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Split Ninth Circuit Requires Default Interest to Cure Default
A Chapter 11 debtor “cannot nullify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure,” held a split panel of the U.S. Court of Appeals for the Ninth Circuit on Nov. 4, 2016. In re New Investments Inc., 2016 WL 6543520, *3 (9th Cir. Nov. 4, 2016) (2-1). Reversing the bankruptcy court, the court's majority relied on a 1994 amendment of Bankruptcy Code § 1123(d) (” … the amount necessary to cure [a] default [under a reorganization plan] shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”) Id. at *2. In effect, the amended § 1123(d) overruled the Ninth Circuit's earlier holding that “a debtor who cures a default, thus 'nullify[ing] all consequences of' that default, may repay arrearages at the pre-default interest rate.” Id. at *5, quoting In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338, 1342 (9th Cir. 1988). According to the Ninth Circuit, the “plain language of § 1123(d) compels” the result it reached. Id. at *3.
Relevance
Courts have regularly wrestled with lenders' asserted claims to contractual default interest. In the Ninth Circuit, eight months before the Court of Appeals handed down New Investments, a Bankruptcy Appellate Panel (BAP) held that a “bankruptcy court should apply a presumption of allowability for the contracted for default rate, 'provided that the rate is not unenforceable under applicable nonbankruptcy law.'” In re Beltway One Development Group, LLC, 547 B.R. 819, 830 (9th Cir. BAP 2016), quoting 4 Collier, Bankruptcy ¶506.04[2][b][ii], at 506-105 (16th ed. 2015).
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