Summary:
The Debtor granted Royal Bank America (“RBA”) a first Deed of Trust against a 36-unit condominium complex, in the amount of $17,000,000 and also a “Put Agreement”, which obliged the guarantors of the Deed of Trust, to obtain permanent financing for 10 of the units. At the same time, the Edwards Family Partnership, L.P. (“EFP”) was granted a junior Deed of Trust for $3,000,000.
The RBA loan originally matured on July 1, 2009, but the Debtor exercised its right to extend the loan to January 1, 2010. In December 2009, RBA declared the loan in default for failure to comply with the Put Agreement. RBA did not, however, accelerate the loan. On January 1, 2010, RBA declared a second default due to the failure by the Debtor to pay the entire principal balance, accrued interest and costs. Pursuant to the loan documents, RBA sought to record a confession of judgment in Pennsylvania, for the principal balance, plus interest and attorneys’ fees of 15% of that amount. (A total of $18,942,747.18.) In response, the Debtor filed a Motion to Strike or Open the Confession of Judgment. More than a year later, RBA commenced foreclosure and the debtor filed Chapter 11 bankruptcy.
RBA filed a Proof of Claim, including $1,165,802.25 in accrued interest and $2,470,384.57 in attorneys’ fees. The Debtor objected to the Proof of Claim.
RBA first argued that the Pennsylvania Confession of Judgment determined the amount of attorneys’ fees, interest and late charges and, pursuant to the Rooker-Feldman doctrine, the bankruptcy court was precluded from reconsidering these amounts. The Bankruptcy Court held, however, that because of the pending Motion to Strike, the Confession of Judgment was not a final judgment and not precluded from determination by the bankruptcy court.
Continuing, the Debtor did not contest the amount of principal owed, but did contest the amount of interest, attorneys’ fees and late fees.
Regarding the interest, the Debtor contended that the alleged default of the Put Agreement in December 2009 was not valid, and the lower contract interest rate of 4.25%, rather than the 7.25% default interest rate applied. The Bankruptcy Court found that the Put Agreement default was irrelevant, as RBA validly declared the loan in default in January 2010.
In determining that the default rate was not excessive, the bankruptcy court examined the following factors:
1. the creditor faces a significant risk that the debt will not be paid;
2. the lower rate of interest payable pre-default is shown not to be the prevailing market rate;
3. the difference between the default and the pre-default rates, and whether the differential between the two rates are reasonable; and
4. whether the purpose of the higher interest rate is to compensate the creditor entitled to interest for losses sustained as a result of the fact that it was not paid at maturity or is simply a disguised attempt to penalize the debtor.
In re Deep River Warehouse, Inc., 2005 WL 1513123 *3, *3-4 (Bankr. M.D.N.C. 2005).
Examining the attorneys’ fees, EFP argued that a 15% attorney fee was unreasonable, particularly as the parties agreed that RBA actually only incurred attorneys’ fees of $370,397.80. Under Pennsylvania law, however, the attorneys’ fees mush be reasonable and not excessive. Accordingly, the Bankruptcy Court limited the attorneys’ fees to the amount actually incurred pre-petition.
RBA was allowed an additional $1,140,092 for post-petition interest, representing the amount that it was over-secured based on the determination that the property was worth $19,148,655. It was not allowed any post-petition attorneys’ fees, as there was no longer any equity to secure such fees. Nor did such attorneys’ fees “morph” into an allowable unsecured claim, as 506(d) is the only section that allows such post-petition fees.
Lastly, RBA sought to have a superpriority administrative claim for $293,682.75, representing the amount of RBA’s cash collateral used in excess of adequate protection and property tax payments. The Bankruptcy Court, however, held that “the debtor’s use of cash collateral for costs associated with the maintenance and operation of the property need not be adequately protected. See In re Smithville Crossing, LLC, Case No. 11-02573-8-JRL (Bankr. E.D.N.C. Sept. 28, 2011).
Commentary:
While a Chapter 11 case, this opinion does provide useful options for consumer debtors, including both guidance on objecting to accrued interest once a debt is in default. While the Bankruptcy Court recognizes that other courts have upheld default interest rate margins of up to 15%, many credit cards have default interest rate margins in excess of that amount.
Further, the willingness of the Bankruptcy Court in the Chapter 11 case to preclude post-petition attorneys’ fees under 11 U.S.C. § 506(b), as such fees were not over-secured, seems to be in direct contrast to its nearly uniform approval of attorneys’ fees for Motions for Relief from Stay in Chapter 13 cases, regardless of the secured status of the claim.
For a copy of the opinion, please see:
Croatan Surf Club, L.L.C.- Objection to Claim regarding Attorneys’ Fees and Default Interest Rate.pdf
Blog comments