Reversing its long standing precedent, the U.S. Court of Appeals for the Ninth Circuit held that when a chapter 11 debtor cures a default under its loan agreements, the debtor is required to pay default interest as required by the loan documents, rather than at the non-default rate.
In 1998, the Court of Appeals for the Ninth Circuit held that when a debtor cures a default under its loan agreement, the cure essentially eliminates all of the consequences associated with the default being cured. As a result, the debtor is not required to pay the default interest provided for in the loan agreement on arrearages; rather it is entitled to pay them at the lower, pre-default rate. See Great W. Bank & Tr. V. Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988). Entz-White’s focus was on the term “cure.” Since the term is not defined in the bankruptcy code, the Court relied on its common meaning — cure means a return to the pre-default state.
In 1994, Congress amended the bankruptcy code by adding section 1123(d). Section 1123(d) provides that if a chapter 11 plan provides for curing of defaults, the cure amount shall be determined as provided by the loan agreement and applicable non-bankruptcy law.
In Pacifica L 51 LLC v. New Investments Inc., decided on November 4, 2016, the Ninth Circuit reversed a bankruptcy court order confirming the debtor’s plan which proposed to cure defaults at the pre-default rate. The majority of the Ninth Circuit panel held that section 1123(d) effectively overruled Entz-White. Moreover, although the loan agreement at hand provided for an increased interest rate on the loan itself, not just the arrearages, the Ninth Circuit held that, under section 1123(d), the increased rate is enforceable notwithstanding the cure.
The minority judge dissented. In the minority’s view, the legislative history to section 1123(d) makes it clear that it was intended to overrule the Supreme Court’s opinion in Rake v. Wade, 508 U.S. 464 (1993), which allowed secured creditors of chapter 13 debtors a windfall by allowing them to collect interest on interest. The minority also thought that since the term “cure” is still not defined in the bankruptcy code, section 1123(d) did not effectively overrule Entz-White.
Being a split decision, and in light of a court rule allowing only the full court to overrule a prior precedent, we expect a hearing en banc.
Read the opinion here »