Kimbrell Realty/Jeth Court, LLC v. Fed. Nat'l Mortg. Ass'n (In re Kimbrell Realty/Jeth Court, LLC)
| Decision Date | 07 December 2012 |
| Docket Number | Adversary No. 12–8047.,Bankruptcy No. 12–81454. |
| Citation | 483 B.R. 679 |
| Parties | In re KIMBRELL REALTY/JETH COURT, LLC, Debtor. Kimbrell Realty/Jeth Court, LLC, Plaintiff, v. Federal National Mortgage Association, Defendant. |
| Court | U.S. Bankruptcy Court — Central District of Illinois |
OPINION TEXT STARTS HERE
Sumner Bourne, Peoria, IL, for Plaintiff.
Jeffrey E. Krumpe, Peoria, IL, for Defendant.
This matter is before the Court on the motion for summary judgment filed by the Plaintiff, Kimbrell Realty/Jeth Court, LLC (DEBTOR), against the Defendant, Federal National Mortgage Association (FANNIE MAE). The Complaint seeks a declaratory judgment that a prepayment premium, default interest and certain additional charges sought to be imposed by FANNIE MAE are impermissible. The motion addresses only the prepayment premium and default interest. This is a core proceeding, both statutorily and constitutionally, under 28 U.S.C. § 157(b)(2)(B) and (K).
1. DEBTOR owns and operates a forty-five unit rental complex located in Peoria, Illinois, commonly known as Jeth Court.
2. The DEBTOR filed a voluntary petition for protection under chapter 11 on June 18, 2012, and is operating its apartment rental business as debtor in possession.
3. As of August 1, 2008, the DEBTOR obtained a loan from Royal Bank of Canada in the principal amount of $2,264,000.00 payable with interest at 6.55% in monthly installments of $14,385.55 over a term of 84 months, with the remaining balance due August 1, 2015, which the Note defines as the “Maturity Date.”
4. The loan is evidenced by an instrument entitled Multifamily Note, identified as a Fannie Mae Multifamily Recourse Fixed Rate Note—Multistate, Form 4100–R, 10–05.
5. Neither “prepayment” nor “prepayment premium” is defined in the definitions paragraph of the Note.
6. The term “prepayment” is used in paragraph 10 of the Note to include both voluntary extra payments made when the borrower is not in default, and involuntary payments collected from the borrower after a default and acceleration, including the application of collateral.
7. The Note provides in paragraph 10 that the “prepayment premium” is payable whether the prepayment is voluntary or involuntary.
8. Paragraph 10(e) of the Note provides that borrower recognizes that any prepayment, voluntary or involuntary, will cause lender a loss, the amount of which is difficult to ascertain, and that borrower agrees that the prepayment premium formula represents a reasonable estimate of the damages lender will incur because of a prepayment.
9. Attached to the Note is a schedule entitled “Schedule A, Prepayment Premium,” which sets out a formula for calculating the prepayment premium.
10. The Note is secured by a Multifamily Mortgage, Assignment of Rents and Security Agreement, granting a mortgage on the real estate owned by the DEBTOR.
11. FANNIE MAE is the assignee of Royal Bank of Canada and is entitled to enforce the Note and Mortgage.
12. Prior to bankruptcy, the DEBTOR defaulted on its obligations under the Note and Mortgage and FANNIE MAE exercised its right to accelerate the entire unpaid principal balance under the Note.
13. On February 7, 2012, FANNIE MAE filed an action to foreclose the mortgage in the Peoria County Circuit Court.
14. In addition to principal of $2,185,859.78 and scheduled and accrued interest of $48,917.72, the foreclosure complaint alleges, among other charges, default interest in the amount of $22,344.34 and a prepayment/yield maintenance amount due of $400,962.55.
15. The proof of claim filed by FANNIE MAE includes the following amounts due as of September 30, 2012:
+-----------------------------------+
¦Principal Balance ¦$2,185,859.78 ¦
+--------------------+--------------¦
¦Yield Maintenance ¦400,962.55 ¦
+--------------------+--------------¦
¦Interest Due ¦145,560.05 ¦
+--------------------+--------------¦
¦Default Interest Due¦81,362.56 ¦
+-----------------------------------+
The “Interest Due” is calculated based upon 366 days at 6.55%. The “Default Interest Due” is based upon 335 days at 4.00%.
16. The Note separately defines “Default Rate” to mean “a rate equal to the lesser of 4 percentage points above the Interest Rate or the maximum interest rate which may be collected from Borrower under applicable law.”
17. Paragraph 8 of the Note provides, in part, that so long as any payment remains past due for 30 days or more, interest shall accrue on the unpaid principal balance from the due date of any such payment at the Default Rate.
18. The total amount due according to the proof of claim is $2,898,588.71.
19. The DEBTOR concedes that FANNIE MAE is oversecured.
20. The DEBTOR is attempting to obtain a take-out loan to refinance the debt and pay off FANNIE MAE in full. The purpose of this proceeding is to obtain a determination of the amount of FANNIE MAE'S allowed secured claim so that refinancing may proceed.
The adversary complaint is filed in six counts. Counts I and II deal with the prepayment premium and III and IV deal with default interest. Counts V and VI deal with certain other additional charges included in the payoff statement. The motion does not address Counts V and VI and is thus properly construed as a motion for partial summary judgment.
Counts I and III are brought under section 502(b)(1) of the Bankruptcy Code, providing for disallowance of a claim to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.”
Counts II and IV are brought under section 506(b) of the Bankruptcy Code, providing that an oversecured creditor shall be allowed “interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement” under which its claim arose.
The DEBTOR contends that because the Note has been accelerated the prepayment premium is not enforceable as a matter of Illinois law. Alternatively, the DEBTOR contends that if a prepayment premium is allowed, the additional interest due on account of default is not enforceable under Illinois law and is not a reasonable charge. FANNIE MAE argues that the prepayment premium and default interest are provided for by the Note and are not prohibited by applicable law.
Under Federal Rule of Civil Procedure 56(c), made applicable to adversary proceedingsby Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact, and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the material facts are not in dispute, the sole issue is whether the moving party is entitled to judgment as a matter of law. ANR Advance Transp. Co. v. International Broth. of Teamsters, Local 710, 153 F.3d 774, 777 (7th Cir.1998).
The motion for summary judgment requires the Court to analyze the enforceability of the prepayment premium and the default interest provisions under factual circumstances that the parties agree are undisputed. Both the Note and Mortgage provide that the governing law shall be the law of the jurisdiction in which the mortgaged real estate is located. So Illinois law applies. The DEBTOR does not dispute that the Note, by its terms, provides for a prepayment premium and for default interest and that it does not characterize them as alternative remedies. Neither does the DEBTOR challenge that the preconditions for imposition of a prepayment premium and default interest, as stated in the Note, have occurred. Nor does the DEBTOR challenge the computation of the amount of the prepayment premium and default interest. 1
The DEBTOR relies upon Bankruptcy Code section 502(b)(1), which provides for the disallowance of a claim to the extent it is unenforceable under the governing agreement or applicable law, and upon section 506(b), which permits an oversecured creditor to be allowed interest on its claim and any reasonable fees, costs, or charges provided for under the agreement. The clear majority rule, with which this Court agrees, is that the allowability of prepetition interest, fees, costs and penalties as part of a secured creditor's claim is not determined under section 506, but rather under section 502. In re Wesley, 455 B.R. 383, 386 (Bankr.D.N.J.2011) (citing cases). Section 506(b) applies only to postpetition interest, fees, costs and charges sought as part of an oversecured claim. Id.
Prepayment premium.
By the terms of the Note, the DEBTOR'S obligation to pay the prepayment premium arose when FANNIE MAE exercised its right of acceleration, which occurred prepetition. A payoff letter issued by FANNIE MAE on April 12, 2012, includes the prepayment/yield maintenance sum of $400,962.55, assessed on account of the “involuntary” prepayment. In the context of this chapter 11 case, however, the DEBTOR is proposing to refinance the loan with a new lender in order to pay FANNIE MAE in full, an event which, viewed in isolation, would be a voluntary prepayment. On one hand, if the Note is considered as being involuntarily prepaid based on its prepetition acceleration, then section 502(b)(1) and (2) should apply. On the other hand, if the prepayment is viewed as a “voluntary” postpetition prepayment, then section 506(b) should apply. 2 The parties do not address, and thus do not ask the Court to decide at this stage, whether the prepayment premium liability derives from the prepetition event of acceleration or the postpetition event of refinancing. Neither do they address or ask the Court to decide whether the enforceability of the prepayment premium is properly analyzed under section 502(b) or section 506(b). As it...
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