567 B.R. 438
Bankr. E.D.N.Y.2017Background
- Yeshivah Ohel Moshe (debtor) operates a synagogue/school in Brooklyn and defaulted on a $2 million mortgage loan originating with The Park Avenue Bank; the note provided for an 8% non-default rate and a 24% post-default rate.
- The loan passed through several hands and is now held by NY Five Star Equity Corp. (Five Star); a state foreclosure action resulted in summary judgment on default before Yeshivah filed Chapter 11.
- Five Star filed a proof of claim (~$5.8M) that includes default interest and fees; Yeshivah did not object to the claim amount but proposed a Chapter 11 plan that would reinstate the loan by paying arrears at the non-default rate.
- Five Star objected, asserting Section 1123(d) requires cure amounts to be determined by the underlying agreement and state law (thus including the contractual default rate); the court ordered briefing and held multiple hearings.
- The bankruptcy court found the amended plan patently unconfirmable because it failed to provide the default/post-petition interest required by the loan and New York law, thereby impairing Five Star’s contractual rights and entitling Five Star to vote against the plan.
Issues
| Issue | Yeshivah's Argument | Five Star's Argument | Held |
|---|---|---|---|
| Whether a debtor may cure a mortgage default in Chapter 11 by paying arrears at the non-default interest rate and thereby avoid contractual default interest | Curing means "taking care" of the triggering event (In re Taddeo/Entz-White): paying arrears at non-default rate nullifies default consequences | Section 1123(d) requires cure amounts to be determined by the underlying contract and state law; the loan calls for 24% default interest | Court held Section 1123(d) controls; debtor cannot avoid contractual default interest by paying only non-default rate |
| Whether the plan renders Five Star’s claim unimpaired (so Five Star is deemed to accept) under Section 1124(2) | The plan reinstates the loan and thus does not alter creditor rights | The plan alters Five Star’s contractual right to default/post-petition interest, impairing its claim and entitling it to vote | Held impaired; Five Star’s rights are altered and it may vote; plan cannot be deemed accepted by Five Star |
| Whether equitable grounds (lender misconduct, debtor’s nonprofit status, disproportionality) permit disallowance or modification of the contractual default rate | Lender misconduct and equitable considerations (charitable mission, alleged predatory lending) justify denying or reducing default/post-petition interest | No persuasive evidence of misconduct; New York law enforces contractual default rates and treats them as interest, not penalties | Court found no credible evidence of misconduct or other equitable grounds to disallow/modify default or post-petition interest |
| Whether post-petition interest on an oversecured claim should be disallowed | Post-petition interest should be limited/denied due to alleged predatory lending and statutory violations | Section 506(b) and precedent allow post-petition interest for oversecured creditors absent equitable reasons to deny it | Court held Yeshivah failed to rebut presumption; post-petition interest not disallowed |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (2011) (bankruptcy court's constitutional authority for final judgment on core matters discussed)
- Rake v. Wade, 508 U.S. 464 (1993) (Chapter 13 cure and entitlement to pre- and post-confirmation interest discussed)
- Pacifica L 51 LLC v. New Investments, Inc. (In re New Investments, Inc.), 840 F.3d 1137 (9th Cir.) (Section 1123(d) requires cures to follow underlying agreement and state law; rejects Entz-White rule)
- DiPierro v. Taddeo (In re Taddeo), 685 F.2d 24 (2d Cir. 1982) (Chapter 13 cure defined as "taking care" of triggering event; precedent debtor relied upon)
- Great W. Bank & Trust v. Entz-White Lumber & Supply, Inc. (In re Entz-White), 850 F.2d 1338 (9th Cir.) (earlier precedent allowing cure at non-default rate under some circumstances)
- Ruskin v. Griffiths, 269 F.2d 827 (2d Cir.) (equitable considerations in awarding post-petition interest to oversecured creditors)