Over Secured Creditors Get Interest, Even at 18%!

Since the United States Supreme Court in the Ron Pair case (U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 1989) declared that creditors, who had security in excess of the amount of their claims, were entitled to interest, the case law has evolved on the issue of what the proper interest rate is under the various different circumstances. As a general rule, if a creditor has not instituted the so-called “default rate” prior to the bankruptcy, the default rate is not allowed.

The Eighth Circuit BAP, following what is generally thought to be the minority rule, allowed interest at a high default rate – 18% to a secured creditor in a Chapter 11 after a sale. The secured creditor, Bank of Missouri, was owed $11,000,000.00 and had a non-default contract rate of 3.65% on one loan and a 7.5% rate on another. The sale of the Debtor’s assets through the Bankruptcy Court went extraordinarily well, resulting in a final bid of $14,000,000.00. The bank, which previously had zero expectation of getting all of its money, immediately asked the Court for $440,000.00 of post-bankruptcy interest at an 18% interest default rate. The Eighth Circuit disregarding “equitable considerations” ordered payment of the contract default rate of 18%, seemingly a windfall to the bank and causing other subordinate secured creditors to receive zero.

In Re Family Pharmacy, Inc. is a bit of an “outlier” in that it allowed the default rate, even though, on the day of the bankruptcy filing, the Debtor was not in default. However, the case does illustrate the desire of Bankruptcy Courts to honor contracts, at least in terms of interest rates, when they can. This case runs contrary to the law in most jurisdictions.

Categories: Bankruptcy

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