In Re South Side House, LLC
451 B.R. 248
| Bankr. E.D.N.Y. | 2011Background
- Debtor South Side House, LLC operates a mixed-use property in Brooklyn and filed Chapter 11 in 2009 as a single-asset real estate case.
- Loan documents from 2007 between Debtor and lender UBS (later assigned) provided for 5.575% interest with 5% default rate and contained default, acceleration, prepayment, and special servicer provisions.
- Lender accelerated in January 2009 after Debtor defaulted in November 2008; foreclosure proceedings were stayed by the bankruptcy filing.
- Lender filed a claim totaling $36,833,639.68, including principal, prepetition default interest, prepayment consideration, and anticipated special servicer fees.
- Parties stipulated certain elements: secured claim of $29 million, non-default interest, some escrow credits, and monthly special servicer fee; Debtor contested portions of the claim.
- Debtor proposed a Chapter 11 plan classifying the Lender’s unsecured claims and voting to reject the plan; the plan contemplates treatment of the Lender as the sole Class 1 secured creditor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether prepetition default interest is allowable | Lender argues default interest is permitted under the loan and NY law. | Debtor contends default interest is inequitable and not properly demanded, potentially disallowed under 502. | Default interest is allowed to the extent provided by the loan and NY law. |
| Whether prepayment consideration is due upon default and acceleration | Lender maintains prepayment consideration is triggered by the loan documents and acceleration does not preclude payment. | Debtor argues prepayment provision is not triggered by default/acceleration and could be unmatured; argues evasion provisions and lack of plan affectability. | Prepayment consideration is not required or allowed in this default/acceleration context. |
| Whether special servicer fees are recoverable | Lender asserts ongoing and anticipated special servicer fees are recoverable under the loan documents. | Debtor contends the amount is not properly supported and should be limited under the bankruptcy process. | Special servicer fees allowed to the extent proven; limitation to six additional months of fees plus reasonable expenses unless further adjustment. |
Key Cases Cited
- United Merchants & Mfrs. v. Equitable Life Assurance Soc'y of the U.S. (In re United Merchants & Mfrs.), 674 F.2d 134 (2d Cir. 1982) (prepetition claims and enforceability under nonbankruptcy law; standards for allowance)
- In re Milham, 141 F.3d 420 (2d Cir. 1998) (prepetition interest and contract interpretation under NY law)
- United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (U.S. 1988) (value of collateral and 506(a) framework for secured claims)
- In re Solutia, Inc., 379 B.R. 473 (Bankr. S.D.N.Y. 2007) (valuation timing and treatment of contingent/unliquidated claims under §502)