Court Opinion

ID: 4876
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:00:04+00
Date Added: 2024-06-11T13:30:52.789559
License: Public Domain

United States Court of Appeals,

                                             Fifth Circuit.

                                             No. 91–8255.

                           In the Matter of Wayne M. LAYMON, Debtor.

                              Theron BRADFORD, Trustee, Appellant,

                                                   v.

                                James CROZIER, Trustee, Appellee.

                                             April 8, 1992.

Appeal from the United States District Court for the Western District of Texas.

Before THORNBERRY, GARWOOD, and DAVIS, Circuit Judges.

        THORNBERRY, Circuit Judge:

        The appellant, an oversecured creditor, appeals from the district court's affirmance of the

bankruptcy court's decision awarding post-petition interest on appellant's oversecured claim at the

federal judgment interest rate rather than at the contractual default rate. Because we find that the

district court and bankruptcy court incorrectly interpreted the Supreme Court's opinion in United

States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989), and

incorrectly applied the federal judgment interest rate as the applicable rate of interest under § 506(b)

of the Bankruptcy Code, we reverse and remand to the district court.

                                            I. Background

        In August 1983, Wayne Laymon, the debt or, executed a promissory note in the original

principal amount of $669,900.00 to Theron Bradford, Trustee. The Note provided for annual

payments in the amount of $66,990 for four years to cover accrued interest and to reduce the

principal, and a balloon payment due on August 24, 1988. Under the provisions of the Note, all

unmatured amounts accrued interest at the rate of 10%, while all matured unpaid amounts accrued

interest at the highest rate permitted by law (the default rate), which the parties have stipulated to be

18%.
       The debtor failed to make the first payment due under the Note on August 18, 1984, and filed

a voluntary petition under Chapter 11 on September 4, 1984. In 1986 he made adequate protection

payments to Bradford totalling $311,165, and the Trustee (Crozier) thereafter made additional

adequate pro tection payments totalling $315,000. The Note matured by its terms on August 24,

1988. On May 8, 1989, Bradford filed a motion requesting payment of interest, costs, and fees under

section 506(b) of the Bankruptcy Code, claiming that he was entitled to interest at the 18% penalty

rate. After a hearing on stipulated facts, the bankruptcy court denied Bradford's request for penalty

interest, but allowed post-petition interest on the claim at the pre-default contract rate of 10%.

       Bradford filed a motion for reconsideration, and the Trustee filed a cross-motion for

reconsideration. After another hearing, the court vacated its prior opinion and held that the federal

judgment interest rate of 28 U.S.C. § 1961 provided the proper rate of interest at which post-petition

interest accrued. In re Laymon, 117 B.R. 856, 864 (Bankr.W.D.Tex.1990). Bradford appealed the

bankruptcy court's holding to the federal district court. The district court affirmed the opinion of the

bankruptcy court. Bradford now brings this appeal.

                                             II. Analysis

A. The Standard of Review

        The parties contest the standard of review to be applied by this court. Bradford submits that

this appeal presents solely a question of law reviewable de novo. The Trustee, on the other hand,

argues that awards and denials of post-petition interest are equitable determinations, reviewed for

abuse of discretion.

       The district court simply affirmed the bankruptcy court's order based on the reasoning in the

bankruptcy court's opinion. It is clear that the foundation of the bankruptcy court's decision is its

interpretation of the Supreme Court's opinion in United States v. Ron Pair Enterprises, Inc., 489 U.S.
235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989). The bankruptcy court's interpretation of Ron Pair

constitutes a legal question which we review de novo. See In re Consolidated Bancshares, Inc., 785
F.2d 1249, 1252 (5th Cir.1986) (citing Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303,

1308 (5th Cir.1985)).

B. The Interpretation of the Ron Pair Decision

       After a hearing on the motions for reconsideration, the bankruptcy court decided that the

contract rate was not the correct rate of interest to be applied under § 506(b) and that the federal

judgment interest rate was the proper rate to apply. Based on its interpretation of the Supreme

Court's opinion in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103
L. Ed. 2d 290 (1989), the bankruptcy court concluded that the issue of interest was completely

divorced from the existence of an agreement, and therefore, the agreement did not provide the

applicable rate of interest. We find that the bankruptcy court incorrectly interpreted Ron Pair.

       In Ron Pair, the Supreme Court held that § 506(b) applied to all oversecured claims,

consensual and nonconsensual. The decision resolved a split in authority over whether § 506(b)

applied only to claims arising under an agreement, or whether it applied to all oversecured claims,

arising from consensual agreements or nonconsensual statutory liens. 3 COLLIER ON BANKRUPTCY

¶ 506.05 at 506–42. Section 506(b) provides that:

       [t]o the extent that an allowed secured claim is secured by property the value of which ... is
       greater than the amount of such claim, there shall be allowed t o the holder of such claim,
       interest on such claim, and any reasonable fees, costs, or charges provided for under the
       agreement under which such claim arose.

11 U.S.C. § 506(b). In Ron Pair, the Supreme Court analyzed the plain meaning of § 506(b), finding

that the phrase "interest on such claim" is not modified by the clause "provided for in the agreement,"

because " "interest on such claim' is set aside by commas, and separate from the reference to fees,

costs, and charges by the conjunctive words "and any.' " Ron Pair, 109 S. Ct. at 1030. As a result,
"interest on such claim" refers both to consensual and nonconsensual claims. Id. When interpreting

the Ron Pair decision, the bankruptcy court concluded that "[g]iving full effect to the Supreme

Court's interpretation of that comma leads ineluctably to the conclusion that the entire issue of

interest is completely divorced from either the existence or the content of any underlying agreement."

In re Laymon, 117 B.R. 856, 858–59 (Bankr.W.D.Tex.1990). This conclusion is erroneous. The

Ron Pair decision does not address the issue of what rate of interest is applied under § 506(b). There

is nothing in the Ron Pair decision that leads us to believe that the Supreme Court intended to speak

to the rate of interest under § 506(b).

C. What Rate of Interest Applies Under § 506(b)?

       Even though we hold that Ron Pair does not affect the rate of interest applied in § 506(b),

we still must det ermine what rate of interest applies in this case. The Supreme Court "has been

reluctant to accept arguments that would interpret the Code, however vague the particular language

under consideration might be, to effect a major change in pre-Code practice that is not the subject

of at least some discussion in the legislative history." Dewsnup v. Timm, ––– U.S. ––––, 112 S. Ct.
773, 779, 116 L. Ed. 2d 903 (1992). The legislative history of § 506(b) does not refer to a rate of

interest. 3 COLLIER ON BANKRUPTCY ¶ 506.05, at 506–47. The language of § 506(b) does not refer

to a rate of interest. See 11 U.S.C. § 506(b). Therefore, we must conclude that Congress did not

intend for § 506(b) of the Code to effect a major change in pre-Code practice concerning the rate of

interest applied under the section. See Pennsylvania Department of Public Welfare v. Davenport,

495 U.S. 552, 110 S. Ct. 2126, 2133, 109 L. Ed. 2d 588 (1990) ("We will not read the Bankruptcy

Code to erode past bankruptcy practice absent a clear indication that Congress intended such a

departure.").

       Prior to the enactment of the Bankruptcy Code, courts applied a general rule that the accrual

of interest on claims against the bankrupt estate was suspended from the date the petition was filed.
See Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162

(1946). Yet, most courts recognized three exceptions to this rule. See United States v. Bass, 271
F.2d 129, 130 (9th Cir.1959). One of these exceptions was that post-petition interest was allowed

when the security for a claim was worth more than the sum of principal and interest due, i.e. when

the creditor was oversecured. See In re Macomb Trailer Coach, 200 F.2d 611, 613 (6th Cir.1953).

When the Bankruptcy Code was enacted, § 506(b) codified pre-Code law regarding this exception.

In re United Merchants and Manufacturers, Inc., 674 F.2d 134, 138 (2d Cir.1982). Since § 506(b)

does not speak to the rate of interest allowed under the section, we turn to pre-Code case law for the

answer.

          Prior to the enactment of the Code, the majority of courts utilized the contract rate of interest

when allowing an oversecured creditor to collect post-petition interest pursuant to § 506(b). 3

COLLIER    ON   BANKRUPTCY ¶ 506.05, at 506–46. Therefore, we hold that when an oversecured

creditor's claim arises from a contract, the contract provides the rate of post-petition interest. In this

case, however, the contract included a 10% pre-default rate and an 18% default rate. Bradford claims

that he is entitled to the 18% default rate. Under pre-Code law, courts were "not required in all cases

to apply a contractual default rate of interest in determining the amount of an "allowed secured claim'

within the meaning of [§ 506(b) ]." In re Sheppley & Co., 62 B.R. 271 (Bankr.N.D.Iowa 1986)

(discussing the following pre-Code cases: Vanston Bondholders Protective Committee v. Green, 329
U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946); American Surety Co. v. Sampsell, 327 U.S. 269, 66
S. Ct. 571, 90 L. Ed. 663 (1946); U.S. Trust Co., v. Zelle, 191 F.2d 822 (8th Cir.1951), cert. denied

342 U.S. 944, 72 S. Ct. 558, 96 L. Ed. 703 (1952); In re Black Ranches, Inc., 362 F.2d 8 (8th Cir.),

cert. denied sub nom., Black v. Strand, 385 U.S. 990, 87 S. Ct. 595, 17 L. Ed. 2d 450 (1966); Ruskin

v. Griffiths, 269 F.2d 827 (2d Cir.1959), cert. denied, 361 U.S. 947, 88 S. Ct. 402, 4 L. Ed. 2d 381

(1960)). Most courts took a flexible approach, recognizing situations in which "the higher rate would

produce an inequitable or unconscionable result, so as to require disallowance thereof." Sheppley,
62 B.R. at 277. Accordingly, whether the 18% default rate, rather than the 10% pre-default rate,
should apply in this case must be decided by examining the equities involved in this bankruptcy

proceeding.

       Therefore, we REVERSE and REMAND to the district court for further proceedings

consistent with this opinion.