Casa Blanca Project Lenders, L.P. v. City Commerce Bank (In Re Casa Blanca Project Lenders, L.P.)

196 B.R. 140, 96 Daily Journal DAR 8762, 96 Cal. Daily Op. Serv. 4167, 1996 Bankr. LEXIS 587, 29 Bankr. Ct. Dec. (CRR) 129, 1996 WL 288381
CourtUnited States Bankruptcy Appellate Panel for the Ninth Circuit
DecidedApril 30, 1996
DocketBAP No. CC-95-1345-VHM. Bankruptcy No. ND 93-12987-RR
StatusPublished
Cited by23 cases

This text of 196 B.R. 140 (Casa Blanca Project Lenders, L.P. v. City Commerce Bank (In Re Casa Blanca Project Lenders, L.P.)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Appellate Panel for the Ninth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Casa Blanca Project Lenders, L.P. v. City Commerce Bank (In Re Casa Blanca Project Lenders, L.P.), 196 B.R. 140, 96 Daily Journal DAR 8762, 96 Cal. Daily Op. Serv. 4167, 1996 Bankr. LEXIS 587, 29 Bankr. Ct. Dec. (CRR) 129, 1996 WL 288381 (bap9 1996).

Opinions

OPINION

VOLINN, Bankruptcy Judge:

OVERVIEW

The Chapter 11 debtor appeals an order granting an over-secured creditor default interest where the creditor received full payment of its principal, interest at the pre-default rate, costs and attorneys’ fees. The trial court awarded the creditor the higher interest rate because the collateral was sold pursuant to § 363 of the Bankruptcy Code rather than in the context of a plan of reorganization.2 We reverse and remand.

FACTUAL BACKGROUND AND PROCEEDINGS

The debtor, along with a consortium of lenders, held a second position deed of trust on certain real property located in Santa Barbara, California. The debtor, a limited partnership, and its associates, in a high risk, high interest loan exceeding 30 percent, had advanced over $850,000 to the original owner-borrowers. The property was undeveloped and could only be sold as a single lot. The original equity holders and borrowers, Frank and Lorraine Serena, defaulted and the consortium foreclosed and purchased the property at a trustee’s sale. City Commerce Bank (the “Bank”) was the holder of the first-position deed of trust, securing a note dated January 22, 1988 in the amount of $2,300,000. The Bank subsequently initiated foreclosure proceedings. To prevent loss of the property through a trustee’s sale, the debtor, on or about August 28, 1993, filed for protection under Chapter 11 of the Code. In its schedules, the debtor listed approximately $49,000 in unsecured debt and $913,690.71 in secured debt. All of the secured debt was owed to the Bank. The debtor’s enumerated assets were the real property valued at $1,530,000 and a negligible amount of personal property. On this record, and as it turned out, the bank was oversecured.

Within a month after the petition was filed, the Bank moved for relief from stay. The motion was granted subject to a 90-day moratorium in order to allow the debtor to sell the entire property to a previously-identified purchaser. The sale did not close, but to prevent foreclosure, the debtor filed a complaint for injunctive relief and a temporary restraining order. The litigation resulted in a series of preliminary injunctions which gave the debtor time to obtain approval from the California Department of Real Estate to subdivide the property into eight individual lots. As a condition of the stay of foreclosure, the debtor was required to make adequate protection payments to the Bank in the amount of $31,000 to $35,000 every six weeks. This sum was equivalent to interest at the non-default rate. Because of the Bank’s pressure for immediate liquidation, [142]*142the lots were sold under § 363, rather than pursuant to a plan of reorganization.3

After the sale of each lot, the Bank was also paid the net sale proceeds. The debtor ultimately sold six of the eight lots. The proceeds were sufficient to both reimburse the Bank’s costs and pay its outstanding principal plus interest at the non-default rate.

As an oversecured creditor under § 506(b), the Bank sought further interest at a default rate and attorneys’ fees of $29,500.4 The base variable interest rate on the note was prime plus 2 percent, which at the outset amounted to 9 percent. Presumably, the variable rate reflected changes in the market interest rate. The note provided that in the event of default, the interest rate would be increased by 7 percent. The record shows that the prime plus two figure created a variable interest rate which ranged between 9.5 and 12.5 percent. Therefore, the default rate would, presumably, range between 16.5 and 19.5 percent. The total amount of default interest was an additional $266,979.01, which the Bank sought from the sale of the remaining lots. The net proceeds are projected to be over $550,000. The debtor objected to the Bank’s request because it wished to apply the additional proceeds to recoupment of some of its investment as it would have been entitled to do under a Chapter 11 plan pursuant to § 1129(b)(2), discussed below. The court ordered all funds in excess of the non-default rate to be held in trust until the issue was resolved. The Bank then brought a motion to disburse these proceeds to pay off the balance, which, as indicated, consisted of accrued default interest.

The court held that because the sales did not take place pursuant to a plan of reorganization, the obligation to the Bank was not “cured.” Without a legal cure, the court concluded that the Bank was entitled to attorneys’ fees and interest at the default rate. An evidentiary hearing was held on April 24, 1995, to determine the propriety of the default interest .rate and the Bank’s attorneys’ fees. The court found the interest and fees reasonable and ordered them paid. The debtor timely appealed the court’s order.

The debtor asserts that payment to the Bank constitutes a cure regardless of whether it occurs outside of, or pursuant to, a plan of reorganization. As such, the debtor claims that default interest is not owing because a cure nullifies all consequences of default, including the increased interest rate. The debtor further argues that equity demands that the court disallow the higher rate in this instance.

ISSUES

1) Whether a defaulted obligation to an oversecured creditor is cured in Chapter 11 where the creditor receives a return of principal plus interest at the pre-default rate after a sale of the collateral pursuant to § 363.

2) Whether equity requires that the pre-default rate of interest be imposed in order to allow for a distribution to the debtor.

STANDARD OF REVIEW

Whether a cure can occur pursuant to a sale under § 363 is a question of statutory interpretation and is reviewed de novo. In re Southeast Company, 81 B.R. 587 (9th Cir. BAP 1987), aff'd, 868 F.2d 335 (9th Cir.1989). A trial court’s findings of fact are reviewed under the clearly erroneous standard. In re Johnston, 49 F.3d 538 (9th Cir.1995).

DISCUSSION

Relationship of State and Federal Law

A creditor is not entitled to postpetition interest under the Bankruptcy Code unless it is oversecured. 11 U.S.C. § 506(b).5 [143]*143Even where interest payments are appropriate, however, neither the Code nor the applicable legislative history indicate what the rate should be.

We note that, as a rule, bankruptcy courts apply state law when analyzing a debt- or’s interest in property. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). However, this case requires the application of bankruptcy rather than state law because the issue before the panel involves payment of the Bank’s secured claim, not the debtor’s interest in property. Vanston Bondholders Protect. Comm. v. Green, 329 U.S. 156, 162, 67 S.Ct. 237, 240, 91 L.Ed.

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196 B.R. 140, 96 Daily Journal DAR 8762, 96 Cal. Daily Op. Serv. 4167, 1996 Bankr. LEXIS 587, 29 Bankr. Ct. Dec. (CRR) 129, 1996 WL 288381, Counsel Stack Legal Research, https://law.counselstack.com/opinion/casa-blanca-project-lenders-lp-v-city-commerce-bank-in-re-casa-blanca-bap9-1996.