The District Court ruled that the Bankruptcy Code provides that, in general, a claim must be oversecured in order to recover postpetition interest in addition to reasonable fees, costs and charges as part of its secured claim. As to the appropriate rate of interest applicable to an oversecured creditor’s principal claim, however, Bankruptcy Code §506 and the accompanying legislative history are silent. The District Court reported that a great majority of courts to have considered the issue of postpetition interest have concluded that the contract rate of interest applies. Default rates of interest generally do not enjoy, however, the same straight-forward treatment that postpetition interest claims for basic interest do. The Supreme Court noted in the case of Rake v. Wade that postpetition interest may be claimed up to the extent of the value of the collateral.
The District Court ruled that entitlement to default interest is generally determined by a reliance on equitable principles or the cure rationale evoked by the 9th Circuit Court of Appeals in the case of In re Entz-White Lumber & Supply, Inc. The District Court, unlike the Bankruptcy Court, found that the debtor in this case had not “essentially…cured” his default. The District Court noted that the majority of jurisdictions allow, or at least give “a presumption to the allowability of default rates of interest, provided that the rate is not unenforceable under applicable nonbankruptcy law”. The facts and equities specific to each case prove determinative in the analysis of default rates. Within this analysis, the contract default rate is neither irrelevant nor predictive.
The District Court decided that the question presented by this case was just how far the Bankruptcy Court’s equitable powers extended under a modern reading of Bankruptcy Code §506(b). The rule governing the District Court’s consideration of this case was as follows: where the circumstances necessitating an equitable deviation are plainly absent and the contract interest rate does not violate state usury laws, function as a penalty or exceed the value of the collateral, the presumption in favor of the contract rate has not been rebutted. The District Court noted that to do otherwise is to impinge on a creditor’s statutory rights under Bankruptcy Code §506b). The District Court decided that in Dixon the presumption was in favor of the contract default rate. In order to discover what equitable considerations may support the Bankruptcy Court’s decision to deviate from this contract rate, the District Court turned to an analysis of the case law. The District Court found that those cases presenting equitable circumstances necessitating a deviation from the contract default rate were distinguishable on their facts. In this case, the contract default rate of interest in question violated neither state nor federal law, and there was a notable lack of circumstances which would encourage an equitable deviation from the stated contractual default rate.
The District Court stated that it seemed clear as well that the Bankruptcy Court erred when it deemed the default rate to be a penalty. No evidence existed on the record to support the Bankruptcy Court’s characterization. The default rate was within the bounds of state usury law, and merely calling the rate exorbitant, or noting its large departure from the non-default rate, did not suffice to render it unconscionable.
In summary, the District Court ruled that the contractual default interest rate in Dixon had not been rebutted by equitable considerations. The District Court ruled that the Bankruptcy Court’s decision to reject the default interest rate and apply the nondefault interest rate was therefore erroneous. The Bankruptcy Code and applicable case law, facts of the case and equitable principles of distribution compelled that the debtor should have been held to the contract default rate of interest provided in the note. The District Court stated that to find otherwise would render a windfall to the debtor. While a 36-percent interest rate is high, the courts do not have plenary power to alter commercial contracts or to substitute their judgment for that of the parties. The District Court found it necessary to remand the attorney’s fees portion of the case to the Bankruptcy Court for reconsideration, as the increased recovery available to the creditor altered the context for analyzing the reasonableness of the fee request.
The District Court ruled that entitlement to default interest is generally determined by a reliance on equitable principles or the cure rationale evoked by the 9th Circuit Court of Appeals in the case of In re Entz-White Lumber & Supply, Inc. The District Court, unlike the Bankruptcy Court, found that the debtor in this case had not “essentially…cured” his default. The District Court noted that the majority of jurisdictions allow, or at least give “a presumption to the allowability of default rates of interest, provided that the rate is not unenforceable under applicable nonbankruptcy law”. The facts and equities specific to each case prove determinative in the analysis of default rates. Within this analysis, the contract default rate is neither irrelevant nor predictive.
The District Court decided that the question presented by this case was just how far the Bankruptcy Court’s equitable powers extended under a modern reading of Bankruptcy Code §506(b). The rule governing the District Court’s consideration of this case was as follows: where the circumstances necessitating an equitable deviation are plainly absent and the contract interest rate does not violate state usury laws, function as a penalty or exceed the value of the collateral, the presumption in favor of the contract rate has not been rebutted. The District Court noted that to do otherwise is to impinge on a creditor’s statutory rights under Bankruptcy Code §506b). The District Court decided that in Dixon the presumption was in favor of the contract default rate. In order to discover what equitable considerations may support the Bankruptcy Court’s decision to deviate from this contract rate, the District Court turned to an analysis of the case law. The District Court found that those cases presenting equitable circumstances necessitating a deviation from the contract default rate were distinguishable on their facts. In this case, the contract default rate of interest in question violated neither state nor federal law, and there was a notable lack of circumstances which would encourage an equitable deviation from the stated contractual default rate.
The District Court stated that it seemed clear as well that the Bankruptcy Court erred when it deemed the default rate to be a penalty. No evidence existed on the record to support the Bankruptcy Court’s characterization. The default rate was within the bounds of state usury law, and merely calling the rate exorbitant, or noting its large departure from the non-default rate, did not suffice to render it unconscionable.
In summary, the District Court ruled that the contractual default interest rate in Dixon had not been rebutted by equitable considerations. The District Court ruled that the Bankruptcy Court’s decision to reject the default interest rate and apply the nondefault interest rate was therefore erroneous. The Bankruptcy Code and applicable case law, facts of the case and equitable principles of distribution compelled that the debtor should have been held to the contract default rate of interest provided in the note. The District Court stated that to find otherwise would render a windfall to the debtor. While a 36-percent interest rate is high, the courts do not have plenary power to alter commercial contracts or to substitute their judgment for that of the parties. The District Court found it necessary to remand the attorney’s fees portion of the case to the Bankruptcy Court for reconsideration, as the increased recovery available to the creditor altered the context for analyzing the reasonableness of the fee request.
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