Interest Rate Swap Termination Damages Are Allowable Under the Bankruptcy Code

INTEREST RATE SWAP TERMINATION DAMAGES ARE ALLOWABLE UNDER THE BANKRUPTCY CODE

In a very recent case of first impression, the Bankruptcy Court for the Southern District of California held that damages for termination of an interest rate swap agreement are not unmatured interest. In re Thrifty Oil Co., 31 BCD 373 (Bankr. S.D. Cal. 1997). Therefore, the damages were not limited by section 502(b)(2) of the Bankruptcy Code and the lender was entitled to a claim for damages as provided in the swap agreement.

The debtor entered into swap transactions with Bank of America to hedge the interest rate fluctuations on a floating rate term loan on which B of A was the agent. After the debtor filed for bankruptcy, B of A filed a claim for the damages due B of A for the termination of the swap agreements. The debtor objected to B of A's claim arguing that the damages under the swap agreement were unmatured interest disallowed by Bankruptcy Code section 502(b)(2) because the term loan and the swap were one integrated loan transaction and B of A was undersecured. The Bankruptcy Court examined the agreement and the course of dealing between the parties and held that the swap was a separated transaction and, therefore, damages for termination of the swap agreement were not unmatured interest and were allowable against the debtor's estate.