The First Circuit Chooses A 'Flexible' Approach To Post-Petition Interest

In a recent decision, the First Circuit used a "flexible" approach to value the collateral claimed by an oversecured creditor, and granted post-petition interest on the creditor's claim. In re SW Boston Hotel Venture, LLC, No. 12-9008, 2014 WL 1399418, — F.3d — (1st Cir. Apr. 11, 2014). Oversecured creditors (i.e., creditors whose collateral is worth more than the value of their secured claim) are exceptions to the general rule that creditors in a bankruptcy cannot receive post-petition interest. 11 U.S.C. § 502(b)(2) (disallowing claims for unmatured interest); 11 U.S.C. § 506(b) (creating exception for oversecured creditors). Considering the claim of a creditor who became oversecured during the bankruptcy proceeding, the First Circuit highlighted the extent of a court's discretion to determine how, when, and at what rate post-petition interest accrues. Choosing between two camps, the First Circuit adopted what is known as the "flexible" approach in establishing when the creditor became oversecured (the "valuation date") of the creditor's collateral, though the court noted that this approach might not be appropriate in other circumstances. The court looked to a pre-petition agreement among the parties to determine the rate at which post-petition interest accrued but found that, even though the parties' contract called for compounded interest, the creditor forfeited that particular right by not raising it in time.

Determining Secured Status: Application of the Flexible Approach

The parties in SW Boston did not dispute that the creditor, Prudential Insurance Company of America ("Prudential"), became oversecured at some point during the bankruptcy proceeding, but they disagreed as to when this occurred. Because Prudential's claim decreased over the course of the proceeding while the value of its underlying collateral increased, the measuring date made "the difference between a finding of oversecurity or undersecurity." In re SW Boston Hotel Venture, LLC, No. 12-9008, 2014 WL 1399418, at *6 (1st Cir. Apr. 11, 2014).

The Bankruptcy Code does not indicate when a court should value secured collateral to determine a creditor's secured status. The case law has separated into two camps: some courts have adopted a strict "single-valuation" approach, where creditors' secured statuses are categorically determined on the same date, such as the filing date or plan confirmation date. See, e.g., Orix Credit Alliance, Inc. v. Delta Res., Inc., 54 F.3d 722...