OneUnited Bank v. Charles Street African Methodist Episcopal Church
501 B.R. 1
D. Mass.2013Background
- CSAME is a Massachusetts nonprofit corporation within the AME Church; it operates churches and related activities and owns property including the main church building.
- The AME Church Book of Discipline governs property in trust under the In Trust Rule, with AMECI holding title to property for the church network.
- CSAME obtained two mortgage loans from OneUnited in 2006: a Church Loan ($1.115 million) and a Construction Loan ($3.652 million) secured by CSAME real property and with default interest up to 18%.
- CSAME obtained guarantees and a CD from the First Episcopal District to secure the Construction Loan; testimony at hearings questioned authority under the Book to transfer funds between entities.
- CSAME faced delays on the Roxbury Renaissance Center project; construction defaulted, CSAME defaulted on both loans, and CSAME filed Chapter 11 in March 2012 to avoid foreclosures.
- Bank filed a proof of claim seeking about $5 million including default interest; CSAME objected arguing default rate was an unenforceable penalty; Bankruptcy Court denied dismissal and sustained the claim objection.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Should CSAME’s Chapter 11 have been dismissed for cause? | OneUnited: CSAME not eligible; bad faith. | CSAME argues it is a proper Chapter 11 debtor and not a shell. | No dismissal; CSAME eligible and not a bad-faith filing. |
| Are the default interest provisions unenforceable penalties under state law? | OneUnited: default rate reflects damages. | CSAME — penalties not reasonable forecasts of damages; penalties. | Yes; default interest provisions are unenforceable penalties. |
| Did the bankruptcy court properly apply the burden of proof on the default-rate objection? | OneUnited: burden on CSAME to prove illegitimacy of rate improperly shifted. | CSAME: proper to apply proof-of-claim framework; burden on lender to justify rate. | Burden properly allocated to CSAME under the proof-of-claim framework. |
Key Cases Cited
- In re Capitol Food Corp. of Fields Corner, 490 F.3d 21 (1st Cir. 2007) (lists §1112(b)(1) ‘for cause’ dismissal factors)
- In re Victoria Ltd. P’ship, 187 B.R. 54 (Bankr.D. Mass. 1995) (nonexhaustive ‘for cause’ dismissal grounds; rehabilitation)
- In re Colbran, LLC, 475 B.R. 291 (Bankr.D. Mass. 2013) (nominee trust; eligibility vs. shell analysis)
- In re Vill. Green Realty Trust, 113 B.R. 105 (Bankr.D. Mass. 1990) (nominee trust indicators; business operation)
- In re 201 Forest St., LLC, 409 B.R. 543 (Bankr.D. Mass. 2009) (default-rate as penalty; burden of proof on lender)
- NPS, LLC v. Minihane, 451 Mass. 417 (Mass. 2008) (default damages; requirement of reasonable forecast)
- Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) (access at portals; drastic remedy; plan considerations)
- Hemingway Transp., Inc., 993 F.2d 915 (1st Cir. 1993) (proof of claim; prima facie evidence standard)