Summary:
The Debtors guaranteed a $765,440.00 bridge loan with an adjustable interest rate, with range between 14% and 28%, and a 12 month term, with an option to extend the note for an additional 12 months. The Debtors filed Chapter 11 and proposed a 30-year amortization rate at 5% interest, to which the lender objected both as to the interest rate and the new term.
At hearing, an expert in commercial real estate testified that there was no effective market for this loan, so the bankruptcy court turned to the formula approach outlined in Till v. SCS Credit Corporation, 541 U.S. 465 (2004), to construct the appropriate interest rate. The bankruptcy court found that because the property generated a steady stream of income and was well-maintained, a 5% interest rate adequately accommodated the risk to the lender.
As to the 30-year amortization, the bankruptcy court agreed that “[a] commercial loan in chapter 11 must resemble a commercial loan on the open market to be fair and equitable to the creditor.” However, the court was not required to consider the identity of the lender, the nature of its business nor the source of the lender’s funds. As the bankruptcy court in the Eastern District of North Carolina had previously never approved a commercial loan with an amortization of more than twenty years, and then with a balloon payment. See In re American Healthand Human Services, Inc., No. 08-03135-8-JRL (Bankr. E.D.N.C. Jan. 5, 2009) (Leonard, J), the court here found that a 30 year amortization, without any shorter term balloon, was not “fair and equitable” under 11 U.S.C. § 1129(b)(2)(A).
For a copy of the opinion, please see:
Shoaf- Interest Rate and Amortization Term for Secured Claim in Chapter 11.pdf
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