In re Terry Limited Partnership

Terry Limited Partnership (Terry) (debtor) gave first, second, and third mortgages on Terry’s office building to three lenders (creditors). Terry defaulted on the second and third mortgages and subsequently filed for Chapter 11 bankruptcy. Terry’s reorganization efforts failed, and the bankruptcy court ordered the sale of the office building. The third mortgagee, Invex Holdings (Invex), bought the building for roughly $4 million. The sale proceeds were to be used to satisfy the first and second mortgages, with Invex receiving any leftover amount for itself. The first mortgage was satisfied in full, but a dispute arose between Invex and the second mortgagee, Equitable Life Insurance Company (Equitable) about the amount of Equitable’s claim. Under Equitable’s mortgage, the contractual interest rate was 14.25 percent absent default and 17.25 percent when the mortgage was in default. If the court calculated the interest on Equitable’s mortgage using the 17.25-percent default rate, the resulting amount of Equitable’s claim would leave Invex with barely any of the sale proceeds after the claim was satisfied. Equitable was an oversecured creditor because it had a claim for less than the value of the collateral securing the claim. Under 11 U.S.C. § 506(b), an oversecured creditor can recover interest on the creditor’s claim and any reasonable fees, costs, or charges provided for under the agreement from which the claim arose. In proceedings on the dispute in the bankruptcy court, the court heard evidence that mortgage transactions commonly include a default interest rate to protect mortgage companies from any unforeseeable costs and risks from a buyer’s default. An expert witness for Invex testified that a mortgage transaction with a 14.25-percent predefault rate and a 17.25-percent default rate was not unreasonable. The bankruptcy court ultimately awarded Equitable postdefault interest at the 17.25-percent rate, and the district court affirmed. Invex appealed.