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Default Interest Rate Due from Date of Default
Description Appeals court affirmed decision that Chapter 11 reorganization proceedings did not extinguish the terms of a loan that required higher interest payments to be made once default occurred. Stay during bankruptcy did not extinguish the right to higher interest rate payments to creditors.
Topic Bankruptcy
Key Words Default Interest Rate
C A S E   S U M M A R Y
Facts A credit agreement between debtor Southland and credit banks provided that in the event of default, the interest rate on the loan would rise by two percent per year. Three years into the agreement, Southland reorganized in bankruptcy under Chapter 11. The banks asserted the higher interest rate took effect when pre-bankruptcy default occurred; Southland asserted that it took effect on the effective date of the reorganization plan. The bankruptcy and district courts agreed with the banks; Southland appealed.
Decision Affirmed. The fact that creditors were precluded from claiming the higher interest rate while Southland was under Chapter 11 reorganization planning did not extinguish the right to the interest from the date of the first default once the company was reorganized. The agreement was clear that the higher rate took effect in event of default, which occurred. Higher interest payments are due from the date of initial default.
Citation In the Matter of the Southland Corp. v. Toronto-Dominion, 160 F.3d 1054 (5th Cir., 1998)

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