Alerts

Oversecured Lender Awarded Post-Petition Interest at Contractual Default Rate Plus Compounded Interest

January 23, 2008

The United States Bankruptcy Court for the Southern District of New York recently awarded an oversecured lender post-petition interest on the full amount of its secured claim at the default rate set forth in the lender’s contract (19%) plus compound (PIK) interest up to the aggregate rate of 25% (the maximum rate allowable under New York State usury laws). In re Urban Communicators PCS Limited Partnership, et al., 2007 Bankr. LEXIS 4062 (Bankr. S.D.N.Y. 12/11/07) (Gerber, B.J.). Relying on Section 506(b) of the Bankruptcy Code, the court held the oversecured lender to be entitled to post-petition interest on its claim. According to the court, the “great majority of courts” rely on the parties’ contract to determine what rate of interest should be awarded. Id. at *51. Nevertheless, it was not required to use the contract rate; rather, the issue was within the court’s discretion. Id. at *54–55. Though the 19% default rate was found acceptable, giving full effect to the compounding (PIK interest) provision here would have increased the effective interest rate to an unacceptable 38%, the court explained. The equities favored limiting the awarded rate to the 25% state law criminal usury cap. Id. at *63–64.