- U.S. Court of Appeals, First Circuit ("First Circuit") Case Nos. 12-9008, 12-9009
- First Circuit affirmed ruling of Bankruptcy Appellate Panel for the First Circuit (the "BAP") that appeals from orders of U.S. Bankruptcy Court, District of Massachusetts (J. Feeney)("Bankruptcy Court") were not equitably moot despite substantial consummation of confirmed plan. First Circuit did so without determining appropriate standard of review of BAP's ruling. First Circuit reversed BAP order reversing, in part, Bankruptcy Court order establishing amount of secured credidtor's claim and First Circuit vacated BAP order disturbing the confirmation order. First Circuit found that Bankruptcy Court's application of "flexible" valuation approach to determine date that secured creditor's entitlement to post-petition interest arose was sound. First Circuit also found no error in Bankruptcy Court's findings that (a) date sale of primary collateral closed was date secured creditor conclusively became oversecured; (b) secured creditor was entitled to default rate of interest under loan documents from date of sale; and (c) interest was not compounding, and vacated the BAP's Section 506(b) order, remanding to the Bankruptcy Court for further proceedings consistent with the First Circuit's opinion.
- Procedural context:
- Appeal by debtors and junior secured creditor of BAP order vacating Bankruptcy Court's confirmation order and BAP order reversing, in part, order granting secured creditor's motion for post-petition interest under Section 506(b), to First Circuit Court.
- Debtor, SW Hotel Boston ("SW Boston") owned a mixed-use project that was developed to operate the only "W" hotel in Boston under contract with Starwood Hotel Properties along with several amenities, as well as high-end condominiums. SW Boston and several of its affiliates filed chapter 11 on April 28, 2010. Prudential Insurance Company of America ("Prudential") had financed the property’s development and as of the filing, was owed approximately $165,592,000. The City of Boston ("City") held a junior secured claim, having provided financing of approximately $10,500,000. Four months into the case, Prudential sought, unsuccessfully, relief from stay on the ground that that it was undersecured as to SW Boston's assets and was not adequately protected. SW Boston had conceded that Prudential was undersecured. The motion for relief was denied on the basis that SW Boston was oversecured when all of its collateral was considered, and therefore, Prudential to have adequately protected by an equity cushion. In May, 2011, the Bankruptcy Court granted SW Boston’s motion to sell the hotel assets to a third party for $89.5 million. It took SW Boston until June, 2011 to close the sale, due to several contingencies that had to be satisfied. Prudential received approximately $88,322,000 from the sale of the hotel. Sales of condominiums were ongoing, resulting in further paydown of Prudential’s debt over the course of the case. Meanwhile, on March 31, 2011, the debtors filed a chapter 11 plan that proposed to pay Prudential in full by March, 2014. The plan contemplated that Prudential would receive post-effective-date interest of 4.25% per annum, but it made no provision for postpetition, pre-effective-date interest. Prudential objected to confirmation of the plan on multiple grounds. 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) (“Section 506(b) motion”) at the contract default rate of 14.5% from the petition date. The parties did not dispute that Prudential became oversecured at some point during the case. The debtors instead argued that the default rate was not enforceable, and that Prudential was only entitled to interest following the sale closing. The Bankruptcy Court conducted an evidentiary hearing regarding confirmation and the Section 506(b) motion. On October 4, 2011, it issued an order granting Prudential post-petition interest at 14.5% per annum, commencing on the hotel sale date. The court ruled that the hotel sale price, rather than its earlier valuation at the lift-stay hearing, was the best indicator of the hotel's value. However, it also noted that, in light of the ongoing improvements and the resolution of various contingencies, the sale price did not reflect its value on any earlier date. The Bankruptcy Court set Prudential’s claim accordingly and confirmed the plan. Prudential appealed the court’s Section 506(b) ruling and the confirmation order. The Bankruptcy Court denied Prudential’s motion for a stay and the plan became effective. 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 post-petition 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 each appealed both of the BAP's decisions to the First Circuit. As to equitable mootness, the First Circuit held that since the BAP considered the relevant factors and concluded that, if Prudential prevailed on appeal, the Bankruptcy Court could fashion some form of practicable relief, there was no reason to dislodge that determination. As to substance, the First Circuit reviewed the bankruptcy court's interpretation of § 506 de novo, and its factual finding as to when Prudential became oversecured for clear error. The First Circuit agreed with the Bankruptcy Court and the BAP that, at least in the circumstances presented, a bankruptcy court may, in its discretion, adopt a flexible approach in selecting the appropriate measuring date. In selecting that date, 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. The First Circuit held that this finding was supported by the record. Having established that the bankruptcy court did not clearly err in determining when Prudential's post-petition interest began to accrue, the Court turned to two questions regarding how that interest accrued: at what rate, and whether the interest is simple or compound. The First Circuit found no error in the Bankruptcy Court’s holding that the contractual default rate was appropriate, and enforceable under Massachusetts law. It also found no error in allowing only simple interest, although primarily because Prudential did not seek payment of compound interest until after it was awarded post-petition interest at the default rate by the BAP. Ultimately, the First Circuit For the vacated the BAP's § 506(b)and confirmation orders and remanded with instructions that the BAP affirm the bankruptcy court's § 506(b) and confirmation orders.
- J. Lynch, J. Stahl, J. Howard
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