Court Opinion

ID: 9697738
Source: CourtListenerOpinion
Date Created: 2023-08-25 19:28:05.027463+00
Date Added: 2024-06-11T18:20:35.005069
License: Public Domain

McKEAG, Bankruptcy Judge,
concurring:
I generally concur in the judgment of the Panel and specifically endorse its analysis of the equitable factors that govern an award of default interest. I write separately, however, to address the broader implications of the Panel’s discussion of “cure.” First, I disagree with the majority’s conclusion that the concept of “cure” should apply to a lien-free sale. Additionally, the authorities relied upon by the majority in reaching that conclusion would prohibit any award of default interest in a sale setting.
Sections 1123(a)(5) and 1124(2) of the Bankruptcy Code expressly recognize the right to “cure” a default through a Chapter 11 plan of reorganization. The two leading cases decided by the Ninth Circuit Court of Appeals which discuss “cure” are both firmly rooted in the plan confirmation process. See In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338, 1340 (9th Cir.1988); In re Southeast Co., 868 F.2d 335 (9th Cir.1989). Specifically, in each, the circuit court’s primary focus was whether the secured claim was “unimpaired” under section 1124(2) for plan confirmation purposes. To answer this question, the court had to consider whether the creditor should receive the post-default interest rate in order to be returned to its pre-default status. Both cases held in the negative.
Courts in other circuits have not extended the discussion of “cure” in Entz-White and Southeast to the lien-free sale setting. Rather, these courts simply determined the amount of the creditor’s allowable claim under section 506(b), including equitable entitlement to default interest, in order to distribute the proceeds from the sale of the creditor’s collateral. The issue of “cure” never even surfaces in these decisions. See, e.g., In re Terry Limited Partnership, 27 F.3d 241 (7th Cir.), cert. denied sub nom., — U.S. -, 115 S.Ct. 360, 130 L.Ed.2d 313 (1994); In re Kalian, 178 B.R. 308 (Bankr.D.R.I.1995); In re Consolidated Properties Ltd. Partnership, 152 B.R. 452 (Bankr.D.Md.1993); In re Hollstrom, 133 B.R. 535 (Bankr.D.Colo.1991).
In the Ninth Circuit, the few reported decisions that have considered whether a default can be “cured” in connection with a lien-free sale reach different results. Courts have expressly stated that Entz-White and Southeast are inapplicable to sales pursuant to section 363. In re Boardwalk Partners, 171 B.R. 87, 90, n. 1 (Bankr.D.Ariz.1994); In re Melbell Associates, Inc., 99 B.R. 31, 34 *149(Bankr.E.D.Cal.1989). While these decisions did not consider the issue at any length, they refused to extend the concept of “cure,” as interpreted for purposes of sections 1123 and 1124, to a lien-free sale under section 363.
On the other hand, In re 433 South Beverly Drive, 117 B.R. 563 (Bankr.C.D.Cal.1990), relied upon by the majority, reached the opposite conclusion. Applying the rationale of Entz-White and Southeast to a lien-free sale, the court held that the request for post-default interest should not be treated any differently in a sale than under a Chapter 11 plan. Accordingly, consistent with Entz-White and Southeast, it disallowed default interest. The court reasoned that the concept of “cure” is not exclusive to Chapter 11 and should be consistent throughout the Bankruptcy Code. As authority for this proposition, the court referenced section 365 of the Bankruptcy Code dealing with execu-tory contracts and unexpired leases, which, like sections 1123 and 1124, but unlike section 363, specifically uses the term “cure.” The decision merely concluded that the absence of the term “cure” from section 363 is not critical.
These conflicting authorities do not satisfactorily resolve the issue of whether the Southeast and Entz-White holdings should apply to lien-free sales. However, on balance, I believe the concept of “cure” should not be applied in a section 363 lien-free sale context. First, the plain meaning of the statute should control. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242-243, 109 S.Ct. 1026, 1030-32, 103 L.Ed.2d 290 (1989). While Congress used the term “cure” throughout the Bankruptcy Code, it did not use it in connection with section 363 sales. This fact alone is sufficient reason not to expand the holdings in Southeast and Entz-White to lien-free sales.
Another reason favoring a more conservative approach is that the consequences of a “cure” through a confirmed plan, as opposed to a lien-free sale, may differ. Although payment in full of a secured claim can occur in either setting, the distinction can be important and was implicitly recognized in The creditor in Entz-White claimed that the proposed Chapter 11 plan could not “cure” the default because its loan had fully matured prior to bankruptcy. It relied on In re Seidel, 752 F.2d 1382 (9th Cir.1985), a Chapter 13 case, which stated: Entz-White.
But when a debt has already matured — as in Seidel’s case — ‘cure’ as defined by these courts cannot aid the debtor, since reinstatement of the original terms of the debt will merely make the debt immediately due and payable.
752 F.2d at 1386. Entz-White recognized Seidel as good law. The court pointed out that because the proposed plan made the creditor’s obligation “immediately due and payable” upon confirmation, it did precisely what Seidel required.12
The facts in this appeal illustrate the potential problems with treating payment through a sale of the creditor’s collateral as the equivalent of a “cure” under a plan. Here, as in Entz-White, the loan matured by its terms prior to the Debtor’s bankruptcy. Although the Bank obtained relief from the automatic stay early in the Chapter 11 case, the effective date of the relief was delayed approximately ninety days to permit the Debtor to complete a pending bulk sale of the project. When this sale fell through, the Debtor obtained permission from the California Department of Real Estate to sell the property in individual lots. It also obtained a series of preliminary injunctions from the bankruptcy court, contingent on payment of current interest to the Bank, delaying the Bank’s foreclosure until the individual parcels of property could be sold.
This chronology of events must be contrasted to an immediate and complete repayment of the Bank’s entire claim upon plan confirmation. In fact, these piecemeal sales of the Bank’s collateral and reduction of its indebtedness over time would not have constituted a “cure” for purposes of Entz-White. The Ninth Circuit Court of Appeals was explicit that a naturally matured loan would need to be paid immediately upon confirmation to obtain the benefits of a “cure.” Thus, *150in this case, the Debtor did not and could not have confirmed a plan which, consistent with the requirements of Entz-White, left the Bank unimpaired and “cured” its obligation.13 These circumstances ably demonstrate why the benefit of annulling default interest should not automatically be extended to every sale in which a secured creditor is paid off.
The majority equates the pay-off of a loan as part of a section 363 sale to a “cure” pursuant to a confirmed plan. The consequence of this approach, however, is that the Bank would not be entitled to default interest. While Entz-White recognized the bankruptcy court’s discretion to determine an appropriate interest rate, it concluded that:
[The debtor] is entitled to avoid all consequences of the default — including higher post-default interest rates.... It is clear 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.
850 F.2d at 1342. This principle was reaffirmed in Southeast. 868 F.2d at 338. Consistent with these decisions, the bankruptcy court in Beverly Drive limited the interest rate to the higher of the market rate or the predefault rate, but did not allow default interest. 117 B.R. at 567.
The decision regarding whether the concept of “cure” applies to a lien-free sale is directly tied to the question of whether the Bank is even entitled to receive default interest. Implicit in that concept, as interpreted by the Ninth Circuit Court of Appeals in Entz-White, is a prohibition against default interest. On the other hand, if the more limited approach I urge is followed, the Bank may still be able to collect default interest under section 506(b). On remand, the bankruptcy court should consider the fact that the Bank has now been fully repaid, thus receiving the equivalent of a “cure” of its defaulted loan obligation. That factor alone, however, should not preclude the allowance of default interest.
I agree with the result reached by the majority, which requires the bankruptcy court to examine and consider various equitable factors before allowing default interest. My disagreement extends only to the Court’s application of the Entz-White and Southeast holdings to lien-free sales, which would preclude any award of default interest.

. At least one court has allowed default interest because the plan failed to pay off a matured loan on confirmation. In re Tri-Growth Centre City, Ltd., 136 B.R. 848, 852 (Bankr.S.D.Cal.1992).

. The Debtor has now proposed a plan that provides for full payment of the Bank’s claim. The bankruptcy court correctly determined, however, that filing a plan after the sales had been completed and the Bank was already paid did not warrant treatment under Entz-White. To the extent the Bank's default had been cured, it was cured outside of a plan. Transcript of Hearing, February 21, 1995, pp. 10-12.