In In re Beltway One Development Group, LLC, 547 B.R. 819 (9th Cir. B.A.P. 2016), the Ninth Circuit's Bankruptcy Appellate Panel ("BAP") found that an oversecured creditor is presumptively entitled to accrued post-petition, pre-plan confirmation default interest and late charges as part of its oversecured claim.
In 2008, Beltway One Development Group, LLC ("Beltway") obtained a loan from Wells Fargo's predecessor-in-interest in the amount of $10 million. The loan was secured by a business park in Las Vegas, Nevada. Borrower defaulted on the loan by failing to pay it in full at maturity in May 2011 and then filed a chapter 11 bankruptcy petition to avoid foreclosure. Beltway's proposed plan of reorganization provided that the maturity date on the loan would be extended by almost six years, with a balloon payment due upon maturity, and a cramdown interest rate of 4.25%. The proposed plan also provided that Wells Fargo would not be entitled to any default interest, late fees, or other charges arising as a result of Beltway's previous defaults. In proposing such a plan, Beltway was apparently relying on the Ninth Circuit's decision in In re Entz-White Lumber and Supply, Inc. ("Entz-White"), which held that if a defaulted loan is "cured" upon plan confirmation, the lender is not entitled to default interest and other default amounts. Entz-White, 850 F.2d 1338, 1342 (9th Cir. 1988). Unlike in Beltway One, however, the Entz-White plan proposed to pay the entirety of the outstanding, matured loan (excluding default penalties) upon plan confirmation, effectively reinstating, and simultaneously paying off, the debt. The Entz-White court therefore found that "by curing the default, [the debtor] is entitled to avoid all consequences of the default-including higher post-default interest rates." Id. Failing to address this distinction, the bankruptcy court in Beltway One confirmed Beltway's proposed plan and denied Wells Fargo recovery of any default penalties.
On appeal, the Bankruptcy Appellate Panel overturned the bankruptcy court, briefly reviewing the case history in the Ninth Circuit regarding entitlement to default interest. As an initial matter, it noted that pursuant to section 506(b) of the Bankruptcy Code, a creditor holding a claim that is secured by property of a value in excess of the value of the claim (i.e., an oversecured creditor) is entitled to "pendency interest," which it defined as interest accruing on the claim from the petition date up to the effective date of the plan. The Court then distinguished Beltway plan from that proposed in the Entz-White case, emphasizing that the Beltway plan did not provide for a cure of all outstanding defaults upon confirmation. The Court found that under these circumstances, there is a presumption that pendency interest should be calculated at the default rate; provided, however, that "the presumption of the contractual default rate applies only to those oversecured creditors whose claims to the higher interest rate are enforceable under nonbankruptcy law" and the presumption is "subject to rebuttal based on equitable considerations." Beltway One, 547 B.R. at 830. The Court made it clear that, rather than requiring a creditor to demonstrate the reasonableness of the default rate, "the burden [is on] the debtor to demonstrate the rate's unreasonableness, or that it is not enforceable under nonbankruptcy law."
This case should be viewed as a win for oversecured creditors, given that the BAP declined the opportunity to expand the Entz-White holding and placed the burden squarely on the shoulders of debtors, rather than on creditors, to prove that the contracted-for default rate is either unenforceable or unreasonable.
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