STAHL, Circuit Judge.
This appeal presents multiple issues arising from a heavily contested Chapter 11 bankruptcy proceeding. Stated simply, a secured creditor appealed to the Bankruptcy Appellate Panel for the First Circuit ("the BAP") from the bankruptcy court's orders determining its entitlement to postpetition interest (and thus the total amount of its claim) and confirming the debtors' Chapter 11 plan. The BAP reversed in part, significantly increasing the secured creditor's entitlement to post-petition
In 2007, Debtor-Appellant SW Boston Hotel Venture, LLC, ("SW Boston") sought financing to develop a mixed-used property that would become the W Hotel and Residences ("the W") in Boston's theater district. In January of 2008, after a previous lender withdrew its financing commitment, the Prudential Insurance Company of America ("Prudential") agreed to provide up to $192.2 million in financing ("the Prudential Loan") pursuant to a construction loan agreement ("the CLA"). Prudential took a mortgage and first priority security interest in SW Boston's real and personal property and any proceeds thereof. It also required additional collateral and credit support in the form of certain real estate and other property owned by the remaining Debtors-Appellants ("Affiliated Debtors"), as well as a $17.3 million letter of credit. Sovereign Bank issued the letter of credit based on the credit provided by two non-debtor affiliates of SW Boston.
The W project consists of a 235-room hotel, 123 luxury condominium units, an underground parking garage, a restaurant, a spa and related retail space, and a bar. The hotel was to operate under the W Hotels brand of Starwood Hotels and Resorts Worldwide, Inc. ("Starwood"), with Starwood managing the operations.
The W opened on schedule in October of 2009, but, due in large part to the ongoing recession, obtained substantially fewer commitments to purchase condominiums than the CLA required. In addition, the restaurant, spa, and bar — all required to operate under the W Hotel flag — had not been completed, and the Debtors lacked sufficient funding to complete them. In December 2009, after Prudential declined to provide additional funds, SW Boston and the City entered into a loan agreement ("the City Loan"), with the City agreeing to provide $10.5 million in additional funding.
On April 28, 2010, after SW Boston failed to make a mandatory quarterly payment
The filing of the bankruptcy petitions resulted in imposition of an automatic stay as to all creditors' efforts to enforce their liens. See 11 U.S.C. § 362(a). However, § 362(d) requires the court to grant relief from the stay unless certain creditor safeguards are met. See id. § 362(d)(1).
On March 28, 2011, SW Boston filed a motion for court approval of a purchase and sale agreement ("the P & S") for the sale of the hotel and garage to an unrelated third party for $89.5 million. The bankruptcy court granted the motion on May 24. But, before the sale could close, SW Boston was required to resolve several outstanding issues on which the P & S was contingent. For example, the P & S was conditioned on the assignment of certain construction warranties from the W's construction manager, Bovis Lend-Lease
On March 31, 2011, three days after filing the hotel sale motion, the Debtors filed their reorganization plan. The plan need not be described in great detail, but, in broad strokes, it called for Prudential to be paid in full by March of 2014 if the hotel sale closed, or after a more extended period if it did not. The plan contemplated that Prudential would receive post-effective-date interest of 4.25% per annum, but it made no provision for post-petition, pre-effective-date interest. Prudential objected to confirmation of the plan on multiple grounds.
Throughout the pendency of the bankruptcy case, SW Boston continued construction. After SW Boston resolved various issues with contractors who had suspended their work because of the bankruptcy filings, the spa was completed and opened on August 18, 2010. That September, after two work interruptions caused by a change in the building code and the state's appeal of a variance granted to SW Boston, SW Boston received all necessary approvals to recommence construction of the bar. Multiple open construction items on the W were completed. SW Boston continued to sell condominiums, paying over the proceeds (less certain deductions) to Prudential.
On April 15, 2011, Prudential moved for a determination that it was oversecured and therefore entitled to post-petition interest under 11 U.S.C. § 506(b).
The bankruptcy court held a three-day combined trial addressing Prudential's § 506(b) motion and the Debtors' proposed plan. On October 4, 2011, it issued an order granting Prudential post-petition interest at 14.5% per annum, commencing on
On November 14 and 16, respectively, the bankruptcy court issued an opinion finding that the plan (with some modifications) met all confirmation requirements and an order confirming the modified plan over Prudential's objections. On November 17, Prudential filed a notice of appeal of the confirmation decision to the BAP, along with a motion to stay the confirmation order pending appeal. The bankruptcy court denied the stay motion on November 21, and, on November 30, so did the BAP when Prudential sought the same relief there. The plan became effective on December 1.
While the parties were briefing the appeals, the Debtors moved to dismiss Prudential's appeals as equitably moot. The BAP found that, although the plan had been substantially consummated, the appeals were not equitably moot because Prudential could still be afforded relief without harming innocent third parties or unraveling the reorganization (especially because Prudential represented its willingness to accept alternative forms of relief that would not require such unraveling).
As to the § 506(b) appeal, the BAP: (1) held that Prudential was entitled to postpetition interest from the petition date, reversing the bankruptcy court's finding that Prudential had only become oversecured on the hotel sale date; (2) affirmed the bankruptcy court's determination that the contractual default rate of interest (14.5%) applied; and (3) reversed the bankruptcy court's ruling that the interest was not compounding. As to the confirmation order appeal, without addressing the confirmability of the plan, the BAP vacated and remanded the confirmation order so that the plan could be amended to accommodate Prudential's now-increased claim. The Debtors and the City
Throughout these proceedings, the Debtors have continued to sell W condominiums and have since paid Prudential the full amount due under the originally confirmed plan. The City, in contrast, has not received all the payments owed to it under the plan, which became effective on December 1, 2011. The Debtors, we were informed at oral argument, have also stopped making installment payments owed to other creditors under that plan.
According no special deference to the BAP, we focus instead on the bankruptcy court's decisions, reviewing conclusions of law de novo and findings of fact for clear error. Stornawaye Fin. Corp. v. Hill (In re Hill), 562 F.3d 29, 32 (1st Cir.2009). The bankruptcy court's interpretation of the relevant statutes presents a question of law, while its application of those statutes to the facts of this case presents a mixed question of law and fact that we review for clear error unless its analysis was "infected by legal error." Winthrop Old Farm Nurseries, Inc. v. New Bedford Inst. for Sav. (In re Winthrop Old Farm Nurseries, Inc.), 50 F.3d 72, 73 (1st Cir.1995) (internal quotation marks omitted). Absent legal error, we will not reverse a factual finding under this "formidable standard," Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 69 (1st Cir. 2012), unless, "on the whole of the record, we form a strong, unyielding belief that a mistake has been made," Cumpiano v. Banco Santander P.R., 902 F.2d 148, 152 (1st Cir.1990). "If the bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety, we may not reverse." Goat Island S. Condo. Ass'n v. IDC Clambakes, Inc. (In re IDC Clambakes, Inc.), 727 F.3d 58, 64 (1st Cir. 2013) (alteration and internal quotation marks omitted).
The Debtors first appeal from the BAP's denial of their motions to dismiss Prudential's appeals as equitably moot. The doctrine of equitable mootness allows an appellate court to dismiss a bankruptcy appeal if "an unwarranted or repeated failure to request a stay enabled developments to evolve in reliance on the bankruptcy court order to the degree that their remediation has become impracticable or impossible," Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 48 (1st Cir.1998), or if "the challenged bankruptcy court order has been implemented to the degree that meaningful appellate relief is no longer practicable even though the appellant may have sought a stay with all due diligence," id.
As a threshold issue,
In a careful and detailed analysis that we need not reproduce here, the BAP considered the relevant factors and concluded that, if Prudential prevailed on appeal, the bankruptcy court could fashion some form of practicable relief, even if only partial or alternative. We perceive no reason to dislodge this determination. We therefore turn to the substance of the bankruptcy court's orders.
As a general matter, unmatured interest is not allowed after the filing of a bankruptcy petition. 11 U.S.C. § 502(b)(2). However, Congress has created an exception to this rule in the case of "oversecured" creditors. See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 372-73, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988); Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 869 (4th Cir.1994). Two provisions of § 506 of the Bankruptcy Code govern the award of post-petition interest to an oversecured creditor. First, § 506(a) sets the amount of a creditor's allowed secured claim:
11 U.S.C. § 506(a)(1).
Id. § 506(b). Thus, if the collateral is worth more than the amount of the secured claim, the creditor is entitled to post-petition interest on its claim
The parties agree that Prudential was oversecured during at least part of the bankruptcy proceeding and therefore is entitled to some amount of post-petition interest, but they differ as to how to determine oversecured status, when Prudential became oversecured, and the applicable interest rate and type.
We review the bankruptcy court's interpretation of § 506 de novo, and its factual finding as to when Prudential became oversecured for clear error. See Hill, 562 F.3d at 32.
Although § 506(a) dictates how courts should determine secured status and collateral value, it does not specify the time as of which these determinations should be made.
Courts have split on the timing issue. Several have adopted a "single-valuation" approach, where the determination of oversecurity for § 506(b) purposes always occurs at a fixed point in time (generally either the petition date or the confirmation date). See, e.g., Orix Credit Alliance, Inc. v. Delta Res., Inc. (In re Delta Res., Inc.), 54 F.3d 722, 729 (11th Cir.1995) (per curiam) ("[T]he oversecured creditor's allowed secured claim for postpetition interest is limited to the amount that a creditor was oversecured at the time of filing."). Others have adopted a "flexible" approach, giving the bankruptcy court discretion to determine the appropriate measuring date based on the circumstances of the case. See, e.g., T-H New Orleans, 116 F.3d at 798 ("[F]or purposes of determining whether a creditor is entitled to accrue interest under § 506(b) in the circumstance where the collateral's value is increasing and/or the creditor's allowed claim has been or is being reduced by cash collateral payments, such that at some point in time prior to confirmation of the debtor's plan the creditor may become oversecured, valuation of the collateral and the creditor's claim should be flexible and not limited to a single point in time, such as the petition date or confirmation date."). The bankruptcy court provided a thorough review of the split in authority, see In re SW Hotel Venture, LLC, 460 B.R. 4, 27-31 (Bankr.D.Mass.2011), and we need not repeat it here.
The bankruptcy court and the BAP both adopted the flexible approach, although their applications of it differed. The bankruptcy court found that the hotel sale price provided the best evidence of the hotel's value as of the sale date, but concluded that the sale price was not reflective of its value at any earlier point in time due to the previously outstanding contingencies. The BAP agreed that the sale price was the best evidence of value, but concluded that the sale price established that Prudential was oversecured throughout the pendency of the bankruptcy proceedings.
The Debtors and the City urge us to uphold the bankruptcy court's application of the flexible approach in this case. Prudential's argument is two-pronged. Prudential urges us to adopt a single-valuation approach using the confirmation date as the measuring date, and to hold that, as a matter of law, its oversecurity at confirmation dictates that it receive post-petition interest from the petition date regardless of whether it was undersecured at any point prior to that date.
In a helpful amicus brief, the Mortgage Bankers Association ("Mortg. B.A.") argues that the timing of the valuation must, by statute, be tethered to the purpose for which the valuation is made, and that the single valuation approach is overly simplistic because it requires the same measuring date regardless of the purpose of the valuation. However, noting that an open-ended flexible approach could require potentially limitless redeterminations in cases of fluctuating value, it cautions that any rule must avoid serious practical consequences: if the flexible approach provides that a pre-confirmation valuation is not only relevant but also essential to determining creditors' secured status at confirmation, that may unduly burden creditors or, conversely, be used to harass debtors by encouraging aggressive action by creditors. We do not believe our resolution of this case raises those concerns.
We agree with the bankruptcy court and the BAP that, at least in the circumstances presented here, a bankruptcy court may, in its discretion, adopt a flexible approach.
We have previously recognized that the statutory directive to determine collateral's value "in light of the purpose of the valuation and of the proposed disposition or use of such property," § 506(a), affords bankruptcy courts flexibility in determining the appropriate valuation method, given the particular facts of the case at hand. Winthrop Old Farm, 50 F.3d at 73-74; see also In re Heritage Highgate, Inc., 679 F.3d 132, 141 (3d Cir.2012) ("[In the § 506(a) context], Congress envisioned a flexible approach to valuation whereby bankruptcy courts would choose the standard that best fits the circumstances of a particular case."). But we have not yet addressed whether this same flexibility extends to selecting a measuring date. Several considerations convince us that, in appropriate circumstances, it does.
First, neither § 506(b)'s language, nor its legislative history, nor the bankruptcy rules define the measuring date for purposes of post-petition interest, suggesting flexibility. See T-H New Orleans, 116 F.3d at 798. The language of § 506(a) also suggests that Congress intended bankruptcy courts to have flexibility. While § 506(a)(1) sets out a general rule that collateral value "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property," § 506(a)(2) creates an exception to the general rule:
§ 506(a)(2) (emphasis added). The fact that Congress mandated particular measuring dates in the exception without mandating a particular measuring date in the general rule suggests that it intended flexibility under § 506(a)(1). See Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) ("Where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.") (alteration and internal quotation
Second, the considerations that supported affording flexibility in selecting a valuation method in Winthrop Old Farm apply equally to selecting a valuation time. There, we noted that allowing bankruptcy courts to select the appropriate valuation method on a case-by-case basis "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." 50 F.3d at 75-76; see also Heritage Highgate, 679 F.3d at 142 n. 7 ("Like the appropriate measure of fair market value, the appropriate time as of which to value collateral may differ depending on the facts presented. As with the replacement valuation technique, bankruptcy courts are best situated to determine when is the appropriate time to value collateral in the first instance.") (citation omitted); T-H New Orleans, 116 F.3d at 798 (noting that a flexible standard "recognizes the discretionary nature of bankruptcy courts as courts of equity ... [and] the equitable nature of bankruptcy in seeking a balance between debtors and creditors (debtor's right to a fresh start versus the creditor's right to the value of its claim)").
Third, rather than yielding the fairest result, a rigid single-valuation approach guarantees an all-or-nothing result that hinges more on fortuity than reality. For example, if the petition date were the required measuring date, a creditor that first became oversecured even one day later would be allowed no post-petition interest, even though it was oversecured throughout almost the entire bankruptcy and even though it could receive substantial postpetition interest under a flexible approach. Conversely, if the confirmation date were the required measuring date, a creditor that first became oversecured just one day earlier would be allowed post-petition interest for the entirety of the bankruptcy proceeding (up to the amount of the equity cushion).
In support of its argument that the confirmation date must be the measuring date, Prudential notes that the collateral value must be calculated at confirmation because, by definition, the estate can only distribute what value the debtors actually have at that time. Thus, its entitlement to post-petition interest (or, more precisely, whether its receipt of post-petition interest to which it would otherwise be entitled will
For these reasons, we hold that, under the particular facts presented in this case, the bankruptcy court did not err in adopting a flexible approach for determining oversecured status.
The bankruptcy court determined that Prudential became oversecured as of the date the hotel sale closed and was entitled to post-petition interest from that date through the effective date. Although this is a factual determination to which the clear-error standard would normally apply, cf. Baybank-Middlesex, 69 F.3d at 1203 (reviewing for clear error a determination that the creditor was undersecured for adequate-protection purposes), Prudential argues that that standard is inappropriate here because the bankruptcy court's factual determination was infected by legal error, see Winthrop Old Farm, 50 F.3d at 73, in that the bankruptcy court wrongly elevated Prudential's burden of proof in establishing oversecurity. We find no such error.
The parties agree that, ultimately, the burden was on Prudential to show by a preponderance of the evidence that it was oversecured,
The bankruptcy court considered several possible measuring dates (the petition date, the date of the lift-stay decision, the date SW Boston signed the hotel P & S and filed its motion for approval of the sale, the date the court approved the sale motion, the hotel sale date, and the date of the confirmation hearing), and determined that the sale closing date was the earliest that Prudential had established oversecured status.
As for the petition date, the court noted that Prudential had submitted no evidence that it was oversecured at that time, and that it instead relied on the Debtors' schedules of assets, which indicated that the value of Prudential's collateral, in the aggregate, was substantially more than its total pre-petition claim. As Prudential points out, these schedules were completed under penalty of perjury. But, as the Debtors point out, the schedules also specifically indicated that the listed values were book values that may not reflect the fair market value of the Debtors' interest in the relevant property. See Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 36 (2d Cir.1996) ("[B]ook values are not ordinarily an accurate reflection of the market value of an asset."). The bankruptcy court did not rely on these values because they were not substantiated by any evidence. We perceive no error, clear or otherwise.
As for the lift-stay decision, the Debtors correctly note that the main issue there was whether the W was necessary to an effective reorganization. The Bankruptcy
11 U.S.C. § 362(d)(2).
Pointing to the bankruptcy court's finding that, although Prudential was undersecured as to SW Boston alone, it was oversecured by approximately $19 million when all of the Debtors' collateral was considered in the aggregate, Prudential argues that, under Baybank-Middlesex, the bankruptcy court's subsequent "dismiss[al]" or "disregard" of this earlier finding is "a practice not countenanced" in this circuit. Prudential misstates both the facts of the case and the relevant law.
First, the bankruptcy court did not dismiss or disregard its earlier findings; instead, it surveyed the entire lifespan of the case, incorporating subsequent developments into its analysis of the earlier valuation, and determined that Prudential had not met its burden of showing oversecurity for § 506(b) purposes at any time before the sale date. The bankruptcy court did not simply ignore its earlier valuation; it explicitly considered its earlier valuation and explained in detail why that valuation did not control. And, as we will discuss below, that determination was not clearly erroneous.
Second, while Baybank-Middlesex noted that a valuation made at an adequate-protection hearing was not dicta, as the valuation was a factual finding that constituted a "logical step in making an adequate protection determination," 69 F.3d at 1203, it plainly does not require an earlier valuation for one purpose to be binding for some other purpose. Nor would such a requirement square with the statutory directive that collateral's value
Prudential next argues that the sale price is the best evidence of the hotel's value, and that that price necessarily established that it was oversecured throughout the bankruptcy proceedings. Courts have routinely held that "so long as the sale price is fair and is the result of an arm's-length transaction, courts should use the sale price, not some earlier hypothetical valuation, to determine whether a creditor is oversecured and thus entitled to postpetition interest under § 506(b)." Dobbins, 35 F.3d at 870; see also Takisaki v. Alpine Grp., Inc. (In re Alpine Grp., Inc.), 151 B.R. 931, 935-36 (9th Cir. BAP 1993). We have no quibble with the proposition that an arm's-length sale generally provides better evidence of value at a given time than does an appraisal of its value at that same time. But that does not mean that a sale price at one time necessarily establishes the collateral's value at some other time. Where the value of collateral is changing, a one-size-fits-all valuation poorly reflects that reality.
Here, the bankruptcy court did note that the price obtained at the arm's-length sale provided the best indicator of the hotel's value, and it acknowledged that the price ($89.5 million) strongly suggested that the appraised values relied upon at the lift-stay hearing ($55 million and $65.6 million) were conservative, supporting Prudential's argument that it was oversecured at least as of the appraisal dates. However, the bankruptcy court went on to note that several contingencies "could have derailed the sale," even after it granted the hotel sale motion (about two weeks before the actual sale). It held that it was only when the last improvements were completed, all outstanding contingencies were resolved (including resolving issues with the Starwood contract, a contingency that Prudential itself described as "an essential element to the success of the [W]"), and the sale actually closed that the sale price accurately reflected its value. The court thus found that Prudential had not shown
The BAP held that the bankruptcy court erred in not applying the sale price to the entirety of the bankruptcy proceeding based on its view of the reasoning in Urban Communicators, 379 B.R. at 243-44. We are unpersuaded that the reasoning in Urban Communicators leads to the outcome Prudential seeks. There, the secured creditor loaned funds to the debtors for the purchase of radio wave spectrum licenses. During a subsequent bankruptcy, the Federal Communications Commission cancelled the debtors' licenses — unlawfully so, as litigation between the FCC and a different license-holder would later make clear. Id. at 238. After the FCC "effectively und[id] its cancellation or attempted cancellation" of the debtors' licenses, id. at 239, the debtors sold them, with the sale price establishing that the creditor was oversecured, id. at 239-240. However, the debtors argued that, at least during the five-year cancellation period, the collateral package was worth significantly less and the creditor was undersecured. Id. at 204-41. The court disagreed, noting that, in addition to the licenses themselves, the creditor's lien attached to proceeds from the sale of the licenses, the debtors' litigation rights against the FCC, and capital stock of the debtors' subsidiaries. Id. at 244. The court determined that the sale price actually did reflect the collateral's earlier value, as the debtors had "maintained litigation rights against the FCC for this wrongful cancellation, whose value is now apparent." Id. Thus, even though it may have been uncertain for a time whether the licenses could eventually be sold and the proceeds turned over to the creditor, subsequent events made clear that the collateral package-including litigation rights — always was sufficient to render the creditor oversecured. This is plainly distinguishable from the situation here, where the actual value of the hotel increased over time. To the extent that one can read Urban Communicators to hold that a sale price automatically and always relates back to the petition date regardless of intervening events — and we doubt very much that it can be so read, see id. at 243 (noting that, even under the flexible approach, courts should generally use the sale price as "the best available evidence of collateral value except where the circumstances dictate a different approach") (emphasis added) — we disagree with it.
In addition, in rejecting the bankruptcy court's factual determination, the BAP utterly ignored both the relevant clear-error standard and the bankruptcy court's reliance on the improvements and contingencies that, in its estimation, rendered the eventual sale price a poor indicator of earlier value.
Having established that the bankruptcy court did not clearly err in determining
Section 506(b) does not specify how to compute postpetition interest. The Supreme Court, construing § 506(b), has held that the phrase "provided for under the agreement or State statute under which such claim arose" modifies only "reasonable fees, costs, or charges," and not "interest on such claim." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Thus, the statutory language does not dictate that bankruptcy courts look to the applicable contract provisions, if any, when computing postpetition interest. However, courts are largely in agreement that, although the "appropriate rate of pendency interest is ... within the limited discretion of the court," Key Bank Nat'l Ass'n v. Milham (In re Milham), 141 F.3d 420, 423 (2d Cir.1998), where the parties have contractually agreed to interest terms, those terms should presumptively apply so long as they are enforceable under state law and equitable considerations do not dictate otherwise, see, e.g., Gen. Electric Capital Corp. v. Future Media Prods. Inc., 536 F.3d 969, 974 (9th Cir.2008) (adopting the rule "adopted by the majority of federal courts" that the "bankruptcy court should apply a presumption of allowability for the contracted for default rate, provided that the rate is not unenforceable under applicable nonbankruptcy law") (internal quotation marks omitted); In re Terry Ltd. P'ship, 27 F.3d 241, 243 (7th Cir.1994) ("What emerges from the post-Ron Pair decisions is a presumption in favor of the contract rate subject to rebuttal based upon equitable considerations."); 4 Collier on Bankruptcy ¶ 506.04[2][b] (stating that interest, including allowance of contractual default rate and compounding, should be determined by reference to applicable nonbankruptcy law). As the General Electric Capital court noted, enforcing the contract is consistent with the general premise that "creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code." 536 F.3d at 973 (alteration omitted) (quoting Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Electric Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007)) (internal quotation marks omitted); see also In re Lapiana, 909 F.2d 221, 223 (7th Cir.1990) ("[B]ankruptcy, despite its equity pedigree, is a procedure for enforcing pre-bankruptcy entitlements under specified terms and conditions rather than a flight of redistributive fancy....").
The bankruptcy court and the BAP both held that Prudential was entitled to interest at 14.5%, the default rate specified in the CLA.
Under Massachusetts law, the court must determine whether the default interest provision constitutes allowable liquidated damages or an unenforceable penalty. See OneUnited Bank v. Charles St. African Methodist Episcopal Church of Bos., 501 B.R. 1, 10 (D.Mass.2013). The party challenging a liquidated damages provision bears the burden of showing that it constitutes an unenforceable penalty, and all reasonable doubts are resolved in favor of enforcement. See NPS, LLC v. Minihane, 451 Mass. 417, 886 N.E.2d 670, 673 (2008). A liquidated damages provision will be enforced provided, "first, that at the time of contracting the actual damages flowing from a breach were difficult to ascertain; and second, that the sum agreed on as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach." Id. (internal quotation marks omitted). It was the Debtors' "burden to show that the amount of liquidated damages [was] unreasonably and grossly disproportionate to the real damages from a breach or unconscionably excessive." Id. at 421, 886 N.E.2d 670 (internal quotation marks omitted).
Here, the Debtors established only that Joanna Mulford, a Vice President of Prudential, did not personally engage in any analysis of Prudential's anticipated damages in the event of a breach, nor was she aware of whether anyone else had done so. If the burden had been on Prudential to establish the enforceability of default interest, perhaps this analysis would come out differently. As it is, however, this partial admission does not discharge the Debtors' burden to show that the default rate was not reasonably related to anticipated damages and, in fact, was so grossly disproportionate to anticipated damages or otherwise unconscionable as to be unenforceable under Massachusetts law.
We also find no error in the bankruptcy court's analysis under federal equitable principles. After discussing and applying factors that bankruptcy courts have used in balancing the equities, see In re Gen. Growth Props., Inc., No. 09-11977, 2011 WL 2974305, at *4 (Bankr.S.D.N.Y. July 20, 2011) (setting out four-factor test); In re Jack Kline Co., 440 B.R. 712, 745-46 (Bankr.S.D.Tex.2010) (setting out seven-factor test, plus additional catch-all factor), the court determined that application of the default rate would not be inequitable. Specifically, the court noted that: (1) other creditors would not be harmed because the plan contemplated payment of all creditors in full; (2) although Prudential was quite litigious, "raising multiple objections to virtually every motion made by the Debtors," SW Hotel Venture, 460 B.R. at 36, its conduct did not rise to the level of obstruction of the bankruptcy process or other misconduct; (3) the Debtors did not rebut Prudential's evidence that the CLA's default rate was consistent with default rates of similar loans in the market, including where Prudential was either the lender or
Prudential argues that it is entitled to accrue postpetition interest at the default rate, compounding monthly. The bankruptcy court held that it was not entitled to compound interest, and the BAP reversed.
As noted above, the CLA defines "Applicable Interest Rate" as "9.50% per annum, compounding monthly," and the "Default Rate" as "a rate per annum equal to the lesser of (i) the maximum rate permitted by applicable law, or (ii) five percent (5%) above the Applicable Interest Rate." The bankruptcy court, however, erroneously stated that the CLA "does not provide for compound interest either at the default rate or the non-default rate of interest." Noting that compound interest is disfavored by Massachusetts law absent an express agreement to the contrary, see, e.g., Inhabitants of Tisbury v. Vineyard Haven Water Co., 193 Mass. 196, 79 N.E. 256, 257 (1906), the court ruled that Prudential was not entitled to compound interest.
Recognizing that the above-quoted provision does expressly call for monthly compounding of interest, the Debtors seek to introduce ambiguity by pointing to other provisions of the contract that appear to imply that interest will be simple. We need not delve into the ambiguity question because we find that Prudential cannot claim entitlement to compounding where it — whether by inadvertence or in an attempt to sandbag the Debtors and mislead the bankruptcy court we cannot say — did not seek compound interest until after the bankruptcy court granted it post-petition interest at the default rate running from
The bankruptcy court granted Prudential post-petition interest from the hotel sale date at 14.5% based upon its consideration of the equities of the situation in light of what Prudential purported to request. Only after securing that order did Prudential assert an entitlement to compound interest.
For all of these reasons, we affirm the bankruptcy court's holding that Prudential is entitled to post-petition interest accruing from the hotel sale date at the default rate of 14.5% without compounding, and reverse the BAP's § 506(b) order to the extent it conflicts.
Prudential moved to dismiss the City's and the Debtors' appeals from the BAP's
The BAP noted that its § 506(b) order resulted in a large increase in the amount of Prudential's claim, and thus affected the evaluation of the plan under 11 U.S.C. § 1129. On that basis, the BAP vacated the confirmation order to "afford the Debtors an opportunity to amend the [p]lan's terms to account for the increased amount of Prudential's claim and the resulting pay out to Prudential and/or for the bankruptcy court to fashion alternative forms of relief for Prudential that would not unravel the reorganization." In re SW Bos. Hotel Venture, LLC, No. 11-087, 2012 WL 4513869, at *3 (1st Cir. BAP Oct. 1, 2012). Prudential argues that, because this order required significant further proceedings in the bankruptcy court, it cannot have been a final order subject to this court's jurisdiction.
"[B]ecause bankruptcy cases typically involve numerous controversies bearing only a slight relationship to each other, `finality' is given a flexible interpretation in bankruptcy." Bourne v. Northwood Props., LLC (In re Northwood Props., LLC). 509 F.3d 15, 21 (1st Cir. 2007) (internal quotation marks omitted). A bankruptcy court order may be final even if does not resolve all issues in the case, "but it must finally dispose of all the issues pertaining to a discrete dispute within the larger proceeding." Perry v. First Citizens Fed. Credit Union (In re Perry), 391 F.3d 282, 285 (1st Cir.2004). In this circuit, "when a district court remands a matter to the bankruptcy court for significant further proceedings, there is no final order for purposes of § 158(d) and the court of appeals lacks jurisdiction." In re Gould & Eberhardt Gear Mach. Corp., 852 F.2d 26, 29 (1st Cir.1988). However, "[w]hen a remand leaves only ministerial proceedings, for example, computation of amounts according to established formulae, then the remand may be considered final." Id. There is no question that the bankruptcy court's § 506(b) and confirmation orders were final, nor is there any question that the BAP's § 506(b) order was final.
We are presented here with an unusual case, where the BAP's remand order did contemplate significant proceedings in the bankruptcy court, but did so based solely on its erroneous rulings as to the measuring date and the compounding of interest. In light of our reinstatement of the bankruptcy court's § 506(b) order, the entire basis of the remand has been eviscerated, and effectuating this court's opinion with respect to § 506(b) entails no further proceedings in the bankruptcy court. Nor would our consideration of the remand order risk the "piecemeal appellate review" that the finality rule seeks to prevent. Northwood Props., 509 F.3d at 21. It would be entirely illogical to leave the remand order in place, thereby vacating the confirmation order on a now-rejected basis, to be followed, presumably, by immediate reinstatement of the plan as originally confirmed.
In these circumstances, we believe that the Supreme Court's instruction that "the requirement of finality is to be given a practical rather than a technical construction," Gillespie v. U.S. Steel Corp., 379 U.S. 148, 152, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964) (internal quotation marks omitted), is best effectuated by exercising jurisdiction over both of the BAP's orders. And, because the BAP's remand order was premised entirely on its mistaken § 506(b) order, we vacate the remand order.
For the foregoing reasons, we vacate the BAP's § 506(b) and confirmation orders and remand to that tribunal with instructions that it affirm the bankruptcy court's § 506(b) and confirmation orders and remand the case there for further proceedings consistent with this opinion. All parties shall bear their own costs on appeal.
So ordered.
In addition, Prudential apparently failed to submit copies of the relevant documentation (the note, mortgage, and CLA) along with its proof of claim, despite the proof-of-claim form's specific instructions to do so and contrary to the requirements of Bankruptcy Rule 3001. Therefore, even if the burden-shifting approach had applied, it is highly questionable whether Prudential was entitled to the presumed validity that attaches to a "proof of claim executed and filed in accordance with [Rule 3001]," Fed. R. Bankr.P. 3001(f).