In re AE Hotel Venture, 04 B 19764.

• Decision Date: 16 February 2005
• Docket Number: No. 04 B 19764.,04 B 19764.
• Citation: 321 B.R. 209
• Parties: In re AE HOTEL VENTURE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

321 B.R. 209

In re AE HOTEL VENTURE, Debtor.

No. 04 B 19764.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

February 16, 2005.

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Douglas S. Draper, Constant G. Marquer, III, Deborah Weisler Fallis, Leslie A. Collins, Heller, Draper, Hayden, Patrick & Horn, LLC, New Orleans, LA; Karen R. Goodman, Shefsky & Froelich, Chicago, IL, for AE Hotel Venture.

John Robert Weiss, Bryan E. Minier, Katten Muchin Zavis Rosenman, Chicago, IL, for GMAC Commercial Mortgage Corp.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This chapter 11 case involving debtor AE Hotel Venture ("AE Hotel") is before the court on the motion of GMAC Commercial Mortgage Corporation ("GMACCM") to determine the value of its secured claim.¹

AE Hotel ran a suburban Chicago hotel which it acquired with a $7.6 million loan currently held by a securitization trust. AE Hotel eventually defaulted on the loan and was forced to seek relief under chapter 11 of the Bankruptcy Code. Shortly after the bankruptcy began, the hotel property was sold. Meanwhile, as special servicer for the trustee of the securitization trust GMACCM filed a secured proof of claim in the bankruptcy, and GMACCM now asks the court to determine the value of its claim.² In addition to principal and pre-default interest, GMACCM maintains that under the loan documents and under sections 506(a) and (b) of the Code it is entitled to a late charge, default interest, and a prepayment premium. AE Hotel does not contest GMACCM's right to the late charge but does object to default interest and the prepayment premium.

The matter is fully briefed and ready for ruling. For the reasons discussed below, GMACCM's motion is granted in part and denied in part. GMACCM is entitled to the prepayment premium. Its request for default interest, however, is denied.

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(K). The court accordingly may enter a final judgment. In re Smith, 848 F.2d 813, 816 (7th Cir.1988).

2. Findings of Fact

No facts are in dispute, and no party has sought an evidentiary hearing. The facts recited in the parties' papers are as follows.

From 1997 until recently, AE Hotel, an Illinois joint venture, owned and operated a Hawthorne Suites Hotel in Lincolnshire, Illinois. In May 1997, AE Hotel and La-Salle National Bank ("LaSalle"), as trustee

it was filed. No party has objected to the claim. of a land trust, borrowed $7.6 million, apparently to acquire the hotel property. The loan was evidenced by a note (the "Note") with a maturity date of June 1, 2007 and an interest rate of 9.72%. AE Hotel and LaSalle granted a mortgage on the property, executing a mortgage, security agreement, and assignment of rents (the "Mortgage"). The Mortgage accorded the lender a first priority lien on the property and its proceeds.

The loan was subsequently "securitized." That is, the loan was pooled with other loans, and securities consisting of interests in the pool were sold to public investors who were promised a fixed rate of return. See F.D.I.C. v. Ernst & Young LLP, 374 F.3d 579, 580 (7th Cir.2004) (explaining securitization). The Mortgage and certain other documents were assigned to LaSalle as trustee for the particular series of mortgage-backed pass-through certificates—the "securitization trust."³ LaSalle delegated authority to act on its behalf to GMACCM as special servicer of the trust.

The Mortgage defines what constitutes an "event of default" under the loan documents. One of these, not surprisingly, is a failure to pay any portion of the debt within five days of the date the payment is due. The Note and Mortgage also contain terms specifying certain added charges AE Hotel will incur in the event of either a late payment or other default. Three of these charges are relevant here.

• First, paragraph 8 of the Note and section 23 of the Mortgage provide for a late payment charge if a payment is made more than five days after the due date. The charge consists of 5% of the unpaid balance or the maximum legally permissible amount, whichever is less. The purpose of this charge, according to the loan documents, is "to defray the expense incurred" in "handling and processing such delinquent payment and to compensate Mortgagee for the loss of the use of such delinquent payment."

• Second, paragraph 6 of the Note and section 21 of the Mortgage impose a new and higher "default rate" of interest following either an event of default or a failure to pay the debt in full on the maturity date. Under these provisions, interest on the unpaid principal balance of the Note accrues at 14.72% following a default, a 5% increase over the Note's original 9.72% interest rate.

• Third, paragraph 5 of the Note and section 24 of the Mortgage provide for a prepayment premium if a prepayment occurs after an event of default.⁴ Paragraph 5 of the Note states that if after an event of default and "at any time prior to a sale of the Mortgaged Property ... either through foreclosure or the exercise of the other remedies available to the Payee," AE Hotel pays an amount sufficient to satisfy the debt under the Note, that payment will be deemed "a voluntary prepayment," and AE Hotel will be obligated to pay an additional "prepayment consideration." Section 24 of the Mortgage is in all relevant respects identical.

Paragraph 4 of the Note sets out the formula for calculating any prepayment premium. Translated roughly into English, the Note says that the prepayment premium will be the larger of two numbers. The first number is the difference between (a) the principal the borrower is repaying, and (b) the amount of remaining principal and interest on the date of the prepayment, discounted to present value at a discount rate equal to the yield of certain U.S. Treasury securities—securities with maturity dates resembling the maturity date of the loan—during the week before the prepayment.⁵ The second number is 1% of the outstanding principal on the prepayment date.

According to GMACCM, the first number, which necessarily varies with the interest rates on the government securities and may be as low as zero, is designed to capture the actual loss the trust suffers when a loan is prepaid. The prepayment premium, GMACCM says, thus provides a "precise method" of determining the trust's losses and so is always "an exact calculation of the damage" resulting from a prepayment. AE Hotel has not contested as a factual matter GMACCM's description of the prepayment premium formula or the formula's effect in compensating for losses resulting from a prepayment. The court therefore takes GMACCM's assertions to be true.⁶

Six and a half years after the loan was made, AE Hotel defaulted. On December 1, 2003, AE Hotel stopped making payments due under the Note, an "event of default." GMACCM accelerated the debt, declaring the entire amount due. On May 17, 2004, GMACCM filed an action in Illinois state court to foreclose on the property and to have a receiver appointed. Three days later, on May 20, 2004, AE Hotel sought bankruptcy protection, filing a petition for relief under chapter 11. The obvious purpose of the bankruptcy was to gain time to sell the hotel property and other assets of the estate. To that end, in July 2004 AE Hotel sought and received permission from the court to sell the property. The hotel property was ultimately sold at public auction on August 30, 2004 for $7.8 million. The court entered an order approving the sale the next day.

In the interim, on July 21, 2004, GMACCM had filed a proof of its claim in the bankruptcy. The claim, all of which purports to be secured, has four elements: (1) principal and pre-petition interest, (2) post-petition interest, (3) attorneys' fees, a late charge, and other fees and expenses, and (4) a prepayment premium.⁷ On September 4, 2004, GMACCM filed a motion for "allowance" of its claim. AE Hotel opposed the motion, objecting to GMACCM's requests for default interest and for the prepayment premium. AE Hotel has not objected to any other element of the claim and has not disputed any of the dollar amounts of those elements.

3. Conclusions of Law

a. Default Interest

GMACCM is not entitled to postpetition default interest. The claim for default interest is not a claim for interest at all, as GMACCM postures it, but rather a claim for a charge. GMACCM has not demonstrated that the charge is "reasonable," as section 506(b) requires.

Under section 506(b) of the Code, a creditor with an oversecured claim—and AE Hotel concedes that GMACCM's claim is oversecured—is entitled to receive "interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose." 11 U.S.C. § 506(b); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). As section 506(b) requires, GMACCM will receive interest post-petition at the Note's original contract rate of 9.72%. AE Hotel has not objected to that portion of GMACCM's claim, and the claim for post-petition interest at 9.72% is thus allowed. 11 U.S.C. § 502(a).

GMACCM's claim for default interest—the additional 5% interest that began accruing upon AE Hotel's default—is another matter. Generally speaking, interest compensates for the delay in receiving money owed: "the loss of the time value of money." In re Continental III. Sec. Litig., 962 F.2d 566, 571 (7th Cir. 1992); see also Art Press Ltd. v. Western Printing Mach. Co., 852 F.2d 276, 278 (7th Cir.1988). GMACCM arrived at the interest rate it believed would compensate for that loss in the Note: a rate of 9.72%. That being so, the difference between the original rate and the 14.72% default rate—a difference of 5%—could not have been meant to perform the...