The Bank of Missouri v. Family Pharmacy, Inc., No. 19-6025 (8th Cir. 2020)
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The Bankruptcy Appellate Panel reversed the bankruptcy court's order denying BOM's motion under 11 U.S.C. 506(b) for allowance of postpetition default interest.
The panel held that the bankruptcy court erred in applying a liquidated damages analysis and ruling the default interest rate was an unenforceable penalty under Missouri law; the panel made no decision as to whether and when the default interest rates under the notes at issue were triggered under the facts of this case, because such decisions are mixed questions of law and fact that are best left for the bankruptcy court to decide in the first instance; the panel endorsed the view that post-Ron Pair, the pre-confirmation interest rate to be applied under section 506(b) to an oversecured creditor whose claim is evidenced by a promissory note or similar loan agreement is the contract (both non-default and default) rate set forth in the note or loan agreement, to the extent enforceable under applicable law; the panel held that, absent state law to the contrary, a liquidated damages vs. penalty analysis is not applicable and should not be applied to a default interest rate set forth in a promissory note or similar loan agreement; and the panel followed the rule that equitable considerations should be used sparingly and only in exceptional circumstances. Accordingly, the panel remanded for further proceedings.
Court Description: [Saladino, Author, with Schermer and Shodeen, Bankruptcy Judges] Bankruptcy Appellate Panel. The bankruptcy court erred in denying the Bank of Missouri's motion under Code Sec. 506(b) for allowance of postpetition default interest; the Panel makes no decision as to whether or when the default interest rates under the notes at issue were triggered under the facts of the case, as those are mixed questions of law and fact, and such decisions are best left to the bankruptcy court in the first instance; the Panel endorses the view that post-Ron Pair, the preconfirmation interest rate to be applied under Section 506(b) to an oversecured creditor whose claim is evidenced by a promissory note or similar loan agreement is the contract (both non-default and default) rate set forth in the note or loan agreement to the extent enforceable under applicable law; absent state law to the contrary, a liquidated damages vs. penalty analysis is not applicable and should not be applied to a default interest rate set forth in a promissory note or similar loan agreement; equitable considerations should be used sparingly and only in exceptional circumstances. [ March 18, 2020 ]
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