Alerts

Oversecured Lender's Contractual Prepayment Penalty Held Enforceable As Unsecured Claim Against Solvent Debtor

November 16, 2007

The Court of Appeals for the First Circuit recently held that an oversecured lender holds at least an unsecured claim for contractual prepayment penalties against a solvent debtor. UPS Capital Business Credit v. Gencarelli (In re Gencarelli), 2007 BL 91656 (1st Cir., Aug. 30, 2007). As the court explained, "[t]his is a difficult question that has significant ramifications for the commercial lending industry." Id. at 16. It is irrelevant, the court explained, whether the prepayment penalty is unreasonable or entitled to secured lender priority status under § 506(b) of the Bankruptcy Code ("Code"), so long as the penalty is valid under applicable state law.