The U.S. Court of Appeals for the Ninth Circuit recently ruled in In re New Investments, Inc. that a debtor may only cure a contractual default under a Chapter 11 reorganization plan by fulfilling the contract’s post-default interest rate provisions. This decision overturns the Ninth’s Circuit’s 1988 rules in In re Entz-White Lumber & Supply, Inc. and joins several other circuit courts in requiring a debtor to pay default interest.
In the case, the debtor obtained a $3 million loan from the lender, Pacifica L 51, LLC, to buy a hotel. The loan called for an eight percent interest rate and in case of default, the interest rate increased to 13 percent. The debtor defaulted on the note and filed Chapter 11 bankruptcy. Under a reorganization plan, the debtor proposed to sell the hotel and use the proceeds to pay the outstanding loan debt at the eight percent interest rate. The lender argued that a 1994 amendment to the Bankruptcy Code — Section 1123(d) — required the debtor to fulfill the default cure obligations under the loan agreement.
In Entz-White, the Ninth Circuit held that when a default is cured under a reorganization plan, the debtor can avoid default provisions in loan documents, including higher interest rates. Section 1123(d) of the Bankruptcy Code, enacted six years following the Entz-White decision, provided that, “if it is proposed in a plan to cure a default the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”
In New Investments, the Ninth Circuit held that under Section 1123(d), the lender was entitled to obtain interest at the 13% default rate, finding that “Subsection § 1123(d) renders void Entz-White’s rule that a debtor who proposes to cure a default may avoid a higher, post-default interest rate in a loan agreement.”
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