Bank of Mo. Creditor v. Family Pharmacy, Inc. (In re Family Pharmacy, Inc.), No. 19-6025

614 B.R. 58

IN RE: FAMILY PHARMACY, INC.; Family Pharmacy of Missouri, LLC; HealthTAC Logistics, LLC; Family Property Management, LLC ; Family Pharmacy of Strafford, Inc. Debtors

The Bank of Missouri Creditor - Appellant

v.Family Pharmacy, Inc.; Family Pharmacy of Missouri, LLC; HealthTAC Logistics, LLC; Family Property Management, LLC ; Family Pharmacy of Strafford, Inc. Debtors - Appellees

JM Smith Corporation; Smith Management Services, LLC Creditors - Appellees

No. 19-6025

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: February 19, 2020

Filed: March 19, 2020

Counsel who presented argument on behalf of the appellant was Andrew Muller, of Kansas City, MO. The following attorney(s) appeared on the appellant brief; Andrew Muller, of Kansas City, MO.

Counsel who presented argument on behalf of the appellee was John Joseph Cruciani, of Kansas City, MO. Darryl Scott Laddin, of Atlanta, GA. The following attorney(s) appeared on the appellee brief; John Joseph Cruciani, of Kansas City, MO., Daniel R. Luppino, of Kansas City, MO., Darryl Scott Laddin, of Atlanta, GA.

Before SALADINO, Chief Judge, SCHERMER and SHODEEN, Bankruptcy Judges.

SALADINO, Chief Judge.

The Appellant, the Bank of Missouri ("BOM"), appeals the order of the bankruptcy court denying its motion under 11 U.S.C. § 506(b) for allowance of postpetition default interest. We have jurisdiction over this appeal. See 28 U.S.C. § 158(b). For the reasons that follow, we reverse and remand.

STANDARD OF REVIEW

On appeal from a final judgment, the appellate court reviews the bankruptcy court's legal decision using a de novo standard and reviews factual findings for clear error. Fix v. First State Bank of Roscoe , 559 F.3d 803, 808 (8th Cir. 2009). This case primarily involves review of the bankruptcy court's interpretation and application of § 506(b) under a de novo standard. See United States v. Brummels , 15 F.3d 769, 771 (8th Cir. 1994) (stating that standard of review for the lower court's "application of facts to the legal interpretation" of a statute is de novo ); Wegner v. Grunewaldt , 821 F.2d 1317, 1320 (8th Cir. 1987) (stating that reviewing court considers bankruptcy court's statutory constructions de novo ).

FACTUAL BACKGROUND

The facts are not disputed.¹

Debtor Family Pharmacy, Inc., and four related entities (collectively, the "Debtors") filed voluntary petitions for Chapter 11 relief on April 30, 2018. Debtors' assets consisted primarily of inventory, equipment and real estate used in operating pharmacies in southwest Missouri. Those assets were encumbered by three secured creditors, in order of priority: The Bank of Missouri, owed approximately $11 million; Cardinal Health, $1 million, and J M Smith Corporation and Smith Management Services, LLC (collectively, "Smith"), $18 million.

Early in the case, Debtors and their creditors determined that the assets needed to be sold at an auction sale free and clear of liens pursuant to 11 U.S.C. § 363. Smith, the Debtors' primary supplier, agreed to advance debtor in possession financing and to serve as the so-called stalking horse bidder for the sale with an $8 million opening bid.

The court promptly entered orders approving Debtors' interim and final motions for use of debtor in possession financing and use of cash collateral, and approving bid procedures for the sale. The auction drew substantial interest and on August 8, 2018, the bankruptcy court entered its sale order approving Smith as the purchaser with a final bid of $13,975,000. Under the terms of the sale order and subsequent stipulations with various claimants, the sales proceeds (after various fees and closing costs) were disbursed to BOM and Cardinal Health, leaving excess sales proceeds of approximately $556,040.59.

Under its stipulation with the Debtors, BOM received $11,300,440.67, which represented its full principal balance, estimated interest at the non-default rate set forth in its loan contracts, certain fees and expenses, less its share of the broker's fee for the sale. The parties reserved any issues as to BOM's entitlement to additional interest, fees or charges. BOM, as an oversecured creditor, later filed its motion under 11 U.S.C. § 506(b) seeking allowance of $18,271.19 in postpetition attorneys fees plus $442,843.51 in interest calculated at an 18% default rate. The Debtors and Smith jointly objected to BOM's motion. Smith is owed approximately $16 million on account of its undersecured secured claim.

At the hearing on the BOM's motion, the Debtors and Smith agreed to allowance of the BOM's attorney fees, leaving only the default interest at issue.

BANKRUPTCY COURT DECISION

The bankruptcy court denied BOM's motion to enforce the default interest provisions for two alternative reasons. First, the bankruptcy court held the default interest rate constituted an unenforceable penalty under Missouri law. In so doing, the bankruptcy court held that under Missouri law, courts refuse to enforce liquidated damages clauses found to be improper penalties. Using this standard, the bankruptcy court concluded that BOM's default interest rate constituted an unenforceable penalty. Second, and as an alternative holding, the bankruptcy court held that the default interest rate could not be enforced based on "equitable considerations."

Before reaching its alternative holdings, the bankruptcy court briefly addressed the issue of whether the default interest rate had even been triggered under the terms of the contracts. The bankruptcy case was filed on April 30, 2018. The parties are in agreement that on that date, the loans were not in default. Under the express terms of the promissory notes, the next scheduled payments were due May 1, 2018. It is undisputed that the debtors did not make those or any subsequent postpetition payments. BOM argued that its default interest rate was automatically triggered when the payments were not made on May 1. The Appellees argued that they were excused from making postpetition payments absent a court order, and should not be held in default. Noting that the caselaw on the subject was "murky," and due to its alternative holdings, the bankruptcy court did not rule on the default issue.

DISCUSSION

BOM asserts three assignments of error by the bankruptcy court. First, it asserts the court erred in finding the default interest rate under its loan documents constituted an unenforceable penalty under Missouri law. Specifically, BOM asserts that it was erroneous to apply a liquidated damages vs. penalty analysis to a contractual rate of interest set forth in a promissory note. Second, BOM asserts that it was erroneous for the bankruptcy court to weigh "equitable considerations" under the plain language of 11 U.S.C. § 506(b). Finally, even though the bankruptcy court declined to opine on the issue, BOM argues that to the extent the bankruptcy court based its holding on a lack of default or a lack of notice, that too is erroneous under the express language of the loan documents.

11 U.S.C. § 506(b)

It is undisputed that BOM is entitled to "interest" on its claims. 11 U.S.C. § 506(b) provides:

To the extent that an allowed secured claim is secured by property the value of which, after recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided under the agreement or State statute under which such claim arose.

In United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), the Supreme Court held that § 506(b) allows all oversecured creditors, including those holding nonconsensual liens, to recover postpetition interest on their claims. Id. at 241, 109 S.Ct. 1026. In doing so, the Supreme Court rejected the pre-Code practice of treating consensual and nonconsensual liens differently, saying it could not discern "any significant reason why Congress would have intended, or any policy reason would compel, that the two types of secured claims be treated differently in allowing postpetition interest." Id. at 243, 109 S.Ct. 1026. The Supreme Court concluded that this result was mandated by the plain language of the statute and is "unqualified." Id. at 241, 109 S.Ct. 1026.

However, the right of an oversecured creditor to recover "fees, costs and charges" is qualified. Under the plain language of the statute, those recoveries are allowed only if provided for in the parties' agreement and only if the court determines they are reasonable. Id. at 241-42, 109 S.Ct. 1026. In holding that the right to interest was "unqualified," the Supreme Court was saying that the qualifications applicable to the right to recovery of fees, costs and charges under § 506(b) – that they must be provided for in an agreement and must be reasonable – are not applicable to any oversecured creditor's entitlement to interest.

Although the Ron Pair holding is clear that all oversecured creditors are entitled to postpetition interest, the Supreme Court did not set the rate at which an oversecured creditor is entitled to recover postpetition interest. Since Ron Pair , "most courts have concluded that ‘postpetition interest should be computed at the rate provided in the agreement, or other applicable law, under which the claim arose – the so-called contract rate of interest." ’ White v. Coors Distrib. Co. (In re White), 260 B.R. 870, 879 (8th Cir. BAP 2001) (citations omitted). In White , we affirmed the bankruptcy court's decision that an assignee of the original lender was entitled to collect postpetition interest under Nebraska law and under § 506(b) at the 18% rate specified in the contract.

The Contract Rate of Interest.

The bankruptcy court found that between July 21, 2014, and March 1, 2018, BOM made eight loans to the Debtors. The individual promissory notes have non-default interest rates ranging between 3.65% and 7.5%. Other than these non-default...