Prudential Insurance Company v. SW Boston Hotel Venture, LLC
748 F.3d 393
| 1st Cir. | 2014Background
- In 2008 Prudential made a $192.2M construction loan to develop the W Hotel (SW Boston Hotel Venture and affiliated debtors). Prudential held a first lien; the City of Boston later made a $10.5M junior loan to keep construction going.
- Debtors filed Chapter 11 in 2010 after missing a payment; Prudential drew a letter of credit and filed a secured claim (reduced by the draw).
- Prudential sought relief from the automatic stay; the bankruptcy court denied relief, finding adequate protection and a likely reorganization.
- Prudential moved for a § 506(b) determination that it was oversecured and entitled to post-petition interest at the contractual default rate (14.5%) and sought compounding; the debtors argued oversecurity began only at the hotel sale and that the default rate/compounding were unenforceable or inequitable.
- The bankruptcy court held Prudential became oversecured as of the hotel sale closing date, awarded non-compounded post-petition interest at 14.5% from that date, and confirmed the plan. The BAP reversed on timing (post-petition interest from petition date) and compounding, vacating confirmation; this Court reverses the BAP and affirms the bankruptcy court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Equitable mootness of Prudential's appeals | Prudential argued appeals were not moot and relief could be fashioned without undoing reorganization | Debtors/City argued appeals were equitably moot because plan was consummated | BAP correctly refused to dismiss as equitably moot; this Court sees no abuse of discretion in that refusal |
| When oversecurity is measured for § 506(b) (timing) | Prudential: adopt a single-measuring date (confirmation or petition) or at least treat sale price as reflecting value throughout; entitlement should run from petition (or confirm) date | Debtors/City: flexible measuring date; bankruptcy court should determine appropriate date based on circumstances (here sale closing) | Court: endorses flexible approach in proper cases; affirmed bankruptcy court's factual finding that Prudential became oversecured at hotel sale closing date (no clear error) |
| Rate and enforceability of contractual default interest (14.5%) | Prudential: contractual default rate presumptively applies; enforceable under governing law | Debtors: default rate is unenforceable or inequitable; if allowed must be reasonable under § 506(b) | Court: presumption applies; debtors failed to show Massachusetts law or equity made 14.5% unenforceable; 14.5% allowed |
| Compounding of post-petition interest | Prudential: contract defined applicable rate as compounding monthly; therefore default rate should compound | Debtors: compounding disfavored under Massachusetts law and equity; Prudential did not timely press compounding below | Court: affirmed bankruptcy court's denial of compounding—Prudential waived opportunity and cannot claim compounding after election; interest allowed is simple at 14.5% from sale date |
| Finality / jurisdiction to review BAP remand vacating confirmation | Prudential: BAP remand was not a final appealable order, so appeal to circuit lacks jurisdiction | Debtors/City: remand flowed from BAP's § 506(b) ruling and is reviewable; relief remains practicable | Court exercised jurisdiction because BAP remand depended solely on its erroneous § 506(b) rulings; vacated BAP remand and directed BAP to affirm bankruptcy court orders |
Key Cases Cited
- United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (oversecured creditor entitlement and valuation principles)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989) (contract terms in § 506(b) context; limitations on reading statutory modifiers)
- Rake v. Wade, 508 U.S. 464 (1993) (timing for accrual/payment of postpetition interest)
- Baybank-Middlesex v. Ralar Distribs., Inc., 69 F.3d 1200 (1st Cir. 1995) (oversecured creditor postpetition interest doctrine)
- Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P'ship (In re T-H New Orleans Ltd. P'ship), 116 F.3d 790 (5th Cir. 1997) (endorsing flexible measuring-date approach)
- Winthrop Old Farm Nurseries, Inc. v. New Bedford Inst. for Sav. (In re Winthrop Old Farm Nurseries, Inc.), 50 F.3d 72 (1st Cir. 1995) (statutory instruction to tailor valuation to purpose permits flexibility)
- In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012) (flexible valuation principles in § 506 context)