Ninth Circuit Requires Debtors to Pay Interest at Default Rate to Cu...

In the recent decision of Pacifica L51 LLC v. New Invs., Inc. (In re New Invs., Inc.), 2016 WL 6543520 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that section 1123(d) legislatively overruled Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and required debtors to pay interest at the default rate in order to cure a default pursuant to a plan of reorganization.

The debtor defaulted on a mortgage.  The bankruptcy court confirmed a chapter 11 plan that allowed the debtor to cure the default by selling the property and using the sale proceeds to pay the loan off at the pre-default rate.  At the same time, the court required the debtor to escrow nearly $800,000 as a disputed claim reserve should an appellate court require the debtor to pay default interest to effectuate the cure.  The Ninth Circuit took a direct appeal and reversed.

The Court ruled that “[t]he plain language of § 1123(d) compels the holding that a debtor cannot nullify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure.”  The circuit court explained that “[w]hat § 1123(d) affects is how a debtor returns to pre-default conditions, which can include returning to a lower, pre-default interest rate. . . . [Under common law, the] borrower does not effectuate a cure merely by paying past due installments of principal at the pre-default interest rate. Rather, the borrower’s cure obligations may also include late charges, attorneys’ and trustee’s fees, and publication and court costs. . . .  It is only once these penalties are paid that the debtor can return to pre-default conditions as to the remainder of the loan obligation.”

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at [email protected].