Milham, In re

• Decision Date: 10 April 1998
• Docket Number: D,No. 1336,1336
• Citation: 141 F.3d 420
• Parties: 39 Collier Bankr.Cas.2d 1275, 32 Bankr.Ct.Dec. 581, Bankr. L. Rep. P 77,677 In re Ronald P. MILHAM and Benedetta Milham, Debtors. KEY BANK NATIONAL ASSOCIATION f/k/a Key Bank of New York, Creditor-Appellant, v. Ronald P. MILHAM and Benedetta Milham, Debtors-Appellees, Andrea E. Celli, Trustee-Appellee. ocket 97-5056.
• Court: U.S. Court of Appeals — Second Circuit

Page 420

141 F.3d 420

39 Collier Bankr.Cas.2d 1275, 32 Bankr.Ct.Dec. 581,

Bankr. L. Rep. P 77,677

In re Ronald P. MILHAM and Benedetta Milham, Debtors KEY BANK NATIONAL ASSOCIATION f/k/a Key Bank of New York Creditor-Appellant, v. Ronald P. MILHAM and Benedetta Milham, Debtors-Appellees Andrea E. Celli, Trustee-Appellee.

No. 1336, Docket 97-5056.

United States Court of Appeals Second Circuit.

Argued March 20, 1998.

Decided April 10, 1998.

Richard L. Weisz, Albany, NY (Hodgson, Russ, Andrews, Woods & Goodyear, LLP, of counsel), for Creditor-Appellant.

Martin J. Goodman, Albany, NY, for Debtors-Appellees.

Andrea E. Celli, Albany, NY, for Trustee-Appellee.

(Richard J. Miller & Associates, P.C., Rudolph J. Meola, on the brief, Albany, NY), for Amicus Curiae New York State Credit Union League, Inc.

Before: JACOBS, LEVAL, and GIBSON, ^* Circuit Judges.

PER CURIAM:

The question presented on this appeal, which is one of first impression in this Circuit, is whether an oversecured creditor is entitled to be paid its contract rate of interest post-confirmation even if the payment of that rate of interest will enable the creditor to receive more than the present value of its claim as of the effective date of the plan. For the reasons that follow, we answer this question in the negative.

BACKGROUND

Ronald and Benedetta Milham filed a petition under Chapter 13 of the Bankruptcy Code on April 24, 1996. They were indebted to Key Bank under a retail installment contract secured by a 1991 Lincoln Town Car. The Milhams owed $3,163.07 on the contract, which has an interest rate of 9.5%. The collateral has a National Automobile Dealers Association value of $11,962.50. ¹ Key Bank is therefore an oversecured creditor: the value of the asset securing its payment exceeds the amount of the debt owed to it.

The plan proposed by the Milhams contemplated payment of $3,000 plus 8.5% interest per annum on the Key Bank loan. Key Bank objected, arguing that as an oversecured creditor it is entitled to the entire amount owed plus the 9.5% per annum contract rate of interest. The Bankruptcy Court confirmed the plan at the 8.5% rate, and Key Bank appealed to the Second Circuit Bankruptcy Appellate Panel on the limited question of the applicable rate of interest post-confirmation. The panel affirmed the confirmation in an opinion by Judge Lifland, with a partial dissent by Judge Kaplan. This appeal followed.

DISCUSSION

"In a bankruptcy case, interest is the tail of the dog, but it is a long tail and it wags a lot." Dean Pawlowic, Entitlement to Interest Under the Bankruptcy Code, 12 Bankr.Dev. J. 149, 150 (1995). Directly or by Pendency interest presents a trickier question. In general, the Bankruptcy Code does not provide for pendency interest, because the filing of a bankruptcy petition usually stops interest costs from running. Section 506(b), however, provides an exception for oversecured creditors:

                implication, the Bankruptcy Code provides for three categories of interest:  (1) interest accrued prior to the filing of the bankruptcy petition (prepetition interest);  (2) interest accrued after the filing of a petition but prior to the effective date of a reorganization plan (pendency interest);  and (3) interest to accrue under the terms of a reorganization plan (plan interest).  Id. at 151.   Prepetition interest is generally allowable to the extent and at the rate permitted under the applicable nonbankruptcy law, including the law of contracts.  Id. Thus, for amounts accrued prior to the Milhams' filing, it is undisputed that Key Bank is entitled to interest at the contract rate
                

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.

11 U.S.C. § 506(b) (1993). In this passage, Key Bank places heavy weight on the phrase "to the extent"; essentially, Key Bank argues that this provision guarantees it interest at the contract rate, even after confirmation, until the equity cushion is exhausted (that is, until the value of the collateral no longer exceeds the creditor's claim). Key Bank's position is problematic, for several reasons.

First, as the panel in the present case correctly noted, section 506(b) does not say that the oversecured creditor collects pendency interest at the contractual rate. In United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989), the Supreme Court held that the phrase "provided for under the agreement under which such claims arose" does not modify the phrase "interest on such claim." Unlike prepetition interest, pendency interest is not based upon contract. See Rake v. Wade, 508 U.S. 464, 468, 113 S.Ct. 2187, 2190, 124 L.Ed.2d 424 (1993) ("[T]he right to postpetition interest under § 506(b) is unqualified and exists regardless of whether the agreement giving rise to the claim provides for interest.") (internal quotation marks omitted). The appropriate rate of pendency interest is therefore within the limited discretion of the court. See In re DeMaggio, 175 B.R. 144, 148 (Bankr.D.N.H.1994). Most courts have awarded pendency interest at the contractual rate; but nevertheless, however widespread this practice may be, it does not reflect an entitlement to interest at the contractual rate.

Even if Key Bank were entitled to pendency interest at 9.5%, that rate would apply only to the period bounded by the petition on one side and on the other by confirmation of the plan, because pendency interest does not continue to run post-confirmation. "It is generally recognized that the interest allowed by § 506(b) will accrue until payment of the secured claim or until the effective date of the plan." Rake, 508 U.S. at 468, 113 S.Ct. at 2190 (citing 3 Collier on Bankruptcy p 506.05, pp. 506-43 and n. 5c (15th ed.1993)).

On the date of confirmation, the allowed claim of an oversecured creditor is augmented by the inclusion of section 506(b) pendency interest. See, e.g., Orix Credit Alliance, Inc. v. Delta Resources, Inc. (In re Delta Resources, Inc.), 54 F.3d 722, 729 (11th Cir.) ("[A]n oversecured creditor ... is entitled to receive postpetition interest as part of its claim at the time of confirmation of a plan or reorganization ...."), cert. denied, 516 U.S. 980, 116 S.Ct. 488, 133 L.Ed.2d 415 (1995); In re DeMaggio, 175 B.R. at 150 ("[Section] 506(b) determines the exact amount of the claim...."); In re Foertsch, 167 B.R. 555, 560 (Bankr.D.N.D.1994) ("[Section] 506(b) allows an oversecured creditor to enhance its claim by adding to it postpetition interest....").

Section 506(b) thus defines the allowed claim of an oversecured creditor; treatment of that claim after confirmation is governed by Section 1325, which establishes (a) ... the court shall confirm a plan if--

the circumstances under which the court may confirm a Chapter 13 debtor's reorganization plan:

(5) with respect to each allowed secured claim provided for by the plan--

(A) the holder of such claim has accepted the plan;

(B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or

(C) the debtor surrenders the property securing such claim to such holder; ...

11 U.S.C. § 1325(a) (1993). Under this provision, the court can confirm a plan if one of three conditions is satisfied with respect to secured creditors (a category which, of course, includes oversecured creditors): the secured creditor accepts the plan; the debtor surrenders the property securing the claim to the creditor; or the debtor invokes the so-called "cram-down" power of section 1325(a)(5)(B). The present case concerns the cram-down option, pursuant to which the debtor can keep the property over the objection of the creditor. The creditor then retains a lien securing the claim and the debtor must pay the creditor over the life of the plan (which under Chapter 13 is not to exceed five years) amounts totalling the present value of the allowed secured claim as of the effective date of the plan. See Associates Commercial Corp. v. Rash, --- U.S. ----, ---- - ----, 117 S.Ct. 1879, 1882-83, 138 L.Ed.2d 148 (1997).

Postconfirmation interest, or plan interest, is a function of the present value requirement of the cram-down provision. The Code does not define the term "present value" but legislative history describes the mechanical...