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In Re DeNofa

124 Fed. Appx. 729, 2005 WL 375703 (3rd Cir. 2005)

MORTGAGES; BANKRUPTCY — When calculating the value of secured property to determine post-petition interest owed to a creditor on a loan pursuant to 11 U.S.C. 506(b) of the federal Bankruptcy Code, a court may not use third-party property used to secure the loan, but is limited to the value of the property belonging to the bankruptcy estate.

Two men owned a manufacturing company. The company took out a loan which was secured by an interest in property owned by the company. The loan was also secured by a mortgage on the men’s private residences. One of the men filed a bankruptcy petition. The lender filed a proof of claim and a motion for an automatic stay. It then assigned its interest in the loan to an investment company. The man then filed an adversary proceeding against the investment company seeking an accounting of the company’s claim and a reduction in the total amount owed to the company. The man claimed that he had entered into an oral agreement with the company in which the parties agreed to freeze the accrual of interest. In response, the company disputed the existence of an oral agreement and sought post-petition interest pursuant to 11 U.S.C. 506(b) of the federal Bankruptcy Code. The District Court held that it could not include third-party property used to secure the loan when calculating the value of the secured property to determine post-petition interest, and that it was limited to using only property that belonged to the bankruptcy estate. As a result, it concluded that the company was not entitled to post-petition interest under the statute. The company appealed, asserting that it was entitled to non-debtor property pursuant to the plain meaning of the statute.

The Court of Appeals affirmed the District Court’s ruling. In reaching its decision, it evaluated the relevant provisions of 11 U.S.C. 506(b). The statute permits a creditor to receive post-bankruptcy petition interest where the debt owed to the creditor is oversecured. A debt is oversecured if the value of the property securing the debt exceeds the total amount of the debt. On appeal, the company asserted that in assessing its claim for post-petition interest, the District Court should have included third-party property securing the loan to calculate the value of the secured property to determine post-petition interest. It further asserted that the term “property” in subsection (b) of the statute was not expressly limited to property belonging to the bankrupt estate and therefore, third-party property could be used to calculate post-petition interest. The Court reviewed both subsections (a) and (b) of the statute and determined that one provision could not be fully understood and applied without the other. Accordingly, it found that the terms used in both provisions were interchangeable. The term “property” in subsection (a) of the statute is expressly limited to property belonging to the bankruptcy estate. Therefore, the Court held that this definition of property should be applied to the term “property” in subsection (b). As a result, the Court concluded that the company was only entitled to property belonging to the bankrupt estate, and therefore was not entitled to post-petition interest under the statute.


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