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Presque Isle Apartments, L.P. v. Fidelity Union Bank/First National Bank (In Re Presque Isle Apartments, L.P.)
Citations: 109 B.R. 687; 1990 Bankr. LEXIS 2928; 1990 WL 5332Docket: 16-21010
Court: United States Bankruptcy Court, W.D. Pennsylvania; January 26, 1990; Us Bankruptcy; United States Bankruptcy Court
On January 29, 1985, Presque Isle Apartments, L.P. executed a $300,000 promissory note at 12% interest in favor of First Fidelity Bank, secured by a second mortgage on a 96-unit apartment complex. Following the debtor's default on April 29, 1985, and subsequent filing for Chapter 11 bankruptcy on February 12, 1987, the debtor filed a motion to determine the lien status and appropriate interest rate post-default. Key issues include the interpretation of "highest rate of interest allowed by law" and the correct interest rate to apply. The debtor claims this refers to New Jersey's basic judgment rate of 6%, while the Bank cites the criminal usury rate of 50% for corporate loans but seeks to maintain the original 12% rate post-default. The court rejected the debtor’s argument, stating that the term "highest rate of interest" encompasses any rate permissible under New Jersey law, which does not limit the definition to the judgment rate. Legal interest is defined by New Jersey statutes, which allow rates above the basic judgment rate. The court emphasized that the parties likely intended for the interest provision to protect the Bank from increased credit risk after the debtor's default, implying a preference for maintaining a higher interest rate rather than reducing it post-default. Adopting a rule that allows a debtor a reduced interest rate post-default would be counterproductive, as it could incentivize defaults. Courts are required to interpret contract language according to its plain meaning, which in this case indicates that interest after default is charged at the maximum legally permissible rate, not the basic judgment rate. In New Jersey, the basic interest rate for loans is set at 6%, with a cap of 16% for written contracts. However, loans exceeding $50,000 that are not secured by a first lien on real property can have any agreed-upon interest rate, up to the criminal usury rates of 50% for corporations and 30% for individuals. Although higher post-maturity rates are permissible, excessively high rates can be deemed unenforceable as penalties. The Bank's loan to the debtor exceeded $50,000 and was not secured by a first lien, allowing for a contractual interest rate of 12%. As the loan was in default but no judgment had been entered, the court concluded that the equitable post-default interest rate should reflect the agreed-upon 12%. Consequently, the Bank's request to maintain a 12% simple interest rate on the outstanding balance post-default was granted. Additionally, there is a clarification regarding the historical judgment rates in New Jersey, which have varied over time and do not currently align with the basic interest rate of 6%. An appropriate order reflecting these determinations will be issued.