470 B.R. 126
Bankr. S.D.N.Y.2012Background
- Single-asset real estate debtor; FM holds the principal secured claim and forecloses on a building valued at $91.7 million.
- Loan originally totaling about $84.2 million, matured on August 7, 2009; FM is assignee of the original lenders and holds the loan documents.
- Maturity/default triggered a 5% increase to the base rate (default rate 10%), plus a 5% late payment premium and monthly administrative fees; a $3 million letter of credit was drawn.
- FM’s payoff as of August 3, 2011 totaled $100.8 million, with an allowed claim ultimately sought at $96,999,633.54 (exclusive of attorneys’ fees) as of the petition date; protective advances accrued post-petition.
- Plan proposes to extinguish the FM loan rights and replace with Amended and Restated Note and Mortgage, altering the creditor’s post-confirmation rights.
- Debtor and FM dispute the treatment of pre-petition default interest, post-petition interest, and the Late Payment Premium; the court must determine the allowed amount of FM’s claim and applicable interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pre-petition default interest enforceable under state law | Debtor argues default rate is punitive and inequitable | FM contends default rate reflects risk and is contractually allowed | Pre-petition default interest permitted; contract rate applies per New York law. |
| Post-petition interest on oversecured claim | Debtor argues court should limit post-petition interest to non-penalty amounts | FM entitled to post-petition interest up to collateral value, with limited discretion | Oversecured post-petition interest at the default rate allowed to the extent permitted by 506(b). |
| Late Payment Premium recoverability | Late payment premium is an unenforceable penalty given no late payments will occur | Premium intended to cover administrative costs for delinquencies | Late Payment Premium not recoverable in this case; no late payments occur under the plan. |
| Administrative Fees and double recovery concerns | FM entitled to $6,000 monthly Administrative Fees; Late Payment Premium and Default Rate not both collectible to avoid double recoveries. | ||
| Plan impact on FM's remedies post-confirmation | Plan extinguishes loan rights; FM will receive Amended and Restated Note and Mortgage with plan-based administration. |
Key Cases Cited
- Milham, 141 F.3d 420 (2d Cir. 1998) (pre-petition interest governed by nonbankruptcy law; not a penalty when default occurs)
- In re Arcade Publ’g, Inc., 455 B.R. 373 (Bankr.S.D.N.Y. 2011) (supporting interpretation of § 506(b) in post-petition context)
- Vanston Bondholders Prot. Comm. v. Green, 329 U.S. 156 (S. Ct. 1946) (post-petition interest principles in insolvency law)
- Ruskin v. Griffiths, 269 F.2d 827 (2d Cir. 1959) (default rate not treated as penalty; equitable considerations limited)
- Vest Assocs., 217 B.R. 696 (Bankr.S.D.N.Y. 1998) (limit on double recovery for default interest and late charges)
- Urban Communicators PCS Ltd. P’ship v. Gabriel Capital, L.P., 394 B.R. 325 (S.D.N.Y. 2008) (presumption of contract rate post-petition; equities narrow)
- In re 400 Walnut Assocs., L.P., 461 B.R. 308 (Bankr.E.D.Pa. 2011) (court disallowed default interest as to pre-petition portion in some contexts)
- In re General Growth Props., Inc., 451 B.R. 323 (S.D.N.Y. 2011) (discussion of post-petition interest and secured claims)