The United States Bankruptcy Appellate Panel (“BAP”) for the 10^th Circuit

Applying Iowa law, recently upheld an award of post-petition interest of $377,097.31 at a rate of 18% (accruing at $900 per day) as well as over $200,000 in attorneys’ fees and costs to the Debtor’s largest secured creditor, Rolling Hills Bank and Trust (the “Bank”)entered by the United States Bankruptcy Court for the District of Wyoming after it found, in part, that the default interest rate called for under the Variable Rate Notes in question was incorporated by reference to the Bank’s indexing system.[1]

Per the BAP’s ruling, Twiford Enterprises, Inc. (the “Debtor”) owns and operates a cattle ranch in Glendo, Wyoming, consisting of approximately 2,870 acres and 1,400 head of cattle. The Twiford family has controlled the ranchland since homesteading in 1878. In recent years, the Debtor financed the operation through five loans made by the Bank and secured by both real and personal property. The Debtor indicated in its filings that, even though the loans were current, disputes concerning the calculation of variable interest rates and the Bank’s refusal to extend maturity dates caused it to seek bankruptcy protection in the face of a replevin action and foreclosure proceedings filed in Wyoming state court.

The Debtor filed a chapter 11 petition in March 2018, and the Bank filed a proof of claim based on five promissory notes totaling $5,797,103.29.2 Three of the promissory notes featured variable interest rates (the “Variable Rate Notes”) tied to an index called Rolling Hills Bank & Trust Base Rate 2010 (the “Index”)— an internal rate index maintained by the Bank. The Variable Rate Notes stated the interest rates would change one day after the origination dates and then may change as often as daily. The Debtor objected to the Bank’s claim, arguing, in part, the 18% default interest rate contemplated by the Variable Rate Notes constituted an impermissible penalty. The Debtor later supplemented its objection to include additional history related to the loan negotiation process and arguing the terms of the Variable Rate Notes rendered it impossible to calculate the pre-default interest rate on the loans.

After a telephonic evidentiary hearing, the Bankruptcy Court overruled the Debtor’s objection to the Bank’s claim. The Debtor did not appeal the order overruling the objection.

The Bank then filed a motion to allow post-petition interest, attorneys’ fees, and costs to be included in its claim pursuant to section 506(b) of the Bankruptcy Code on the basis that the Bank was an oversecured creditor due to an estimated equity cushion of $2 Million. The Debtor objected, in part claiming it was impossible to verify the Bank’s calculation of post-petition interest under the Variable Rate Notes because one could not determine the applicable interest rate and the interest rate change date for those notes.

The Bankruptcy Court conducted a hearing on the Bank’s Motion and the Debtor’s objection, and eventually approved the Bank’s request for post-petition interest as well as attorneys’ fees and costs, concluding, in part, that the interest rates, while variable, were ascertainable from the Index, which was incorporated by reference into the Variable Rate Notes. The Debtor then appealed to the BAP.

On appeal, the Debtor argued the Bank’s section 506(b) claim was improper because the Variable Rate Notes supporting the Bank’s claim were unenforceable as: (1) the interest rates were an essential term of the Variable Rate Notes; (2) there was no meeting of the minds that the Bank’s index rate was incorporated in the Variable Rate Notes or how often or when rates would change or by how much; and (3) the Bank could change the interest rates at its “whim and will.”

As an initial matter, the BAP found the issue of whether the Variable Rate Notes were enforceable was not properly before the Court because the Debtor did not appeal the order overruling the objection to the Bank’s claim. The BAP then turned to the Bankruptcy Court’s award of post-petition interest under section506(b), which provides, in part, “[t]o the extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim.”

The BAP noted the Supreme Court interprets section 506(b) as authorizing the holder of an allowed oversecured claim to receive postpetition interest.[2] The BAP went on to note, when a claim is based on a consensual lien—a lien provided for under a contract signed by the parties—the majority of courts conclude that postpetition interest should be computed at the rate provided in the agreement, or other applicable law, under which the claim arose—the so-called ‘contract rate’ of interest.

In upholding the Bankruptcy Court’s application of the interest rates incorporated in the Variable Rate Notes by reference to the Index, the BAP looked to the laws of the State of Iowa as each of the notes in question provided the laws of Iowa should govern enforceability. The BAP gave particular credence to Iowa Supreme Court precedent that “[t]he cardinal rule of contract interpretation is to determine what the intent of the parties was at the time they entered into the contract.”[3] Contract formation requires parties to “express mutual assent to the terms of the contract. Mutual assent is present when it is clear from the objective evidence that there has been a meeting of the minds.”[4] “To meet this standard, the contract terms must be sufficiently definite for the court to determine the duty of each party and the conditions of performance.” [5]

The BAP went on to note that, when interpreting a contract, Iowa courts “look both to the terms of the contract as well as to any documents included by reference.”[6] The doctrine of incorporation requires the contract to make a clear and specific reference to an extrinsic document to incorporate the document into the contract, and a party to a contract (in this case the Debtor) has “a duty of inquiry to discover the document incorporated by reference.” [7]

After reviewing the terms of the Variable Rate Notes, the Bankruptcy Court concluded and the BAP agreed, the notes incorporated the Index by reference. Specifically, the express terms of the Variable Rate Notes refer to the “ROLLING HILLS BANK & TRUST BASE RATE 2010” index. Accordingly, although the Variable Rate Notes did not define the “Rolling Hills Bank & Trust Base Rate index,” the reference in the notes in question was specific enough to allow a party to the contract to inquire as to the Index and to be provided with a copy of the Index or a substituted index. The Index in question listed the daily interest rate and identified the days on which the interest rate changed. While determining the interest rate under the Variable Rate Notes required additional steps beyond merely looking at the Variable Rate Notes, the determination was not impossible. Further, reference to the Index was sufficiently clear and specific enough for a reasonably sophisticated businessperson to inquire about the applicable interest rates.

If you need help understanding your rights in the complicated bankruptcy process, contact the experienced bankruptcy attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

[1] In Re Twiford Enterprises, Inc., v. Rolling Hills Bank and Trust, United States Bankruptcy Appellate Panel Case No. WY-19-037 (10th Circuit, Oct 15,2020).

[2] United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240-42 (1989).

[3] Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430, 436 (Iowa 2008) (citing Walsh v. Nelson, 622 N.W.2d. 499, 503 (Iowa 2001)).

[4] Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839, 846 (Iowa 2010) (quoting Schaer v. Webster Cty., 644 N.W.2d 327, 338 (Iowa 2002)).

[5] Id. (citing Seastrom v. Farm Bureau Life Ins. Co., 601 N.W.2d 339, 346 (Iowa 1999)).

[6] Hofmeyer v. Iowa Dist. Ct. for Fayette Cty., 640 N.W.2d 225, 228 (Iowa 2001). (Emphasis added).

[7] Longfellow v. Sayler, 737 N.W.2d 148, 154 (Iowa 2007).