11th Circuit Rules Business Debtor Owes Default Rate Interest

This summer, the 11th Circuit, the court that provides precedent for Florida Bankruptcy cases, came down with an unfavorable ruling for bankruptcy debtors regarding default rate interest in a Chapter 11 bankruptcy case, in re: Sagamore Partners, Ltd.  As with all bankruptcy cases, having an understanding of the background helps: 
Key Pre-Bankruptcy History
The debtor, Sagamore Patners, Ltd (“Sagamore”), owns a namesake hotel in Miami.  In 2006, Sagamore took out a secured loan for $31.5 million to refinance the hotel. JPMCC 2006-LDP7 Miami Beach Lodging LLC (“lender”) eventually obtained ownership of the loan.
The terms of the loan provided that if Sagamore defaulted it would owe a default interest rate of 11.54% per year, a huge jump up from the 6.54% interest-only payments it was required to pay until 2016.  Default was defined in the loan agreement as missing “any regularly scheduled payment…”
Lower Level Bankruptcy Proceedings
Since this is a bankruptcy case, you’ve probably already guessed what happened next: Sagamore defaulted and stopped making payments in 2009.  The lender filed a Florida foreclosure shortly thereafter and in 2011 Sagamore filed for bankruptcy.  The lender filed a proof of claim in the bankruptcy proceedings asserting a right to the principal amount as well as “default interest, late charges, costs, attorneys’ fees, expenses…”
Sagamore filed a bankruptcy plan that involved reinstatement of the loan and it objected to the lenders claim that it was owed default-rate interest.  The lender, in response, waived late fees for any period where the court awards default-rate interest.  Late fees were approximately $250,000, a substantial sum, but one that paled in comparison to the nearly $5.5 million owed from default rate interest.  The bankruptcy court essentially found in favor of Sagamore and the lender appealed.
The appellate court held that because the lender had failed to demand default rate interest and even if it had, had waived its right by asserting that it was entitled to late fees.
11th Circuit’s Decision
The lender once again appealed and found a more sympathetic court at the 11th Circuit.  The 11th Circuit held that the lender was as it claimed due default rate interest.
It’s decision turned on its analysis of 11 USC §1123 which provides that a bankruptcy plan “provide adequate means for the plan’s implementation, such as…curing or waiving any default.”  11 USC §1123(a)(5)(G).  Historically, that statutory section was used to allow debtors to reinstate a loan while avoiding contractual penalty provisions, like default rate interest.
The current version of the bankruptcy code specifically directs that if part of the bankruptcy plan includes curing a default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”  The 11th Circuit held that this meant Sagamore was required to comply with the terms of its loan agreement with lender, which would have required paying the default-rate interest to cure the default and reinstate the loan.
The court also applied Florida law to conclude that the lender had not waived its right to default interest noting that under Florida law, late fees and default rate interest can be pursued at the same time without waiving one.
While courts in other jurisdictions, like the 9th Circuit, have reached a different, more debtor friendly decision on similar facts, the 11th Circuit’s decision controls Florida cases.  There remain many ways for business and individual bankruptcy debtors to obtain favorable results in Florida bankruptcy cases.  The Jacksonville bankruptcy attorneys at Adam Law Group can help you find the best approach for your case.