Matter of Elmwood Farm, Inc., Bankruptcy No. 80 B 20346

• Decision Date: 07 April 1982
• Docket Number: Bankruptcy No. 80 B 20346,Adv. No. 81 6195.
• Citation: 19 BR 338
• Parties: In the Matter of ELMWOOD FARM, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

19 B.R. 338 (1982)

In the Matter of ELMWOOD FARM, INC., Debtor.

Bankruptcy No. 80 B 20346, Adv. No. 81 6195.

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

April 7, 1982.

Sidney Turner, White Plains, N.Y., for trustee.

Helfand & Alter, New York City, and Savad & Gavioli, Nanuet, N.Y., for secured claimants; Maxwell Barrett, New York City, of counsel.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The issue to be resolved in this case is the extent, if any, to which secured claimants may recover interest and attorneys' fees with respect to their secured claims.

The debtor, Elmwood Farm, Inc., filed with this court a petition for relief under Chapter 11 of the Bankruptcy Code on August 6, 1980. However, the debtor was unable to effect a reorganization, with the result that it was converted to Chapter 7 for liquidation by order of this court on March 18, 1981. The trustee in bankruptcy, who was selected by the United States Trustee pursuant to 11 U.S.C. § 15701, thereafter defended an adversary proceeding commenced by the above-captioned plaintiffs for an order directing the trustee to pay certain amounts due them pursuant to perfected mortgages against the debtor's real and personal property, together with interest and attorneys' fees.

The debtor's estate was liquidated by the trustee through the sale of property free and clear of liens, with the liens to attach to the proceeds in accordance with the provisions under 11 U.S.C. § 363(f). The expense of this sale amounted to $27,150. Additionally, the trustee received the proceeds of fire insurance to which the estate was entitled as a result of a fire that destroyed the debtor's horse stables. The gross estate currently totals $672,778.54 to which should be added interim allowances previously disbursed in the amount of $42,206.23, for a total gross estate of $714,984.77.

The plaintiffs established at the trial that the principal amount of their original loan to the debtor was $270,000, of which $140,000 was owed to the Peoples National Bank of Rockland County, $75,000 was owed to the Northeast Small Business Investment Corporation and $55,000 was owed to Samuel Kripke. An additional $50,000 was thereafter advanced by Samuel Kripke, for a total principal indebtedness due to the plaintiffs in the amount of $320,000, which was subordinate to a first mortgage dated January 5, 1979, in the sum of $95,000, secured by approximately 45 unimproved acres.

The plaintiffs' mortgage notes provide that the debtor agreed to pay interest on the principal at the rate of 15 per cent per annum, together with attorneys' fees of 20 per cent of the unpaid balance, if the notes were placed with attorneys for collection.

The evidence at the trial also revealed that when the debtor filed its Chapter 11 petition on August 6, 1980, its indebtedness to the plaintiffs, inclusive of interest at the rate of 15 per cent per annum totalled $415,397.85, comprised as follows:

                           Plaintiff                       Debt
                   The Peoples National Bank of
                     Rockland County                     $189,712.15
                   Northeast Small Business Investment
                     Corporation                           92,597.70
                   Samuel Kripke                           67,880.00
                   Samuel and Emma Kripke                  65,208.00
                

It is noted that subsequent to the filing of the proof of claim by Peoples National Bank of Rockland County, the sum of $20,000 was paid to the trustee because this sum was applied by the bank to passbook collateral after the filing of the debtor's Chapter 11 petition. Therefore, the bank filed an amended proof of claim to reflect this refund. The parties have agreed in the proposed orders which they previously submitted that the trustee is entitled to deduct from any payments to be made to the Peoples National Bank of Rockland County the sum of $3,599.96, representing the interest on the $20,000 at 15 per cent per annum for the period from the date of the filing of the Chapter 11 petition to October 19, 1981, when the $20,000 was refunded to the trustee.

Since the gross estate of $714,984.77, inclusive of interim allowances, exceeds the amount of the first mortgage, originally at $95,000 (but now totalling approximately $120,000 with interest) and the amount of the plaintiffs' secured claims when the Chapter 11 petition was filed, aggregating $415,397.85, it follows that the plaintiffs may look to 11 U.S.C. § 506(b), which provides:

"§ 506. Determination of secured status.

. . . . .

(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 under the agreement under which such claim arose."

INTEREST

Code § 506(b) is a codification of existing law that permits a creditor whose security is more than sufficient to receive payment in full to recover interest beyond the date of bankruptcy in accordance with the terms of the security agreement. The rule was stated as follows in Coder v. Arts, 152 F. 943 at 950 (8th Cir. 1907), affirmed 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772 (1908):

"By the terms of the note and mortgage the mortgagor agreed to pay interest on his debt until it was paid, and that the mortgaged lands might be sold by the mortgagee, and that their proceeds might be applied to the payment of this debt and interest. The covenant for the sale and the application of the proceeds of these lands to the payment of the debt and interest was valid and binding, and it ran with the land, so that when the latter came to the hands of the trustee it was mortgaged for the payment of the interest as much as for the payment of the principal, and the proceeds of its sale necessarily came to his possession subject to the same charge."

See also In re Unikraft Homes of Virginia, Inc., 370 F.Supp. 667 (D.C.W.D.Va.1974); In re Sequist, 369 F.Supp. 678 (D.C.Conn.1974). In the Sequist case the court said at page 680:

"Since, in the present case, a sale of the mortgaged property free and clear of liens produced a fund which exceeded the principal of the secured debt, the petitioner was clearly entitled to interest beyond the date of

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