Beal Bank v. Crystal Properties, Ltd., L.P. (In re Crystal Properties, Ltd., L.P.)

Thien and Carol Ng took out multiple loans secured by real property. Each note contained a default-interest clause stating that if the Ngs missed a payment “at the option of the holder hereof and without notice or demand,” the loan would be accelerated “and thereafter bear interest” at a rate 5 percent higher than the original rate. The deeds of trust for the collateral property each stated that the underlying loans could be accelerated by delivering a notice of default. In 1995, the Ngs stopped paying on the loans. The Federal Deposit Insurance Corporation (FDIC) controlled the bank that had issued the loans. The FDIC sent letters to the Ngs that included payoff calculations at the original loan rate, stated that the Ngs’ default “invokes” the default-interest clause, and threatened to file a notice of default. The Ngs’ loans were then transferred to Beal Bank (creditor). In early 1997, Beal recorded formal notices of default for seven of the loans. By then, three of the loans had matured, meaning the full amount was already due. Shortly thereafter, the Ngs transferred the loans’ collateral to a partnership they owned, Crystal Properties, Limited, LP (Crystal) (debtor). The next day, Crystal filed for bankruptcy. In the bankruptcy action, Beal argued that, under the default-interest clause, the loans had started accruing the increased interest rate in 1995 when the Ngs defaulted. However, the bankruptcy court ruled that the increased interest had not started accruing until Beal recorded the notices of default in 1997 and did not apply to the three matured loans. The district court affirmed. Beal appealed.