In re 1300 Desert Willow Road, LLC, 2026 WL 2172297 (Bankr.S.D.N.Y. July 21, 2026) asked the question whether Section 506(b)’s reference to “reasonable fees, costs, or charges” impose a reasonableness limitation on the creditor’s prepetition fees and other charges, or merely limits the postpetition charges the creditor can recover? Surprisingly, the courts are in disagreement on this issue.
Desert Willow noted that two courts of appeal – for the Fifth and Eleventh Circuits – have each ruled that the text of Section 506(b) of the Bankruptcy Code unambiguously requires the application of that section’s reasonableness standard to prepetition, as well as postpetition, charges. See In re Welzel, 275 F.3d 1308, 1314 (11th Cir.2001) (“Section 506(b) * * * does not draw a distinction between fees vested pre- or post-petition * * * * Instead, the subsection refers blanketly to ‘reasonable fees,’ without differentiation based on the time the fees vested.”); and Wells Fargo Bank, N.A. v. 804 Congress L.L.C. (In re 804 Congress, L.L,C.), 756 F.3d 368, 374-75 (5th Cir.2014)
On the other hand, other courts have reached the opposite conclusion. For example, Desert Willow quoted In re Wesley, 455 B.R. 383, 386 (Bankr.D.N.J.2011) as follows:
The majority rule is that the allowability of pre-petition interest, fees, costs, and penalties “as part of the secured creditor’s ‘claim’ is not determined by section 506, but is governed by section 502 in conjunction with other provisions of the Code.
See also, In re Nunez, 317 B.R. 666, 670 (Bankr.E.D.Pa.2004) (“Quite simply, interest, fees and costs arising pre-petition are already a part of a secured creditor’s proof of claim in the first instance rendering section 506(b) inapplicable.”); In re Vanderveer Ests. Holdings, Inc.283 B.R. 112, 131 (Bankr.E.D.N.Y.2002) (“Interest, fees, costs and charges arising pre-petition are part of the secured creditor’s claim in the first instance, and are therefore not governed by §506(b).”)
Desert Willow too followed this latter line of authority. Two considerations compelled its adoption of the narrower construction of §506(b)’s reasonableness requirement that courts outside the Fifth and Eleventh Circuits have adopted. First, the court noted that its interpretation harmonized §506(b) with Section 502(b) of the Bankruptcy Code in a manner consistent with the text of both sections. It explained that §502(b) can only be read one way, i.e., it unambiguously provides for the allowance of all prepetition claims recoverable under nonbankruptcy law, regardless of whether the bankruptcy court might consider the claim unreasonable. In contrast, §506(b)’s reasonableness requirement can plausibly be read either broadly or narrowly – that is, either to apply to all claims, prepetition as well as postpetition, or to apply only to the specific postpetition sums that §506(b) adds to the creditor’s §502(b) claim. The court concluded that the narrower of these two interpretations was preferable, “because unlike the broader interpretation, it is consistent with the plain meaning of §502(b).” Id. at *4. On the other hand, the Eleventh and Fifth Circuit’s interpretation produced an absurd result: It treats oversecured creditors less favorably than undersecured creditors with respect to their prepetition claims. Id.
Matthew T. Gensburg
mgensburg@gcklegal.com