United States: Pre-Petition Default Interest: Don’t Take Anything For Granted

Last Updated: April 29 2014
Article by Vicki R. Harding

In Re Shree Mahalaxmi, Inc., 503 B.R. 794 (Bankr. W.D. Tex. 2014)

After a mortgage lender learned of a pre-petition default during a bankruptcy, it filed an amendment to its proof of claim to add pre-petition default interest. The debtor objected to both the original claim and to the addition of pre-petition default interest. The court's decision turned on interpretation of the loan documents under applicable state law.

The debtor owned a hotel, which was subject to a deed of trust in favor of the lender. At some point after the loan was made and prior to bankruptcy, the debtor placed two junior liens on the hotel in favor of a third party bank.

Originally the lender filed a proof of claim for ~$619,000. After the special servicer for the loan put the note up for auction, the auction company notified the lender of the two junior liens. In response, the lender amended its proof of claim to include pre-petition default interest on the basis that the junior liens triggered a default under the loan documents. Thus, the claim was increased by ~$400,000 for default interest.

The debtor argued that the loan documents required prior notice and an opportunity to cure before imposing default interest and the note did not provide for automatic accrual of default interest. The lender argued that there was no requirement for notice and that the loan documents did not provide any grace periods for this type of default.

The court began by noting that pre-petition claims for interest and fees are allowable as part of the underlying secured claim. The issue is governed by Section 502 of the Bankruptcy Code, which disallows a claim to the extent that it is for unmatured interest. (This is in contrast to the analysis under Section 506, which generally permits post-petition interest only to the extent that the lender is over secured.)

Thus, the key question was whether the claim for default interest was matured and earned as of the date the bankruptcy was filed. It appears there was no dispute that there was a default under the loan documents. There were provisions in the loan documents prohibiting the debtor from further encumbering the collateral and from incurring additional debt (other than trade debt).

However, the court interpreted the loan documents to require a payment default to trigger default interest. In particular, the note provided (with a similar provision in the deed of trust):

Should the ... (ii) Principal Amount or any amount thereof, together with any other amounts due and payable hereunder, not be promptly paid on the Maturity Date or any earlier date when the same shall be due and payable (whether by acceleration or otherwise), then in such event, the rate of interest to be paid on the Principal Amount and all such other amounts shall be increased to the Default Rate and shall be computed from the date such amounts were initially due and payable through the date, if any, upon which such amounts are actually and fully paid. ... The foregoing provisions shall not be construed as a waiver by Holder of its right to pursue any other remedies available to it under the Deed of Trust or any other Loan Document, nor shall it be construed to limit in any way the application of the Default Rate.

Consequently, a non-payment default would have to trigger acceleration of the note, which in turn would constitute a payment default, in order to support the claim for default interest. However, the loan documents provided that the lender had discretion to accelerate after an event of default, so that acceleration did not automatically occur.

Thus, to trigger default interest for a non-payment event of default, the lender first had to exercise its option to accelerate the loan. Under applicable state law, acceleration required two notices: (1) notice of intent to accelerate and (2) notice of acceleration. Since acceleration was viewed as a harsh remedy, the notices were required to be "clear and unequivocal."

Although parties can choose to waive notice requirements, the waiver must also be clear and unequivocal. The state supreme court held that this means the waivers "must state specifically and separately the rights surrendered." A waiver of "notice" or "notice of acceleration" would be sufficient to waive notice of acceleration, but not of the intent to accelerate. Similarly, a general waiver of all notices would be insufficient to specifically waive the two separate rights.

In this case, the lender obviously did not accelerate since it wasn't even aware of the default prior to bankruptcy. So the only way it could prevail was if the waiver provision was sufficient. The note contained a standard waiver provision, including: "Maker hereby expressly waives the right to receive any notice from Holder with respect to any matter for which this Note does not specifically and expressly provide for the giving of notice by Holder to Maker." The court concluded that, at best, this waived the notice of acceleration, but was not sufficient to waive the notice of intent to accelerate.

The lender cited several cases to support its argument that it should be entitled to retroactively apply default interest to its claim. However, those cases were distinguishable in that the lenders had sent out a pre-petition notice and/or the loan documents did not require acceleration.

The court's summary of its decision was that the parties did not provide for automatic default interest upon occurrence of an event of default in the loan documents; and the court declined to rewrite the contracts and instead enforced the terms as agreed.

There is a tendency to assume that default interest will become due whenever there is an event of default. However, as illustrated by this case, the terms of a loan may not be that straightforward. Any time there is an issue, it is worth reviewing the details of the loan documents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki R. Harding
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.