Bankruptcy Code section 506(b) entitles an oversecured creditor to post-petition interest and reasonable fees and other charges. Are a creditor’s pre-petition charges also subject to a court’s view of what is reasonable?

Courts are split on this issue. A judge in New York recently explained why, in his view, reasonableness is not the right standard for the pre-petition portion of a claim. Pre-petition charges should be determined by applicable state law and not a judge’s analysis of what is reasonable. In re 1300 Desert Willow Road, LLC, No. 25-11375, 2026 WL 2088511 (Bankr. S.D.N.Y. Jul. 20, 2026).

The debtor is a single-asset real estate company. The creditor had loaned the debtor $20 million secured by a mortgage on real property. The debtor defaulted, and the parties entered into forbearance agreements for two years. When the last agreement ended and the creditor looked to foreclose, the debtor filed for chapter 11.

The debtor proposed a plan that the court ruled likely couldn’t be confirmed. Instead, the court approved a liquidating plan the secured creditor had proposed. The plan called for a sale of the debtor’s assets in August 2026.

The creditor held “the vast majority of claims against the debtor.” If the debtor proved to be solvent, then the creditor was likely oversecured.

At issue was how the court should determine the pre- and post-petition amounts due to the creditor.

Bankruptcy Code section 506(b) provides that an oversecured creditor shall receive “interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.”

The parties in 1300 Desert Willow Road did not dispute that this language applied to post-petition interest and charges. They disagreed on whether the reasonableness standard also applied to the creditor’s pre-petition charges.

Both the Fifth and Eleventh Circuit Courts of Appeal have held that reasonableness is the right test under section 506(b) for pre-petition charges. See In re Welzel, 275 F.3d 1308, 1314 (11th Cir. 2001); 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).

Those courts noted that section 506(b) does not specifically draw a distinction between pre- and post-petition charges.

But lower courts in other jurisdictions have reached a different conclusion. Their view is that the pre-petition charges are not governed by section 506(b) but rather Bankruptcy Code section 502(b).[i]

And that section says nothing about reasonableness, but requires judges to apply applicable non-bankruptcy (state) law.

The court in 1300 Desert Willow Road agreed with those courts and not the two courts of appeal.

The court observed that “the conclusion that section 506(b) is ambiguous is inescapable.” 2026 WL 2088511, at *3. This is because that section does not differentiate between pre-and post-petition amounts due to an oversecured creditor.

But, the court added, “a broad reading of this provision, so as to impose a reasonableness limitation on prepetition as well as postpetition charges, conflicts with section 502(b)’s allowance of prepetition charges to the full extend provided by nonbankruptcy law.” Id.

The court said “two considerations compel” this result. First, “[s]ection 502(b) can only be read one way: 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.” Id.at *4.

Second, applying a reasonableness limitation to the pre-petition portion of a claim could “produce[] an absurd result.” An oversecured creditor could receive less than an undersecured creditor on the pre-petition portion of a claim that the court deems to be unreasonable, while the undersecured creditor could receive a greater amount based on the application of state law under section 502(b).

Therefore, the court held, “section 506(b)’s reasonableness requirement applies only to postpetition fees and other charges. Charges that accrue prepetition in favor of an oversecured creditor are allowed to the full extent provided by nonbankruptcy law.” Id.