1300 Desert Willow Road, LLC
APPEARANCES:
BRONSON LAW OFFICES, P.C.
Counsel for the Debtor
480 Mamaroneck Avenue
Harrison, NY 10528-0023
By: H. Bruce Bronson, Jr.
BRYAN CAVE LEIGHTON PAISNER LLP
Counsel for Romspen Investment, LP
301 S. College Street, Suite 2150
Charlotte, NC 28202
By: Jarret P. Hitchings
Katie Spewak
We are here on the Debtor’s objection to the secured claim of its lender, Romspen Investment LP (“Romspen”). The Debtor has objected to Romspen’s claim on a number of grounds. Specifically, the Debtor challenges the inclusion of default interest, late fees and forbearance fees, and it argues that interest should be computed on a simple, rather than compound, basis.2
The charges to which the Debtor objects accrued both prepetition and postpetition. It is undisputed that the postpetition amounts are subject to
Applying New York law to prepetition amounts and
FACTUAL AND PROCEDURAL BACKGROUND
My ruling assumes familiarity with the facts of this case, which I set forth in some detail in my recent decision, In re 1300 Desert Willow Rd., LLC, 677 B.R. 176 (Bankr. S.D.N.Y. 2026). For today’s ruling, I will briefly summarize the facts most directly relevant to the issues before me.
The Debtor is a single-asset real estate entity, which was formed to acquire a light industrial manufacturing facility located in Los Lunas, New Mexico. In April 2022, the Debtor refinanced its debt by taking out a $20 million loan, secured by a first mortgage on that property, from Romspen, a real estate investment firm. Later that year, after a number of tenants vacated the property, the Debtor failed to make payments due under the loan, and the loan became fully due and payable. Romspen scheduled the property for a foreclosure sale but then entered into a series of forbearance agreements with the Debtor, which remained in place for a bit more than two years. In June 2025, after the last forbearance agreement had lapsed and with a foreclosure sale finally imminent, the Debtor filed its chapter 11 petition.
Romspen is the Debtor’s only secured creditor, and its only substantial creditor of any sort. It asserts a claim of approximately $26 million as of the petition date, consisting of about $20
I confirmed Romspen’s liquidating plan for the Debtor on March 31, 2026. Prior to confirming that plan, I had ruled that the Debtor’s plan was not likely to be confirmable, and for that and other reasons, I allowed Romspen to proceed to confirmation with its plan while putting the Debtor’s plan on hold. See 1300 Desert Willow, 677 B.R. at 183–87. In connection with my order confirming Romspen’s plan, I approved bidding procedures for the sale of the Debtor’s property, with a bid deadline of August 10, 2026 and a sale hearing to follow.
Lеt me turn now to the record with respect to the claim objection on which I’m ruling today. The Debtor filed a claim objection and later a reply. Romspen filed a single response. The Debtor filed one declaration and Romspen filed two declarations in connection with their respective pleadings. Romspen also filed a supplemental appendix attaching certain Canadian legal authorities.
On April 23, 2026, I held a non-evidentiary hearing, pursuant to Local Bankruptcy Rule 9014-2, at which counsel for Romspen and the Debtor appeared. As I usually do at such hearings, I asked the parties whether they wished to present any evidence beyond what they had already filed in connection with their motion papers. Both parties told me essentially the same thing—namely, that they did not wish to present any further evidence and did not believe an evidentiary hearing was needed, provided they could resolve their disputes over the reasonableness of
GOVERNING LEGAL STANDARDS
Before turning to the Debtor’s specific objections to Romspen’s claim, I will address several threshold legal topics: (i) the Bankruptcy Code standards governing the allowance of fees, costs and other charges that accrue in favor of an oversecured creditor; (ii) the relevant standards under New York law; and (iii) the burden of proof for claim objections under the Bankruptcy Code.
I. The Treatment of Oversecured Creditors’ Claims Under Bankruptcy Code §§ 506(b) and 502(b)
The Bankruptcy Code treats claims that arise prepetition differently than claims that arise postpetition.
I am unaware of any decisions in this district that have squarely addressed this issue.3 In other jurisdictions, the case law is divided. Two courts of appeal—for the Fifth and Eleventh Circuits—have each ruled that the text of
Outside the Fifth and Eleventh Circuits, a number of lower courts have disagreed with those two courts of appeal. According to a 2011 New Jersey bankruptcy court decision:
The majority rule is that the allowability of pre-petition interest, fees, costs, and penalties “as part of the secured creditor’s ‘claim’ is not determined by section 506, but is governed by section 502 in conjunction with other provisions of the Code.” See 4 COLLIER ON BANKRUPTCY ¶ 506.04[1] (Alan N. Resnick and Henry J. Sommer eds., 16th ed.)
In re Wesley, 455 B.R. 383, 386 (Bankr. D.N.J. 2011) (collecting authorities); see also, e.g., In re Nunez, 317 B.R. 666, 670 (Bankr. E.D. Pa. 2004) (“Quite simply, interest, fees and costs arising pre-petition are already a part of a secured creditor’s proof of claim in the first instance rendering section 506(b) inapplicable.”); In re Vanderveer Ests. Holdings, Inc., 283 B.R. 122, 131 (Bankr. E.D.N.Y. 2002) (“Interest, fees, costs and charges arising pre-petition are part of the secured creditor’s claim in the first instance, and are therefore not governed by § 506(b).”).
The text of
Two considerations compel adoption of the narrower construсtion of
A second, equally compelling reason to reject a broad construction of
To take an extreme example, imagine two secured creditors with identical claims for $1 million, one of which is slightly oversecured (its collateral is worth $1,001,000), the other of which is slightly undersecured (its collateral is worth $999,000). Imagine further that a substantial prepetition portion of each creditor’s claim—say $100,000—is allowable under state law but would be deemed unreasonable by the bankruptcy court. Under the interpretation of
It could be argued that bankruptcy policy disfavors the payment of unreasonably large fees to oversecured creditors, particularly when unsecured creditors are being paid only pennies on the dollar. This is a legitimate and important concern. However, the imposition of a reasonableness requirement on the prepetition fees of oversecured, but not undersecured, creditors is not a coherent or a textually supported solution to this issue. The only conclusion that makes sense and is consistent with the Bankruptcy Code’s text is that Congress chose not to impose a reasonableness requirement on the prepetition claims of any secured creditors, whether oversecured or undersecured.4
II. New York Law Concerning the Enforcement of Contractual Agreements
This brings me to the sеcond threshold legal topic: the legal standards governing the enforcement of parties’ agreements under New York law.5 As the New York Court of Appeals has held, “it is a deeply rooted principle of New York contract law that parties may contract as they wish . . . in the absence of some violation of law or transgression of a strong public policy.” 2138747 Ontario, Inc. v. Samsung C&T Corp., 31 N.Y.3d 372, 377 (N.Y. 2018) (internal quotation marks and citations omitted); see also 159 MP Corp. v. Redbridge Bedford, LLC, 33 N.Y.3d 353, 359–60 (N.Y. 2019) (citing New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81 (N.Y. 1989)).
Consistent with this principle, New York courts generally enforce contractual agreements according to their terms, particularly when the contract is the product of arms’ length negotiations between sophisticated parties, as was the case here. See Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 695 (N.Y. 1995) (“Freedom of contract prevails in an arm’s length transaction between sophisticated parties . . . and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.”); see also 159 MP Corp. v. Redbridge Bedford, LLC, 33 N.Y.3d 353, 359-60 (N.Y. 2019) (public policy requires “disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations”
This general rule is subject to a limited number of exceptions. The Debtor has argued that two of those exceptions apply here: New York’s prohibition on usurious contracts, and its rule that liquidated damages provisions that operate as penalties will not be enforced.
New York’s usury rules are set forth in two statutes, the General Obligations Law and the Penal Law. See
In contrast, loans above $2.5 million to a business are not subject to any usury restrictions. See Alleon Cap. Partners, 225 A.D.3d at 580 (“[C]ivil and criminal usury laws do not apply to any loan or forbearance in the amount of [$2,500,000] or more.” (internal quotation marks and citation omitted)). This appears to reflect a legislative judgment that large commercial transactions generally involve sophisticated parties, which do not need the same degree of protection as do borrowers that take out smaller loans. See Adar Bays, 37 N.Y.3d at 331 (N.Y. 2021) (“The legislative history of the 1980 amendment . . . evidences the legislature’s judgment that borrowers of more than $2.5 million were capable of protecting their own interests without the protection of the usury laws.” (internal quotation marks and citation omitted)). The loan to this Debtor was in
As for liquidated damages provisions, New York law provides that such provisions are enforced unless found to function as an impermissible penalty. In the seminal case on this issue, Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (N.Y. 1977), the Court of Appeals ruled that “[p]arties to a contract have the right to agree to [liquidated damages] clauses provided that the clause is neither unconscionable nor contrary to public policy . . . and public policy is firmly set against the imposition of penalties or forfeitures.” Truck Rent-A-Ctr., 41 N.Y.2d at 424 (citing Mosler Safe Co. v. Maiden Lane Safe Deposit Co., 199 N.Y. 479, 485 (N.Y. 1910) and City of Rye v. Pub. Serv. Mut. Ins. Co., 34 N.Y.2d 470, 472–73 (N.Y. 1974)).
III. The Burden of Proof for Claim Objections
The burden of prоof for claim objections requires only brief discussion, as these legal standards are well-known and not disputed by the parties.
THE DEBTOR’S OBJECTIONS TO ROMSPEN’S CLAIM
Turning now to the specifics of the Debtor’s claim objection, I will address first the Debtor’s objections to claim amounts that accrued between July 21, 2023 and the petition date; then its objections to amounts that acсrued after the petition date; and finally, the issue of compound versus simple interest.
I. Romspen’s Prepetition Claim Amounts
The Debtor has objected to all of Romspen’s prepetition late fees and forbearance fees.6 However, by agreement dated July 21, 2023 (the second forbearance agreement), the Debtor and Romspen agreed on the amounts that the Debtor owed Romspen as of that date, including the specific amounts of late fees and forbearance fees that had accrued. The Debtor has not challenged the enforceability of that agreement. Consequently, I will treat the amounts of late fees and forbearance fees owed as of July 21, 2023 as fixed by that agreement, and I will consider only the Debtor’s objections to fees that accrued after that date.
For the reasons I will now explain, I am going to disallow Romspen’s claim for late fees that accrued between July 21, 2023 and the petition date, and to allow its claim for forbearance
A. Late fees
The note provides for two different types of late fees. One is a 5 percent charge for each late payment. According to Romspen, those amounts totaled approximately $338,000 as of the petition date. A portion of that $338,000 amount, namely about $106,000, was fixed by the July 21, 2023 forbearance agreement; my ruling will address only the portion of these fees that accrued after that. The second type of late fee is a lump sum late fee that accrues upon maturity or acceleration of the note. That late fee is calculated as 0.5 percent of the principal balance of $20.1 million, or $100,500. That $100,500 sum was assessed prior to July 21, 2023 and is included in Schedule 1 to the second forbearance agreement. In other words, that is one of the amounts to which the Debtor agreed when it entered into that forbearance agreement. I will therefore deny the objection to the extent it seeks to challenge that amount.
The Debtor argues that the prepetition late fees constitute an unenforceable penalty under New York law. I agree. The New York Court of Appeals held, in its Truck decision, that contractual payments that constitute penalties are unenforceable. See Truck Rent-A-Ctr., 41 N.Y.2d at 424 (“[P]ublic policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority.”). Although the Truck case involved liquidated damages, not late fees, the standard adopted by the Court of Appeals in that case appears to apply more broadly. That is, the court in Truck didn’t limit its analysis to liquidated damages.
New York courts that have addressed late fees have applied a similar standard. They have stricken late fees when they found them to compensate the lender for the same costs as default interest and therefore to function as penalties. See, e.g., Beltway 7 Props., Ltd. v. Blackrock Realty
However, the New York courts don’t appear to apply this test on an across-the-board basis. That is, they don’t appear to rule that late fees always duplicate default interest. Rather, they appear to apply this legal standard on a case-by-case basis and to decide in each individual case whether the late fee duplicates the default interest and is therefore impermissible. See id.; see also, e.g., Novendstern v. Mount Kisco Med. Grp., 177 A.D.2d 623, 625 (2d Dep’t 1991) (striking a duplicative claim for fees as an unenforceable penalty).
In this case, the only evidence the parties have presented on this issue is the language of the note. In particular, Romspen points to recitals in sections 2.1 and 2.3, which it claims support the conclusion that default interest and late fees under the note serve different purposes.
I don’t agree. The purposes set forth in the note with respect to late fees and default interest are very similar. Late fees are described in section 2.1 as being to “defray the expense incurred by [Romspen] in handling and processing such delinquent payment and to compensate [Romspen] for the loss of the use of such delinquent payment.” Mestrezat Decl. (ECF No. 13), Ex. 4, § 2.1. Section 2.3 of the note says that default interest is “given for the purpose of compensating [Romspen] at reasonable amounts for [its] added costs and expenses that occur as a result of [the Debtor’s] default and that are difficult to predict in amount, such as increased general overhead, concentration of management resources on problem loans, and increased cost of funds.” Id. at § 2.3.
Those strike me as roughly the same purposes. While the wording is different, the substance is essentially the same. The stated purposes of both the late fees and the default interest are to
It is clear that the same result would follow if the allowability of the prepetition late fees were governed by
Fo these reasons, I will disallow Romspen’s claim for late fees that accrued between July 21, 2023 and the petition date.
B. Forbearance fees
As already noted, the Debtor and Romspen entered into a series of forbearance agreements in the years before the Debtor’s bankruptcy filing, which collectively required Romspen to forbear for slightly more than two years, from late Januаry 2023 to late February 2025. In connection with those agreements, Romspen charged the Debtor a number of forbearance fees. Romspen’s proof
There were additional forbearance fees, in larger amounts, that Romspen charged and the Debtor paid. As to those fees, the Debtor is asking me to credit those in reduction of its debt to Romspen. However, a substantial majority of those fees were not real fees—that is, they were not charges incurred by the Debtor by virtue of failing to pay on time. Rather, they were agreements by the Debtor to pay down its debt to Romspen by specified amounts. For instance, the January 24, 2023 agreement provided that both the $600,000 “forbearance fee” and the $225,000 “extension fee” were to be credited to the loan balance. See Mestrezat Decl. (ECF No. 13), Ex. 12, §§ 5(d), 6(c). I don’t consider payments of this sort to be fees. They are mandatory repayments of part of an overdue debt, nоt fees. The real fees totaled slightly more than $500,000, specifically $508,334, of which $150,000 remains unpaid. Those are the fees I will consider.
The Debtor has not shown that the forbearance fees violate governing New York law standards. In the first place, the total amount of forbearance fees was not enormous—only a bit more than $500,000—in exchange for which the Debtor got two years of forbearance. This sum doesn’t strike me on its face as grossly disproportionate to the financial risk Romspen took on by forbearing for two years from enforcing its remedies with respect to its defaulted $20 million loan.
Of course, this is an issue of fact. What’s dispositive is that the Debtor has not presented any evidence to support a finding that this sum was grossly disproportionate to the risks involved. For example, the Debtor has not offered the testimony of a financial advisor to say that the forbearance fees Romspen charged were greater than the forbearance fees that lenders generally charge—that is, that the fees were above market. I am not aware of any facts that would suрport
I therefore find that these fees were reasonable. They would be allowable under
In addition, it is far from clear that this New York rule applies to forbearance fees. New York courts routinely uphold forbearance agreements. See 3052 Brighton 1st St. II, LLC v. 3052 Brighton First, LLC, 212 A.D.3d 695, 696 (2d Dep’t 2023) (“A forbearance agreement will generally be enforced according to its terms where . . . it is unambiguous.”). Moreover, forbearance agreements serve different purposes than liquidated damages provisions. “Liquidated damages are an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would . . . result [from] breach of the agreement.” In re Helios & Matheson Analytics, Inc., 633 B.R. 115, 119 (Bankr. S.D.N.Y. 2021) (internal quotation marks and citations omitted).
Forbearance fees compensate lenders for something quite different. A lender that forbears agrees to refrain from exercising its contractual remedies for a specified period of time. In broad terms, forbearance agreements accomplish what the automatic stay accomplishes in bankruptcy: They require the lender to delay enforcement of its contractual remedies, thereby undertaking the risk that the value of its collateral will decline while it is barred from exercising its remedies. Forbearance fees, like adequate protection payments, compensate the lender for this risk. Cf. In re Pine Lake Vill. Apartment Co., 19 B.R. 819, 825 (Bankr. S.D.N.Y. 1982) (“[A] secured creditor
Given the differences between liquidated damages provisions and forbearance agreements, it is far from clear that a New York court would apply the liquidated damages standard to forbearance fees. But even if that standard applied, it would not be satisfied here. The Debtor has not shown that the amounts of the forbearance fees were unreasonable, and it follows that those fees did not operate as unlawful penalties under New York law.
The Debtor’s remaining arguments to disallow the forbearance fees can be addressed very briefly. The Debtor argues that New York’s usury laws treat forbearance fees as interest. That appears to be correct, but it is not relevant because, as I’ve already discussed, New York’s usury laws do not apply to loans in excess of $2.5 million to businesses. This loan, of course, was for much more than $2.5 million. The Debtor argued, finally, that additional factual development is needed on the reasonableness of the forbearance fees. However, the Debtor did not ask me to adjourn the hearing to allow it to take discovery on that issue, nor did the Debtor request an evidentiary hearing on the issue.
For these reasons, I will allow Romspen’s claim for forbearance fees that accrued between July 21, 2023 and the petition date.
II. Romspen’s Postpetition Claim Amounts
The Debtor objects to two sorts of postpetition charges: default interest and late fees. I will allow Romspen’s claim for postpetition default interest to the extent Romspen turns out to be oversecured, and I will disallow Romspen’s claim for postpetition late fees.
I addressed the legal standards governing postpetition default interest for oversecured creditors at some length in a decision earlier this year, In re 33 Mako LLC, 2026 WL 922562 (Bankr. S.D.N.Y. 2026). I incorporate that legal discussion into this ruling and will only give a short summary of the points most salient to the issue now before me.
Courts construing
How this test applies in this case will depend on the Debtor’s financial position following the consummation of the upcoming sale of the Debtor’s property. One possible outcome is that Romspen may be undersecured, in which case it would not be entitled to any postpetition interest. Another possibility, at the other end of the spectrum, is that Romspen is oversecured and the Debtor is solvent. In that scenario, as I just mentioned, the presumption in favor of allowing interest at the contractual default rate would be very strong, maybe unrebuttable. The Debtor has not identified any possible basis to overcome that presumption.
The Debtor makes only one argument as to why default rate interest should be disallowed in this third scenario. The debtor argues that the last of the four equitable factors—whether allowing default interest would have an adverse effect on the Debtor’s fresh start—warrants disallowance of default interest. If I disallow postpetition default interest, the Debtor contends, it may be able to raise sufficient funds to pay off the full amount of Romspen’s claim. In that event, Romspen has said that it would allow the Debtor to keep the property, rather than going through with the scheduled sale. According to the Debtor, this would preserve its “fresh start.”
This argument fails for several reasons. First, there is no evidence that the Debtor would actually be able to raise the money it needs to pay off Romspen’s claim even if I disallowed default interest. According to Romspen, the Debtor has repeatedly said, both before and during the bankruptcy, that it would soon be able to put together a refinancing to take out Romspen’s loan, but these promises have never come to fruition. I have no way of knowing whether the Debtor’s current expectation of a refinancing is accurate or just another hope on its part that again will not come to fruition.
There is also a second, independent reason why I find this “fresh start” factor to be entitled to little or no weight. Strictly speaking, the notion of a fresh start applies only to individuals, not companies. Nevertheless, courts have sometimes given this factor weight in corporate chapter 11 cases, at least when the debtor had a real operating business, with employees and ongoing commercial operations. See, e.g., In re 53 Stanhope LLC, 625 B.R. 573 (Bankr. S.D.N.Y. 2021). I agree that, in cases of that sort, important bankruptcy interests may be served by allowing the
Moreover, the particular facts of this case reinforce the absence of a bankruptcy interest in preserving Mr. Ebrahimzadeh’s ownership. As I ruled in my earlier decision in this case, Mr. Ebrahimzadeh is not an ideal manager of the Debtor’s property. See 1300 Desert Willow, 677 B.R. at 186. He had a poor track record before the bankruptcy, so poor that a receiver was appointed to displace him. When the Debtor regained possession upon filing bankruptcy, Mr. Ebrahimzadeh proceeded to do a poor job of managing the Debtor in this case. See id. In addition, during the bankruptcy, Mr. Ebrahimzadeh was indicted by a federal grand jury in a Massachusetts district court on six felony counts, including wire fraud and bank fraud. While I have no basis to know whether he is likely to be convicted or acquitted, his indictment is likely to impair his ability to manage the Debtor’s property effectively. Id.
For these reasons, I find that no basis exists to disallow default interest. To the extent Romspen turns out to be oversecured, I will allow Romspen’s claim for postpetition interest at the default rate.
The next type of postpetition charges to which the Debtor objects is late fees. I will say at the outset that it is not clear to me that any late fees actually accrued postpetition. As already discussed, the note provides for two types of late fees. One is a fee equal to 5 percent of each monthly interest payment that is late. That fee, I would assume, ceased to accrue after the loan was accelerated, which happened before the bankruptcy. The other sort of late fee under the note was a one-time fee, a fee of 0.5 percent of the total unpaid principal, which came due when Romspen accelerated the loan. That fee accrued and was paid prepetition.
To the extent some late fees may have accrued postpetition, I am going to disallow them. As previously discussed, postpetition late fees are subject to the general reasonableness standard of
III. Simple Versus Compound Interest
The Debtor argues that Romspen is entitled only to simple interest, not compound interest. This issue is governed by the terms of the promissory note, as well as the loan agreement, which is incorporated by reference into the note.
It is well settled under New York law that, when a contractual agreement is complete and unambiguous, it should be enforced according to its terms. See South Rd. Assocs., LLC v. Int‘l Bus. Machs. Corp., 4 N.Y.3d 272, 277 (N.Y. 2005). Further, it is “important to read the document as a
Evidence extrinsic to a contract may be considered if the contract is ambiguous. See South Rd. Assocs., 4 N.Y.3d at 278; State v. Home Indem. Co., 66 N.Y.2d 669, 671 (N.Y. 1985). Where no party adduces extrinsic evidence, or where the extrinsic evidence provided does not resolve the ambiguity, interpretation of the contract remains a question of law. See Hartford Acc. & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 172 (N.Y. 1973) (“[I]f the equivocality must be resolved wholly without reference to extrinsiс evidence the issue is to be determined as a question of law for the court.”); see also Home Indem., 66 N.Y.2d at 672 (where “no inferences [could] be drawn from extrinsic evidence, the interpretation of the insurance policy [was] an issue of law.”).
A. Relevant provisions of the note and loan agreement
I find that the relevant provisions of the note and the loan agreement support the conclusion that simple interest, not compound interest, is required.
Romspen’s argument that the note requires compound interest rests on the last four words of the first sentence of section 1.2, which provides: “Interest at the Applicable Interest Rate on the principal sum of this Note shall be calculated on the basis of a three hundred sixty (360) day year and the actual number of days elapsed in such period, and shall be compounded monthly.” Mestrezat Decl. (ECF No. 13), Ex. 4, § 1.2 (emphasis added). Romspen argues that the last four words of this sentence, providing that interest “shall be compounded monthly,” are dispositive. According to Romspen, nothing in the note contradicts these four words.
I agree with the Debtor that this sentence is ambiguous. Compound interest, by definition, is interest paid on both principal and unpaid interest. As the Second Circuit has stated, “‘[c]ompound interest’ is interest paid on both principal and previously accumulated interest; at the end of each interest period, the accrued interest is added to the principal for purposes of future calculations of interest.” Themis Cap., LLC v. Dem. Rep. Congo, 626 F. App‘x 346, 349 (2d Cir. 2015) (quoting 72 N.Y. Jur. 2d Interest and Usury § 2).
It could be argued that, when the parties provided in this sentence that interest would be compounded monthly on “the principal sum of this Note,” they contemplated that any unpaid interest would be added to principal on a monthly basis. This argument might be persuasive if this sentence were viewed in isolation. However, other provisions of the note and the loan agreement undercut this interpretation. For examplе, section 1.1(a) of the note says that “[i]nterest on the full Loan amount” shall accrue at the annual rate of 11.25 percent. Mestrezat Decl. (ECF No. 13), Ex. 4, § 1.1(a). The word “Loan” is defined as “the advances made by [Romspen] to [the Debtor] pursuant to [the loan] [a]greement.” Id., Ex. 1, Sched. I at 4. The term “advances,” by its common understanding, means principal, not interest, since interest is not advanced; it merely accrues.
The provisions of the loan agreement, which are incorporated by reference in the note, reinforce this conclusion. Specifically, the loan agreement defines the word “Debt” to mean “all Indebtedness of [the Debtor] to [Romspen], including, without limitation, the outstanding principal
I find that, taken together, these provisions indicate that the parties intended interest to accrue at a simple rate, not a compound rate.
The Debtor points to one additional provision of the note, which it claims provides further support for the conclusion that interest under the note accrues at a simple, not a compound, rate. Specifically, the Debtor points to the last sentence of section 1.2, which states that “[t]he principle of deemed reinvestment of interest does not apply to any interest calculation under this Note.” Id., Ex. 4, § 1.2. The Debtor notes that the concept of deemed reinvestment of interest is often equated with compound interest and, on this ground, asks me to read this sentence to mean that the parties intended interest to be simple, not compound.
Romspen does not dispute that deemed reinvestment of interest is oftеn associated with compound interest. However, Romspen contends that this concept can also have different meanings, and it argues that I should give it a different meaning here. Moreover, I should do so as a matter of Canadian law and practice, because Romspen—a Canadian-based lender—included the reference to deemed reinvestment of interest in the note as part of the disclosures required of Canadian lenders by the Interest Act of Canada. See Canada Act, 1982, c. I-15, reprinted in R.S.C. 1985, app II, no. 44 (Can.). To support its proposed interpretation of this provision, Romspen has
If I had to rule on who has the better of this argument—that is, what effect to give to section 1.2’s statement that deemed reinvestment of interest does not apply to the calculation of interest—I would be inclined to agree with the Debtor. This sentence, on its face, appears to support the conclusion that simple, not compound, interest is required. However, I am reluctant to rule on this issue, given Romspen’s contention that the issue is governed by Canadian law. Although Romspen has filed an appendix of Canadian authorities on this issue, it has not offered any expert testimony on Canadian law, nor has it asked for leave to present expert testimony. As a result, I don‘t believe I have a sufficient record to rule on the meaning of the last sentence of section 1.2 under Canadian law.
Fortunately, I don‘t have to rule on this issue, because Romspen doesn‘t contend that the note’s reference to deemed reinvestment of interest affirmatively cuts in its favor. It merely argues that I shouldn‘t give any weight to this sentence. I don‘t need to give weight to this sentence, because, as I just explained, the other provisions of the note establish that interest is computed at a simple, not a compound, rate.
Let me mention, finally, an argument that the Debtor preemptively addressed in its claim objection, assuming that Romspen would raise it. As it happened, Romsрen did not make this argument, but for the purpose of completeness, I will address it. The argument rests on section 5.13 of the note, which provides in pertinent part as follows:
In the event of a conflict between or among the terms, covenants, conditions, or provisions of the Loan Documents, the term(s), covenant(s), condition(s), and/or provision(s) that [Romspen] may elect to enforce from
time to time so as to enlarge the interest of [Romspen] in its security, afford [Romspen] the maximum financial benefits or security for the debt, and/or provide [Romspen] the maximum assurance of payment of the Debt in full shall control.
Mestrezat Decl. (ECF No. 13), Ex. 4, § 5.13.
I find that section 5.13 does not apply to the compound interest issue. This section gives Romspen certain rights when two or more provisions of the loan documents conflict. For example, if section 1.2 unambiguously provided for compound interest but other sections provided for simple interest, Romspen might have a plausible argument under section 5.13 that it could rely on section 1.2 notwithstanding any contrary provisions in other sections of the note. However, as I‘ve already ruled, section 1.2 is itself ambiguous as to whether compound interest is required. As a result, there‘s no conflict here between two provisions that mean different things. Rather, there‘s an ambiguous provision whose meaning is clarified by reference to other provisions. For that reason, section 5.13 does not apply.
B. Extrinsic evidence
At oral argument, when I asked the parties what evidence they wished to present beyond the documents attached to their motion papers, the only potential topics counsel raised were the reasonableness of attorneys’ fees and the accuracy of Romspen‘s calculations. Neither party asked me to consider any extrinsic evidence to aid in determining whether interest is simple or compound.
Subsequently, in a letter it filed shortly before the April 27, 2026 hearing, Romspen asked me to consider the second forbearance agreement as extrinsic evidence bearing on the compound interest issue. As I‘ve noted, Schedule 1 to that agreement detailed the outstanding indebtedness that the Debtor then owed Romspen, including base interest, default interеst, and a number of other
According to Romspen, the interest amounts included in Schedule 1 to this agreement are sufficiently large that they could only be the result of compounding. Romspen argued that I should therefore treat this agreement as extrinsic evidence that the parties understood the note to require compound, not simple, interest. In response, Debtor‘s counsel disputed that the forbearance agreement showed that his client understood interest under the note to be compound, rather than simple. He argued that this forbearance agreement was presented to his client on a “take it or leave it” basis, and his client believed it had to sign the agreement without changes as the price of obtaining forbearance. According to Debtor‘s counsel, his client did not, to his knowledge, review the calculations and make any determination of whether they were accurate or whether they reflected compound interest.
I find that the limited evidence on this issue is inconclusive. It is possible that the forbearance agreement reflects the parties’ understanding that interest would be calculated on a compound interest basis. But it is equally possible that the Debtor did not share that view but nevertheless was willing to agree to pay the amounts shown on Schedule 1 in order to obtain forbearance. Because neither Romspen nor the Debtor has provided any evidence on this issue beyond the forbearance agreement itself, I have no basis to make a finding as to which of these
CONCLUSION
For the foregoing reasons, I will enter an order granting the Debtor’s objection in part, denying it in part, and deferring my ruling in part until a final determination can be made as to whether Romspen is oversecured.
Dated: July 21, 2026
New York, New York
/s/ Philip Bentley
Honorable Philip Bently
United States Bankruptcy Judge