FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GENERAL ELECTRIC CAPITAL 

No. 07-55694 CORPORATION,

Petitioner-Appellant, D.C. No.  BK-SV-06-10170-

v. GM

FUTURE MEDIA PRODUCTIONS INC., OPINION Respondent-Appellee. 

Appeal from the United States District Court

for the Central District of California

Geraldine Mund, Bankruptcy Judge, Presiding

Argued and Submitted

June 9, 2008—Pasadena, California

Filed July 3, 2008

Before: Stephen S. Trott, Sidney R. Thomas, and

Raymond C. Fisher, Circuit Judges.

Opinion by Judge Trott

8105
COUNSEL

Michael K. Maly, Hannah L. Blumenstiel, Winston & Strawn

LLP, San Francisco, California, for the appellant. 

Harry D. Hochman, Pachulski Stang Ziehl & Jones LLP, Los

Angeles, California, for the appellee.

OPINION

TROTT, Circuit Judge: 

General Electric Capital Corporation (“GECC”), an oversecured creditor, appeals the bankruptcy court’s order denying

it default interest and attorneys’ fees. GECC argues that the

bankruptcy court improperly applied a per se rule against

default interest to the facts of this case. We have jurisdiction

pursuant to 28 U.S.C. § 158(d)(2)(A), and we reverse and

GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8107
remand to the bankruptcy court with instructions to apply the

rule adopted by the majority of federal courts and to then

determine if an award of attorneys’ fees is proper. 

BACKGROUND

GECC and Future Media Productions, Inc. (“Debtor”) were

parties to a Loan and Security Agreement (“loan agreement”),

dated August 13, 2004. The loan agreement included a $10.5

million, 42-month term loan, as well as a $5 million revolving

line of credit. Interest under the loan agreement accrued prior

to default (“pre-default rate”) at the Index Rate plus 1.5% per

annum, with additional interest of 2% per annum after default

(“default rate”). The loan agreement, governed by New York

law, obligated Debtor to pay attorneys’ fees and costs

incurred by GECC in connection with any dispute relating to

the loan agreement. All advances under the loan agreement

were secured by a perfected, first priority security interest in

substantially all of Debtor’s assets. 

On March 31, 2005, an event of default occurred, and the

loans began to bear interest at the default rate. Additional

events of default occurred thereafter. These difficulties, and

others, led Debtor to conclude that an orderly liquidation of

its assets would best serve its interests and those of its creditors. On February 14, 2006, Debtor filed a petition for relief

under Chapter 11 of the Bankruptcy Code. After filing its

bankruptcy petition, Debtor had a need for cash to wind down

its operations and to prepare for the sale of its assets. GECC

agreed to Debtor’s use of GECC’s “cash collateral” subject to

the terms of a stipulation (“the stipulation”) executed by

GECC and Debtor on February 15, 2006. On February 16,

2006, Debtor filed a motion in the bankruptcy court requesting approval of the stipulation. 

In the stipulation, Debtor represented that it had executed

an agency agreement to sell its assets in an auction, which

was guaranteed to produce at least $7,636,500 in net pro8108 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
ceeds. Debtor conceded that it owed GECC about $5.4 million dollars including principal and interest under the loan

agreement. Debtor conceded also that this obligation was payable to GECC and that the obligation was not subject to, nor

would Debtor assert, any defense of any kind to the obligation. The stipulation reserved the right of any other interested

party to object to GECC’s claim. Also, the stipulation permitted Debtor to continue to maintain a “lockbox” account into

which it deposited its cash, including the proceeds of its asset

sales, and which GECC periodically “swept” for the purposes

of paying down Debtor’s obligation. 

On February 21, 2006, the bankruptcy court provisionally

approved the stipulation and set a final hearing for March 3,

2006. On March 1, the Official Committee of Unsecured

Creditors (“the Committee”) was formed, and on March 2, the

Committee objected to the stipulation. At the March 3 hearing, and a subsequent March 30 hearing, the bankruptcy court

continued the final hearing on the stipulation. During that

time, other issues arose between Debtor, the Committee, and

another creditor, preventing GECC and the Committee from

resolving their differences as to the stipulation. 

On or about April 10, 2006, GECC and Debtor entered into

an amended stipulation (“the amended stipulation”). In

response, the Committee withdrew its original objection to the

payment of asset sale proceeds to GECC, subject to its request

for a ruling that GECC was not entitled to payment of interest

at the default rate, or alternatively that GECC’s right to interest at the default rate as part of its allowed claim would be

determined by the court as if GECC had been paid in full

through a confirmed plan of reorganization. 

On April 25, 2006, the bankruptcy court held a hearing on

approval of the amended stipulation. At that hearing, GECC’s

counsel proposed an interim solution to stop the accrual of

interest on GECC’s unpaid claim. The solution proposed that

GECC would be paid in full, including interest at the default

GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8109
rate as specified in the loan agreement, and any dispute about

default interest would be resolved at a later time. The parties

agreed, and the court approved the proposal—allowing the

default rate issue to be litigated independently. The Final

Cash Collateral Order was entered on May 4, 2006, and

GECC was paid $5,728,584.20, representing the amount

owed on its claims for unpaid principal and loan fees, interest

at the contract rate including default interest since the first

event of default occurred, plus all reimbursable expenses of

GECC, consisting of all remaining auditor fees and legal fees

through April 30, 2006. 

On August 28, 2006, the Committee filed a motion in the

bankruptcy court requesting a determination of the interest

rate applicable to GECC’s secured claim. The Committee

asserted that the proper interest rate to be applied to GECC’s

oversecured claim was the pre-default rate rather than the

default rate, and that GECC should return the amount it had

collected over the pre-default rate (“the default rate differential”) in the amount of $164,995. GECC opposed this motion

and sought attorneys’ fees, costs, and expenses in connection

with this aspect of the controversy. 

On November 15, 2006, the bankruptcy court entered an

order concluding that GECC was entitled to interest at the

pre-default rate and was not entitled to attorneys’ fees or

costs. The order required GECC to return the default rate differential to Debtor pursuant to our holding in In re Entz-White

Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988).

Additionally, the court denied GECC’s request for attorneys’

fees and costs on the ground that GECC was not the prevailing party. GECC appeals from the bankruptcy court’s order.

DISCUSSION

A. Standard of Review. 

We review de novo a bankruptcy court’s conclusions of

law. In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005). 

8110 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
B. Analysis. 

[1] Bankruptcy Code § 506(b) provides that the claim of an

oversecured creditor “shall be allowed . . . interest . . . and any

reasonable fees, costs, or charges provided for under the

agreement or State statute under which such claim arose.” 11

U.S.C. § 506(b). The parties do not dispute that GECC is an

oversecured creditor entitled to interest. However, the parties

do dispute the type of interest due to GECC. The Committee

argues that the bankruptcy court correctly determined that

GECC is entitled to collect interest only at the loan agreement’s pre-default rate, whereas GECC argues that it is entitled to a presumption in favor of the loan agreement’s default

rate (an additional 2% interest), subject only to reduction

based upon any equities involved. 

That disagreement presents three issues for our consideration: 1) whether Entz-White applies to the case at bar; 2) if

Entz-White does not apply, how the bankruptcy court should

evaluate the viability of the contractual default interest rate on

remand; and 3) whether GECC is entitled to attorneys’ fees

and costs under § 506(b). 

1. The Applicability of Entz-White. 

[2] In Entz-White, we announced the rule that an oversecured creditor was not entitled to interest at the default rate

where its claim was paid in full pursuant to the terms of a

Chapter 11 plan. Entz-White, 850 F.2d at 1342.1 In the case

at bar, the bankruptcy court extended Entz-White to a claim

that was paid in full as a result of a series of asset sales outside of a Chapter 11 plan. Because a Chapter 11 plan implicates provisions of the Bankruptcy Code that an asset sale

outside of a plan does not, we respectfully conclude that the

bankruptcy court’s extension of Entz-White was error. 

1Soon after, we again applied the same rule in a case involving a Chapter 11 plan with substantially similar facts. See In re Southeast Co., 868

F.2d 335, 338 (9th Cir. 1989). 

GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8111
[3] Our analysis starts from a general premise recently

articulated by the Supreme Court: “[c]reditors’ entitlements in

bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any

qualifying or contrary provisions of the Bankruptcy Code.”

Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co.,

127 S. Ct. 1199, 1204-05 (2007). We read Travelers to mean

the default rate should be enforced, subject only to the substantive law governing the loan agreement, unless a provision

of the Bankruptcy Code provides otherwise. 

[4] In Entz-White we identified such a “qualifying or contrary provision” of the Bankruptcy Code. There, the debtor’s

proposed treatment of the oversecured creditor’s claim was

presented in a Chapter 11 plan. A creditor’s claim is considered “impaired” for purposes of voting on a Chapter 11 plan

unless the plan leaves the creditor’s legal, equitable, and contractual rights unaltered, or the debtor “cures” any default that

occurred prior to or during the bankruptcy case. See 11 U.S.C.

§ 1124(1)-(2). We have explained that the provision allowing

“cures” under § 1124(2)(A) “authorizes a plan to nullify all

consequences of default, including avoidance of default penalties such as higher interest.” Southeast Co., 868 F.2d at 338

(quoting Entz-White, 850 F.2d at 1342). Because the Code

allows the debtor to “cure” defaults under a Chapter 11 plan,

we permitted the debtor to nullify the interest owed at the

default rate.2See id. In the case before us today, however,

there was never any question of whether the debtor needed to

cure a default to render it unimpaired for voting on a Chapter

11 plan. Instead, GECC’s oversecured claim was paid through

a sale of assets governed by § 363, outside the context of a

Chapter 11 plan. As a result, the facts of Entz-White are distinguishable, and thus our per se rule from that case is inapplicable. 

2With the addition of the 1994 amendments, including § 1123(d), the

continued validity of our holding Entz-White is questionable. We, however, do not reach that issue today as the facts presented in this appeal—

grounded in a § 363 sale—are distinguishable from those in Entz-White.

8112 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
The Committee asks us to consider two cases in which

other courts have applied Entz-White’s rule against default

interest in contexts outside of a Chapter 11 plan, In re 433

South Beverly Drive, 117 B.R. 563 (Bankr. C.D. Cal. 1990),

and In re Casa Blanca Project Lenders, L.P., 196 B.R. 140

(B.A.P. 9th Cir. 1996). We have carefully reviewed these

cases, and find their analysis unpersuasive. 

The bankruptcy court in South Beverly, and the Bankruptcy

Appellate Panel (“BAP”) in Casa Blanca, used our holding in

Entz-White as the basis for their analysis. Both courts noted

that “cure” as used in § 1124(2)(A) means a return to predefault status, which nullifies all consequences of default

including an obligation to pay default interest. South Beverly,

117 B.R. at 566; Casa Blanca, 196 B.R. at 143. Each court

noted also that the concept of a “cure” is not exclusive to

Chapter 11 plans; for example, trustees are permitted to cure

defaults in executory contracts under 11 U.S.C. § 365. South

Beverly, 117 B.R. at 566-67; Casa Blanca, 196 B.R. at 144.

The next step of both courts’ analyses, however, departed

from and improperly extended our holding in Entz-White.

Each court transposed the concept of “cure” from § 1124 and

§ 365 into 11 U.S.C. § 363. South Beverly, 117 B.R. at 566;

Casa Blanca, 196 B.R. at 144-45 (citing South Beverly, 117

B.R. at 566-67). The problem with that transposition is that

the text of § 363 does not mention “cure” and the procedures

set out in that section do not implicate the concept of “cure.”

See 11 U.S.C. § 363. In short, there is no “cure” of events of

default, de facto or otherwise, in the context of an asset sale.

Because the bankruptcy court in South Beverly and the BAP

in Casa Blanca improperly read “cure” into § 363, we do not

find those decisions compelling. 

[5] Because the Bankruptcy Code does not provide a “qualifying or contrary provision” to the underlying substantive

law here, the bankruptcy court’s extension of Entz-White to

the loan agreement’s default rate was error. Consistent with

the Supreme Court’s holding in Travelers, we hold that the

GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8113
parties’ arms length bargain, governed by New York law,

controls. 

2. The Bankruptcy Court, on Remand, Should

Evaluate the Viability of the Default Rate Under the

Rule Adopted by the Majority of Federal Courts.

[6] Because we have decided that Entz-White does not control the analysis in this case, we remand to allow the bankruptcy court to decide whether the default rate should apply

under the rule adopted by the majority of federal courts. That

rule simply stated is: The 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.” 4 Collier on Bankruptcy,

¶ 506.04[2][b][ii] (15th Ed. 1996) (“Most courts have

allowed, or at least recognized a presumption of allowability

for, default rates of interest, provided that the rate is not unenforceable under applicable nonbankruptcy law.”). 

This rule has been applied in many bankruptcy courts and

in two of our sister circuits. See, e.g., In re Laymon, 958 F.2d

72, 75 (5th Cir. 1992) (holding “that when an oversecured

creditor’s claim arises from a contract, the contract provides

the rate of post-petition interest,” subject to examination of

“the equities involved in [the] bankruptcy proceeding”), cert.

den., 506 U.S. 917 (1992); In re Terry Ltd. P’ship, 27 F.3d

241, 243 (7th Cir. 1994) (noting the general rule that there is

a “presumption in favor of the contract rate subject to rebuttal

based on equitable considerations”).3

GECC argues that if we decide to apply the new rule we

need not remand because there is no evidence that the default

rate differential of 2% is unreasonable. We reject the creation

3The majority rule is consistent with the Supreme Court’s decision in

Travelers as well as with the plain language of 11 U.S.C. § 1123(d) as

promulgated in the 1994 amendments to the Bankruptcy Code. 

8114 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
of a bright line rule that would accept 2% as an allowable

default rate differential. We reject also GECC’s assertion that

the Committee waived any argument as to the enforceability

of the default rate under New York law. Because the Committee initially prevailed in convincing the district court to reject

the default rate in its entirety, there was no need for further

argument. As a result, we remand the case for proper consideration as prescribed under the majority rule. 

3. The Issue of Attorneys’ Fees Should be Considered

on Remand in Light of Remand on the Merits. 

[7] The bankruptcy court concluded that GECC was not

entitled to attorneys’ fees, costs, and expenses incurred in the

litigation to determine the applicability of the default rate

because GECC did not prevail. Because we remand for a

proper determination of the applicable interest rate, and

because GECC may prevail on the merits, we remand also the

issue of attorneys’ fees, costs, and expenses allowable under

506(b). 

CONCLUSION

Because the bankruptcy court improperly applied our rule

from Entz-White to the facts of this case, we reverse and

remand with instructions to the bankruptcy court to apply the

rule adopted by the majority of federal courts and to then

determine if an award of attorneys’ fees is proper. 

REVERSED and REMANDED.

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