In re Harko
| Decision Date | 31 July 1997 |
| Docket Number | 96-12157.,BAP No. 96-50031,96-50033,Bankruptcy No. 96-11076 |
| Citation | 211 BR 116 |
| Parties | In re Michael Peter HARKO and Margaret Grace Harko, Debtors. KEY BANK OF NEW YORK, Appellant, v. Michael Peter HARKO and Margaret Grace Harko, Appellees, Andrea E. Celli, Trustee. In re Ronald P. MILHAM and Benedetta Milham, Debtors. KEY BANK OF NEW YORK, Appellant, v. Ronald P. MILHAM and Benedetta Milham, Appellees, Andrea B. Celli, Trustee. |
| Court | U.S. Bankruptcy Appellate Panel, Tenth Circuit |
Hodgson, Russ, Andrews, Woods & Goodyear, LLP by Annette M. Tambasco, Albany, NY, for Appellant.
Martin J. Goodman, Albany, NY, for Appellees Ronald P. Milham and Benedetta Milham.
Andrea E. Celli, Albany, NY, trustee.
Before LIFLAND C.J., and KAPLAN and NINFO, JJ.
Two appeals are before us. In neither are the relevant facts in dispute. Both concern the same issue of law, namely whether an oversecured creditor in a case under Chapter 13 of the Bankruptcy Code (the "Code"), 11 U.S.C. §§ 1301-1330, is entitled to its contractual rate of interest pursuant to § 506(b) of the Code post-confirmation. The appellant in both cases is Key Bank of New York ("Key Bank"). The Debtors-Appellees in the first appeal, Michael and Margaret Harko (the "Harkos"), owed Key Bank $3,599.31 under a retail installment contract (the "Harko Contract"), secured by a 1991 Ford Explorer, the average National Automobile Dealers Association (NADA) value of which was $13,300. The Debtors-Appellees in the second appeal, Ronald and Bendetta Milham (the "Milhams"), owed Key Bank $3,163.07 under a retail installment contract (the "Milham Contract"), secured by a 1991 Lincoln Town Car the value of which was $11,962.50, according to Key Bank and $8,713.00 according to the Milhams. In any event, in both cases Key Bank is oversecured. In their respective Chapter 13 plans, the Harkos proposed payment to Key Bank of $3,555.00 with no interest while the Milhams proposed payment to Key Bank of $3,000 plus interest at 8.5% per annum. The contractual rate of interest under the Harko Contract was 13.95% per annum and under the Milham Contract it was 9.5% per annum. Key Bank filed objections to the respective plans, claiming that it was entitled to the contractual rate of interest pursuant to § 506(b) of the Code post-confirmation on its oversecured claims. The bankruptcy court overruled such objections, holding that the oversecured claim holder is entitled to interest at the prepetition contract rate under § 506(b) only up to the effective date of the Chapter 13 plan: the interest rate applicable post confirmation is that which provides the "present value" of the allowed secured claim. The court approved a 9% interest rate in the case of the Harkos and an 8.5% interest rate in the case of the Milhams.
In the Milham appeal, we have had the benefit of the briefs of Key Bank, of an amicus curiae, the New York State Credit Union League, Inc., of the Milhams and of the Chapter 13 Trustee, Andrea E. Celli. In the Harko appeal, we have the briefs of Key Bank and of Ms. Celli.
The facts are undisputed and the issue is one purely of law. The standard of review, accordingly, is de novo. Bellamy v. Federal Home Loan Mortgage Corp. (In re Bellamy), 962 F.2d 176, 178 (2d Cir.1992).
The starting point of our inquiry is a review of the statutory provisions in question and, in the first place, § 1325 of the Code which sets forth the circumstances under which the bankruptcy court may confirm a Chapter 13 debtor's reorganization plan. Section 1325 provides, in material part, that:
See 11 U.S.C. § 1325(a). Under this provision, a plan's proposed treatment of secured claims can be confirmed if one of three conditions is satisfied: the secured creditor accepts the plan; the debtor surrenders the property securing the claim to the creditor; or the debtor invokes the so-called "cramdown" power. See Associates Commercial Corporation v. Rash, ___ U.S. ___, ___ - ___, 117 S.Ct. 1879, 1881-83, 138 L.Ed.2d 148 (1997). Under the cramdown option, the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim. See id.
With regard to the determination of the "allowed amount of the claim," we look first to § 502 of the Code which deals with the allowance and disallowance of claims. Under this section, a claim may become allowed in any of three ways: first, a proof of claim is filed and no party objects; second, a claim is allowed by the court after an objection is filed; and third, a claim is estimated by the court under the provisions of § 502(c). See 4 Collier on Bankruptcy ¶ 502.01 (15th ed. rev.1996). A claim may be disallowed under any of the subsections of § 502(b) or under § 502(d) and (e). See id. For present purposes we need only concern ourselves with § 502(b)(2), pursuant to which, as a general rule, interest on prepetition claims stops accruing as of the date of the filing of the bankruptcy petition.1
With regard to secured claims, however, § 506 of the Code must also be considered. Section 506(a) deals generally with the determination of secured status. It does not govern the allowance of claims.2 Section 506(b), on the other hand, does affect the quantum of the allowed secured claim and provides the exception to the general rule that interest stops accruing as of the filing of the bankruptcy petition. Section 506(b) provides:
11 U.S.C. § 506(b). Thus, § 506(b) provides that an oversecured creditor is ordinarily entitled to postpetition interest on his claim.3 Such interest becomes part of the creditor's allowed claim. This is apparent from the legislative history which states, with respect to fees, costs and charges:
Subsection (b) codifies current law by entitling a creditor with an oversecured claim to any reasonable fees, costs, or charges provided under the agreement under which the claim arose. These fees, costs, and charges are secured claims to the extent that the value of the collateral exceeds the amount of the underlying claim.
H. Rep. No. 95-595 at 356, 357 (1977); S.Rep. No. 95-989 at 68 (1978) U.S.Code Cong. & Admin.News 1978, pp. 6312-13 (emphasis added). There is nothing in the language of § 506(b) to suggest that interest, as opposed to fees, costs and charges, should be treated any differently and the majority of courts have so held. See, e.g., Orix Credit Alliance, Inc. v. Delta Resources, Inc. (In re Delta Resources, Inc.), 54 F.3d 722, 729 (11th Cir.1995) ()4; In re DeMaggio, 175 B.R. at 150 (); In re Foertsch, 167 B.R. 555, 560 (Bankr.D.N.D.1994) (); Warehouse Home Furnishings Distributors, Inc. v. Gladdin (In re Gladdin), 107 B.R. 803, 806 (Bankr.M.D.Ga.1989) (); In re Busone, 71 B.R. 201, 203 (Bankr.E.D.N.Y.1987) (); In re Hugee, 54 B.R. 676, 678-79 (Bankr.D.S.C. 1985) (); In re Corliss, 43 B.R. 176, 178 (Bankr.D.Or.1984) (); In re Webb, 29 B.R. 280, 286 (Bankr.E.D.N.Y.1983) (); In re Klein, 10 B.R. 657, 661 (Bankr.E.D.N.Y.1981) (). Indeed, the Supreme Court in Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) speaks of interest as "part of the oversecured claim under § 506(b)." Id. at 471, 113 S.Ct. at 2192. Thus, the "allowed amount" of the oversecured creditor's claim will include, for purposes of § 1325(a)(5)(B)(ii), a sum representing postpetition interest. The value of property to be distributed under a Chapter 13 plan to an oversecured creditor may not be less than this amount.5
In addition, it is now well settled that full payment under § 1325(a)(5)(B)(ii) includes a "present value" component. See General Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 63 (2d Cir.1997).6 As the Second Circuit stated in In re Valenti, in theory, a creditor who receives the "present value" of its allowed claim...
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