Ninth Circuit Bankruptcy Panel Rules Oversecured Creditor Entitled to Pendency Default Interest When Its Claim is Not Cured by Reorganization PlanThe Ninth Circuit Bankruptcy Appellate Panel has ruled in In re Beltway One Dev. Grp., LLC, that an oversecured creditor is entitled to pendency default interest when that creditor’s claim is not cured by a reorganization plan.

Beltway One secured a $10 million loan from Wells Fargo Bank, N.A., prior to its voluntary bankruptcy filing. Both parties agreed that Wells Fargo was oversecured. Beltway’s reorganization plan included an extension of the loan’s maturity date to 30 years with a cramdown interest rate of 4.25% and a balloon payment at maturity.

Wells Fargo objected to the plan, stating that as an oversecured creditor, it was entitled to pendency default interest (default interest accruing during the bankruptcy case) under Section 506(b) of the Bankruptcy Code since the bank’s claim was not cured under the plan.

While conceding that the bank’s claim was not cured, Beltway argued that the bankruptcy court had “equitable discretion” under In re Entz-White Lumber and Supply, Inc. (9th Cir. 1988) to limit pendency interest. The bankruptcy court denied Wells Fargo’s pendency interest claim and confirmed Beltway’s plan.

On appeal, the Ninth Circuit BAP reversed, finding that “an oversecured creditor can record pendency interest as part of its allowed claim, at least to the extent it is oversecured.”  The BAP noted that Wells Fargo’s claim was not cured under Beltway’s plan because the plan included a new interest rate, new term and new amortization schedule. This made Beltway’s argument citing Entz-White inapplicable, since a court’s equitable discretion under Entz-White is limited to instances 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.”

In its decision, the BAP cited General Elec. Capital Corp. v. Future Media Prods., Inc., where the Ninth Circuit had ruled 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.” Thus, the debtor bears the burden of proof that the pendency default interest rate is unenforceable under applicable non-bankruptcy law.

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