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In Re: 400 Walnut Associates

June 7, 2012

IN RE: 400 WALNUT ASSOCIATES, L.P.


The opinion of the court was delivered by: DuBOIS, J.

MEMORANDUM

I. INTRODUCTION

4th Walnut Associates, L.P. ("Creditor") appeals from a decision of the United States Bankruptcy Court for the Eastern District of Pennsylvania sustaining in part and denying in part the objections of 400 Walnut Associates, L.P. ("Debtor") to Creditor's Proof of Claim. For the reasons that follow, the Court reverses the ruling of the Bankruptcy Court with respect to Creditor's claim for pre-petition interest at the default rate. The case is remanded for further proceedings consistent with this Memorandum.

II. BACKGROUND

A. Factual Background

Debtor has owned a building at 4th and Walnut Streets in Philadelphia since May 2000. In re 400 Walnut Assocs. LP, 454 B.R. 601, 603 (Bankr. E.D. Pa. 2011). On February 20, 2004, Independence Community Bank lent Debtor $13.125 million to finance conversion of the building into residential apartments. In re 400 Walnut Assocs., L.P., 461 B.R. 308, 311 (Bankr. E.D. Pa. 2011). The loan was secured by a mortgage on the property. (Appellant's Br. 4.) In 2006, Sovereign Bank ("Sovereign") acquired Independence Community Bank and, with it, the loan. In re 400 Walnut, 461 B.R. at 311.

Debtor stopped making payments on the loan in mid-2009.*fn1 In November 2009, Sovereign sent Debtor a letter formally declaring the loan to be in default. Id. The loan contract provided for "default rate interest": if a loan payment was past due by fifteen days or more, interest would accrue on the unpaid principal at an annual interest rate of sixteen percent (as opposed to the ordinary, nondefault rate of five percent). (Multifamily Note, J.R. Ex. A.7 ¶ 8.) The contract also provided, "Any forbearance by Lender in exercising any right or remedy under this Note, the Security Instrument or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of that or any other right or remedy." (Id. ¶ 12.)

Sovereign sold the loan to Creditor on June 18, 2010, for $9.55 million. In re 400 Walnut, 461 B.R. at 311. On July 2, 2010, Creditor informed Debtor that it had purchased the loan and declared Debtor in default. Id. Debtor filed a Chapter 11 bankruptcy petition on July 23, 2010, id., and Creditor submitted a Proof of Claim in the amount of $15,267,261.01, id. at 310.

B. Procedural Background

Debtor filed an eight-count Complaint against Creditor in the United States Bankruptcy Court for the Eastern District of Pennsylvania on December 18, 2010, initiating an adversary proceeding within the already-ongoing bankruptcy proceedings. See In re 400 Walnut Assocs., L.P., 454 B.R. 60, 65 (E.D. Pa. 2011). One of Debtor's claims-the one at issue in this appeal-was an objection to Creditor's Proof of Claim. Creditor filed a motion to dismiss the remaining seven claims. On March 31, 2011, the Bankruptcy Court granted the motion to dismiss with respect to six of the claims, all of which were based on state law. Id. at 312.The Bankruptcy Court denied the motion with respect to Debtor's claim for intentional interference with prospective contractual relations. In re 400 Walnut, 454 B.R. at 81.*fn2 On October 20, 2011, the Bankruptcy Court sustained in part and denied in part Debtor's objections to Creditor's Proof of Claim. In re 400 Walnut, 461 B.R. 308.

III. LEGAL STANDARD

A district court reviewing a Bankruptcy Court's judgment on appeal applies a "clearly erroneous" standard to findings of fact. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). The court reviews the legal determinations de novo. J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989).

IV. DISCUSSION

This Memorandum begins by addressing Debtor's argument that the Court lacks jurisdiction to hear Creditor's appeal. Second, it analyzes the merits question presented by Creditor's appeal. Third, it discusses Debtor's claim that Sovereign waived its right to ...


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