Bankruptcy Court
Refuses to Enforce Contractual Default Rate of Interest
In recent decision from the Bankruptcy
Court for the Western District of Kentucky (Judge Lloyd), efforts by the lender
to enforce a default rate of interest, that being the original rate of interest
+5%, were rejected. In re: Perkins, Case
No. 16-10383(1)(12), 2017 WL 439319 (E.D. Ky. Bankr. Feb. 1, 2017).
BB&T had extended a series
of loans, all secured by a farm property.
Important for the ultimate decision, the loans were over secured based
on the value of the collateral.
The loan documents, which were at
a variety of interest rates, each provided that, on default, a default
contractual rate of interest, that being the original interest rate +5%, would
apply. BB&T requested an order from the court to award to get interest at
that rate. In response, the Bankruptcy Court
noted that it considers the award of interest “based on the facts inequities of
each case.” and that:
Case law establishes that a presumption arises in favor of the contractual rate of interest that is subject to rebuttal based on equitable considerations. The presumption is rebutted where the evidence establishes that the default rate is significantly higher than the pre-default rate without any justification being offered for the difference.
In this instance, the Court
found that that rebuttal was successful.
This rebuttal was based upon the fact that the default rate of interest
was this at least double wide had previously been agreed upon. Essentially, that increased rate of interest
did not serve to protect BB&T, as the creditor, from nonpayment. Rather, the excess value of the collateral
had already accomplished that goal. Further, application of the default rate of
interest in favor of BB&T would have significantly reduced the size of the
estate with the result that it would “materially decrease payment, if not
completely eviscerate payments to the unsecured creditors in this case.”
No comments:
Post a Comment