598 B.R. 729
Bankr. S.D.N.Y.2019Background
- Debtor 1111 Myrtle Avenue Group, LLC borrowed $6,283,544.55 secured by Brooklyn commercial property under a Note and Mortgage dated Dec. 30, 2014; Note set non-default rate = prime + 2% and default rate = non-default + 7%.
- Debtor filed Chapter 11 on Sept. 1, 2015; Mortgage listed filing bankruptcy and recording of a lis pendens as events of default; Mortgage also contained a general 30-day cure/grace provision for certain non-monetary defaults and specific 30-day cure period for a lis pendens.
- Purchaser MPH filed a lis pendens and then sued, leading to the Debtor’s bankruptcy; Debtor later prevailed in an adversary proceeding and retained a $7.5M deposit.
- The parties entered a cash-collateral stipulation allowing Debtor to pay at the non-default rate while preserving Lender’s right to seek default interest under §506(b); Plan later paid principal and interest at the non-default rate and escrowed funds for litigation over default interest.
- After Plan confirmation the Lender moved under §506(b) for allowance of post-petition default interest ($1,099,547.23) and attorneys’ fees; Court previously authorized fees to be determined and reserved decision on default interest.
Issues
| Issue | Plaintiff's Argument (Debtor) | Defendant's Argument (Lender) | Held |
|---|---|---|---|
| Whether default interest may accrue post-petition absent written notice of default required by Mortgage’s cure provision | Mortgage’s Grace Period requires written notice and 30-day cure for non-monetary defaults; no notice was given, so loan was never "in default" to trigger default rate | Note imposes default rate upon occurrence of any default (including bankruptcy or lis pendens); Note contains no notice requirement, and some Mortgage defaults (lis pendens) have their own cure periods so notice is not required | Court: Notice provision in Mortgage applies to acceleration remedies, not to accrual of default interest; Note controls and default interest accrues upon event of default without separate notice; lis pendens triggered default interest 30 days after its filing |
| Whether the lis pendens specifically triggered default interest despite no separate notice | Debtor: the 30-day clause is a waiting period before notice, not a self-executing cure period; thus default interest still required notice | Lender: Section 13(v) provides a specific 30-day cure period for lis pendens defaults so no additional notice requirement is needed | Held: Subsection (v) supplies a specific cure period; lis pendens default required no extra notice and default interest runs from 30 days after lis pendens filing |
| Whether contractual default interest (7% spread) is an unenforceable penalty or should be reduced on equitable grounds | Debtor: no monetary injury occurred; lender’s pursuit is punitive/opportunistic; default rate is disproportionate | Lender: default rate allocates risk and was bargained for; creditor was oversecured and entitled to contractual remedies | Held: 7% spread is not a penalty under New York law; debtor failed to rebut presumption in favor of enforcing contract rate; contractual rate enforced |
| Whether equitable factors warrant reducing default interest (misconduct, prejudice to unsecureds, impairment of fresh start) | Debtor: enforcement is inequitable; lender overstated harms; potential prejudice argued | Lender: creditor oversecured; unsecureds were paid in full; no lender misconduct shown; debtor remains solvent and retained equity | Held: No equitable basis to reduce rate—unsecured creditors paid, no lender misconduct, debtor solvent; contract rate awarded (total $1,099,547.23) |
Key Cases Cited
- Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (recognizing oversecured creditor exception allowing post-petition interest)
- Coder v. Arts, 213 U.S. 223 (historical authority cited for post-petition interest rule)
- Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (contract interpretation: courts will not add terms by construction)
- In re Residential Capital, LLC, 508 B.R. 851 (enforcing contractual default rate for oversecured creditor despite equitable arguments)
- Ruskin v. Griffiths, 269 F.2d 827 (under New York law, higher default interest generally not a penalty)
- In re Milham, 141 F.3d 420 (2d Cir.) (discussing circumstances where courts may adjust contractual interest rates)