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South Florida Hotel Owner Forced to Pay Default Interest Rate for $31.5M Loan

Sagamore-300x199A recent ruling from the 11th Circuit Court of Appeals sided with a lender in its effort to recover a higher rate of interest on the loan it made to a hotel owner that subsequently filed Chapter 11 bankruptcy. The decision, which highlights how the 1994 amendments to the bankruptcy code clarified what it means to “cure” a default, marks a significant victory for creditors.

The debtor in the bankruptcy case was Sagamore Partners, Ltd., an entity that owned the Sagamore Hotel, a luxury hotel on South Beach. In 2006, Arbor Commercial Mortgage loaned Sagamore Partners $31.5 million to refinance the hotel. The loan agreement stated that the interest rate was 6.54% but that, if an “event of default” occurred, that rate climbed to 11.54%. Missing any regularly scheduled payment was one example of an event of default.

Sagamore Partners stopped making its monthly payments in August 2009. JPMCC 2006-LDP7 Miami Beach Lodging, LLC, to whom Arbor had assigned the debt, sent a letter to Sagamore Partners notifying it of the default. JPMCC did not, however, send a copy of the notice to Sagamore’s legal counsel in New York, as required under the terms of the loan agreement. JPMCC eventually filed for foreclosure in December 2009, and Sagamore Partners filed for Chapter 11 bankruptcy less than two years later.

In Sagamore’s reorganization, JPMCC and it battled regarding which interest rate should apply. The bankruptcy court sided with Sagamore, ruling that the notice of default was defective, so everything that came after it was improper. The U.S. District Court disagreed, determining that the notice was adequate but that JPMCC was still not entitled to the higher interest rate. JPMCC had demanded late fees, and the lender was not entitled to both late fees and default interest. This was largely a “win” for Sagamore, since the late fees were only about $250,000, but the default interest would have exceeded $5 million.

The 11th Circuit, however, sided with the creditor. The court concluded that, following the 1994 amendments to the Bankruptcy Code, the relevant code section, 11 USC 1123(d), mandates that debtors must cure defaults in accordance with the underlying agreement, as long as that agreement does not violate any relevant non-bankruptcy laws. In Sagamore’s case, the loan agreement called for a default interest rate of 11.54%. Nothing in the terms of the agreement governing default interest violated any relevant Florida law. As a result, that meant that Section 1123(d) required Sagamore to pay the 11.54% interest to cure the default.

The appeals court also ruled that JPMCC never waived its claim to default interest. The only documents where JPMCC demanded late fees and did not mention default interest were internal documents that Sagamore only obtained as part of the bankruptcy litigation. JPMCC never sent the debtor anything asking for late fees and omitting default interest. In fact, the lender explicitly waived its right to late fees for any period in which the court ordered default interest.

The Sagamore case is important to take into consideration, whether you are a creditor or a debtor who is contemplating filing Chapter 11 bankruptcy. For in-depth knowledge and reliable representation regarding Chapter 11 bankruptcy, contact the Florida bankruptcy attorneys at Stok Folk + Kon. Our attorneys have the experience and understanding of bankruptcy law needed to help you protect your business’ assets.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

Absence of Acceleration Provision Cuts Recovery for Florida Creditor, Florida Business Lawyers Blog, Sept. 18, 2015

Employer’s Bankruptcy Filing Does Not Stop Florida Employee’s Lawsuit, Florida Business Lawyers Blog, May 15, 2015

Photo credit: “Sagamore Hotel Miami Beach” by Phillip Pessar at flickr.com.