The Return of the Solvent Debtor Doctrine?

In the recent decision of UPS Capital Business Credit v. Gencarelli (In re Gencarelli), 501 F.3d 1 (1st Cir. 2007), the First Circuit tackled the thorny bankruptcy issue of how to treat a claim asserted by an oversecured creditor for a prepayment penalty deemed unreasonable under 11 U.S.C. ' 506(b) but enforceable under state law. While the First Circuit purported to limit its holding to cases involving solvent debtors, its analysis of the interplay between ' 506(b) and
' 502 could (and should) be broadly applied to permit oversecured creditors to assert unsecured claims for unreasonable prepayment penalties, even in insolvent cases, to the extent allowable under state law. Thus, the First Circuit not only added its weight to the list of authorities allowing as unsecured claims unreasonable prepayment penalties asserted by oversecured creditors, but, by implication, the court may have added further fuel to the debate regarding the allowability of claims by unsecured creditors for contractual, post-petition attorney fees, which has been lingering in the wake of the Supreme Court's decision in Travelers Casualty & Surety Company of America v. Pacific Gas & Electric Co., 127 S. Ct. 1199 (2007). (Note, the term 'prepayment penalty' is no longer frequently used in bankruptcy parlance, particularly for secured creditors trying to enforce such 'penalties' after acceleration, but the term is used here [as it was in Gencarelli] for convenience. Other commentators, courts, and contract drafters have, at times, referred to prepayment penalties as 'prepayment premiums,' 'yield maintenance premiums,' and various other iterations, but all of these terms refer generally to a contractual provision designed protect profits from long-term yields in the event the borrower repays a loan prior to expiration of the ordinary term.)