United States: Pryor Cashman Bankruptcy Team Lands Victory On Behalf Of Secured Creditor Seeking Default Rate Interest
Last Updated: May 16 2017

In a decision expected to have wide-ranging implications for the tri-state area mortgage lending business, the Bankruptcy Court for the Eastern District of New York recently held that a debtor may not cure and reinstate a mortgage loan through its chapter 11 plan of reorganization unless the cure amount includes accrued default rate interest pursuant to the terms of the underlying promissory note.

In In re Yeshivah Ohel Moshe, Case No. 16-43681 (Bankr. E.D.N.Y.), the debtor entered into a $2,000,000 promissory note secured by its interest in certain real property. The note included a provision that provided for an increased interest rate in the event of a default. The debtor defaulted, and the secured lender accelerated the debt, with interest accruing at the default rate.

Facing foreclosure, the debtor sought protection under chapter 11 of the Bankruptcy Code. In its proposed plan of reorganization, the debtor sought to reinstate the loan by curing the arrears at the non-default rate. In opposition, the secured lender argued that any cure must include interest at the rate provided for in the underlying note and mortgage, including any default rate interest.

On May 11, 2017, Judge Elizabeth S. Stong of the United States Bankruptcy Court for the Eastern District of New York issued a decision, siding with the secured lender. The Bankruptcy Court held that "[b]y proposing to cure its default and reinstate the [l]oan by paying arrears at the non-default interest rate, [the debtor] does not cure the default in accordance with the underlying loan agreement and New York state law" as required by the Bankruptcy Code. Judge Stong concluded that the debtor's failure to pay the full amount of the secured lender's claim, including accrued default interest, impairs the secured creditor's contractual rights and renders the debtor's plan patently unconfirmable.

The bankruptcy court's decision adopts the Ninth Circuit's recent decision in Pacifica L 51 LLC v. New Investments, Inc. (In re New Investments, Inc.), 840 F.3d 1137 (9th Cir. 2016) – a secured creditor is entitled to receive the benefit of its bargain, and a debtor may not use bankruptcy to avoid paying default interest.

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