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CRE Finance World, Winter 2013

Post-Bankruptcy Interest on Oversecured Debt: How Much Can You Get? Prudential charged on its other, similar loans. That consistency, But there are those occasions — primarily loan modifications/ opined the B.A.P., was enough to overcome any insinuation that forbearances — when the circumstances of a particular credit the rate amounted to a “penalty” that should be reduced as a inspire a more aggressive demand on the default rate than the matter of equity. lender’s internal guidelines will per se tolerate. In these situations, as SW Boston illustrates, there is something of a comparative risk Strategic Considerations: Formulating a Defensible assessment for the lender to make when deciding whether to stay Default Rate within or go above internal “spec”: the risk of leaving a few basis For CRE lenders, anticipating what will happen in a borrower points’ worth of default interest on the table versus the risk of the bankruptcy with any precision is extraordinarily difficult. And borrower later filing a Chapter 11 and using a “penalty” argument much of what happens in Chapter 11 cases is either technically to side-step the default rate altogether. or practically beyond the lender’s control — a fact of life that’s driven largely by the limited “exclusivity” the Bankruptcy Code gives debtors This risk assessment is not unlike many others in CRE lending, in possession (i.e., the “exclusive” right of the debtor in possession inasmuch as there is a “bird in hand” aspect to it that can’t be to control its own destiny for a period of time). In SW Boston, ignored. With so many loans in some phase of “amend and extend” for example, lender Prudential certainly had no practical way of modifications—loans with covenant defaults but a reliable level of forecasting, at loan origination, whether default interest would end debt service—there is at least a macro-level argument to be made up having a major negative impact on junior creditor recoveries in that the risk of borrower bankruptcy is so relatively remote that any a subsequent bankruptcy. opportunity to maximize here-and-now default interest service is one to be seized. “There are those occasions — But the SW Boston primarily loan modifications/ decision highlights a But as the lender in SW Boston (perhaps) learned after nearly forbearances — when the potentially important two years of bankruptcy court litigation, Chapter 11 can create circumstances of a particular strategic item that an opportunity for a savvy borrower that, in any other forum, credit inspire a more aggressive can come into play would be foreclosed by the four corners of a carefully drafted loan demand on the default rate during loan origination agreement. In Chapter 11, even something as “boilerplate” as a than the lender’s internal or modification: the mortgage’s default interest rate can be fodder for challenge, and guidelines will per se tolerate.” source of the agreed lenders should remain wary as credit risks are evaluated and default rate. Most material decisions are made. institutional lenders set their default interest 1 The Prudential Insurance Company of America v. City of Boston (In rates (or default/non-default spreads) with a fairly high level of re SW Boston Hotel Venture, LLC), Bankr. Case. No. 10-14535-JNF consistency from loan to loan and borrower to borrower—usually (B.A.P. 1st Cir. Oct. 1, 2012). as a hybrid matter of internal credit policy and market sensitivity. 2 In re General Growth Properties, Inc., No. 09-11977, 2011 WL 2974305, And rarely will borrowers want to spend much time at origination *4 (Bankr. S.D.N.Y. July 20, 2011). negotiating the finer points of post-default remedies when there are more pressing matters at hand (like non-default interest). A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 65


CRE Finance World, Winter 2013
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