In re SW Boston Hotel Venture, LLC
In re SW Boston Hotel Venture, LLC, ___F.3d___, 2014 Westlaw 1399418 (1st Cir. 2014):The First Circuit Court of Appeals held that bankruptcy courts may choose to use a flexible approach when selecting a “measuring date” for the accrual of an over secured creditor’s right to postpetition interest, and the value assigned to the property during the creditor’s relief from stay motion is not necessarily binding at later stages of the bankruptcy case.
Facts: A lender held a first priority mortgage on a hotel and related properties. A few months after the borrower’s Chapter 11 filing, the lender moved for relief from the automatic stay; the debtor successfully contended that the creditor was oversecured, precluding relief from the stay.
Less than a year later, the hotel property was sold for a very good price. The oversecured lender filed a motion under 11 U.S.C.A. §506(b), seeking the recovery of postpetition interest accruing during the pendency of the reorganization at the default rate set forth in the loan documents. The bankruptcy court granted the lender’s motion but held that postpetition interest began to accrue only as of the date of the sale of the property, rather than from the petition date. The First Circuit BAP reversed on that point, but the First Circuit reversed the BAP.
Reasoning: The court held that when viewed as a whole, the language of §506 permits a flexible approach to the date for determining whether a creditor is oversecured. The court noted that although §506(b) does not provide a specific measuring date, an exception to the rule contained in §506(a)(2) does specify the date of the filing of the petition as the measuring date: “The fact that Congress mandated particular measuring dates in the exception without mandating a particular measuring date in the general rule suggests that it intended flexibility . . . .”
The court also noted that using the petition date as the sole measuring date would lead to absurd results:
[R]ather than yielding the fairest result, a rigid single-valuation approach guarantees an all-or-nothing result that hinges more on fortuity than reality. For example, if the petition date were the required measuring date, a creditor that first became oversecured even one day later would be allowed no post-petition interest, even though it was oversecured throughout almost the entire bankruptcy and even though it could receive substantial post-petition interest under a flexible approach. Conversely, if the confirmation date were the required measuring date, a creditor that first became oversecured just one day earlier would be allowed post-petition interest for the entirety of the bankruptcy proceeding (up to the amount of the equity cushion). We do not believe that Congress intended entitlement to post-petition interest to depend so heavily on chance.
In a footnote, however, the court held that although the statute permits a flexible approach to valuation, it does not necessarily require flexibility:
We do not suggest that bankruptcy courts must, or even should, adopt the flexible approach whenever collateral values and/or claim amounts fluctuate. We simply recognize that a bankruptcy court may, in the exercise of its discretion, determine that, on the particular facts before it, equity and fairness would be best served by application of a flexible approach.
The creditor then argued that since the bankruptcy court had earlier found that the creditor was oversecured at the time it moved for relief from the automatic stay, thus justifying the denial of the creditor’s motion, that finding was binding upon the bankruptcy court when considering the creditor’s entitlement to postpetition interest. The court disagreed: “[A] valuation made for one purpose at one point in a bankruptcy proceeding has no binding effect on valuations performed for other purposes at other points in the preceding.”
Comment: The court’s “contextual” approach to valuation under §506(b) is messy but unavoidable. The court’s linguistic argument is appropriate: if Congress had wanted to ossify the valuation date as of the commencement of the case, Congress would have included that precise phrase, just as it did in (e.g.) § 544(a). Also, I think the court’s policy argument is very insightful, since a rigid “petition date” standard would deprive the creditor of the opportunity to seek postpetition interest, when the property has appreciated during the bankruptcy proceeding.
But I am troubled by the court’s treatment of the findings made during the creditor’s motion for relief from stay. The debtor successfully contended that the secured creditor was oversecured, a common tactic. When the creditor later moved for postpetition interest, shouldn’t the debtor’s successful defense of the relief from stay motion have given rise to a classic example of judicial estoppel? If the debtor was able to persuade the court at the outset of the case that the creditor was substantially oversecured at that time, how could the court have triggered postpetition interest as of any later date? The appellate court’s reasoning on this issue comes down to “that was then, this is now,” which is not very satisfying. Debtors are therefore encouraged to play fast and loose with property appraisals, submitting high appraisals at the outset of the case and then low appraisals later.
For a discussion of the First Circuit BAP’s opinion in this case, see 2012 Comm. Fin. News. 85, Date of Accrual of Oversecured Creditor’s Right to Postpetition Interest Is Determined under Flexible Approach.
Substance of this analysis appeared on California State Bar Insolvency Committee e-newsletter