## Facts

- Terry Limited Partnership owned an office building encumbered by first, second, and third mortgages.
- Terry defaulted on the second and third mortgages and filed for Chapter 11 relief; reorganization failed.
- The bankruptcy court ordered a sale of the building; the sale proceeds were to pay the first mortgage, then the second mortgage (Equitable Life Assurance Society), with any remainder to the third mortgagee/purchaser (Invex Holdings).
- Invex purchased the building at the court-ordered sale for about $4 million; the first mortgage was paid in full.
- Equitable’s loan documents provided for 14.25% interest absent default and 17.25% interest upon default.
- Equitable was oversecured from the sale proceeds, and it sought post-petition interest at the 17.25% default rate plus contractual fees, costs, and charges.
- Evidence showed default-rate premiums were common in commercial mortgages; Invex’s own expert testified the 14.25%/17.25% structure was not unusual or unreasonable.

## Issues

1. Whether, under 11 U.S.C. § 506(b), an oversecured creditor may recover post-petition interest at a contractual default rate rather than the non-default rate.
2. Whether § 506(b) allows recovery of contractual fees, costs, and charges from collateral proceeds, and under what limits.

## Decision

- The Seventh Circuit affirmed the district court, which had affirmed the bankruptcy court.
- The court held Equitable, as an oversecured creditor, could recover post-petition interest at the 17.25% contractual default rate under § 506(b).
- The court also allowed contractual fees, costs, and charges to the extent they were enforceable under state law and reasonable.
- The court rejected Invex’s fairness objection that default interest would leave little or nothing for the junior lienholder.

## Legal Principles

- Under 11 U.S.C. § 506(b), an oversecured creditor is entitled to post-petition interest, and to reasonable fees, costs, or charges provided in the parties’ agreement.
- When a contract specifies a default interest rate, that rate is generally applied for an oversecured claim unless the objecting party shows the rate is unenforceable under applicable state law or is inequitable in the bankruptcy context.
- Bankruptcy courts have limited reason to override contractual priority and interest terms in a dispute between secured creditors when unsecured creditors are not harmed.
- Contractual fees, costs, and charges are recoverable under § 506(b) only to the extent they are reasonable and valid under nonbankruptcy law.

## Conclusion

The Seventh Circuit enforced a senior mortgagee’s contractual default-rate interest and related loan charges under § 506(b) because the creditor was oversecured and the junior creditor failed to show the default premium or charges were unlawful, unreasonable, or otherwise improper in bankruptcy.


In re Terry Ltd. P’ship, 27 F.3d 241 (7th Cir. 1994)