JOAN N. FEENEY, Bankruptcy Judge.
The matter before the Court for determination is the "Motion of The Prudential Insurance Company of America for an Order Authorizing the Application of Payments Received during the Chapter 11 Cases to Payment of Postpetition Interest pursuant to Section 506(b) of the Bankruptcy Code" (the "506(b) Motion").
The Court held an evidentiary hearing on the 506(b) Motion in conjunction with the hearing on confirmation of the Debtors' Modified First Amended Joint Plan of Reorganization, and Prudential's Objection to that plan. After a three day trial beginning on June 27, 2011 and extensive briefing by the parties, the Court took the 506(b) Motion under advisement. As the Court observed in note 3, the Debtors commenced an action against Prudential on September 15, 2011 seeking to avoid various liens under 11 U.S.C. §§ 544 and 547.
The issues presented include whether Prudential is an oversecured creditor entitled to accrue and be paid postpetition interest after the commencement of the Debtors' Chapter 11 cases, and, if so, whether it is entitled to interest at the default rate. Resolution of those issues requires the Court to decide at what point in time a creditor's secured status is determined during the pendency of a Chapter 11 case for the purpose of determining whether a secured claimant is entitled to postpetition interest and other charges as
On April 28, 2010 (the "Petition Date"), SW, General Trading Company ("General Trading"), Frank Sawyer Corporation ("FSC"), 100 Stuart Street, LLC ("Stuart Street"), and Auto Sales & Service, Inc. ("Auto Sales") filed voluntary Chapter 11 petitions. Subsequently, on June 4, 2010, General Land Corporation ("General Land"), 30-32 Oliver Street Corporation ("Oliver Street"), and Arlington Street Trust ("Arlington Street Trust") also filed voluntary Chapter 11 petitions.
On November 1, 2010, Prudential filed proofs of claim in the Debtors' cases, identifying itself as the holder of a secured claim in an amount of "[n]ot less than $180,803,185.93 (plus all interest, costs, and fees)." Prudential attached to its proofs of claim an Addendum containing a narrative description of its claim and a schedule— Schedule 1—in which it referenced "Construction Loan Documents," including a Construction Loan Agreement dated January 15, 2008, a Promissory Note dated January 15, 2008, a First Priority Mortgage, Security Agreement, Fixture Filing, and Assignment of Sales Contracts and Deposits dated as of January 15, 2008 (the "Mortgage") on the land, improvements and personal property located on 100 Stuart Street, Boston, Massachusetts, and various other guaranties, assignments, pledge agreements, and mortgages affecting property of the Affiliated Debtors (the "Construction Loan Documents"). Despite the instruction on the proof of claim form (Official Form 10) to "attach copies of lien documentation," none of the documents were attached to the proofs of claim, and, except for the Construction
Prudential specifically asserted in paragraph 3(a) of the Addendum that, in addition to the aggregate principal amount of $180,803,185.93, it was owed "all interest accrued and unpaid both prior and subsequent to the Petition Date [April 28, 2010], calculated in accordance with the Construction Loan Documents, plus all fees, expenses and other amounts owed to Prudential pursuant to the Construction Loan Documents....." Moreover, in paragraph 3(b) of the Addendum, Prudential asserted the following:
Prudential did not attach to its proofs of claim any accounting of any amounts owed for prepetition interest, postpetition interest, or any of the fees, costs or charges it now seeks. As noted above, it did not attach to its proofs of claim any of the Construction Loan Documents to which it referred in the Addendum, including the Construction Loan Agreement, Promissory Note or Mortgage.
On August 3, 2010, Prudential filed a Motion for Relief from the Automatic Stay pursuant to 11 U.S.C. § 362(d) (the "Lift Stay Motion") with respect to the real property located at 100 Stuart Street, comprised of the Hotel and over 120 condominium units (the "Residences" or the "Condominiums"). On January 28, 2011, after briefing and a three-day evidentiary hearing, the Court denied the relief sought by Prudential. In the Court's Memorandum (the "Lift Stay Memorandum"), see In re SW Boston Hotel Venture LLC, 449 B.R. 156 (Bankr.D.Mass.2011), the Court denied Prudential's request for relief from the automatic stay after finding that when the total value of its collateral package was evaluated an equity cushion in excess of $19 million existed as to the amount of Prudential's claim.
The Sale Motion evidenced that the Debtors had entered into a purchase and sale agreement with Razorbacks Owner LLC (the "Purchaser"), an affiliate of Pebblebrook Hotel Trust, pursuant to which the Purchaser agreed to acquire the Hotel for $89.5 million, subject to higher and better offers. On May 24, 2011, the Court approved the sale of the Hotel pursuant to 11 U.S.C. § 363 to the Purchaser. The closing occurred on June 8, 2011. After the closing, the Debtors caused net sale proceeds in the sum of $83,322,017 to be paid to Prudential.
Prior to the closing of the sale of the Hotel and other assets, the Debtors, on March 31, 2011, filed a Joint Plan of Reorganization and a Disclosure Statement. Prudential filed an Objection to the original Disclosure Statement on April 29, 2011. On May 5, 2011, the Debtors filed a First Amended Joint Plan of Reorganization, together with an Amended Disclosure Statement. On May 24, 2011, the Court approved the Amended Disclosure Statement, and scheduled a confirmation hearing for June 27, 2011. On June 24, 2011, Prudential filed an Objection to the Amended Plan; on June 27, 2011, the Debtors filed a Modified First Amended Joint Plan of Reorganization (the "Plan").
Through their Plan, the Debtors propose to pay, in full, the "Allowed Prudential Claim," adjusted for amounts paid during the pendency of the Chapter 11 cases and to pay that claim by March 31, 2014 with interest accruing at 4.25% per year or another rate determined by the Court. The Plan in paragraph 1.10 contains a definition of the term "Allowed Prudential Claim" as follows:
In paragraph 4.2(k), the Debtors provide that Prudential "shall receive such additional or other treatment as may be necessary, as agreed to between the Debtors and ... Prudential ... or as determined by the Bankruptcy Court, to permit ... Prudential ... to realize the indubitable equivalent of its Allowed Claim."
Under the Plan, the Debtors propose to pay Prudential, monthly, the aggregate of the Debtors' cash in excess of fixed working capital amounts;
The Debtors in paragraph 4.7(e)(iv) of their Plan agreed that no insiders would receive cash distributions on account of their allowed claims until the allowed claims of all non-insider creditors have been paid in full. In paragraph 4.2(h), the Debtors also agreed to provide Prudential with monthly, quarterly, and yearly financial reports. Specifically, on a monthly basis, they agreed to provide Prudential with
Additionally, on a quarterly basis, Debtors agreed, at paragraph 4.2(h)(iii), to provide Prudential with a comparison of their actual expenses and their budgeted expenses and to annually provide Prudential with unaudited financial statements and tax returns within 10 days of filing.
The Debtors, at paragraph 4.2(d)(iii), of their Plan agreed that payments made on account of the Allowed Prudential Claim would be applied first to accrued interest and second to the principal balance of the claim. The Debtors did not expressly provide that Prudential is entitled to postpetition interest on its secured claim. Indeed, in their Amended Disclosure Statement, the Debtors state that "because Prudential is undersecured as to each Debtor," it is not entitled to postpetition interest, cost or attorneys' fees. See Amended Disclosure Statement at 11 (Docket Entry # 587). In addition, the Debtors did not provide for payments to Prudential using the default rate of interest, although the parties stipulated that, at the Petition Date, the Prudential loan was in default.
In paragraph 5.8, the Debtors provided the following:
The Debtors in Exhibit A to their Plan also established negative covenants to limit or prohibit their ability to exceed budgeted expenses; to permit any additional liens on collateral, subject to Prudential's Mortgage or that of the City of Boston, unless the lien secures financing allowing payment of the Allowed Prudential Claim in full; to change their management structure; to guaranty or become liable for any indebtedness or obligation of a non-Debtor insider; to be a party to a merger or reorganization, unless the Debtor is the surviving entity; to purchase or acquire stock in another organization, other than in the ordinary course of business; or to make any distribution to equity.
In Exhibit A to the Plan, the Debtors also established 20 affirmative covenants for the benefit of Prudential and other creditors, which include requirements to (i) file all post-Effective Date tax returns; (ii) pay all post-Effective Date Residence fees promptly when due; (iii) make cumulative payments to the holder of the Allowed Prudential Claim in accordance with a Schedule attached to the Plan, until such time as the Allowed Prudential Claim is paid in full; (iv) maintain insurance for each of the Debtors and their respective properties; and (v) perform and/or observe all of the material covenants and agreements required to be performed and observed under the existing agreements with Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), the manager of the Hotel, as well as the Bliss Spa, Culinary Concepts (Boston) LLC, Ultimate Parking, LLC, and Wink Retail Group, Inc.
The Debtors initially approached Prudential about financing the development of the W Hotel and Residences after a loan from a German commercial bank lender, HSH Nordbank, failed to close. On January 15, 2008, Prudential and SW entered into an agreement, captioned, "Construction Loan Agreement," whereby Prudential provided up to approximately $190 million in construction financing for the construction of a hotel and residence complex.
Under the Construction Loan Agreement, the loan balance accrued interest at the rate of 9.5% per year. In the event of a default, the outstanding principal balance of the loan and any overdue interest were to accrue interest at the default rate of interest of 14.5% per annum. See Prudential's Exhibit 3, Construction Loan Agreement, at paragraph 2.3.3. In addition, the Construction Loan Agreement provided for a Late Payment Charge in paragraph 2.3.4. That section provided:
Under paragraph 4.1.13 of the Construction Loan Agreement, the Borrowers agreed as follows:
According to Prudential, as noted above, the Debtor executed a Promissory Note evidencing the loan obligation and a Mortgage to secure the Note and Construction Loan Agreement. The parties appear to agree that to secure the Debtors' obligations to Prudential, SW Boston entered into a First Priority Mortgage, Security Agreement, Fixture Filing, and Assignment of Sales Contracts and Deposits, previously identified as the "Mortgage," with Prudential which granted Prudential a first priority mortgage and security interest on SW Boston's real and personal property and the proceeds from the sale of real and personal property. SW Boston also executed pledge and control agreements with respect to two accounts at Sovereign Bank, which were not submitted into evidence, and certain of the Affiliated Debtors, including FSC, Arlington Street Trust, General Land, General Trading, Oliver Street, and Auto Sales, executed guarantees of SW's obligations to Prudential, which are discussed in more detail below.
FSC executed its "Payment Guaranty" on January 15, 2008, as did Oliver Street, Auto Sales, and General Trading. General Land and Arlington Street Trust executed their guaranties on December 22, 2008 at the time the Construction Loan Agreement, according to those guaranties, "was amended by that certain First Amendment to Construction Loan Agreement dated as the date hereof." Prudential did not submit into evidence that or any other amendments to the Construction Loan Agreement. Additionally, like the Promissory Note, it did not introduce the Mortgage into evidence at the trial concerning the 506(b) Motion, or at any stage of this case. To date, neither the Debtors nor the Official Committee of Unsecured Creditors (the "Creditors' Committee") has claimed that the Mortgage was not recorded, although the Debtors recently commenced an adversary proceeding against Prudential, captioned "Complaint to Avoid Liens and Claims Asserted by the Prudential Insurance Company of America."
In addition to the collateral provided by SW Boston, the Affiliated Debtors provided guarantees to Prudential and pledged additional collateral as security for repayment of the Construction Loan. FSC issued what Prudential describes as "a Payment Guaranty, a Carveout Guaranty, and a Completion Guaranty" (the "FSC Guarantees"), although only the Payment Guaranty was introduced into evidence. FSC also executed pledge and control agreements with respect to a securities account and, according to Prudential, assigned its interest in the subscription agreement of Frank Sawyer Trust. The FSC Payment Guaranty defined "Guaranteed Obligations" as follows:
Oliver Street granted Prudential a first priority mortgage on, and an assignment of leases and rents from, real property located at 25 and 27 Pinckney Street, Boston, Massachusetts and guaranteed FSC's obligations under the FSC Guarantees.
Except for the Payment Guaranty executed by FSC, the various guarantees executed by the Affiliated Debtors define "Guaranteed Obligations" in paragraph 1, captioned "Defined Terms," as follows:
(emphasis in original). The definition of Guaranteed Obligations referenced the payment of Enforcement Costs as set forth in Section 3(g) of the guarantees, and in Section 2(g) of the FSC Payment Guaranty. That section of the guarantees set forth the following intentions:
(emphasis in original). In summary, the Construction Loan Documents entitle Prudential to seek or collect attorneys' fees from SW, as well as interest and late charges, and they entitle Prudential to
Two of the Debtors' non-debtor affiliates, SE Berkeley Street, LLC ("SE Berkeley") and SE McClellan Highway, LLC ("SE McClellan"), are parties to a creditor agreement with Sovereign Bank. Pursuant to their agreement, Sovereign Bank issued a letter of credit in favor of Prudential for approximately $17.3 million (the "Letter of Credit"). Shortly after the Debtors' filings, Prudential drew the full amount of the Letter of Credit and applied the funds to the principal balance due on the Construction Loan.
The City has a secured claim in the amount of $10.5 million arising from a loan agreement dated December 9, 2009 between SW and the City. At the time it executed its agreement with SW, the City entered into an Intercreditor and Subordination Agreement (the "Subordination Agreement") with Prudential pursuant to which it subordinated certain payment rights to those of Prudential. The Intercreditor and Subordination Agreement also prohibited the City from receiving certain payments from the Debtors while the Debtors' obligations to Prudential remain outstanding, and required the City to surrender any payments received from the Debtors to Prudential. The agreement also provided that the City must assign to Prudential, upon Prudential's request, its voting rights concerning the Debtors' Plan.
Putting aside Prudential's failure to submit complete proof of its secured status, and the challenge to its liens raised in the Debtors' recently filed adversary proceeding, the Court observes that the positions of Prudential and the Debtors with respect to the value of the Prudential collateral and its concomitant status as an undersecured or oversecured creditor, have vacillated during the course of the Debtors' Chapter 11 cases in response to pending motions pertinent to the use of cash collateral, relief from the automatic stay, plan confirmation and the instant 506(b) Motion.
As of the Petition Date, the Debtors, in their schedules, stated, under the penalty of perjury, that the property owned by SW at 100 Stuart Street had a value of $223,287,214.10. See Schedule A-Real Property filed in the SW case (Docket Entry # 94). In the parties' Joint Pretrial Memorandum filed in conjunction with the Lift Stay Motion, the parties stipulated that the value of all real estate securing Prudential's claim, other than 100 Stuart Street, and excluding marketable securities and cash, was $7,075,000 in the Fall of 2010. See Joint Pretrial Memorandum (Docket Entry #338). Therefore, as of the Petition Date, using Debtors' valuation of 100 Stuart Street and the agreed values set forth in the Joint Pretrial Memorandum, the aggregate value of the collateral securing Prudential's claim was approximately $231,000,000.00, whereas the amount owed Prudential was approximately $180,000,000. Adding the value of marketable securities referenced by the Debtors in their Opposition to the Lift Stay of approximately $8.5 million, the collateral package far exceeded the amount of the debt. See Opposition by Debtors to Prudential's Lift Stay Motion (Docket Entry # 227).
Prudential claimed it was undersecured throughout much of the Debtors' cases. In its Lift Stay Motion, dated August 3, 2010, Prudential asserted that the value of 100 Stuart Street was $141,000,000 in relation to its debt at that time which it asserted was approximately $162.4 million. See Prudential's Lift Stay Motion (Docket Entry # 201).
On January 28, 2011, the Court, in denying Prudential's Lift Stay Motion, found that the value of the Hotel and Residences was $153,600,000.00 and that the parties had stipulated that the value of other collateral, including securities, was $14,754,000.00 (the stipulated values of real property other than Stuart Street was $7,715,000 plus securities of approximately $7 million). Thus, the Court determined that Prudential was oversecured if its debt was compared to the total value of all its collateral. Adding the stipulated value of all collateral other than 100 Stuart Street with the value of 100 Stuart Street resulted in a total collateral package of $168,354,000.00 to secure an obligation of $154,000,000. When SW's cash collateral was added, the Court concluded: "[g]iven the total value of the collateral package, an equity cushion exists with respect to Prudential's claim in an amount in excess of $19 million." In re SW Boston Hotel Venture, LLC, 449 B.R. at 176.
On March 28, 2011, SW filed the Sale Motion to which it attached a Purchase and Sale Agreement with Razorbacks Owner LLC, dated the same day, with a stated purchase price of $89.5 million. The Court entered an order granting the Sale Motion on May 24, 2011, and, on June 8, 2011, Prudential received net proceeds of $83,322,017 from the sale of the Hotel and other assets.
As of May 31, 2011, the parties stipulated to the aggregate value of Prudential's collateral, other than the Hotel at $82,781,809. If the offer price for the Hotel is added to that sum, the total collateral package could be valued at $172,172,809 ($15,891,744 + $66,781,065 + $89.5 million). See Stipulation and Amended Stipulation Regarding (I) Discovery Schedule in Connection with Hearings on June 27, 2011 and (II) for Purposes of Such Hearings, the Value of the Remaining Condominium Units (Docket Entries # 667 and # 716); and the Sale Motion (Docket Entry # 495).
As of June 23, 2011, the aggregate value of Prudential's collateral was $78,327,688, which sum is determined by adding the stipulated value of the remaining Residences ($63,772,219) and the stipulated value of all collateral other than 100 Stuart Street ($14,555,469). As of August 12, 2011, the aggregate value of Prudential's collateral was $76,624,688, which sum is determined by subtracting from the last stipulated value for the remaining Residences the net proceeds of the sales of Residences in July 2011 ($63,772,219-$1,676,000), and then adding to that result the last stipulated value of all collateral, other than 100 Stuart Street ($62,096,219 + $14,528,469).
In addition to the Letter of Credit ($17.3 million) and the net proceeds from the sale of the Hotel ($83,322,017 on June 8, 2011), the Debtors have reduced Prudential's secured claim by payments of net proceeds from the sale of Residences. Between April 28, 2010 and November 3, 2010, the Debtors paid Prudential $9,153,883 in proceeds from the sales of Condominiums. Between November 4, 2010 and May 31, 2011, they paid Prudential $15,775,673 in proceeds from the sales of the Residences. Between June 1, 2011 and June 23, 2011, they paid Prudential $3,320,000 in proceeds from the sales of Condominiums, plus $83,322017 from the sale of the Hotel, resulting in a debt to Prudential of $55,834,959, excluding interest, fees and charges. (Debtors' Exhibit 6). According to Debtors' Status Report filed on August 12, 2011, they paid Prudential $1,676,000 in proceeds from the sales of Residences in July and that, as of the date of the Report, they had paid Prudential approximately $29.6 million in proceeds from the sales of Residences, and owe Prudential between $52 and $53 million, exclusive of postpetition interest, fees and charges.
At the hearing on the 506(b) Motion, Joanna Mulford ("Ms. Mulford"), a Vice President of The Prudential Insurance Company of America, testified on behalf of Prudential. Her Declaration was introduced into evidence as her direct testimony, and she was cross-examined by Debtors' counsel pursuant to an agreement of the partes. Ms. Mulford indicated that the principal amount of Prudential's loan had been reduced from $180.8 million to $163.5 million by application of $17.3 million attributable to the Letter of Credit proceeds. She also reported that the Debtors have paid Prudential approximately $22.2 million from the sale of Residences. She compared the amount due Prudential for postpetition interest, as of April 25, 2011, prior to the sale of the Hotel in June of 2011, using the non-default contract rate of interest and the default rate of interest. Using the 9.5% contract rate, Ms. Mulford calculated interest owed at $16,209,512.78. Using the 14.5% default rate of interest, she calculated interest owed at $24,740,835.30. Ms. Mulford, however, did not explain how she actually computed those figures.
Ms. Mulford testified that she was responsible for the loan after it was originated and that another group, "[o]n the portfolio side," actually originated the loan. She also testified that the rates of interest set forth in the Construction Loan Agreement were predicated on similar loans in the market at the time of the loan's origination, "whether it be a loan that we're originating or a loan that we're actually taking out on one of our properties." She added that she did not engage in any analysis with respect to the anticipated costs, or losses, that Prudential might sustain as a result of a default. Ms. Mulford conceded that she did not engage in any analysis with respect to whether the default rate of interest, which is 5% higher than the non-default contract rate, reasonably anticipated Prudential's costs and expenses in the event of a default. Indeed, she admitted that she made no inquiries to determine on what basis they established the default rate of interest.
On redirect examination, Ms. Mulford described PRISA as a private investment fund, similar to a hedge fund. She emphasized that interest rates in the Construction Loan Agreement were similar to those in situations where Prudential is both a lender and a borrower.
Prudential seeks postpetition interest, fees and costs under 11 U.S.C. § 506(b) on the ground that it has an allowed, secured claim which exceeds the value of its collateral. Maintaining that it is an oversecured creditor entitled to postpetition interest and reasonable fees, costs and charges, Prudential seeks to recover postpetition interest from the date of the filing of the petition. It relies upon the Lift Stay Memorandum in which this Court determined for purposes of 11 U.S.C. § 362(d)(1) that "[g]iven the total value of the collateral package, an equity cushion exists with respect to Prudential's claim in an amount in excess of $19 million." 449 B.R. at 176. Prudential estimates that its collateral, consisting of the Hotel, the Residences, plus additional collateral in the form of cash, securities and real estate of the Affiliated Debtors, had a value of approximately $200,000,000 at the commencement of these cases when it was owed approximately $180,800,000.
Prudential further argues, however, that, for purposes of confirmation of the Debtors' plan, it is owed $90,432,714. It asserts that its claim as of May 31, 2011 was $171,212,200 to which it adds both estimated additional fees and expenses of $750,000 using a Plan Effective Date of July 14, 2011 and estimated default interest of $1,792,531 from June 1, 2011 to July 14, 2011 [sic], and from which it subtracts the proceeds from the sale of the Hotel in the sum of $83,322,017. Using a total collateral package valued at $73,327,688, it states: "taking into account the value of the Prudential Collateral as of Confirmation, Prudential's secured claims as of Confirmation are equal to the value of the Prudential Collateral, or $78,300,688."
Prudential argues that it has been an oversecured creditor of the Debtors in the aggregate and that it has been oversecured throughout the Debtors' Chapter 11 cases. It emphasizes that the Hotel sold for a sum well in excess of the value this Court determined in its Lift Stay Memorandum dated January 28, 2011.
In connection with the confirmation hearing, the Debtors and Prudential agreed that the value of the collateral held by Prudential as of the confirmation hearing was $14,555,469 in cash, securities and mortgages on properties owned by Arlington Street Trust, General Land and Oliver Street, and that the value of the remaining unsold Residences was $63,772,219, totaling $78,327,688. Prudential argues that it is entitled to the benefit of any increase in values during the bankruptcy proceeding through allowance of the 506(b) Motion.
In sum, Prudential argues that it is entitled to the default rate of interest provided in the Construction Loan Agreement, adding that application of the default rate of interest is enforceable under state law. It asserts that the default rate of interest is within the range typically charged by commercial lenders, is not inequitable, and will not negatively affect the dividend to junior creditors.
The Debtors seek denial of Prudential's 506(b) Motion, except as to postpetition interest at the non-default rate of 9.5% per annum accruing beginning June 8, 2011, the date SW conveyed the proceeds from the sale of the Hotel and other assets pursuant to the Court's allowance of the Sale Motion on May 24, 2011. According to the Debtors, Prudential's loan balance was approximately $56 million at that time. They argue that Prudential should only be allowed postpetition, preconfirmation interest at the rate of 9.5% per annum from June 8, 2011 to the Effective Date, while accounting for payments made after that date.
The Debtors maintain that they have paid Prudential $83,322,017 in net sale proceeds from the sale of the Hotel and related assets approved by the Court on May 24, 2011, as well as $17.3 million from the Letter of Credit and proceeds from the sales of Residences since the commencement of Debtor' cases and have reduced its claim on the petition date from $182,078,243
The Debtors object to Prudential aggregating the value of all its collateral for purposes of its 506(b) Motion. They maintain that, on the petition date, Prudential was undersecured as to SW and to each Affiliated Debtor and remained so when this Court issued its Lift Stay Memorandum on January 28, 2011. The Debtors also argue that not only was Prudential undersecured as to SW until June 8, 2011, it is undersecured as to each Affiliated Debtor, adding that the determination, in the context of the Lift Stay Motion that Prudential was undersecured as to SW is res judicata on the issue.
The Debtors observe that Prudential has not submitted evidence with respect to the reasonableness of its fees and costs. They also contend that Prudential should not be allowed the default rate of interest in the sum of 14.5% per annum because, in their view, that rate is an unreasonable penalty, particularly as allowance of postpetition, preconfirmation interest at the contract rate of 9.5% could add as much as $16,209,512.78 to the principal balance, if
The Debtors assert that as of the petition date the amount owed to Prudential for principal and interest was $182,078,243, and that at the time of the hearings on the Lift Stay Motion, Prudential was owed $155,644,359, largely due to the payment of $17.3 million from the Letter of Credit. In the context of the Lift Stay Motion, the Court determined that the value of the Hotel was $65,600,000. In the context of the 506(b) Motion and confirmation of the Debtors' Plan, the parties have stipulated that the value of the Residences was $63,772,219, although in November of 2010 at the time of the trial on the Lift Stay Motion, the value of the Residences was $82,556,736.
Although the Debtors sold the Hotel, they assert that the amount set forth in the Asset Purchase Agreement filed with the Sale Motion on March 28, 2011, should not be determinative of the Hotel's value because there were material risks associated with closing the sale, as well as hold backs and adjustments. Prudential was paid $83,322,017 in net sale proceeds on June 8, 2011, the date the sale of the Hotel and other assets closed, reducing the balance of Prudential's loan to $55,834,959, exclusive of postpetition interest. The Debtors maintain that as of the date of the confirmation hearing on June 24, 2011, Prudential was owed $53,537,825 excluding postpetition, preconfirmation interest and costs.
The Debtors object to consideration of the value of Prudential's collateral in the aggregate and assert that given the stipulated value of the collateral of each individual Debtor, Prudential was undersecured until June 8, 2011, the date when the Hotel sale closed and the stipulated value of the Residences was $66,069,053 with respect to SW and is still undersecured with respect to remaining Debtors. They argue that Prudential cannot aggregate the value of all of the Debtors' assets to establish an entitlement to postpetition interest. Emphasizing that SW is the primary obligor and the Affiliated Debtors are guarantors who have secured their guarantees with mortgages or other pledged assets, the Debtors argue that Prudential was undersecured prior to the Hotel sale on June 8, 2011 and should be bound by its earlier contention that it was undersecured. The Debtors also maintain that Prudential was undersecured with respect to the Affiliated Debtors whose assets on an individual basis were and are worth less than the total amount due to Prudential.
The Debtors object to the 14.5% default rate of interest claimed by Prudential because it is five points above the non-default rate set forth in the Construction Loan Agreement and because Prudential failed to submit any "evidence that the default rate of interest was reasonably related to the anticipated costs and damages expected to be incurred by Prudential in the event that the Debtors defaulted under the
Not only do the Debtors contend that the default interest rate is unreasonable, they contend that payment of default interest is inequitable because Prudential received enhancement of its collateral and received substantial proceeds from the sales of the Hotel and Residences during the pendency of the Chapter 11 cases. In short, they maintain that payment of default interest would be a windfall to Prudential, particularly as Prudential has opposed virtually every motion made by the Debtors, creating market uncertainty, adversely affecting sales and making their reorganization efforts more difficult and expensive. In the Debtors' view, Prudential's allowed secured claim always has been adequately protected, and the Debtors have reduced its claim substantially during the pending Chapter 11 cases. The Debtors emphasize that because Prudential has not documented or itemized its fees and has not filed a fee application for attorneys' fees, it cannot obtain an award of fees.
The City opposes Prudential's request for accrual and payment of interest under 11 U.S.C. § 506(b) to the extent that Prudential seeks interest prior to the date of the closing of the sale of the Hotel. Moreover, the City objects to payment of any interest at the default rate, arguing that the default rate will penalize the City and severely compromise its ability to recover money lent to SW under a program to stimulate local real estate development. Noting that it pledged its present and future affordable housing and economic development revenue to fund the loan it made, it states that "[i]f Prudential is permitted to recover postpetition interest at the default rate of 14.5%, the City's standing to recover its affordable housing and economic development money will be severely compromised," adding that it would be particularly inequitable to allow interest at the default rate where the City's funds have been used and continue to be used to increase the value of Prudential's collateral.
Section 502(b) of the Bankruptcy Code sets forth the general rule applicable to bankruptcy cases that, subject to certain exceptions, "the court shall determine the amount of [a] claim ... as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that ... such claim is for unmatured interest." 11 U.S.C. § 502(b)(2). The rule, as noted, is subject to an important exception applicable to secured creditors. Section 506(b) provides:
11 U.S.C. § 506(b). The United States Supreme Court has made clear that an oversecured creditor is unqualifiedly entitled to postpetition interest on its oversecured claim. United States v. Ron Pair
The starting point for determining whether a secured creditor is entitled to interest is § 506(a), which governs the determination of secured status. Section 506(a) provides: in pertinent part:
11 U.S.C. § 506(a) (emphasis supplied).
A creditor is considered to be oversecured when the value of its collateral exceeds the amount of the creditor's allowed claim. See United States. v. Ron Pair Enters., Inc., 489 U.S. at 239, 109 S.Ct. 1026. Undersecured creditors are not entitled to accrual or payment of postpetition interest. See United Savs. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). In Timbers, the Court stated:
Id. at 372-73, 108 S.Ct. 626 (emphasis in original).
Section 506(a) further provides that the secured status of a creditor's claim must be determined in light of the purpose of the valuation and the proposed disposition or use of the property that is collateral. See In re Winthrop Old Farm Nurseries, Inc. v. New Bedford Inst. for Savs. (In re Winthrop Old Farm Nurseries, Inc.), 50 F.3d 72, 75-76 (1st Cir.1995) ("a court remains faithful to the dictates of § 506(a) by valuing the creditor's interest in the collateral in light of the proposed post-bankruptcy reality: no foreclosure sale and economic benefit for the debtor derived from the collateral equal to or greater than its fair market value. Our approach allows the bankruptcy court, using its informed discretion and applying historic principles of equity, to adopt in each case the valuation method that is fairest given the prevailing circumstances."). Consistent with the conclusions of the First Circuit in Winthrop Old Farm, and contrary to the Debtors' arguments, a finding that collateral has a certain value at the inception of a case is not binding on the court when it is conducting a valuation for another purpose later in the case. See Baybank-Middlesex v. Ralar Distribs., Inc., 69 F.3d 1200, 1203 (1st Cir.1995); In re Richardson, 97 B.R. 161, 162 (Bankr.W.D.N.Y.1989).
In order to determine secured status, the amount due to the secured creditor is compared to the value of its collateral. See Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Moreover, the application of § 506(a) is a multi-step process.
The provisions of both § 506(a) and (b) raise temporal issues. The timing of the comparison between the amount of debt and the value of the collateral required by § 506(a) and (b) is crucial in determining the allowed amount of the secured claim and whether the secured creditor is oversecured. The bankruptcy court must determine the appropriate date for assessing the value of collateral, as values may decrease, increase or fluctuate over time during the pendency of the case, as evidenced by what has transpired in the Debtors' cases where both the amount of debt and the value of the collateral have declined due to payments to Prudential and sales of the Hotel and Residences, respectively. Thus, the application of § 506(a) and (b) often presents difficulties in the context of determining a secured creditor's entitlement to postpetition interest during the pendency of the Chapter 11 case (often referred to as "pendency interest") where a debtor has made significant payments to the secured creditor and substantially paid down the balance owed to the creditor during the case due to sales of assets or the appreciation of the value of the secured creditor's collateral during the case.
The first issue that must be determined is when should a valuation occur for the purpose of determining a secured creditor's entitlement to postpetition interest and fees. Although in Chapter 7 and 13 cases, § 506(a) mandates that the amount of a claim secured by a security interest in personal property be determined as of the petition date, see 11 U.S.C. § 506(a)(2), the Bankruptcy Code does not reference any particular date for such determinations in Chapter 11 cases. The timing inquiry under § 506(b) in a Chapter 11 case is to be contrasted with the determination of the amount of a secured claim for the purposes of determining the propriety of a proposed treatment of a secured party's claim in a plan of reorganization under 11 U.S.C. § 1129(b)(2)(A)(i). Under the latter provision relating to approval of a cramdown plan, courts agree that the appropriate time for valuation of a secured claim is the date of the hearing on confirmation of a plan. See In re Blake, No. 07-12445-FJB, 2009 WL 4349787 at *5 (Bankr.D.Mass. Nov. 30, 2009); In re Landing Assocs., Ltd., 122 B.R. 288, 293 (Bankr.W.D.Tex.
There is considerable disagreement among courts on the issue of what is the appropriate date for determining entitlement to postpetition, preconfirmation interest and charges under § 506(b). Courts have adopted a variety of approaches. As noted by the Court in Toy King,
Toy King, 256 B.R. at 190. A number of courts fix the secured creditor's interest in property of the estate, namely the amount of its secured claim, at the petition date. See, e.g., Empresas Inabon, Inc. v. Gotay (In re Empresas Inabon, Inc.), 358 B.R. 487, 526 (Bankr.D.P.R.2006) ("A secured claim is `oversecured' to the extent that the value of the creditor's interest in the estate's interest in property is greater than the amount of the creditor's allowed prepetition claim."); In re Kalian, 169 B.R. 503 (Bankr.D.R.I.1994) (claim of undersecured creditor in Chapter 11 case does not increase by virtue of rental income); In re Reddington/Sunarrow Ltd. P'ship, 119 B.R. 809 (Bankr.D.N.M.1990) (secured claim was fixed as of petition date for purpose of determining adequate protection). Those courts rely on the Supreme Court's ruling in Timbers that an undersecured creditor whose collateral is not declining during the pendency of a bankruptcy case is not entitled to postpetition interest. "Any portion of postpetition interest and allowed fees, costs or charges that exceed the oversecured amount would not be allowed as part of the secured claim under § 506(b) but, rather, excess postpetition fees, costs and charges constitute an unsecured claim against the estate, and excess postpetition interest is subject to disallowance under § 502(b)(2)." See In re Empresas Inabon, Inc., 358 B.R. at 526 (citing Baybank Middlesex v. Ralar Distrbs., Inc., 69 F.3d 1200, 1202 (1st Cir. 1995)). Accordingly, under this approach if a secured claim is not fully secured on the petition date, the secured creditor will not be entitled to postpetition interest or fees under § 506(b).
The single valuation approach has been criticized as creating an incentive on the part of debtors to delay the case as long as possible. See In re Vermont Inv. Ltd. P'ship, 142 B.R. 571, 574 (Bankr.D.D.C. 1992). Other courts have commented that the single valuation approach is inconsistent with the Supreme Court's statement in Dewsnup that any increase in valuation during bankruptcy should accrue to the benefit of the mortgagee, not the debtor or unsecured creditors. See, e.g., In re Union
Utilizing another approach, referred to as the "dual valuation" approach, several courts have determined secured status twice, once at the petition date and once at the hearing on confirmation of a plan of reorganization. See, e.g., In re Addison Props. Ltd. P'ship, 185 B.R. 766, 784 (Bankr.N.D.Ill.1995); In re Kennedy, 177 B.R. 967 (Bankr.S.D.Ala.1995). Those courts recognize that it is necessary to determine secured status through valuation at the outset for adequate protection purposes, and at confirmation for the purpose of determining treatment under the plan and reducing the amount of the secured claim by any payments made by the debtor. "If the collateral package at the time of confirmation exceeds the amount of the creditor's total prepetition claim, the creditor is entitled to interest and costs under Section 506(b) to the extent of the surplus." In re Addison Props. Ltd. P'ship, 185 B.R. at 784. Under the dual valuation approach an oversecured creditor's claim for postpetition interest, which is determined near the conclusion of the case, "must be denied to the extent that, together with the principal amount of the claim, it exceeds the value of the collateral... [o]r put another way, the oversecured creditor's allowed secured claim for postpetition interest is limited to the amount that a creditor was oversecured at the time of filing." See Orix Credit Alliance, Inc. v. Delta Resources, Inc. (In re Delta Resources, Inc.), 54 F.3d 722, 729 (11th Cir. 1995), cert. denied, 516 U.S. 980, 116 S.Ct. 488, 133 L.Ed.2d 415 (1995). The Eleventh Circuit in Delta Resources, recognized that it is not possible to determine postpetition interest until a time near the conclusion of the Chapter 11 case. Id.
Where collateral is sold during the pendency of a Chapter 11 case, a number of courts use the date of approval of a sale to determine when a claim is secured for § 506(b) purposes. See, e.g., Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 870 (4th Cir.1994). See also Takisaki v. Alpine Group, Inc. (In re Alpine Group, Inc.), 151 B.R. 931, 935-36 (9th Cir. BAP 1993). The Fourth Circuit in Dobbins, explained the approach, stating:
Dobbins, 35 F.3d at 870. Courts using the price obtained at an arm's-length sale to determine the amount of the allowed secured claim conclude that, if the secured party is undersecured at the time of the sale, it is not entitled to postpetition interest, even if it were oversecured at the time the case was commenced. They reason that payment of postpetition interest under those circumstances would be unfair to unsecured creditors. See In re Toy King Distribs., Inc., 256 B.R. at 191.
The leading decision in which the court adopted the flexible approach is T-H New Orleans Ltd. P'ship, 116 F.3d at 798. In a thorough and well-reasoned opinion, the court of appeals rejected the single valuation approach, and stated the following:
Id. (citations omitted).
In T-H New Orleans, the Fifth Circuit took specific note of the change in the secured party's status during the pendency of the case as the secured creditor's claim was being reduced by payments made
116 F.3d at 799. Finally, the Fifth Circuit rejected the secured creditor's argument that it was entitled to the postpetition interest that would have accrued during the entire postpetition, preconfirmation period on its claim since the petition date. Id. The court ruled that the amount of interest allowed under § 506(b), as explicated by the Supreme Court in Timbers, is limited to the amount of interest which, when added to the allowed claim, will not exceed the value of the collateral. In other words, an oversecured creditor's claim may include interest up to the value of the collateral. Id.
Following the reasoning of the Fifth Circuit in T-H New Orleans, the United States Bankruptcy Court for the Southern District of New York in In re Urban Communicators PCS Ltd. P'ship., 379 B.R. 232 (Bankr.S.D.N.Y.2008), aff'd in part, rev'd in part on other grounds, 394 B.R. 325 (S.D.N.Y.2008), considered whether a secured creditor was entitled to § 506(b) pendency interest where its secured claim was oversecured on the petition date, became undersecured thereafter due to depreciation during the case, and finally became oversecured again due to a sale of the collateral for a price sufficient to pay the secured claim in full. Adopting the flexible approach to fixing the date for determining a secured claim for § 506(b) purposes, the court was persuaded that, where a sale of collateral has occurred, the sale price is the value of the collateral. The court determined that despite the temporary decrease in value, the ultimate increase in collateral value entitled the secured creditor to earn postpetition interest on its oversecured claim. 379 B.R. at 245. The court reasoned:
Id. at 243 (footnote omitted). The court found that the creditor was entitled to pendency interest from the petition date based upon its determination that the creditor was oversecured as of the date of the sale of collateral, which it viewed as conclusive on the issue of valuation. Id. at 244.
Although the bankruptcy court's decision was reversed in part based upon its ruling with respect to its computation of the default interest rate, the court's decision was affirmed with respect to that part of its decision relating to the time for determining the creditor's secured status. The district court determined that, although there was a substantial period of time during the Chapter 11 case in which the secured creditor's collateral was worth less than its claim, based upon the sale price obtained for the collateral in good faith and at arm's length, the secured creditor had an oversecured claim and was entitled to receive postpetition interest. See Urban Communicators PCS Ltd. P'ship v. Gabriel Capital, L.P., 394 B.R. 325, 336-37 (S.D.N.Y.2008).
The decision of the United States Court of Appeals for the First Circuit in Baybank-Middlesex v. Ralar Distribs., Inc., 69 F.3d 1200 (1st Cir.1995), does not compel this Court to accept the argument made by the Debtors that this Court's prior finding with respect to collateral values and its ruling that Prudential was undersecured in the context of the Debtors' request to use cash collateral and adequate protection is binding in a later dispute. In Ralar Distribs., Inc., the secured creditor did not argue that collateral valuations made at an adequate protection hearing had no binding effect in the context of a valuation made for another purpose at a later time. The First Circuit refused to consider the valuation issue resulting in a change in values and payments as not squarely presented by the secured creditor. 69 F.3d at 1203 n. 5.
As referenced above, the creditor bears the burden of proving, by a preponderance of the evidence, that its claim is oversecured. See In re Jack Kline Co., Inc., 440 B.R. at 712. In short, it has the ultimate burden of proof of showing entitlement to postpetition interest and fees, including "proving a referenced agreement with the debtor or a state statute which allows the over-secured creditor to collect post-petition attorneys' fees." Id. at 732-33 (footnote omitted).
This Court adopts the view espoused by the majority of courts, in particular the decisions of the courts in T-H New Orleans and Urban Communicators, which have adopted the flexible approach as to the timing of the determination of secured status. This Court rejects the single valuation approach as unfair to the
Applying the principles set forth in decisions adopting the majority view to the facts of the present case, there are several options for the choice of dates that the Court could use to fix the secured status of Prudential's claim: 1) the petition date; 2) the date the Court determined Prudential's Lift Stay Motion, namely January 28, 2011; 3) the date that SW signed the Purchase and Sale Agreement with Razorbacks Owner LLC and filed its Sale Motion, namely March 28, 2011; 4) the date the Court granted the Sale Motion, namely May 24, 2011; 5) the date the sale to Razorbacks Owner LLC closed, namely June 8, 2011 or 6) the date of the confirmation hearing. Prudential argues that it is entitled to postpetition interest from the petition date, but it did not establish that it was a fully secured creditor at that time. Indeed, in litigating the Lift Stay Motion, it maintained that it was not fully secured.
The Court finds that June 8, 2011, the date of the closing of the sale, is the appropriate time for fixing Prudential's oversecured status. On that date, it was unequivocally established and beyond dispute that Prudential was an oversecured creditor. Prudential did not submit evidence of oversecured status at the commencement of the Debtors' cases, and there was no evidence substantiating the values utilized by the Debtors in their Schedules of Assets. The Court's decision with respect to the Lift Stay Motion was based upon expert testimony, not the operation of the market place in which a willing seller and willing buyer agreed to a purchase price. The filing of the Sale Motion and the Purchase and Sale Agreement with Razorbacks Owner LLC setting forth a sale price of $89.5 million on March 28, 2011 provided strong evidence that the appraised values ascribed to the Hotel by the expert appraisers engaged by the parties were conservative and that Prudential was oversecured by the assets of SW alone. Nevertheless, as the Debtors and the City argue, there were a variety of contingencies associated with the sale to Razorbacks Owner LLC which could have derailed the sale even after the Court approved the Sale Motion on May 24, 2011. Accordingly, the Court adopts the flexible approach and shall utilize the price obtained at an arm's length sale of the Debtors' Hotel as the best indicator of value for purposes of determining secured status, in conjunction with the stipulated value of the remaining Residences and other collateral. See Urban Communicators PCS Ltd. P'ship v. Gabriel Capital, L.P., 394 B.R. at 337; and Debtors' Exhibit 6.
As noted, subsequent events, including the Sale of the Hotel, which brought a price far in excess of the values ascribed to it by expert witnesses engaged by Prudential and the Debtors, and the ongoing sales of Residences, establish Prudential's oversecured status as of June 8, 2011. In view of the evidence and the decisions recognizing that the actual sale price is the best indicator of value, the Court finds that Prudential is entitled to postpetition interest during the pendency of this case, commencing on June 8, 2011.
The Court unequivocally rejects the argument made by the Debtors that each Affiliated Debtor's assets and liabilities, including the debt owed to Prudential, must be compared on a piecemeal basis for the purpose of determining whether Prudential has a fully secured claim, particularly in view of the provisions of its Plan.
"For purposes of determining the value of [a creditor's] security ... under Code § 506(a), ... the Court is solely concerned with property in which the debtors have an interest." In re Fiberglass Indus., Inc., 74 B.R. 738, 740 (Bankr. N.D.N.Y.1987) (aggregating collateral of debtors who operated as an "integrated entity," but excluding collateral pledge by non-debtors). This follows because § 506(a) refers to "a lien on property in which the estate has an interest." See Assocs. Commercial Corp. v. Rash, 520 U.S. at 961, 117 S.Ct. 1879. Thus, the determination of Prudential's status as an oversecured (or undersecured) creditor must be made aggregating the collateral of all the Debtors—SW and the Affiliated Debtors. Such a determination is consistent with the Debtors' merger for purposes of Plan payments on the Effective Date "pursuant to Section 1123(a)(5)(C) of the Bankruptcy Code and the Confirmation Order" set forth in paragraph 5.8 of the Plan.
Section 506(b) provides that a fully secured creditor may be allowed "interest on such claim, and any reasonable fees, costs or charges provided for under the agreement or State Statute under which such claim arose." 11 U.S.C. § 506(b) (emphasis added). Recovery of postpetition interest is unqualified if a secured creditor is oversecured. The United States Court of Appeals for the Second Circuit in Key Bank Nat'l Assoc. v. Milham (In re Milham), 141 F.3d 420 (2d Cir.1998), cert. denied, 525 U.S. 872, 119 S.Ct. 169, 142 L.Ed.2d 138 (1998), explained:
Id. at 423. Recovery of fees, costs, and charges, however, is allowed only if they are reasonable, and provided for in the agreement under which the claim arose. U.S. v. Ron Pair Enterprises, 489 U.S. at 241, 109 S.Ct. 1026.
Most courts hold that entitlement to default interest is a matter of federal law. See In re Route One West Windsor Ltd. P'ship, 225 B.R. 76, 86 (Bankr.D.N.J. 1998); In re Consol. Properties Ltd. P'ship, 152 B.R. 452, 456 (Bankr.D.Md. 1993); but see 201 Forest Street LLC v. LBM Fin. LLC (In re 201 Forest Street LLC), 409 B.R. 543, 565 (Bankr.D.Mass. 2009). In Forest Street, the court, citing Massachusetts cases, stated "Massachusetts law examines a default interest rate to ascertain whether it is a permissible liquidated damages clause or an unenforceable penalty." 409 B.R. at 565 (citing TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422, 430, 844 N.E.2d 1085, 1092 (Mass.2006), and De Cordova v. Weeks, 246 Mass. 100, 104-05, 140 N.E. 269, 270-71 (1923)). This Court disagrees with the decision in Forest Street, which also placed the burden on the debtors to prove the unenforceability of default interest rates of 20% and 25% in two notes executed by the debtors. Id. This Court agrees with the decision in Route One West, in which the court observed:
225 B.R. at 86.
Although courts disagree on whether a creditor is entitled to interest at the default rate provided for in a loan agreement, the majority of courts has concluded that where a debtor is in default in the payment of a loan owed to an oversecured creditor, there is a presumption that postpetition interest should be computed at the default rate provided for in the applicable agreement. See The Southland Corp. v. Toronto-Dominion (In re Southland Corp.), 160 F.3d 1054, 1059-60 (5th Cir.1998) (citing In re Terry Ltd. P'ship, 27 F.3d 241, 243-44 (7th Cir.1994), cert. denied, Invex Holdings, N.V. v. Equitable Life Ins. Co. of Iowa, 513 U.S. 948, 115 S.Ct. 360, 130 L.Ed.2d 313 (1994)); see also Riley v. Tencara, LLC (In re Wolverine Proctor & Schwartz), 449 B.R. 1, 5 (Bankr.D.Mass.2011).
General Growth Props., Inc., 2011 WL 2974305 at *4 (citations omitted). See also In re Jack Kline Co., Inc., 440 B.R. 712, 745 (Bankr.S.D.Tex.2010);
In the present case, the Court finds that the contractual default interest
Prudential introduced unrebutted evidence through the testimony of Ms. Mulford, that default rates of interest in loans of the type made and received by Prudential contain default rates of interest that are consistent with the default rate set forth in the Construction Loan Agreement. Thus, the Court concludes that a default rate which is 5% higher than the non-default contract rate is neither a penalty nor inequitable as the Debtors and the City assert. Moreover, the Court rejects the Debtors' argument that the 5% spread between the non-default and the default rates of interest is more than twice the spread that courts typically find reasonable. For example, in Urban Communicators PCS Ltd. P'ship v. Gabriel Capital, L.P., 394 B.R. 325 (S.D.N.Y.2008), the district court reversed the bankruptcy court's decision to reduce an award of interest to a twenty-five percent simple interest equivalent (from thirty-eight percent) in order to compensate the debtors for their efforts to protect their interests in licenses. The district court stated: "it is not inequitable to cut down the interest of Debtors' shareholders by interest payments at a default rate to which Debtors contractually agreed." 394 B.R. at 340. The court, citing Ruskin v. Griffiths, 269 F.2d 827 (2nd Cir.1959), and In re Int'l Hydro-Electric Sys., 101 F.Supp. 222 (D.Mass. 1951), added:
Urban Communicators PCS, 394 B.R. at 340 (quoting Ruskin, 269 F.2d. at 832).
The Debtors have not shown any reason for avoiding the contractual default rate of interest. Based on Ms. Mulford's testimony, the Court finds that the default rate of interest is not a penalty as loans made and obtained by Prudential had similar rates. Allowance of interest at the default rate will not impair the Debtors' fresh start because under their Plan the Debtors are paying all creditors in full in a relatively short period of time. Although the Debtors have rapidly paid down the principal amount owed to Prudential and introduced evidence at the confirmation hearing that they will have in excess of $20,000,000 in cash, plus $15,000,000 in other assets upon completion of their Plan, those factors are not relevant to a decision on whether the default rate of interest is appropriate, but rather are more relevant to the amount to be paid on account of postconfirmation interest for a restructured loan. The present
In its 506(b) Motion, Prudential seeks a determination that it is entitled to apply the postpetition payments it has received from the Debtors (in the approximate sum of $100,000,000) first to interest and next to its fees and costs. Prudential references $750,000 in estimated fees in its Proposed Findings of Fact, but it is unclear whether those are attorneys' fees that were incurred prepetition or postpetition. Prudential's proofs of claim are deficient in that they have no accounting of the amount due for any attorneys' fees or other fees and charges. Prudential has not submitted an application for fees under Fed. R. Bankr.P. 2016 and M.L.B.R. 2016-1(a).
Section 506(b) provides that an oversecured creditor may recover its reasonable fees as provided for in the applicable agreement or state statute under which the claim arose. In order for fees, costs, or charges to be recoverable under § 506(b), the secured creditor must show that those charges arose under the agreement giving rise to the claim and that the fees, costs, or charges are reasonable. See In re 1095 Commonwealth Corp., 236 B.R. 530 (D.Mass.1999) (adding that "[t]he weight of authority is that only federal law governs the enforcement of attorneys' fees provisions in connection with secured claims in bankruptcy, without regard to potentially contrary state law"). A creditor seeking fees, costs or charges under § 506(b) has the burden of proof on each of the requirements for recovery, and with respect to attorneys' fees, it must provide supporting documentation that the fees are authorized by the agreement and were necessary and reasonable. See In re Woods Auto Gallery, Inc., 379 B.R. 875, 885 (Bankr.W.D.Mo.2007).
The United States Court of Appeals for the First Circuit, in Gencarelli v. UPS Capital Business Credit (In re Gencarelli), 501 F.3d 1 (1st Cir.2007), explained the relationship between § 506(b) and § 502. It stated:
Gencarelli, 501 F.3d at 5-6. The First Circuit added: "once a claim for fees is found to be allowable under section 502, it then must be assessed for reasonableness
In its post-filing brief, Prudential has not indicated the specific provision(s) in the Note and Mortgage that give rise to entitlement to attorneys' fees and other fees and charges. The Court's review of the Construction Loan Agreement provides for the payment of reasonable attorneys' fees, but Prudential did not introduce the Promissory Note or Mortgage into evidence. The Guarantees also provide that the Affiliated Debtors, with the exceptions of SW and FSC, guarantee payment of Prudential's attorneys' fees and expenses for services in enforcing FSC's Guaranty. Because the Debtors have proposed to pay Prudential's Allowed Secured Claim and all unsecured claims in full, it would appear that Prudential is entitled to its attorneys' fee as part of its claim if those fees are provided for in the Note and Mortgage and had they been itemized in conjunction with the hearing on its 506(b) Motion.
Prudential has not provided any statement or itemization of its fees or costs, other than a reference in its Proposed Findings to "$750,000 of additional fees and expenses after May 31, 2011." As noted, Prudential has not filed an application for compensation in accordance with Fed. R. Bankr.P. 2016(a) as required by M.L.B.R. 2016-1 as a predicate for allowance of attorneys' fees under § 506(b). In the absence of compliance with this rule, this Court does not have sufficient information to award or allocate fees among the Affiliated Debtors according to the Guarantees.
The Construction Loan Agreement contains a provision for the payment of late charges. Prudential's submissions are also deficient with respect to late charges as it has not provided any accounting or itemization of any late charges. Thus, the Court cannot determine the reasonableness of those charges, particularly in view of the allowance of interest at the default rate from June 28, 2011.
For the foregoing reasons, the Court grants in part and denies in part Prudential's 506(b) motion. The Court shall allow postpetition interest on Prudential's secured claim at the default rate from June 8, 2011, pending a further order liquidating the amount of Prudential's claim. The Court denies Prudential's request for fees, costs and other charges.
Additionally, in its proposed findings, it indicated that its prepetition claim was $182,892,659, reduced by $17.3 million, resulting in a claim of $165,592,659. There is no explanation for the $5.6 million dollar difference between its asserted claim as of May 31, 2011 and its claim at the outset of the Debtors' cases, i.e., the difference between $171,212,200 and $165,592,659.
----------------------------------------------------------------------------------------- Affiliated Debtor Collateral Value (6/23/11) Source ----------------------------------------------------------------------------------------- General Trading $1,399,242 Trial Stipulation ----------------------------------------------------------------------------------------- Sawyer Corp. [FSC] $6,141,870 Trial Stipulation ----------------------------------------------------------------------------------------- Auto Sales $ 230,308 Trial Stipulation ----------------------------------------------------------------------------------------- General Land $2,400,000 Trial Stipulation ----------------------------------------------------------------------------------------- 131 Arlington $1,850,000 Trial Stipulation ----------------------------------------------------------------------------------------- 30-32 Oliver $1,160,000 Trial Stipulation ----------------------------------------------------------------------------------------- 100 Stuart $ -0- See Kravetz Affidavit ¶ 11 -----------------------------------------------------------------------------------------
489 U.S. at 241.
520 U.S. at 961.
In re Wolverine Proctor & Schwartz, 449 B.R. at 5-6 (footnote omitted).
Id. at 745 (citations omitted).
