Ninth Circuit Changes Mind To Favor Creditors In Post-Default Interest Decision

The Ninth Circuit Court of Appeals recently issued a decision that confirms the right of a secured creditor to recover post-default interest in a Chapter 11 bankruptcy case.  In doing so, the Ninth Circuit overruled its 1988 decision, In re Entz-White Lumber & Supply, Inc., which allowed Chapter 11 debtors to avoid paying post-default interest upon confirmation of a Chapter 11 plan of reorganization.

The prior decision held that a debtor curing its default as part of a Chapter 11 plan was entitled to avoid all consequences of the default, including a higher post-default interest rate.  The new Ninth Circuit case, In re New Investments, Inc., noted that the Bankruptcy Code had been amended since 1988.  Specifically, Bankruptcy Code section 1123(d) enacted in 1994, requires that if a Chapter 11 plan proposes to cure a default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable bankruptcy law.”  The Ninth Circuit found this language to be inconsistent with its pre-1994 decision in Entz-White which allowed a debtor to nullify the obligation to pay post-default interest solely by proposing to cure of the default via a Chapter 11 plan.

The Ninth Circuit decision in New Investments represents a significant change in the law, though there had been challenges to Entz-White prior to this decision.  In fact, Hopkins & Carley’s Steve Kottmeier successfully argued in the U.S. Bankruptcy Court, Northern District of California, that the prohibition on collecting post-default interest by a debtor curing a default in a Chapter 11 plan had been legislatively overruled by Bankruptcy Code section 1123(d), which is precisely the conclusion reached by the Ninth Circuit in New Investments.  This decision now clearly authorizes recovery of post-default interest as provided in the operative loan documents, and gives creditors a powerful tool in Chapter 11 bankruptcy cases going forward.

Stay up to date on the latest news, alerts, events and legal insights: