- Case Type:
- Case Status:
- Reversed and Remanded
- 19-6025 (8th Circuit, Mar 19,2020) Not Published
- An oversecured creditor’s claim for postpetition default interest under § 506(b) should be computed at the rate—default or nondefault provided in the parties’ agreement, and should be determined without regard to whether it might be construed as liquidated damages or a penalty provision or (except in compelling circumstances) other equitable considerations. The BAP reversed for determination of whether and when the loans became in default and subject to the default rate.
- Procedural context:
- A chapter 11 debtor’s secured creditor filed a motion for allowance of postpetition interest and attorneys’ fees following a sale of the debtor’s assets that generated sale proceeds in excess of the amount of the secured creditor’s claim. Following stipulations by the parties, only the creditor’s request for default interest was disputed. The Bankruptcy Court denied the request for default interest, concluding (1) that it constituted an unenforceable penalty under Missouri law, and (2) that default interest could not be enforced based on “equitable considerations.” The secured creditor appealed.
- The appeal was presented on fully stipulated facts. In rejecting the bankruptcy court’s analysis, the BAP highlighted the distinction between default interest, the amount of which can increase based on when the default occurs, and liquidated damages, which typically refers to a specific sum of money that does not change according to the timing of the default. Finding not a single case under Missouri law that applied a liquidated damages analysis to a contractual interest rate, the BAP concluded it was error for the Bankruptcy Court to have done so. Regarding the Bankruptcy Court’s invocation of “equitable considerations,” the BAP acknowledged that the majority position among courts may favor a presumption in favor of the contract rate subject to rebuttal based upon equitable considerations. However, observing that no Bankruptcy Code provision empowers a bankruptcy court to modify contractual interest rates outside plan confirmation, the BAP concluded that the secured creditor should be entitled to collect default interest if its loans were in default.
- Saladino, Schermer, and Shodeen
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