The bankruptcy court approved a settlement between the debtors and their lender to resolve the lender’s objection to the debtors’ Chapter 12 plan. It also settles the lender’s motion for relief from stay in which it seeks to recover and foreclose its liens against collateral still owned by the debtors. Under the settlement, the parties stipulated the total amount owed to the bank, which includes unpaid principal, accrued interest, and attorneys’ fees and costs. The debtors are required to execute a “modified” note pursuant to the settlement which will add the accrued interest and the fees and costs to the principal balance of the note and reduce the interest rate. Of the total modified debt, only one-half is recourse against the debtors, the debtors’ estates, and collateral still owned by the debtors. The other half is recourse only against collateral sold out of trust pre-petition. The bank also retains any claims it has against any parties who converted its collateral.
Parties against whom the bank seeks to recover collateral to satisfy the other half of the modified debt objected to the settlement. They assert the settlement seeks approval of attorney’s fees and costs without disclosure or a finding of reasonableness under 11 U.S.C. § 506(b), is usurious under Neb. Rev. Stat. § 45-109, is unfair and inequitable to the objectors, and allows post-petition attorney fees to be collected against the objectors.
The bankruptcy court ruled that the settlement met the required standard of being fair and equitable and in the best interests of the estate. The court found the settlement resolves significant and protracted litigation between the debtors and the bank and requires the bank to make significant concessions.
The court overruled the objection as to the reasonableness of the attorneys’ fees, stating that the court needn’t determine the reasonableness of the fees because the settlement reduces the bank’s secured claim to an amount less than it is entitled to. “On whole, the Bank is not seeking to supplement its proof of claim for payment through the bankruptcy plan [which would implicate §506(b)]. As to the bankruptcy estate, the Bank is voluntarily reducing its claim.”
Likewise, §506(b) does not require the interest rate to be reasonable. It permits interest “provided for under the agreement or State statute under which such claim arose” and the loan agreement in this case provided for a 45% default interest rate.
The objecting parties argued the default interest rate is usurious under Nebraska law, which “forbids contracts for the payment of money to satisfy a debt where the debtor’s payment does not actually discharge the debt.” They took the position that the settlement agreement is usurious because if the debtors pay their half, the indebtedness is not discharged. The court disagreed with this argument, noting that under the terms of the settlement, “[t]he debt is discharged if the contracted amount is paid, plus interest, in an amount less than the usury rate. Making half non-recourse to the debtor simply does not constitute usury.”
The objectors also argued the settlement is unfair and inequitable because it “purports to place them on the hook for at least $277,798.71, plus 9.5% interest” when the debtors have assets available to pay the bank. The court disagreed, noting that the objecting parties’ liability, if any, already exists, and arises both inside and outside of bankruptcy under U.C.C. Article 9. “The objecting parties might prefer the secured party completely recover from the debtors and their bankruptcy estates. But any recovery from the objecting parties is authorized by state law and is not unfair or inequitable. The Bank has multiple avenues of recovery from which it can elect. It is free to avail itself against the objectors, with or without the settlement. The objectors are free to raise any defenses they have.”
The court limited its approval of the settlement to the bankruptcy realm only, giving the settlement agreement no preclusive effect outside of the bankruptcy case or in any litigation between the bank and third parties.