Source: https://www.jdsupra.com/legalnews/ninth-circuit-overturns-entz-white-91130/
Timestamp: 2019-06-19 11:59:26
Document Index: 526726378

Matched Legal Cases: ['§ 1123', '§ 1123', '§ 1123', '§ 1123', '§1123', '§ 1123', '§1123', '§ 1123', '§1123', '§ 1123', '§ 1123', '§ 1123']

Ninth Circuit Overturns Entz-White Lumber; Avoiding Default Interest Via Cure Through Chapter 11 Plan No Longer Valid | Perkins Coie - JDSupra
John Kaplan, Jordan Kroop
In the case of Pacifica L 51, LLC v. New Investments, Inc. (In re New Investments, Inc.), 9th Cir. November 4, 2016, the U.S. Court of Appeals for the Ninth Circuit held that a Chapter 11 debtor could not avoid paying default interest to an over-secured creditor by retroactively curing the default under a plan of reorganization. The New Investments decision overturned the case of In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988), which for 28 years has given debtors in the Ninth Circuit the ability to avoid paying default interest via a “cure” under a plan. The Ninth Circuit panel’s two-judge majority held that Congress’s enactment of 11 U.S.C. § 1123(d) overruled Entz-White.
Uncertainty Over § 1123(d)’s Impact on Entz-White
Entz-White had held that, under Bankruptcy Code § 1123(a)(5)(G), a debtor who cures a default “is entitled to avoid all consequences of the default—including higher post-default interest rates.” Id. at 1342. In other words, if a loan agreement provided for a higher, post-default interest rate on arrearages in the event of default, a debtor who “cures” all monetary defaults under a plan need only repay the arrearages at the lower, pre-default interest rate. Entz-White had concluded that “the power to cure under the Bankruptcy Code authorizes a plan to nullify all consequences of default, including avoidance of default penalties such as higher interest,” even when the terms of the loan agreement called for a higher interest rate (and, ostensibly, penalties and fees) on default. Id.
Bankruptcy Code § 1123(d), enacted in 1994, provides that if a plan of reorganization proposes to cure a default, “the amount necessary to cure the default shall be determined in accordance with the agreement and applicable nonbankruptcy law.” Courts had long disagreed about whether §1123(d) specifically overruled Entz-White’s core holding, with a majority of bankruptcy courts and nearly all district courts and bankruptcy appellate panels ruling that it did not. New Investments held that Entz-White’s rule of allowing a curing debtor to avoid a contractual post-default interest rate in a loan agreement is no longer valid in light of § 1123(d).
New Investments Decides Creditor Entitled to Default Interest
In New Investments, the debtor had borrowed funds secured by a hotel. The note rate was 8%, with the rate increased by an additional 5% after an event of default. The debtor defaulted, the secured lender began non-judicial foreclosure proceedings and the debtor filed a Chapter 11 bankruptcy case. The debtor filed a plan of reorganization under which the hotel was sold, with the secured creditor to be paid in full from the sale. The debtor argued, and the Bankruptcy Court for the Western District of Washington agreed in confirming the plan, that the payment from the sale proceeds represented a “cure” of the debtor’s default to the secured lender and, under Entz-White, eliminated the secured lender’s right to any default interest. In holding that §1123(d) vitiated the doctrine in Entz-White, the Ninth Circuit held that the secured creditor was entitled to default interest because default interest was owed “in accordance with the agreement [the note] and applicable nonbankruptcy law,” quoting § 1123(d).
The dissent by Ninth Circuit Judge Berzon disagreed, holding that §1123(d) does not explain where in the loan agreement to look for the provisions that apply in the event of a cure, whereas Entz-White specified that a “cure” permits the debtor to avoid all consequences of a default. In this view, Congress was not addressing Entz-White at all by enacting § 1123(d) because that subsection does not address Entz-White’s point that a cure retroactively expunges the default itself, eliminating any of the consequences of the default arising under the note.
§ 1123. Contents of plan , 11 U.S.C. § 1123
In re Entz-White Lumber and Supply, Inc. , 850 F.2d 1338 (9th Cir. 1988)