In re Lehal Realty Associates, Bankruptcy No. 89 B 20078.

• Decision Date: 02 April 1990
• Docket Number: Bankruptcy No. 89 B 20078.
• Parties: In re LEHAL REALTY ASSOCIATES, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

112 B.R. 588 (1990)

In re LEHAL REALTY ASSOCIATES, Debtor.

Bankruptcy No. 89 B 20078.

United States Bankruptcy Court, S.D. New York.

April 2, 1990.

Robert P. Herzog, New York City, for Trust Co. of New Jersey.

Marvin Neiman, P.C., New York City, for Israel Halpern.

DECISION ON MOTION AND CROSS MOTION FOR DEFAULT INTEREST AND MODIFICATION OF ATTORNEYS' FEES

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The Trust Company of New Jersey ("TCNJ") has moved for an order pursuant to 11 U.S.C. § 506(b) of the Bankruptcy Code for interest accrued on the principal amount of its state court mortgage foreclosure judgment at the default rate specified in the mortgage note through the date on which the mortgaged property was sold by the Chapter 11 trustee. The sale occurred in accordance with the confirmed Chapter 11 liquidation plan which was successfully proposed by the mortgagee, TCNJ.

Israel Halpern, a general partner of the debtor, Lehal Realty Associates, cross-moved in opposition to TCNJ's motion for an order modifying the court's order dated December 22, 1989, which granted TCNJ's request for attorneys' fees.

On February 9, 1989, an involuntary petition for Chapter 11 relief was filed against the debtor partnership by one of its general partners in order to prevent the mortgagee, TCNJ, from proceeding with its foreclosure action against the debtor's only asset, a beneficial interest in a former golf course in Rockland County, New York.

By order dated October 16, 1989, this court confirmed a Chapter 11 plan of liquidation proposed by TCNJ. The golf course was sold at auction by the Chapter 11 trustee appointed in this case on February 13, 1990 for $7.6 million. After payment of all creditors' claims there remains a surplus of nearly $4 million for distribution to the individual partners of the debtor. TCNJ has been paid its principal claim in full, together with interest calculated by the state court with respect to the foreclosure judgment entered against the debtor on December 20, 1988. TCNJ was also awarded reasonable attorneys' fees by order of this court dated December 22, 1989.

Post Judgment Interest

There is no question that TCNJ is an oversecured creditor within the meaning of 11 U.S.C. § 506(b), because its allowed mortgage foreclosure judgment claim is less than the value of the property which served as collateral for the claim. Accordingly, TCNJ is entitled to receive interest on its claim in accordance with 11 U.S.C. § 506(b), which provides:

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.

TCNJ contends that the amount of interest to which it is entitled is measured by the default rate specified in the mortgage note, which is higher than the 9% New York statutory rate with respect to unpaid judgments. Following the sale of the debtor's real estate pursuant to the Chapter 11 liquidation plan, TCNJ was paid the entire judgment, including costs, statutory interest at the judgment rate of 9% and reasonable attorneys' fees. It is now argued by TCNJ that the higher default rate provided for in the mortgage note should supersede the 9% statutory judgment rate and that TCNJ should be awarded additional interest in the sum of $94,540.91.

In determining the appropriate rate of interest it should be noted that for bankruptcy purposes, it is not essential that an oversecured claimant's right to interest be conditioned upon the existence of a consensual formula. Thus, an oversecured tax lien is entitled to interest notwithstanding that tax liabilities do not arise out of a contract. U.S. v. Ron Pair Enterprises, Inc., 489 U.S. ___, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). After the entry of a judgment of foreclosure, the mortgagee is entitled to interest on the judgment at the legal rate only, even if the rate of interest after default as specified in the mortgage note is higher. In re Herbert, 86 B.R. 433, 436 (Bankr.E.D.Pa.1988); In re Schwartz, 77 B.R. 177, 180 (Bankr.S.D. Ohio 1987). This doctrine is based on the preclusive effect of the judgment and the fact that the judgment thereafter is determinative of the rights of the parties in accordance with the concept of res judicata. See Montana v. U.S., 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979).

The cases cited by TCNJ are distinguishable because they depend upon a contract default rate of interest in cases where no foreclosure judgment was entered. See, e.g., In re Hartsdale Associates, 452 F.Supp. 67 (S.D.N.Y.1978). In re Schaumberg Hotel Owner Ltd. Partnership, 97 B.R. 943 (Bankr.N.D.Ill.1989); In re Skyler Ridge, 80 B.R. 500 (Bankr.C.D.Cal.1987); In re Berry Estates, Inc., 34 B.R. 612 (Bankr.S.D.N.Y.1983); In re Elmwood ...