By Vicki Harding, Pepper Hamilton, LLP
In 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).