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ARTICLE · 04 AUGUST 2014

Post-Petition Interest: Default Rate Is Not A Slam Dunk

Pepper Hamilton LLP
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An oversecured creditor claimed post-petition interest at the contract default rate. The debtors and the post-confirmation liquidating trust objected.

United StatesInsolvency/Bankruptcy/Re-Structuring
Vicki Harding
Vicki Harding

In re Residential Capital, LLC, 508 B.R. 851 (Bankr. S.D.N.Y. 2014) –

An oversecured creditor claimed post-petition interest at the contract default rate. The debtors and the post-confirmation liquidating trust objected, arguing that the lender should be limited to the non-default rate.

Generally a lender is not entitled to post-petition interest. However, under Section 506(b) of the Bankruptcy Code an oversecured creditor is entitled to its claim together with post-petition interest and "any reasonable fees, costs or charges provided under the agreement under which such claim arose" up to the value of its collateral. The court identified the guiding principles for determining the interest rate: (1) there is a rebuttable presumption that the contract default rate applies, and (2) the court has limited discretion, to be used "sparingly," to modify that rate.

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