Funding, Inc., 307 B.R. 849 (N.D. Tex. 2002). We note that
in this sense, Auto Int’l Refrigeration buttresses our above
conclusion, supra Part III.B.1, that § 502(b) does not clearly and
unambiguously mandate across-the-board discounting to present
value.
Another case cited by the dissent, In re: Payless Cashways,
Inc., 287 B.R. 482 (Bankr. W.D. Mo. 2002), relied on a later-
reversed portion of Auto Int’l Refrigeration to find that the creditor
could not collect a higher rate of interest on debt that had not been
affirmatively accelerated. Payless Cashways addressed only 11
U.S.C. § 506, and never even mentioned § 502(b)(2), let alone any

25
note that this approach might not lead to the limited result the
dissent assumes, if we essay a glance at the rest of § 502(b), and not
merely at § 502(b)(2). The general rule of both the Bankruptcy
Code and § 502(b), as our colleague notes correctly, Dis. Op. at 5,
13, is acceleration to the date of filing of the bankruptcy petition,
for the purpose of filing a claim – not the lack of acceleration.19
Section 502(b) in particular illustrates this point – subsections (6)
and (7) specify claims determined “without acceleration,”
(emphasis added). The default state of all “amounts” under §
502(b) subsections other than subsections (6) and (7), then, is
acceleration. Under our colleague’s approach, all of these
“amounts” would be accelerated and presently due, therefore none
would be discounted to present value pursuant to § 502(b). What
our colleague describes as a “special rule created by § 502(b)(2),”
Dis. Op. at 19, would instead swallow the general rule, and any
discounting language the dissent finds in § 502(b) would become
mere surplusage.

possibility of discounting to present value. The final case cited, In
re: Manville Forest Prods. Corp., 43 B.R. 293, 297-98 (Bankr.
S.D.N.Y. 1984), rev’d on other grounds, 60 B.R. 403 (S.D.N.Y.
1986), simply concluded that the debt at issue was accelerated by
the filing of a bankruptcy petition, so that no overt acts were
needed of the creditor. The Manville court was not asked to
determine the allowable amount of any claim, but instead to
determine whether debt was accelerated before being
deaccelerated. Contrary to the dissent’s assertions, then, none of
these cited cases made even a passing inquiry into the subject we
today address, or concluded that discounting was inappropriate.
19
The legislative history shows that § 502(b) and (b)(2)
reflect the basic bankruptcy law tenet that “bankruptcy operates as
the acceleration of the principal amount of all claims against the
debtor.” H.R. Rep. No. 95-595, at 352-54. “Simply stated, the
filing of a petition accelerates the principal amount of all
unmatured claims against the debtor, whether or not a clause in a
prepetition agreement provides that a bankruptcy filing accelerates
the maturity date.” 4-502 COLLIER ON BANKRUPTCY ¶ 502.03
(emphasis added).

26
 We conclude that the language used in § 502(b) does not
clearly and unambiguously require discounting an interest-bearing
obligation to present value in light of the words’ plain meanings
and the language used elsewhere in the Bankruptcy Code. The
Bankruptcy Court erred: Interest-bearing debt should not be
discounted to present value after unmatured interest has been
disallowed pursuant to § 502(b)(2).

IV. CONCLUSION

We conclude that the Bankruptcy Court erred in holding,
and the District Court erred in affirming, that JP Morgan’s claims
should be discounted to present value even after the portion of the
claims for post-petition interest was disallowed. Accordingly, we
will reverse.

SMITH, Circuit Judge, dissenting.

The majority’s reasoning today unnecessarily casts doubt on
a long-standing, broadly-recognized, and well-justified principle
arising under the Bankruptcy Code: that in order to avoid a windfall
for certain creditors, claims based on future obligations should be
discounted to present value before those obligations become
eligible for immediate distribution. Further, the majority’s holding
rests on a mischaracterization of the disputed claims: the majority
treats the claims as equivalent to principal and interest payments on
a loan, when in fact the securitization and guarantee process in this
case gave rise to claims that were based on non-interest-bearing
future obligations. I respectfully dissent.
In adopting their characterization of the disputed claims, the
majority repeats an error committed by both the Bankruptcy Court
and the District Court. This mischaracterization of the disputed
claims in turn led those courts to erroneously disallow the B-2
Certificate holders’ claims to the extent that they were for Oakwood
Homes’ guarantees of payment for the stipulated shortfalls in the
Interest Distribution Amounts. JP Morgan, however, failed to raise

27
this issue on appeal, and therefore there is no opportunity to correct
that error.
Because I believe that the Bankruptcy Court and the District
Court did not otherwise err in holding that the B-2 Certificate
holders’ claims should be discounted to present value, the issues
actually raised on appeal do not require reversing the District
Court’s judgment. Accordingly, I would affirm.
I.
The general purpose of bankruptcy is to “administer an
estate as to bring about a ratable distribution of assets among the
bankrupt’s creditors.” Vanston Bondholders Protective Comm. v.
Green, 329 U.S. 156, 161 (1946). Section 502 of the Bankruptcy
Code carries out this purpose through a two-step process. Section
502(a) provides that a creditor’s claim is deemed allowed unless a
party in interest objects. 11 U.S.C. § 502(a). If a party in interest
objects to a claim, however, “the court, after notice and a hearing,
shall determine the amount of such claim in lawful currency of the
United States as of the date of the filing of the petition, and shall
allow such claim in such amount.” 11 U.S.C. § 502(b). Section
502(b) also specifies several exceptions to this general rule, most
relevantly that the court shall not allow a claim “to the extent that
. . . such claim is for unmatured interest.” 11 U.S.C. § 502(b)(2).
Traditionally, courts have collectively construed § 502(b) and §
502(b)(2) as creating two distinct tracks for analyzing claims based
on future obligations: a general track for claims based on non-
interest-bearing future obligations, and a special track for claims
based on interest-bearing loan obligations.
A.
When other courts have applied the general rule in § 502(b)
to claims based on future obligations, they have discounted such
claims to present value. See In re CSC Indus., Inc., 232 F.3d 505,
508 (6th Cir. 2001) (holding in a case involving unfunded benefit
liabilities under ERISA that “the bankruptcy court must value
present claims and reduce claims for future payment to present
value”); In re CF&I Fabricators of Utah, Inc., 150 F.3d 1293, 1300
(10th Cir. 1998) (same); In re O.P.M. Leasing Servs, Inc., 79 B.R.

28
161 (S.D.N.Y. 1987) (discounting scheduled reimbursement due
under lease); In re Loewen Group Int’l, 274 B.R. 427, 432-41
(Bankr. D. Del. 2002) (discounting future payments owed on a non-
interest-bearing promissory note); In re Trace Int’l Holdings, Inc.,
284 B.R. 32, 38 (Bankr. S.D.N.Y. 2002) (discounting deferred
compensation claim). The basic purpose of this discounting
practice is to “insure the relative equality of payment between
claims that mature in the future and claims that can be paid on the
date of bankruptcy.” In re CF&I, 150 F.3d at 1300; see also In re
Trace, 284 B.R. at 38 (“Discounting is consistent with the
fundamental goal of treating similar claims in the same manner . .
. and reflects the economic reality that a sum of money received
today is worth more than the same amount received tomorrow. . .
. Paying the face amount on an accelerated basis would
overcompensate the creditor by enabling him to receive and use the
money sooner.”).
The courts have properly found the necessary textual support
for this discounting practice in the general requirement of § 502(b)
that the court “shall determine the amount of such claim in lawful
currency of the United States as of the date of the filing of the
petition, and shall allow such claim in such amount.” See In re
CSC, 232 F.3d at 508; In re CF&I, 150 F.3d at 1300; In re O.P.M.,
79 B.R. at 165; In re Trace, 284 B.R. at 38-39. As the Trace Court
explained, the “amount of the claim may and often does vary from
the allowed amount of the claim, the portion eligible for
distribution.” 284 B.R. at 39 (emphasis in original); see also In re
Johns, 37 F.3d 1021, 1023 n.1 (3d Cir. 1994) (“An ‘allowed’ claim
is one that will serve as the basis for distribution.”). Pursuant to the
general instruction in § 502(b), this allowed amount is determined
by the value of the claim in United States currency as of the petition
date, which requires discounting what were originally future
payments to present value. See In re Trace, 284 B.R. at 39; see
also In re O.P.M., 79 B.R. at 184 (“[A] determination of the
amount of such claim cannot be distinguished from a determination
of the value of the claim as of the petition date because any
valuation of a claim is necessarily embodied in § 502(b) so that the
amount of the claim to be allowed is properly ascertained.”)

29
(internal quotations and citations omitted).
In short, because payments that were originally due in the
future will become eligible for immediate distribution through the
bankruptcy process, in order to avoid overcompensating such
creditors, the allowed amount of such claims should be determined
by discounting the future payments to present value. And the
general instruction in § 502(b) provides the necessary textual
support for this practice by requiring the court to “determine the
amount of such claim in lawful currency of the United States as of
the date of the filing of the petition.”
B.
When the contested claim is based on an interest-bearing
loan obligation, however, the courts have disallowed the remaining
post-petition unmatured interest payments in accordance with §
502(b)(2), but have not discounted the remaining principal
payments to present value. See, e.g., In re Wyeth Co., 134 B.R.
920, 922 (Bankr. W.D. Mo. 1991); see also In re Issaac, 2005 WL
3939840 at *3 (Bankr. N.D. Ill. Aug. 25, 2005) (“Claims are
‘allowed’ ‘as of the date of the filing of the petition’ and may not
include interest that is unmatured as of the petition date. 11 U.S.C.
§ 502(b)(2). Thus, a loan claim is fixed as of the filing date and
includes all principal that will ever become due and interest due
only on the filing date.”).20 As one court explained, § 502(b)(2) has
been interpreted as accelerating the principal portion of a loan
claim:
Section 502(b)(2) of the Bankruptcy Code, 11 U.S.C.
§ 502(b)(2), authorizes a creditor to accelerate a
claim, to prove the full amount of an indebtedness,
including the unmatured portion thereof. Even
though only one payment may be due on a note when
bankruptcy intervenes and the remaining payments

20
Although courts typically have not specified that they were not
discounting the principal payments to present value, U.S. Bank was not
able to identify any other case in which a court disallowed regularly-
scheduled interest payments on a loan obligation pursuant to § 502(b)(2)
and then discounted the remaining principal payments to present value.

30
 may not become due until well into the future, the
creditor is allowed to prove a claim for the entire
balance due on the note, plus interest to the date of
bankruptcy.
In re Lynch, 187 B.R. 536, 548 (Bankr. E.D. Ky. 1995); see also In
re Payless Cashways, Inc., 287 B.R. 482, 488 (Bankr. W.D. Mo.
2002) (“[T]he legislative history to section 502(b) states that
bankruptcy acts as an acceleration of the principal amount of all
claims against the debtor.”); In re Auto Int’l Refrigeration, 275 B.R.
789, 813 (Bankr. N.D. Tex. 2002) (“[B]ankruptcy may accelerate
the Loan, however, this acceleration is only for the limited purpose
of calculating Defendants’ claim in the bankruptcy.”); In re PCH
Assocs., 122 B.R. 181, 198 (Bankr. S.D.N.Y. 1990) (“The Note
may be deemed to have been accelerated . . . for the purposes of
calculation of the [creditor’s] claim in these bankruptcy
proceedings.”); In re Manville Forest Products Corp., 43 B.R. 293,
297 (Bankr. S.D.N.Y. 1984) (“It is a basic tenet of the Bankruptcy
Code that ‘[b]ankruptcy operates as an acceleration of the principal
amount of all claims against the debtor.’”) (citations omitted).
Accordingly, the practice of allowing an interest-bearing
claim subject to § 502(b)(2) without discounting the remaining
principal payments to present value does not require an exemption
for § 502(b)(2) cases from the discounting rule authorized by the
general instruction in § 502(b). Rather, once the remaining
principal payments have been accelerated, they have become
presently due. Consequently, the general discounting rule
authorized by § 502(b) requires no further discounting of the
remaining principal payments, because those payment are no longer
due in the future.
This treatment of loan cases subject to § 502(b)(2) is
supported by the legislative history of § 502(b)(2), which provides:
Subsection (b) prescribes the grounds on which a
claim may be disallowed. The court will apply these
standards if there is an objection to a proof of claim.
...
Paragraph (2) requires disallowance to the extent that

31
 the claim is for unmatured interest as of the date of
the petition. Whether interest is matured or
unmatured on the date of bankruptcy is to be
determined without reference to any ipso facto or
bankruptcy clause in the agreement creating the
claim. Interest disallowed under this paragraph
includes postpetition interest that is not yet due and
payable, and any portion of prepaid interest that
represents an original discounting of the claim, yet
that would not have been earned on the date of
bankruptcy. . . .
Section 502(b) thus contains two principles of
present law. First, interest stops accruing at the date
of the filing of the petition, because any claim for
unmatured interest is disallowed under this
paragraph. Second, bankruptcy operates as the
acceleration of the principal amount of all claims
against the debtor. One unarticulated reason for this
is that the discounting factor for claims after the
commencement of the case is equivalent to the
contractual interest rate on the claim. Thus, this
paragraph does not cause the disallowance of claims
that have not been discounted to a present value
because of the irrebuttable presumption that the
discounting rate and the contractual interest rate
(even a zero interest rate) are equivalent.
H.R. Rep. No. 95-595, at 352-54 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6307-10; S. Rep. No. 95-989, at 62-65 (1978),
reprinted in 1978 U.S.C.C.A.N. 5787, 5848-51.21

21
The majority cites this legislative history for the proposition
that “[t]he general rule of both the Bankruptcy Code and § 502(b) . . . is
acceleration to the date of filing of the bankruptcy petition, for the
purpose of filing a claim–not the lack of acceleration.” Maj. Op. at 26
& n.19 (emphasis in original). I find persuasive, however, the reasoning
of the In re O.P.M. Court, which concluded that because the passage in
the legislative history cited by the majority “refers to the policy of
disallowing claims pursuant to § 502(b)(2) for unmatured interest . . . it
is evident, when read in context, that the cited paragraph deals with that
particular subsection of § 502(b).” In re O.P.M., 56 B.R. at 686 n.4; see

32
 But this statement in the legislative history of § 502(b) is
misleading for at least two reasons. First, the interest rate stated on
the face of a debt instrument may be merely nominal, and the actual
bargained-for interest rate may depend on other terms of the
instrument. For example, the courts have carved out an “original
issue discount” rule to reflect the fact that a discount on the

also In re Loewen, 274 B.R. at 433 n.15 (“[W]hen placed in its proper
context, it is apparent that this snippet of legislative history specifically
refers to the policy of disallowing claims for unmatured interest under
§ 502(b)(2). . . . Although . . . other courts have relied upon the
legislative history of § 502(b) for guidance, those courts have done so
in the process of explaining why claims for unmatured interest and/or
original issue discount are disallowed pursuant to § 502(b)(2).”)
(citations omitted). This conclusion is further buttressed by the
reference in this passage to accelerating “the principal amount” of a
claim, a term that would ordinarily have meaning only if the claim in
question was based on a loan obligation subject to the operation of §
502(b)(2).
Finally, I do not agree with the majority that § 502(b)(6) and §
502(b)(7) imply that “[t]he default state of all ‘amounts’ under § 502(b)
subsections other than subsections (6) and (7), then, is acceleration.”
Maj. Op. at 27. Rather, § 502(b)(6) simply provides that “the claim of
a lessor for damages resulting from the termination of a lease of real
property” cannot exceed “the rent reserved by such lease, without
acceleration, for the greater of one year, or 15 percent, not to exceed
three years, of the remaining term of such lease . . . [plus] any unpaid
rent due under such lease, without acceleration . . . .” See § 502(b)(6).
Accordingly, the reference to acceleration in § 502(b)(6) is required by
the possibility that the termination of a lease would result in the
acceleration of rent payments through the application of some damages
rule or provision, not because § 502(b) itself contains a default
acceleration rule. Similarly, § 502(b)(7) simply provides that “the claim
of an employee for damages resulting from the termination of an
employment contract” cannot exceed “the compensation provided by
such contract, without acceleration, for one year . . . [plus] any unpaid
compensation due under such contract, without acceleration . . . .” See
§ 502(b)(7). Again, as with § 502(b)(6), the reference to acceleration in
§ 502(b)(7) simply negates the possibility that a damages rule or
provision would accelerate compensation in the event of a termination
of an employment contract, and therefore this language in § 502(b)(7)
does not imply that there is a default acceleration rule in § 502(b).

33
purchase price of a debt instrument–the amount actually tendered
by the lender to the borrower–can reflect some portion of the
interest to be paid on the loan. See generally In re Pengo Indus.,
Inc., 962 F.2d 543 (5th Cir. 1992); In re Chateaugay Corp., 961
F.2d 378 (2d Cir. 1992). An “original issue discount” occurs when
the nominal interest rate on a debt instrument is set below the
market interest rate for an instrument of that type, which results in
a market purchase price for that instrument which is less than its
face value. See In re Pengo, 962 F.2d at 546. The courts have
treated this difference between the market purchase price and the
face value of such instruments as “in the nature of additional
interest,” and consequently have considered any such unamortized
original issue discounts as claims for unmatured interest within the
meaning of § 502(b)(2). See id. Again, the courts justify this rule
on the basis of the instructions in § 502(b) and § 502(b)(2) and in
light of the “economic reality” of the underlying transaction. See
id.
Another notable problem with this statement in the
legislative history is that the interest rate on debt instruments
typically will reflect not only a general discounting rate, but also
other factors, most prominently the risk that the debtor will not
fulfill his payment obligations as per the loan agreement. See Till
v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (observing that an
interest rate compensates a creditor for the fact that “[a] debtor's
promise of future payments is worth less than an immediate
payment of the same total amount because the creditor cannot use
the money right away, inflation may cause the value of the dollar
to decline before the debtor pays, and there is always some risk of
nonpayment.”). In other words, typically there is a difference
between the interest rate on a loan and the contemporaneous risk-
free discounting rate, and this difference reflects in large part a
premium that the lender has required the borrower to agree to pay
in order to compensate the lender for the risk of nonpayment.22

22
In that sense, lenders typically take out a series of “bets” on
risky borrowers. If a given borrower makes the payments as per the loan
agreement, the lender wins the bet on that borrower, and the lender’s

34
 Accordingly, the disallowance of claims to the extent that
they are for unmatured interest payments pursuant to § 502(b)(2)
carries out at least two distinct financial operations. First, to the
extent that a portion of the interest rate reflects the time value of
money, the rule in § 502(b)(2) does in fact carry out an operation
equivalent to the discounting that the courts would otherwise have
performed pursuant to the general instruction in § 502(b). Second,
to the extent that a portion of the interest rate contains a premium
that reflects the risk of nonpayment associated with the loan, the
rule in § 502(b)(2) acts to disallow the lender’s claim to the extent
that it contains this premium. This second operation is
economically justifiable precisely because this premium was
conditional: the essence of the bargain struck by the lender was that
the lender would receive this premium if the debtor made his
payments as provided by the loan agreement, but that the lender
would fail to receive this premium in the case of nonpayment.
Accordingly, it is economically appropriate for the Bankruptcy
Code to disallow claims to the extent that they contain such a
premium, because the lender’s expectation of receiving this
premium was conditioned on payment of the loan as provided by
the agreement.23

winnings take the form of the interest rate premium that has been paid
by the borrower. Similarly, if a borrower fails to make the payments as
per the loan agreement, the lender loses the bet. If a lender has properly
assessed the risks associated with its various bets, the interest premiums
realized in the cases where the lender wins these bets will compensate
the lender for the lost payments in the cases where the lender loses these
bets.
23
In other words, the rule in § 502(b)(2) in part reflects the fact
that when the debtor enters bankruptcy, the lender has lost his bet on the
debtor, and therefore the lender is not entitled to claim payment of the
premium that he would have received if he had instead won his bet on
the debtor. Indeed, to allow such a claim to the extent that it reflected
this premium would be overcompensating the lender, because lenders
typically receive their compensation for losing such bets from other
loans, namely those in which the lenders made similar bets and actually
won (in that the borrower made the scheduled payments, and the lender
realized the associated interest rate premium).

35
 Consequently, I agree with the majority’s conclusion that
bankruptcy courts are not authorized by § 502(b)(2) to “double
discount” claims. That is because the traditional construction of §
502(b)(2) authorizes Bankruptcy Courts to accelerate any
remaining principal payments in cases governed by § 502(b)(2),
and the discounting of future obligations authorized by the general
instruction in § 502(b) is in fact already embedded as one of the
operations carried out by the disallowance of unmatured interest
pursuant to § 502(b)(2). But the rule in § 502(b)(2) is not simply
equivalent to a discounting rule. Rather, in the course of
disallowing unmatured interest payments, the rule in § 502(b)(2)
also carries out additional operations, most notably the
disallowance of any conditional interest rate premium associated
with the risk of nonpayment.
II.
Although the majority nominally declines to reach whether
§ 502(b) ever permits discounting, the majority’s reasoning does
not appear to be limited to claims based on interest-bearing loan
obligations treated under § 502(b)(2). Consequently, the majority’s
reasoning unnecessarily undermines the traditional and proper
construction of the Bankruptcy Code.
The majority explicitly states that “[w]e do not hold here that
11 U.S.C. § 502(b) never authorizes discounting a claim to present
value. . . .” Maj. Op. at 18-19 (emphasis in original). Nonetheless,
such a conclusion appears to be the logical implication of the
majority’s reasoning.
For example, the majority states, “We are not convinced that
a plain reading of § 502(b) supports the Bankruptcy Court’s
conclusion.” Maj. Op. at 16. The majority distinguishes the term
“amount” from the term “value,”24 and argues that:

24
The majority defines “value” as “the monetary worth or price
of something; the amount of goods, services, or money that something
will command in an exchange.” Maj. Op. at 16 n.8 (emphasis added)
(citation omitted). The presence of the term “amount” in their definition
of “value” severely undermines the majority’s apparent conclusion that

36
 [W]here the Bankruptcy Code intends a court to
discount something to present value, the Code clearly
uses the term “value, as of” a certain date. Many
sources support the use of the term “value” for this
purpose, none support U.S. Bank’s contention that
“amount . . . as of” also implies a present value
calculation.
Maj Op. at 16-17 (citations omitted) (emphasis in original). The
majority concludes: “Where the Code speaks of discounting cash
streams to present value, it speaks in terms of ‘value, as of’ a
certain date. It does not use ‘amount . . . as of.’” Maj. Op. at 18.25
This textual argument is not limited by its terms to claims based on
loan obligations.
Additionally, the majority “decline[s] to follow the

“amount” and “value” cannot refer to the same thing. Moreover, the full
phrase that we are construing is “the amount of such claim in lawful
currency of the United States as of the date of the filing of the petition.”
11 U.S.C. § 502(b). Construing this full phrase as referring to the
“value” of the claim is thus supported by the opinion’s own definition
of “value,” because § 502(b) requires the court to determine “the amount
of . . . money” (namely U.S. currency) which should be “exchanged”
(immediately distributed by the estate to the creditor) as the result of
allowing the claim.
25
An alternative explanation for this variance is that § 502(b)
does not always require discounting to present value, but rather simply
authorizes it in certain circumstances. For example, to the extent that §
502(b)(2) provides an alternative mechanism for determining the
allowed amount of claims based on interest-bearing loan
obligations–namely, by disallowing the interest payments but
accelerating the principal payments–§ 502(b) would not require further
discounting. See Part I.B, supra. More generally, § 502(b) would not
require discounting if the claim was not based on a future obligation, but
rather was based on a payment that was presently or past due. In short,
the fact that § 502(b) generally contemplates many different types of
claims, and that different methods for determining “the amount of such
claim[s] in lawful currency of the United States as of the date of the
filing of the petition” may apply to different claims, provides a sufficient
explanation for why the general instruction of § 502(b) is not written so
as to always require discounting.

37
approach” of the court in Loewen, noting that “Loewen is, of
course, not binding on this Court or the District Court.” Maj. Op.
at 24 & n.17. The majority does state that Loewen is
distinguishable because the promissory notes in that case were not
interest-bearing. Maj. Op. at 24 n.17. But the majority further
states, “The Loewen court determined that 11 U.S.C. § 502(b)
‘clear[ly] and unambiguous[ly] required discounting to present
value . . . a contention we have already rejected above.” Id. In
light of the majority’s broad reasoning with respect to the text of §
502(b), this sweeping statement also goes beyond the more limited
principle that § 502(b) does require additional discounting in cases
subject to the rule in § 502(b)(2).
Finally, the majority states that “[t]he general rule of both
the Bankruptcy Code and § 502(b) . . . is acceleration to the date of
filing of the petition for the purpose of filing [sic] a claim, not the
lack of acceleration.” Maj. Op. at 26 (emphasis in original). If that
was in fact a proper construction of § 502(b) in general, rather than
merely § 502(b)(2) in particular, then logically no claims would be
subject to discounting, because all claims would be presently due.
Collectively, these statements go farther than necessary if we
are merely holding that “double discounting” is not allowed in
cases that are subject to the rule in § 502(b)(2). And as the
majority itself notes, insofar as the majority’s reasoning does not
appear to depend on the future obligations taking the form of
interest-bearing loan obligations, the majority’s reasoning places
our court at odds with the reasoning of all of the other courts to
address these issues. See Maj. Op. at 20 n.13.
In light of the basic purposes of the Bankruptcy Code and
the general instruction in § 502(b), I would adopt today the
traditional view that § 502(b) authorizes discounting claims based
on future obligations to present value. I would also affirm the
standard practice of not discounting the remaining principal
payments in cases subject to §502(b)(2), because such discounting
in effect has already occurred through one of the operations
embedded in the rule in § 502(b)(2), and § 502(b)(2) implicitly

38
operates to accelerate the remaining principal payments.26
III.
In light of this traditional construction of § 502(b) and §
502(b)(2), the courts must determine whether a claim for future
payments should be treated under the general discounting rule, or
rather under the special rule created by § 502(b)(2). In this case, a
careful examination of the disputed claims indicates that the
Bankruptcy Court and the District Court erred by treating these
claims as interest-bearing loan obligations covered by the special
rule in § 502(b)(2), and the majority today repeats this error by
adopting the same characterization of the disputed claims.
The manifest purpose of the securitization and guarantee
process in this case was to convert the original mortgage loans into
a substantially different form of financial instrument. The terms of
the Pooling and Service Agreements make it clear that rather than
loaning funds to the Trusts, the certificate holders were instead
purchasing a right to be paid from the trust’s assets according to the

26
Accordingly, I agree with the majority that an erroneous double
discount has been applied to this claim. However, the mere fact that this
double discounting is erroneous does not tell us which of the two
discounts was the erroneous discount. In my view, the erroneous
discount resulted from the application of § 502(b)(2) to this claim, when
in fact no part of the claim was actually for unmatured interest within the
meaning of § 502(b)(2). See Part IV, infra. In contrast, discounting this
claim to present value was not erroneous, because it was based on
payments that would not have occurred until the future if not for the
claim becoming immediately payable due to the bankruptcy. See Part
I.A, supra. Both of these conclusions–that no part of the claim was for
disallowable unmatured interest, but that the entire claim should be
discounted to present value–are derived from my analysis of the nature
of the financial instrument that gave rise to the claim. See Part III, infra.
But as described in Part V, infra, we cannot correct the error which led
to double discounting in this case because the claimants failed to appeal
the erroneous discount, and only appealed the nonerroneous discount.
So, despite the fact that an erroneous double discount was applied to this
claim, I would hold that we have no opportunity to correct that error,
given the nature of this appeal.

39
specified schedules.27 Indeed, the Agreements described the
payments due to the certificate-holders as “Principal Distribution
Amounts” and “Interest Distribution Amounts.” These terms imply
that the Trusts were not making principal and interest payments on
loans granted to the Trusts by the certificate holders. Rather, these
terms imply that the Trusts were instead distributing payments
derived from the Trusts’ revenues to the certificate holders. The
fact that the Trusts’ underlying revenue streams from the mortgages
were divisible into principal and interest portions, and the fact that
the scheduled distributions to the certificate holders reflected this
underlying division, does not imply that the Trusts’ payments to the
certificate holders were themselves in the nature of principal and
interest payments.
Further, once Oakwood Homes guaranteed the payments on
the B-2 Certificates, the joint obligation of the Trusts and Oakwood
Homes to make the scheduled payments was not conditioned on the
Trusts receiving the necessary revenues from the mortgages held by
the trust. The Limited Guarantee thus further distinguished the
payments due to the B-2 Certificate holders from the underlying
interest and principal payments owed to the Trusts. Cf. In re
Wisconsin Engine Co., 234 F. 281, 284 (7th Cir. 1916) (holding
that even though payments on promissory notes were “expressed in
terms of royalties,” they were not expressed as conditioned upon
such royalties being earned, and thus were not royalty payments).
In Wisconsin Engine, the creditor owned certain patents, and
granted licenses for those patents to the debtor. See id. at 282-83.
The license agreement provided for a royalty, but the license
agreement also in effect securitized and guaranteed the royalty

27
Notably, the “tranch” system adopted by the Trusts, which set
a hierarchical priority system for distributing the available funds among
the different classes of certificate holders, demonstrates that the Trusts
were not simply holding specific sets of mortgages for the benefit of
corresponding sets of certificate holders. Rather, the Trusts were indeed
first “pooling” the revenues received from the mortgages, and then
distributing funds from this general pool to the different certificate
holders according to the schedules and priority system defined in the
Pooling and Service Agreements.

40
payments for the first three years. Id. The agreement provided for
a minimum royalty payment of $22,500 for the first three years, and
further provided that
as evidence or prepayment of such sum the licensee
will deliver to the licensor, at the time of signing this
agreement, two sets of negotiable promissory notes
of equal amounts for the aggregate sums of twenty-
two thousand five hundred dollars ($22,500) . . .
payable at the following times and in the following
amounts: Five thousand dollars ($5,000) shall be
payable at the end of one year from the date hereof;
ten thousand dollars ($10,000) at the end of two
years from the date hereof; and seven thousand five
hundred ($7,500) at the end of three years from the
date hereof.
Id. After the licensee entered bankruptcy, the Seventh Circuit
allowed a claim on one of the two sets of these promissory notes (a
set of three notes for $2,500, $5,000, and $3,750 respectively), for
a total of $10,537.51, their discounted value as of the time
bankruptcy proceedings began. Id. at 282, 284.
The Seventh Circuit analyzed the relationship between the
payments due on the promissory notes and the underlying royalty
payments as follows:
In our judgment, the indebtedness represented by the
notes was the consideration for the grant of the
exclusive license. It was expressed in terms of
royalties, and properly so, because, in so far as
royalties up to that amount would be earned under
the agreement, payment of the notes would cancel
any obligation in respect thereto. But it was not
expressed as conditioned upon such royalties being
earned. The parties contemplated the possible
cancellation of the license before the expiration of
three years because of licensee’s breach of the
agreement or its insolvency. Nevertheless the
obligation to pay the $22,000 [sic] remained.
...
There is no guaranty that, if royalties shall in fact

41
 become due, they shall amount to at least $22,500 for
the period; there is an absolute undertaking that this
amount shall be paid. . . . [T]he provision that notes
should be given and that they should be negotiable is
additional evidence tending to resolve any doubt as
to the intention of the parties that the amount therein
stated was to be payable in any event. That the notes
were not in fact sold is of no moment. The parties
necessarily contemplated that they might be
negotiated.
Id. at 284. In short, the Seventh Circuit recognized that although
the payment obligations were “expressed in terms of royalties,”
once those obligations had been converted into guaranteed and
negotiable financial instruments, they should be treated as such by
the Bankruptcy Code.
This same principle should apply in our case. Although
payments distributed by the Trusts are “expressed in terms” of
“Principal Distribution Amounts” and “Interest Distribution
Amounts,” in reality the B-2 Certificate holders were like the
holders of the negotiable promissory notes in In re Wisconsin
Engine: they were guaranteed a future set of payments, and the
payments owed to the B-2 Certificate holders were not conditioned
on the Trusts acquiring the revenue from the underlying mortgages
and then distributing it to the certificate holders. Indeed, creating
such a financial instrument was the manifest purpose of the
securitization and guarantee process with respect to the B-2
Certificates.
In short, the B-2 Certificate holders’ claims against
Oakwood Homes were not for principal and interest due to them on
a loan that they had made to Oakwood Homes. Indeed, these
claims were not even for guarantees on a loan that the certificate
holders had made to a third party, because the certificate holders
did not in fact loan money to the Trusts. Rather, the certificate
holders had a claim against Oakwood Homes that was equivalent
to any other non-interest-bearing future obligation, even though a
portion of this obligation was expressed as a guarantee of payment

42
for an “Interest Distribution Amount.”28
IV.
Consequently, the Bankruptcy Court’s error was not in
discounting Oakwood Home’s future guarantees of payment for the
Principal Distribution Amounts to present value in accordance with
the general instruction in § 502(b). Rather, the Bankruptcy Court’s
error was in applying the rule in § 502(b)(2) to this case and
disallowing the B-2 Certificate holders’ claims to the extent that
they were for Oakwood Home’s guarantees of payment on the
Interest Distribution Amounts. That is because this portion of the
B-2 Certificate holders’ claims was not in fact for unmatured
interest within the meaning of § 502(b)(2).
In light of the multiple operations embedded in the rule in §
502(b)(2), the consequences of this error were not inconsequential.
Because the B-2 Certificate holders were not directly entitled to
payments from some specific set of mortgages, they had not
bargained for a risk premium in the form of higher mortgage
interest rates. Indeed, the tranch system established by the Pooling
and Service Agreements effectively transferred some of the risk
associated with the possible nonpayment of the mortgages from the
higher priority certificates to the lowest priority certificates–most
notably to the B-2 Certificates–without any compensating increase
in the Interest Distribution Amounts due to the B-2 Certificate
holders.
The limited guarantee of payment supplied by Oakwood
Homes to the B-2 Certificate holders was specifically intended to
facilitate the sale of the B-2 Certificates by eliminating this
concentrated risk. And because Oakwood Home’s guarantee of the

28
In that sense, it should not be relevant that the securities in this
case were partially backed by the revenue from the mortgages held by
the Trusts, rather than the revenue from any other sort of asset that a
trust could hold. As demonstrated by Wisconsin Engine, the
securitization and guarantee process in this case could be applied to
many different types of assets, and the application of the Bankruptcy
Code to a guarantor’s obligations in such cases should not depend on the
nature of the underlying assets held by the Trusts.

43
B-2 Certificate’s scheduled payments was not in the form of a loan,
nor even in the form of a guarantee on a loan, nowhere in this
transaction did the B-2 Certificate holders bargain for any interest
rate premium associated with the risk that Oakwood Homes itself
would fail to make the payments required by the terms of the
Limited Guarantee.29

29
In cases where a lender bargains for interest payments on a
guaranteed loan, it may be reasonable to assume that the lender has
bargained for an interest rate premium associated with the combined risk
of the borrower and the guarantor jointly failing to make payments on
the loan as per their agreements. Accordingly, if in such a case the
borrower fails to make their payments and the guarantor petitions for
bankruptcy, it may be economically justifiable to treat the guarantor’s
future obligations to the lender as if they were interest-bearing loan
obligations within the meaning of § 502(b)(2). See Maj. Op. at 12
(concluding that Oakwood Homes, as the putative guarantor on a loan,
should be treated as being in the “exact same position as the Trusts, the
primary obligors, with respect to the obligation to make these principal
and interest payments”). In other words, in such a case the lender
presumably has again made a “bet”–namely that either the borrower or
the guarantor would make the payments as per their agreements–and the
lender also presumably bargained for compensation for the possibility
of losing this bet in the form of the possibility of realizing an interest
rate premium in the event that the lender won this bet.
We need not reach this issue today, however, because the B-2
Certificates were not in fact loans to the Trusts, and thus Oakwood
Homes’ guarantees of payment on the B-2 Certificates were not
guarantees on loans, and the B-2 Certificate holders were not lenders
who had bargained for an interest rate premium on a loan which would
reflect in part the risk of Oakwood Homes’ nonpayment on its guarantee.
Indeed, these findings are confirmed by the simple fact that parties
described by the majority as the “primary obligors”–the Trusts–will not
in fact become insolvent as a result of the stipulated revenue shortfalls,
and the B-2 Certificate holders will not have a claim against the Trusts
for a default on their obligations under the Pooling and Service
Agreements. Rather, the possibility of such a shortfall in revenues was
expressly contemplated and provided for in the Pooling and Service
Agreements, and the B-2 Certificate holders knowingly purchased low-
priority certificates. Similarly, the B-2 Certificate holders will have no
claim for direct payment from the purchasers who default on their
mortgages, because they did not bargain for and receive the right to such

44
 When the Bankruptcy Court erroneously applied § 502(b)(2)
to disallow the claims to the extent that they were for Oakwood
Home’s guarantees of payment on the Interest Distribution
Amounts, it effectively performed not just a discounting operation,
but also an operation to eliminate a hypothetical interest rate
premium. But because the B-2 Certificate holders had not in fact
bargained for and received such an interest rate premium, applying
the rule in § 502(b)(2) to their claims unjustifiably reduced the
allowed amount of their claims to the extent that it went beyond
discounting their claims to present value.
In other words, by erroneously applying § 502(b)(2) to this
case, the Bankruptcy Court and the District Court treated the B-2
Certificate holders as having made a losing bet on Oakwood Homes
making its payments as per the guarantee agreement. But because
the B-2 Certificate holders had not bargained for an interest rate
premium associated with that risk, they could not have won any
such hypothetical bet in the event that Oakwood Homes fulfilled its
agreement. Accordingly, this error by the Bankruptcy Court and
the District Court had the effect of imposing on the B-2 Certificate
holders the consequences of losing a bet, a bet that they did not in
fact agree to make.30

direct payments. Accordingly, this is not a case in which a lender has a
claim against both a borrower and guarantor who have failed to make
payments, because the B-2 Certificate holders will have no such claim
against either the Trusts or the underlying purchasers as a result of the
stipulated shortfalls. Again, these facts simply confirm that due to the
securitization process, the B-2 Certificate holders were not lenders, and
Oakwood Homes did not provide the B-2 Certificate holders with a
guarantee on a loan.
30
The majority suggests that these considerations are “irrelevant”
because the “interest rate premium reduction was not appealed by JP
Morgan.” Maj. Op. at 22 n.15. I agree that we cannot correct this error
because JP Morgan failed to appeal this decision by the Bankruptcy
Court and the District Court. See Part V, infra. Nonetheless, these
considerations are relevant because they demonstrate the differences
between the error which in fact occurred in this case (the unwarranted
application of § 502(b)(2) to the claims) and the nonerroneous decision

45
 V.
Due to the procedural posture of this case, however, it is not
possible for us to remand the case to the District Court with an
instruction to reverse the Bankruptcy Court’s judgment to the
extent that the Bankruptcy Court disallowed claims based on
Oakwood Home’s guarantees of payment on the Interest
Distribution Amounts. That is because JP Morgan chose not to
raise this portion of the Bankruptcy Court’s judgment as an issue in
this appeal, and instead appealed only the Bankruptcy Court’s
subsequent decision to discount the remainder of the B-2 Certificate
holders’ claims to present value.
Of course, in light of the traditional construction of § 502(b)
and § 502(b)(2), U.S. Bank inconsistently argued below: (1) that
the claims in this case should be treated as interest-bearing
obligations for the purpose of disallowing what the parties have
described as the interest portion of the claims pursuant to §
502(b)(2); and (2) that the claims should not be treated as interest-
bearing obligations for the purpose of accelerating what the parties
have described as the principal portion of the claims. Nonetheless,
as a result of their errors, neither the Bankruptcy Court nor the
District Court compelled U.S. Bank to choose between these
inconsistent theories of the disputed claims. Accordingly, U.S.
Bank remained free to argue on the basis of either theory of the
disputed claims during this appeal.
Before us, U.S. Bank correctly argued that the future
obligations in this case were not in the nature of loan payments and
therefore should be discounted to present value. Accordingly, I
would hold that we are bound to affirm the District Court’s
judgment on this appeal. That is because the Bankruptcy Court did
not err with respect to the sole issue presented on appeal, and JP
Morgan chose not to appeal the issue with respect to which the

which the majority seeks to correct (the discounting of the claims to
present value). In other words, these two possible errors are not
interchangeable, and we should not treat them as such on appeal.

46
Bankruptcy Court did in fact err.31
VI.
In sum, to the extent that the majority’s reasoning implies
that discounting non-interest-bearing future obligations to present
value is contrary to the text of the Bankruptcy Code, I believe that
it unnecessarily and unjustifiably undermines the traditional
construction of § 502(b). Further, in my view the majority has
repeated the error of the Bankruptcy Court and the District Court by
accepting JP Morgan’s position on appeal that Oakwood Homes’

31
The majority expresses “confusion” about this conclusion,
observing that “the courts below determined that legally, it was
permissible to discount a claim to present value after applying §
502(b)(2) to disallow any post-petition interest.” Maj. Op. at 12 n.5. I
agree that the Bankruptcy Court and the District Court erred by
concluding that double discounting was permissible under § 502(b)(2)
and § 502(b). See Note 7, supra. Nonetheless, the mere fact that the
Bankruptcy Court and the District Court erred in their legal reasoning
does not mean that we should reverse the result. See Helvering v.
Gowran, 302 U.S. 238, 245 (1937) (“In the review of judicial
proceedings the rule is settled that, if the decision below is correct, it
must be affirmed, although the lower court relied upon a wrong ground
or gave a wrong reason.”); Brumfield v. Sanders, 232 F.3d 376, 379 n.2
(3d Cir. 2000) (“‘An appellate court may affirm a result reached by the
District Court on different reasons, as long as the record supports the
judgement.’”) (citation omitted). Here, the record supports a
determination that the claims in question were not for principal and
interest within the meaning of § 502(b)(2), and therefore that the claims
were properly discounted to present value. See Part III, supra.
Accordingly, the fact that the Bankruptcy Court and District Court
reached the same conclusion after first determining that the claims in
question were for principal and interest within the meaning of §
502(b)(2) merely means that they reached the right conclusion after
engaging in erroneous reasoning. In contrast, their other conclusion–that
the claims should be disallowed to the extent that they were for the
guarantees of the Interest Distribution Amounts–was not supported by
the record, and I would not have affirmed that decision on appeal. See
Part IV, supra. But that decision has not been appealed, and therefore
we are left considering only a conclusion that is supported by the record,
albeit not by the erroneous reasoning of the Bankruptcy Court and the
District Court.

47
guarantees of payment to the B-2 Certificate holders should be
treated as if they were principal and interest payments. In a world
of increasingly complex financial instruments, it is vital for the
courts to recognize that a series of agreements can transform what
was originally a loan into a very different financial vehicle–and
indeed that effecting such a transformation can be one of the very
purposes of such agreements. The courts in turn should apply the
Bankruptcy Code, including § 502(b) and § 502(b)(2), in light of
the actual economic bargains defined by such financial instruments.
Only then can the courts carry out one of the core purposes of the
Bankruptcy Code–to reliably and fairly distribute the bankrupt’s
assets among its creditors.
For the reasons stated above, I respectfully dissent.

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