Katzenstein v. VIII SV5556 Lender, LLC (In Re Saint Vincent's Catholic Medical Centers), 440 B.R. 587

Background

Debtors filed a second chapter 11; MedMal Trusts protect malpractice victims who are general unsecured creditors.
Creditor purchased Sun Life’s interest in the Staff House Note and Mortgage; claim sought ~46 million, including acceleration indemnification, fees, and interest.
Cap Clause in the Mortgage limits principal indebtedness to $42.5 million plus post-default expenditures to protect the lien; acceleration indemnification fits within or outside that cap depending on interpretation.
Event of Default was argued to be Debtor’s bankruptcy filing; Creditor asserted acceleration indemnification, default interest, and expenses are enforceable.
Bankruptcy court must determine whether acceleration was automatic or voluntary, and whether amounts beyond $39.6–39.5 million principal are secured under the Cap Clause.
Court addresses whether § 506(b) permits these charges, whether ipso facto clauses apply under §§ 365(e)(1) and 541, and whether § 541(c)(1)(B) affects the cap.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether acceleration indemnification is within the Cap Clause cap	Katzenstein contends Cap Clause caps principal only, excluding indemnification and fees.	Creditor argues Cap Clause covers all amounts to protect lien; indemnification and fees are within cap.	Cap includes interest, costs, and penalties; secured up to $42.5 million including indemnification and fees.
Whether acceleration was automatic or voluntary	Acceleration occurred upon filing; tied to Event of Default.	Acceleration was a voluntary act by Creditor under loan documents.	Acceleration was voluntary; Creditor may claim acceleration indemnification under UM & M framework.
Whether § 506(b) limits the disputed charges	Disputed charges are unreasonable; § 506(b) safety valve applies to deny.	Chages are liquidated damages; § 506(b) supports allowance to the extent within cap.	Charges are allowable under § 502 and § 506(b); no denial under 506(b); capped at $42.5 million.
Whether the loan documents contain prohibited ipso facto clauses	Docs contain unenforceable ipso facto clauses under § 365(e)(1) and 541(c)(1)(B).	Mortgages generally not executory; § 365(e)(1) not applicable; § 541(c)(1)(B) valid.	Loan documents do not contain prohibited ipso facto clauses; clause valid and enforceable.
Whether Stay was violated by acceleration/claim filing	Acceleration via filing stay-prohibited.	Filing proof of claim not a stay violation; acceleration occurred upon claim filing.	No stay violation; acceleration contingent claim is permissible.

Key Cases Cited

In re United Merchants & Manufacturers, Inc., 674 F.2d 134 (2d Cir. 1982) (liquidated damages and costs may be part of secured claim)
Capital Ventures Int'l v. Republic of Argentina, 552 F.3d 289 (2d Cir. 2009) (interest on accelerated debt; principal due; post-acceleration interest treated as unearned)
In re Vanderveer Estates Holdings, Inc., 283 B.R. 122 (Bankr.E.D.N.Y. 2002) (liquidated damages upheld as prepayment/acceleration penalty under NY law)
Fin. Center Assocs. of East Meadow, LP, v. TNE Funding Corp. (In re Fin. Center Assocs. of East Meadow, LP), 140 B.R. 829 (Bankr. E.D.N.Y. 1992) (discussion of liquidated damages and cap provisions in bankruptcy)
In re LHD Realty Corp., 726 F.2d 327 (7th Cir. 1984) (acceleration waives prepayment penalties; nonbinding authority where questioned)
In re Solutia, Inc., 379 B.R. 473 (Bankr. S.D.N.Y. 2007) (pendency interest and post-petition interest on secured claims)
Travelers Cas. & Sur. Co. v. Pacific Gas & Elec. Co., 549 U.S. 443 (2007) (property interests defined by state law; secured claim treatment in bankruptcy)
In re Vanderveer Estates Holdings, Inc., 283 B.R. 122 (Bankr.E.D.N.Y. 2002) (reiteration of liquidated damages and cap treatment)
In re Texaco, Inc., 73 B.R. 960 (Bankr. S.D.N.Y. 1987) (ipso facto clauses distinguished; unsecured creditors context)