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Allen Matkins Legal Alert
May 20, 2016              

Ninth Circuit Bankruptcy Appellate Panel Holds that an Oversecured Creditor Is Entitled to Default Interest After the Petition Date and Before Plan Confirmation

In Wells Fargo Bank, N.A. v. Beltway One Dev. Grp., LLC (In re Beltway One Dev. Grp., LLC), 547 B.R. 819 (B.A.P. 9th Cir. 2016), the Ninth Circuit Bankruptcy Appellate Panel recently held that an oversecured creditor is entitled to pendency default interest, i.e., default interest accruing during the bankruptcy case, before plan confirmation where the secured creditor's claim is not cured under a debtor's reorganization plan.

Beltway One involved a $10 million matured, secured loan made by Wells Fargo Bank, N.A., which precipitated Beltway One's voluntary bankruptcy. The parties agreed that Wells Fargo was oversecured. Beltway One's reorganization plan proposed extending the maturity date of the loan for 30 years, while providing a "cramdown" interest rate of 4.25% with a balloon payment at maturity. Wells Fargo objected, arguing, among other things, that as an oversecured creditor it was entitled to pendency default interest under Bankruptcy Code section 506(b) because its claim was not cured under the plan – and, indeed, could not be cured. Beltway One conceded that Wells Fargo's claim was not cured, but argued that under Great Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (In re Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), the bankruptcy court had "equitable discretion" to limit pendency interest. The bankruptcy court agreed, disallowed Wells Fargo's claim for pendency interest, and confirmed the Beltway One's plan.

On appeal, the BAP reversed the bankruptcy court, holding that "an oversecured creditor can record pendency interest as part of its allowed claim, at least to the extent it is oversecured." The BAP found Entz-White inapplicable noting that Wells Fargo's claim was impaired (i.e., not cured) under Beltway One's plan because it provided a new term, new interest rate, and new amortization schedule. The BAP further explained that a court's "equitable discretion" under Entz-White in awarding interest is limited to circumstances where a plan "cures and nullifies all consequences of default, but fails to establish the appropriate postpetition interest rate under the contract or applicable state law." The BAP also relied on General Elec. Capital Corp. v. Future Media Prods., Inc., 536 F.3d 969, 973 (9th Cir.), amended 547 F.3d 956, 960 (9th Cir. 2008) that an oversecured creditor is entitled to "a presumption of allowability for the contracted default rate of interest provided that the rate is not unenforceable under applicable non-bankruptcy law." Accordingly, the debtor, not the oversecured creditor, bears the burden of establishing that the pendency default interest rate is unenforceable under applicable non-bankruptcy law.

In sum, the BAP's decision in Beltway One clarified that when an oversecured creditor's claim is not cured by a reorganization plan, the secured creditor is entitled to pendency interest at the contractual rate, including default interest, unless a debtor can prove the rate is unenforceable under applicable non-bankruptcy law.

Huckins William William Huckins
Restructuring, Insolvency & Bankruptcy | Litigation | Financial Services
San Francisco
(415) 273-7426
(415) 837-1516 (fax)
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