In re Residential Capital, LLC, 508 B.R. 851

Background

Debtors filed chapter 11 on May 14, 2012; Citibank holds an overse-cured MSR Loan Facility with GMAC Mortgage and ResCap; postpetition interest is governed by Bankruptcy Code, with a contract rate presumptively applicable.
Amendment Ten extended the MSR Facility maturity to May 30, 2012 and raised non-default rate to LIBOR+8.5%, with default rate adding 4% to the non-default rate.
Filing bankruptcy, plus the May 30, 2012 maturity, constituted events of default; however, debtors continued payments at non-default rate for a period.
Sale of the debtors’ origination/servicing platform closed January 31, 2013; sale proceeds were applied to the MSR Obligations, with principal repaid and accrued non-default interest paid; the default-rate issue remained unresolved.
Plan confirmed December 11, 2013; unsecured creditors estimated recoveries between 9% and ~36%; the Disclosure Statement described the potential impact of contract-default-rate interest on recoveries.
Court determines Citibank is entitled to postpetition interest at the contract default rate after maturity, and to recover reasonable attorneys’ fees to pursue that relief, subject to review.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether postpetition default rate applies to oversecured claims	Citibank argues for contract default rate after maturity; Travelers supports contract-rate alignment with substantive law.	Trust asserts equitable grounds may deny default-rate postpetition in insolvency to protect unsecured creditors.	Contract default rate may apply after maturity; period pre-maturity limited to non-default rate.
Whether insolvency and unsecured creditors’ harm override the presumptive contract rate	Citibank contends insolvency alone does not defeat the presumption; balance favored by continuing going-concern financing.	Trust argues insolvency harms unsecured creditors and supports denying contract-default-rate to protect them.	Harm to unsecured creditors not sufficient to override presumption; overall equity favors contract-rate post-maturity.
Whether the postpetition contract-rate award is justified in light of DIP financing context	Amendment Ten and DIP financing enabled going-concern and asset maximization benefiting all creditors.	No specific argument stated beyond equitable considerations; relies on independent insolvency concerns.	Financing package, including DIP and Ally loans, supports enforcing the contract rate to maximize recoveries.
Whether Citibank may recover its legal fees and expenses tied to the default-rate motion	Agreement provides for recovery of fees and expenses; motion pursued in good faith.	Trust argues against further fee reimbursement absent reasonableness review by the Trust.	Citibank’s legal fees and expenses are recoverable, subject to reasonableness review.

Key Cases Cited

Travellers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (Supreme Court 2007) (creditor rights arise from substantive law, subject to bankruptcy provisions)
In re Madison 92nd St. Assocs. LLC, 472 B.R. 189 (Bankr. S.D.N.Y. 2012) (contract rate presumptively applies; solvency not determinative)
In re 785 Partners LLC, 470 B.R. 126 (Bankr. S.D.N.Y. 2012) (presumption subject to equitable considerations; may adjust rate)
In re Vest Assocs., 217 B.R. 696 (Bankr. S.D.N.Y. 1998) (equitable factors can limit postpetition interest; adequately protected debts)
In re AMR Corp., 485 B.R. 279 (Bankr. S.D.N.Y. 2013) (ipso facto clauses and bankruptcy policy; equitable considerations apply)
Gen. Elec. Capital Corp. v. Future Media Prods. Inc., 536 F.3d 969 (9th Cir. 2008) (creditor entitlements arise from underlying substantive law)
U.S. Bank Trust Nat’l Ass’n v. Am. Airlines, Inc. (In re AMR Corp.), 485 B.R. 279 (Bankr. S.D.N.Y. 2013) (addressing ipso facto and equitable considerations in bankruptcy)
Neely v. Vest Assocs. (implied by text), see Vest Assocs. discussion (Bankr. S.D.N.Y. 1998) (related to equitable reduction of default interest)