In re Loveridge Mach. & Tool Co., Inc., Bankruptcy No. 83C-00071

• Decision Date: 13 December 1983
• Docket Number: Bankruptcy No. 83C-00071,83C-00312 and 83C-00238.,83C-00313,83C-00315
• Citation: 36 BR 159
• Parties: In re LOVERIDGE MACHINE & TOOL COMPANY, INC., Debtor. In re Dennis Thorup LOVERIDGE and Marsha Ann Loveridge, Debtors. In re Ralph S. LOVERIDGE and Betty T. Loveridge, Debtors. In re Kent H. LOVERIDGE and Vicky A. Loveridge, Debtors. In re Ralph Dale LOVERIDGE and Linda Loveridge, Debtors.
• Court: U.S. Bankruptcy Court — District of Utah

36 B.R. 159 (1983)

In re LOVERIDGE MACHINE & TOOL COMPANY, INC., Debtor.

In re Dennis Thorup LOVERIDGE and Marsha Ann Loveridge, Debtors.

In re Ralph S. LOVERIDGE and Betty T. Loveridge, Debtors.

In re Kent H. LOVERIDGE and Vicky A. Loveridge, Debtors.

In re Ralph Dale LOVERIDGE and Linda Loveridge, Debtors.

Bankruptcy Nos. 83C-00071, 83C-00315, 83C-00313, 83C-00312 and 83C-00238.

United States Bankruptcy Court, D. Utah.

December 13, 1983.

Rulon T. Burton, Burton & Schiess, Salt Lake City, Utah, for debtor Loveridge Machine & Tool Co., Inc.

Matthew F. Hilton, Salt Lake City, Utah, for debtors Dennis Thorup Loveridge, Marsha Ann Loveridge, Ralph S. Loveridge, Betty T. Loveridge, Kent H. Loveridge, Vicky A. Loveridge, Ralph Dale Loveridge, and Linda Loveridge, Glen E. Davies, Watkiss & Campbell, Salt Lake City, Utah, for Northwest Acceptance Corp.

MEMORANDUM OPINION ON CONFIRMATION OF CHAPTER 11 PLAN AND INTEREST RATES UNDER 11 U.S.C. §§ 506(b) and 1129(b)

GLEN E. CLARK, Bankruptcy Judge.

FACTUAL AND PROCEDURAL BACKGROUND

Debtors' Chapter 11 plan covers, for administrative purposes only, the five Chapter 11 cases of members of the Loveridge family and of their corporate business. Thus there are, in effect, five plans. After several hearings on the confirmation of various versions of the plans proposed by debtors, the issues narrowed as debtors modified their plans to secure favorable votes. The Code's requirements relating to notice and a hearing have been satisfied with respect to each modification.

At the hearing on confirmation held on October 18, 1983, debtors had satisfied most of the requirements of 11 U.S.C. § 1129(a) with respect to each of the five plans. Class F-4, composed of the unsecured claims against debtors Kent H. and Vicky A. Loveridge, did not accept the plan as required by 11 U.S.C. § 1126(c). Class B-1, composed of the allowed secured claim of Northwest Acceptance Corporation (Northwest), likewise did not accept the plan. Both classes are impaired under 11 U.S.C. § 1124.

Northwest and debtors were unable to agree on two legal issues: first, the appropriate rate of interest to be added to Northwest's allowed secured claim under 11 U.S.C. § 506(b), and second, the appropriate rate of interest to be added to Northwest's allowed secured claim under 11 U.S.C. § 1129(b).

No member of Class F-4 appeared at the confirmation hearing or filed any objection to confirmation. The sole votes in Class F-4 and Class B-1 were against the plan.

Having received briefs and heard the helpful arguments of counsel, the court now files this memorandum opinion.

CONFIRMATION OF THE PLAN OVER THE OBJECTION OF NORTHWEST ACCEPTANCE CORPORATION

1. The Appropriate Interest Rate Under 11 U.S.C. § 506(b)

Section 506(b) provides that:

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 under the agreement under which such claim arose.

The parties agree that Northwest holds an allowed secured claim secured by property the value of which is greater than the amount of Northwest's claim. Debtors do not seek to recover costs or expenses under Section 506(c).¹ The agreement under which Northwest's claim arose provides for annual interest at the rate of 19 percent.² Debtors' plan proposes the following treatment of Northwest relative to Section 506(b):

The holder of this claim Northwest shall receive on account of its Allowed Secured Claim and allowed attorney fees and costs, interest from the Petition Date to the Effective Date at the Legal Rate as defined by 28 U.S.C. Section 1961 which was in effect as of the Petition Date.

28 U.S.C. § 1961(a), as amended effective October 1, 1982, provides that "interest shall be allowed on any money judgment in a civil case recovered in a district court." The interest rate on such judgments is to be calculated

from the date of the entry of the judgment, at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the judgment.

The Director of the Administrative Office of the United States Courts distributes notice of the prevailing rate and any changes in it to all federal judges. Debtors' plan defines the term "petition date" as the date on which the corporate debtor filed its petition, January 10, 1983. The applicable interest rate under Section 1961 on January 10, 1983 was 8.75 percent.

In my view, Section 506(b) requires, whenever post-petition interest is to be added to an allowed secured claim, interest at the lawful contract rate if there is a contract providing for interest. The parties have made a considerable effort to explain the grammatical structure of Section 506(b) and the meaning of the placement of the comma after the phrase "interest on such claim." Northwest, for example, argues that the placement of the comma means what Collier says it might mean:

The placement of the comma apparently derived from the need the drafters felt to make clear that interest was to be allowed only to the extent it accrued on the claim (as opposed to any other amount).

3 COLLIER ON BANKRUPTCY ¶ 506.05 at 506-36 (15th ed. 1983). Debtors, on the other hand, invoke doctrines of statutory construction in support of their position that the phrase "provided under the agreement under which such claim arose" in Section 506(b) modifies only the terms "reasonable fees, costs or charges" and not the phrase "interest on such claim."³

These arguments are interesting but unnecessary to reach an understanding of Section 506(b). Section 506(b) treats interest, costs, and charges on "an allowed secured claim." An allowed secured claim may arise not only from a contract, but also from a non-contractual obligation which has become a lien on property. An allowed secured claim under Section 506(a) might arise, for example, from a tax lien or a judgment lien based on a tort liability. See In re Busman, 5 B.R. 332, 338 (Bkrtcy.E.D. N.Y.1980) (recognizing that post-petition interest should be added to an oversecured judgment lien under Section 506(b)); In re Bormes, 14 B.R. 895 (Bkrtcy.D.S.D.1981) (recognizing that post-petition interest should be added to an oversecured judgment lien under Section 506(b)).

Because allowed secured claims may arise either from contractual or noncontractual obligations, Section 506(b), when it provides for interest on allowed secured claims, does not specify that interest will accrue at the contract rate. The language of Section 506(b) "requires only that the oversecured creditor receive some rate of interest. It doesn't require that it receive the contract rate of interest, although it does require that the contract determine the allowable expenses and costs." In re Brooks, 24 B.R. 447, 449 (Bkrtcy.D.Kan.1982) (emphasis in original). Accord 1 NORTON BANKR.L. & PRAC. § 28.25 n. 1 at 176 (Supp. Oct. 1983). For many allowed secured claims, there will be no contractual rate of interest. Thus, when the drafters of Section 506(b) provided for interest on oversecured claims, they did not designate a governing interest rate.⁴

Viewed in this way, Section 506(b) makes sense. If there is an agreement providing for fees, costs, or charges, then, subject to the other limitations on the applicability of Section 506(b),

there shall be allowed to the holder of an allowed secured claim . . . any reasonable fees, costs, or charges provided under the agreement under which such claim arose.

If there is no agreement, then fees, costs, and charges are not allowable. But whether the claim arises from a contract or not, interest is to be added to allowed oversecured claims.

Recognizing this, however, does not answer the question of the appropriate interest rate to be applied under Section 506(b). An interest rate should not be chosen by juggling rules of grammar. Neither should the selection of an interest rate be influenced by favoritism of debtors over creditors, creditors over debtors, or of some creditors over others. Using the lawful contract rate where there is a contract avoids such errors and provides a rule which is easily applied and consistent with authority and reason.

Using any interest rate other than the contract rate, where there is a contract, would produce irrational results. To measure the reasonable fees, costs, and charges to be added to an allowed oversecured claim based on a contract, the court would look to the contract. But to measure the interest to be added to the same claim, the court would look outside the contract. Why should bankruptcy law enforce the parties' bargain with respect to fees, costs, and charges but not enforce it with respect to interest?⁵ Moreover, as Northwest's counsel points out, rejecting the contract rate where there is a contract might mean either a windfall to the creditor when the contract rate is less than the rate selected or a windfall to the debtor when the contract rate exceeds the rate selected. Given the volatility of interest rates, the contract rate will often differ from the prevailing market rate at the time of the hearing. The parties in this case have shown no good reason for producing a windfall under Section 506(b).

Debtors agree with the results and reasoning of In re Minguey, 10 B.R. 806 (Bkrtcy.W.D.Wis.1981) and In re Marx, 11 B.R. 819 (Bkrtcy.S.D.Ohio 1981). See also In re Anderson, 28 B.R. 628 (D.C.S.D.Ohio 1982) (district court opinion agreeing with Marx without analysis). Minguey and Marx begin by drawing the reasonable conclusion that the phrase "provided under the agreement under which such claim arose" in Section 506(b) does not modify the word "interest." As...