Financial Security Assurance Inc. v. T-H New Orleans Limited Partnership

In 1988 T-H New Orleans Limited Partnership (T-H) (debtor) purchased and began operating a hotel. In 1989 T-H restructured its mortgage debt through a mortgage note. Financial Security Assurance Inc. (Financial) (creditor) guaranteed the note. In 1990 T-H defaulted on the note. Financial accelerated the note and demanded immediate payment. T-H filed for Chapter 11 bankruptcy. Financial’s allowed claim in the bankruptcy proceedings was approximately $18.5 million. Financial filed a motion for adequate protection of its claim. The bankruptcy court granted Financial’s motion, holding that Financial had a security interest in the hotel’s prepetition and postpetition revenues. The bankruptcy court ordered T-H to begin making payments to Financial from the hotel’s revenue to begin paying down T-H’s obligation to Financial. T-H paid Financial approximately $4.7 million in hotel revenues, decreasing Financial’s claim to approximately $13.75 million. The bankruptcy court determined that the fair market value of the hotel was $13.7 million and would increase over time. Because Financial’s claim was greater than the value of the hotel, Financial was undersecured. The bankruptcy court found that Financial was not entitled to postpetition, preconfirmation interest on its claim until the value of the hotel exceeded Financial’s claim. The bankruptcy court believed that Financial’s claim would become oversecured in October 1994, at which point Financial would be entitled to interest. In 1995 the bankruptcy court confirmed a reorganization plan for T-H that included its determinations regarding Financial’s claim. Financial appealed, arguing that, under 11 U.S.C. § 506(b), it was entitled to postpetition, preconfirmation interest on its claim from the date of T-H’s bankruptcy petition, regardless of the fact that its claim was undersecured.