Circuit Court Affirms Bankruptcy Court’s Broad Discretion to Re-Value Collateral in Determining Creditor’s Entitlement to Post-Petition Interest

The First Circuit held in a recent decision that bankruptcy courts have wide discretion to apply a flexible approach when valuing (and potentially re-valuing) collateral for purposes of determining whether a secured creditor is oversecured and therefore entitled to receive postpetition interest pursuant to section 506(b) of the Bankruptcy Code.   

In In re SW Boston Hotel Venture, LLC, — F.3d —-, 2014 WL 1399418 (1st Cir. April 11, 2014), the debtor and its affiliates owned a development project, including a hotel and condominiums, that secured a prepetition construction loan in excess of $180 million and a junior lien of approximately $10.5 million. Shortly after the petition date, the debtor’s senior secured creditor filed a motion for relief from stay to foreclose on its collateral.  The motion was denied on the grounds that the creditor was adequately protected by, among other things, the debtor’s agreement to make postpetition payments to reduce the principal amounts owing under the loan facility.  In considering the evidence submitted in connection with the lift stay motion, the court ruled that the lender was undersecured, finding that the value of its collateral was less than the face amount of its prepetition claim.

Over the course of the bankruptcy proceeding, the debtor continued to pay down the lender’s claim with the proceeds of condominium sales. Later, the debtor sold the hotel securing the loan, generating proceeds that, together with the appraised values of the lender’s remaining unsold collateral, implied that the lender was now oversecured.  Accordingly, the senior secured creditor then sought allowance of a secured claim for postpetition interest under 11 U.S.C. § 506(b), which entitles oversecured creditors to receive an allowed claim on account of accrued postpetition interest.  The bankruptcy court determined that based on these somewhat peculiar facts,the creditor was entitled to receive postpetition interest from the date that the collateral was re-valued notwithstanding its earlier ruling that the creditor was undersecured, ruling that the appreciated value of the property as evidenced by the hotel sale could serve as a basis for the claim.

In affirming the bankruptcy court’s ruling, the First Circuit held that bankruptcy courts have broad discretion to value, and re-value, collateral throughout the life of a bankruptcy case. The First Circuit noted that orders valuing collateral at one point in time and for one purpose should have no binding effect on valuation determinations later in a bankruptcy case, and recognized that time is a key variable in determining property value.  This decision comports with existing case law that provides that bankruptcy court orders pertaining to valuation are not final orders and are not immediately appealable as a matter of right when issued prior to plan confirmation.

Debtors and creditors alike should take heed of the court’s admonition in SW Boston Hotel Venture that collateral valuation can be a moving target in bankruptcy with potentially significant impact on the amount and treatment of secured claims.


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