Pacifica L 51 LLC v. New Investments Inc., No. 13-36194 (9th Cir. 2016)
Annotate this CaseAfter New Investments defaulted on a note borrowed from Pacifica, Pacifica commenced non-judicial foreclosure proceedings. New Investments then filed for Chapter 11 bankruptcy. The bankruptcy court confirmed New Investments’s plan of reorganization proposing to cure the default by selling the property to a third party and using the proceeds of the sale to pay the outstanding amount of the loan at the pre-default interest rate. In Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc., the court held that a debtor who cures a default “is entitled to avoid all consequences of the default— including higher post-default interest rates.” At issue is whether Entz-White’s rule that a debtor may nullify a loan agreement’s requirement of post-default interest remains good law in light of 11 U.S.C. 1123(d), a provision that Congress enacted after Entz-White. The court held that Entz-White’s rule of allowing a curing debtor to avoid a contractual post-default interest rate in a loan agreement is no longer valid in light of section 1123(d). In this case, the court concluded that Pacifica is entitled to receive payment of the loan at the post-default interest rate. Accordingly, the court reversed and remanded for further proceedings.
Court Description: Bankruptcy. The panel reversed the bankruptcy court’s order confirming a debtor’s Chapter 11 plan of reorganization, which proposed to cure the debtor’s default on a loan by a payment that reflected a pre-default interest rate and extinguished any other late penalties required under the loan agreement. A Chapter 11 plan may include a provision authorizing the debtor to remedy any breach of a loan agreement with a creditor and return to pre-default conditions. Great W. Bank & Tr. V. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), held that a debtor that cures a default is entitled to avoid all consequences of the default, including higher post-default interest rates. The panel held that this rule of Entz-White, allowing a curing debtor to avoid a contractual post-default interest rate in a loan agreement, is no longer good law in light of later-enacted 11 U.S.C. § 1123(d), which provides that, if a plan proposes to cure a default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.” The panel remanded the case for further proceedings. Dissenting, Judge Berzon wrote that neither 11 U.S.C. § 1123(d) nor any other provision of the Bankruptcy Code IN RE NEW INVESTMENTS, INC. 3 provides a definition of “cure” contrary to the one announced in Entz-White. Accordingly, Entz-White has not been displaced. Judge Berzon would affirm the bankruptcy court’s order confirming the debtor’s plan of reorganization, which reflects the pre-default interest rate included in the promissory note.
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