Chapter 11 Debtors Beware – Default Interest Allowed Even When Default is Cured

On Behalf of | Nov 14, 2016 | Uncategorized |

Pursuant to a decision dated November 4, 2016, the Ninth Circuit in In re New Investments, Inc. effectively overruled In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988) finding that when a Chapter 11 plan cures a default, the debtor/borrower must pay interest at the rate specified in the underlying loan documents, even if that rate is a higher default rate of interest. In New Investments, the underlying loan documents called for interest at 8% unless a default occurred in which case the interest rate increased to 13%. The debtor’s Chapter 11 plan proposed to cure the default by selling the property and paying off the loan at the non-default interest rate of 8%. The bankruptcy court approved the plan over the creditor’s objection but the Ninth Circuit overruled. The Ninth Circuit held that if a plan proposes to cure a default in order to treat the creditor as unimpaired, the amount necessary to cure the default must be determined in accordance with the underlying loan documents and applicable nonbankruptcy law. In New Investments, the loan documents called for default interest to be paid in order to cure a default and as such, the debtor was required to pay the same amount under its plan in bankruptcy. The Ninth Circuit relied on Section 1123(d), enacted after Entz-White, which states that the amount to be paid to cure a default in a plan “shall be determined in accordance with the underlying agreement and applicable nonbankrutpcy law.” The decision means that debtors now must cure to the same extent they would be required outside of bankruptcy in order to return to pre-default conditions and thus treat the creditor as unimpaired.

Debtors should consider this decision before filing for Chapter 11 in determining if he/she/it will be able to confirm a plan. Banks/creditors should be cognizant of this decision to ensure a Chapter 11 debtor pays all default interest where applicable under the loan documents.

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If you have any questions or would like further information, please contact Melissa Lowe at 949-340-3400 or [email protected].

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