When is a Pre-payment Penalty Recoverable by a Secured Creditor After a Bankruptcy Case is Filed?
As a general proposition, once a bankruptcy petition is filed, interest is not permitted to accrue on a pre-petition debts. One exception to this rule is when the debt is secured by a pledge of collateral and the value of the collateral exceeds the amount of the debt. 11 U.S.C. § 506. Section 506(b) provides:
(b) 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 [which allows for a surcharge against secured property], 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 or State statute under which such claim arose.
Does this section of the Bankruptcy Code permit an over-secured lender to recover a prepayment penalty? A prepayment premium is a type of “charge” contemplated in § 506(b). The Atrium View, LLC v. E. Savings Bank, FSB (In re Atrium View, LLC), 2008 WL 5378293, at *2 (M.D. Pa. Dec. 24, 2008). For a court to allow a prepayment premium under Section 506(b), the prepayment premium must be both “provided for under the agreement” and “reasonable.” In re Amigo Pat Texas, LLC, 579 B.R. 779, 783 (S.D. Tex. 2017) (citations omitted).
When deciding whether a prepayment premium is “reasonable” under Section 506(b), courts have examined a number of factors. These include: (1) whether the prepayment premium approximates actual damages; (2) whether the creditor will receive the full amount of its principal and will receive interest in full at the contract rate; (3) the amount of prepayment premium as a percentage of the principal loan amount; and (4) the effect on junior creditors. While not dispositive, the last factor—the effect on junior creditors—may be considered “especially significant.” See In re Yazoo Pipeline Co., L.P., No. 08-38121, 2009 WL 2857863 (Bankr. S.D. Tex. Aug. 31, 2009) (citing Southland Corp. v. Toronto–Dominion (In re Southland), 160 F.3d 1054, 1060 (5th Cir. 1998)).(6) See also Schwegmann Giant Supermarkets P'ship, 264 B.R. at 832.