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The Appropriate Interest Rate Under ' 506(b)
“A loaf of bread, a container of milk, and a stick of butter.” This Sesame Street sound bite, lodged in the deepest recesses of our brains, to be sure, came to mind after reviewing the recent decision rendered by Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in the Chapter 11 cases of Residential Capital, LLC (ResCap) on the oft-disputed issue of the appropriate interest rate calculation under Section 506(b) of the Bankruptcy Code. We heard in our minds Judge Glenn repeating, over and over, “rebuttable presumption, equitable considerations, and a balancing of the equities.”
We all know what the issue is. Section 506(b) of the Bankruptcy Code provides that over-secured creditors are entitled to receive post-petition interest, but it does not tell us what interest rate should be applied. Aye, there's the rub. Indeed, Congress' failure to provide the appropriate interest rate has triggered numerous disputes in many different jurisdictions as to whether: 1) the appropriate rate should be the contract rate, the Federal judgment rate, or some other rate altogether; and 2) regardless of which rate is selected, will the award of post-petition interest harm other creditors? This article explores the specific facts and circumstances that Judge Glenn considered and ultimately relied upon when deciding to rule in favor of Citibank, playing the role of secured creditor in the case, granting, for the most part, its request to receive post-petition interest at the default rate governed by its contract.
The ResCap Facts
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