Post-Petition Interest: Not Very Predictable
by | posted in: Cramdown and Priority | 0

By Vicki Harding, Pepper Hamilton, LLP

hardingvIn a recent case a mortgagee battled the debtor over post-petition interest:  When did the lender become oversecured and thus entitled to interest?  Was it entitled to the default rate?  Should interest be compounded?

Some may be surprised to learn that a lender must do more than simply show that it is oversecured to receive its contract rate for the period between the petition date and confirmation.  Most courts hold that a bankruptcy court has at least limited discretion to use another rate.

Here the debtor filed a plan of reorganization that proposed to pay its senior lender in full with interest at 4.25% from the effective date of the plan, but did not include any post-petition, pre-effective date interest.

The lender argued that it was entitled to post-petition interest at the 14.5% contract default rate accruing from the petition date.  The debtor responded that the lender became oversecured only after a sale of its collateral and the default rate was unenforceable and inequitable.

Generally post-petition interest is not allowed, but there is an exception for oversecured creditors.  The 1st Circuit concluded that a bankruptcy court is not required to accept the contract rate, although there is a presumption that the contract rate (including default rate) applies if it is enforceable under state law and there are no equitable considerations leading to a different result. See here for a more detailed discussion of Prudential Ins. Co. of Am. v. SW Boston Hotel Venture, LLC (In re SW Boston Hotel Venture, LLC), 748 F.3d. 393 (1st Cir. 2014).

Preference Recovery: You May Be More Exposed Than You Think
by | posted in: Avoidance | 0

Author: Vicki R. Harding, Pepper Hamilton LLP

Imagine a $2 million property that secures a $1.75 million senior loan and a $500,000 junior loan.  The owner files bankruptcy, and during the 90 days prior to bankruptcy the senior lender received payments totaling $250,000.  Does the senior lender have preference exposure?

A typical assessment is that because the senior lender is over-secured, it did not receive a preference because it did not receive more than it would have in a chapter 7.  However, it can be argued that the payments constitute a preference to the junior lender since it will receive more than in a chapter 7 as a result:  Without the payments, only $250,000 would be left after payment of the senior lender, but with the payments, $500,000 is left.  And the senior lender could be liable in a recovery action as the transferee of the preference under Section 550.

But wait, isn’t that a Deprizio argument, and didn’t Congress fix the Code to preclude this result? The answer is no: Deprizio and Section 550(c) address transfers benefitting insiders made between 90 days and a year prior to bankruptcy.  It does not protect a lender for claims based on transfers made during the 90 days prior to bankruptcy.  Unfortunately for senior lenders, this is not a fanciful hypothetical, but rather the approach taken in Gladstone v. Bank of America, N.A. (In re Vassau), 499 B.R. 864 (Bankr. S.D. Cal. 2013), discussed more in Preferences:  Surprise – Being Fully Secured May Not Be A Complete Defense.