1st Circuit Limits Secured Lender’s Right to Post-Petition Interest by Applying Flexible Standard

by Davis Wright Tremaine LLP
Contact

In an important decision for lenders, the 1st Circuit Court of Appeals recently decided In re SW Boston Hotel Venture LLC, holding that a bankruptcy court was right to give a lender a claim for post-petition interest beginning on the date of the sale of its collateral rather than the commencement date of the debtor’s bankruptcy case. This case serves as a guide for lenders regarding their entitlement to post-bankruptcy interest, and importantly, it provides a precedent for lenders to obtain post-petition interest, even when they happen to be undersecured on the date of the filing of the petition.

Post-petition interest is not generally allowed after the filing of a bankruptcy petition under section 502(b)(2) of the Bankruptcy Code. There is an exception, however, for oversecured creditors, who, under section 506(b) of the Bankruptcy Code, are entitled to post-petition interest up to the value of their collateral. The statute does not state when or how to determine whether a creditor is oversecured, which was the genesis of the dispute described in SW Boston Hotel Venture LLC.

Prudential Insurance agreed to provide up to $192.2 million in financing to build a 235-room hotel, a condominium complex, and related retail space. After making the loan, the borrower, SW Boston, together with several of its affiliates, filed for bankruptcy.

Prudential promptly asked for relief from the automatic stay, arguing that it was undersecured. The bankruptcy court denied the motion. Even though Prudential was marginally undersecured with respect to collateral owned by the primary debtor, Prudential was deemed adequately protected by its interests in other property.

SW Boston then proceeded with a sale of the property. The sale price was higher than the value used by the bankruptcy court to determine, in the context of the earlier stay relief motion, that Prudential was marginally undersecured. Accordingly, Prudential filed a claim seeking post-petition interest going back to the beginning of the bankruptcy case on the basis that the sale revealed Prudential was, in fact, oversecured.

The bankruptcy court decided that Prudential was entitled to post-petition interest, but only beginning on the date of the sale of the property, and not beginning on the date of the commencement of the bankruptcy case. The parties appealed, and the bankruptcy appellate panel reversed, finding Prudential should receive interest from the bankruptcy petition date. The parties appealed again, which prompted the 1st Circuit to issue its decision.

The parties agreed that Prudential was oversecured at some point during the bankruptcy proceedings. They disagreed about when Prudential was oversecured, and what date should be used to determine whether Prudential was oversecured for purposes of deciding Prudential’s right to interest under section 506(b).

There is a split of authority under section 506(b). Some courts, including the 11th Circuit Court of Appeals, have held that a creditor’s allowed secured claim for post-petition interest is limited to the amount that the creditor was oversecured by at the time of the filing of the bankruptcy case. Other courts take a more flexible approach, which they believe is appropriate because section 506(b) does not define the measuring date for purposes of post-petition interest. Those courts sometimes note that section 506(a) says the value of collateral will be determined “in light of the purpose of the valuation and of the proposed disposition or use of the property,” which is not a rigid standard.

The 1st Circuit decided that the flexible approach was a better one. It is more likely to avoid inequitable results. Under the “petition date” approach, if a creditor was undersecured on the petition date, but its collateral increased in value just a day after the petition, the creditor nevertheless would receive no interest at all. On the other hand, if the measuring date was the date of plan confirmation (a position Prudential advocated), then a creditor might be undersecured throughout the bankruptcy case, become oversecured just a day or two before confirmation, and then be deemed entitled to post-petition interest for the entire duration of the case, including periods when it was obviously undersecured.

In this case, it was not clear that Prudential was oversecured at any time prior to the sale. The debtor continued to make improvements to the property. The final sale price probably reflected that work. The 1st Circuit observed it would be unfair for a debtor and other parties to fund continued construction, only for all the benefits of that investment to be captured by another creditor.

The 1st Circuit addressed several other interesting issues along the way. Among other things, it decided that the bankruptcy court’s determination of value—made in the context of the stay relief motion filed by Prudential—was not binding on the bankruptcy court in the later proceedings to decide the nature and extent of Prudential’s claim. Values may change during the course of the bankruptcy case, and values determined for purposes of one kind of motion, such as stay relief, are not necessarily binding for other kinds of motions, such as those to decide an entitlement to post-petition interest.

The 1st Circuit’s decision is significant for lenders because it demonstrates that a lender’s right to post-petition interest may change during the course of the bankruptcy case. Lenders should not simply assume that they are not entitled to interest just because they happen to be undersecured on the petition date. Values may fluctuate during the course of the case, and lenders should remain alert to opportunities to seek post-petition interest based on increased valuations.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Davis Wright Tremaine LLP | Attorney Advertising

Written by:

Davis Wright Tremaine LLP
Contact
more
less

Davis Wright Tremaine LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!