ALI-ABA Course of Study Commercial Real Estate Defaults ...

94
of deficiency has been established in an ancillary proceeding. The
determination of market value of the foreclosed real estate may limit the
amount that may be recovered against other assets of the debtor or against
guarantors or partners of the debtor. 111 This may even apply in seeking to
proceed against other primary collateral such as the furniture, fixtures and
equipment (FF&E) on a hotel loan.
5.3 Yield Maintenance Provisions, 112 Prepayment Charges, Default Interest and
Liquidated Damages 113
5.3.1 Yield maintenance provisions are prepayment fees intended to compensate
the lender for income lost as a result of a premature payment of all or part
of the loan principal. The more recently drafted yield maintenance
provisions clearly impose the premium 114 in the event of prepayment as a
result of an acceleration following a default 115 .
5.3.2 In bankruptcy code proceedings several courts have treated yield
maintenance provisions as liquidated damage clauses 116 and then
characterized the specific provision as an unenforceable penalty provision
on the basis of the computational approach used that would yield to the
lender more then the court determined to be appropriate. 117
111 In Fed. Home Loan Mort. Corp. v. Arrott Associates, 60 F.3d 1037 (3rd. Cir. 1995) the Court reduced the amount
due under a limited guarantee by the market value of the mortgaged property and thus found there to be no liability
under a 10% guarantee.
112 On prepayments generally see Note, Prepayment Penalties: A Survey and Suggestion, 40 Vand L. Rev. 409 (1987).
113 Also see Item 5.28 below on default interest.
114 A careful draftsman will not refer to these payments as "penalties". Perhaps the best characterization in the
document is as a "yield maintenance payment" or an "interest differential adjustment."
115 See Stark, Enforcing Prepayment Charges: Case law and Drafting suggestions, 22 Real Prop. Prob & Trust J., 549
(1987).
116 Whether a provision is a penalty or a liquidated damage clause must be decided under state law. In re Tastyest,
Inc., 126 F.2d 879, 881-882 (3rd Cir. 1942), cert den. 316 U.S. 896, 86 L.Ed 1766, 62 S.Ct. 1291 (1942).
117 See In re Skyler Ridge,80 B.R. 500, 16 Bankr.Ct.Dec. 1122 (Bankr. C.D. Cal 1987)(Kansas Law Applied); In re
Kroh Bros Development Company, 88 B.R. 997 (Bankr. W.D. Mo. 1988). Complaint dismissed. 148 B.R. 97 (Bankr.
P. Mass 1992) (Court concluded formula used was unreasonable by reason of being based on lower yield treasury
bonds and not on a first mortgage interest yield index and because interest loss was not reduced to present value) In re
Imperial Coronado Partners Ltd. v. Home Federal Savings & Loan Assn, 89 C.D.O.S. 1871 (Bankr. C.D. Cal. 1989).
Courts have disallowed a portion of the formula computed amount rather then disallowing the entire premium. In re
Morse Tool, Inc. (Ferrari v. Barelays Business Credi)t, 87 B.R. 745 (Bank. D. Mass. 1988).
30
DSC:767996.2
4/4/2006 3:55 PM Copyright 1996 - 2002 Marvin Garfinkel
All Rights Reserved