Wednesday, February 22, 2017

Bankruptcy Court Refuses to Enforce Contractual Default Rate of Interest

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.”

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