Oversecured Creditor’s Motion for Payment of Postpetition Late Charges and Prepayment Premium Denied
In In re: Amigo PAT Texas, LLC, Debtor, 579 B.R. 779 (2017), the court evaluated a motion by People’s United Equipment Finance Corp. (“PUEFC”), as creditor, for payment of post-petition interest, late charges, prepayment premium and attorney’s fees by Amigo PAT Texas, LLC, as debtor (“Amigo”).
The court granted PUEFC’s request for post-petition interest and granted in part PUEFC’s request for attorney’s fees and costs, but denied PUEFC’s request for late charges and prepayment premium. With respect to PUEFC’s request for late charges, the court observed, in deciding to deny PUEFC’s request, that the underlying promissory note did not provide for payment of late charges after acceleration of the note.
With respect to PUEFC’s request for payment of the contractual prepayment premium, the court considered whether (1) the prepayment premium must be allowed under Texas state law, (2) the prepayment premium is provided for under the relevant agreement and (3) the prepayment premium is “reasonable.” The court concluded that the prepayment premium was valid under Texas law and that it was indeed provided for under the note. But in evaluating the reasonableness of imposing the prepayment premium, the court looked at four factors: (1) whether the prepayment premium approximated actual damages, (2) whether the creditor would receive the full amount of its principal and interest at the contract rate, (3) the amount of the prepayment premium as a percentage of the principal loan amount and (4) the effect on junior creditors. The court concluded that the prepayment premium did not approximate actual damages, since it did not consider market interest rates as a basis for determination (and particularly the difference between the market rate of interest at the time of prepayment and the contract rate for the duration of the loan). Nor did PUEFC offer any evidence of damages resulting from the note’s acceleration. The court also noted that PUEFC would be receiving the full amount of its principal and interest on the note. Lastly, although the amount of the prepayment premium was relatively small (4.9% of the principal amount of the loan), the court noted that every dollar of premium payable to PUEFC would reduce the recovery of Amigo’s unsecured creditors. As a result, the court concluded that awarding the prepayment premium would be unreasonable in light of the circumstances.