- United States Bankruptcy Appellate Panel of the Ninth Circuit, BAP No. NV-14-1564-KiDJu
- If an oversecured creditor is impaired under the plan, the creditor is presumptively entitled to interest at the contractual default rate from the petition date through the plan effective date if the creditor is entitled to such interest under applicable nonbankruptcy law, and the burden is on the debtor to demonstrate equities that warrant a different rate.
- Procedural context:
- Appeal from order confirming reorganization plan cramming down secured creditor.
- The debtor owed $10 million to bank secured by real estate. The interest rate was 1-month LIBOR plus 2.18%. The default rate was an additional 3%. The debtor defaulted and filed for bankruptcy protection. The debtor proposed a plan that paid the claim in full over time and restructured the terms. In calculating the amount of the secured creditor's claim, the debtor calculated pendency interest from the petition to the plan effective date at the contractual non-default rate. The secured creditor objected to the plan, arguing it was entitled to pendency interest at the contractual default rate. The bankruptcy court overruled the objection and confirmed the plan. Citing In re Entz-White Lumber and Supply, Inc., 50 F.2d 1338 (9th Cir. 1988), the court held that if the plan provides for payment in full, the fair and equitable standard does not require the payment of default interest. The BAP reversed. The Entz-White decision applies where the secured claim is paid in full on the effective date of the plan and, therefore, is unimpaired, and not where the terms are restrucured and the creditor is impaired. Surveying the case law in the Ninth Circuit, the BAP held that, while a bankruptcy court has the discretion to deny default interest, an oversecured creditor is presumptively entitled to contractual default interest if the default interest is allowed under applicable nonbankruptcy law. If the creditor is entitled to default interest under nonbankruptcy law, the burden then shifts to the debtor to demonstrate the equities warrant a different rate. The BAP remanded to the bankruptcy court with instructions to follow the presumptive rule.
- Kirscher, Dunn and Jury
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