In re: Beltway One Development Group, LLC

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 31, 2016
• Docket: NV-14-1564-KiDJu
• Status: Published

Opinion

FILED 1 ORDERED PUBLISHED MAR 31 2016 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. NV-14-1564-KiDJu ) 7 BELTWAY ONE DEVELOPMENT ) Bk. No. 2:11-bk-21026-MKN GROUP, LLC, ) 8 ) Debtor. ) 9 ) ) 10 ) WELLS FARGO BANK, N.A., ) 11 ) Appellant, ) 12 ) v. ) O P I N I O N 13 ) BELTWAY ONE DEVELOPMENT ) 14 GROUP, LLC, ) ) 15 Appellee. ) ______________________________) 16 17 Argued and Submitted on February 18, 2016, at Las Vegas, Nevada 18 March 31, 2016 19 Appeal from the United States Bankruptcy Court 20 for the District of Nevada 21 Honorable Mike K. Nakagawa, Chief Bankruptcy Judge, Presiding 22 23 Appearances: Bryce A. Suzuki of Bryan Cave LLP argued for appellant Wells Fargo Bank, N.A.; Gerald M. Gordon 24 of Garman Turner Gordon LLP argued for appellee Beltway One Development Group, LLC. 25 26 Before: KIRSCHER, DUNN and JURY, Bankruptcy Judges. 27 28 1 KIRSCHER, Bankruptcy Judge: 2 3 Creditor Wells Fargo Bank, N.A., appeals the bankruptcy 4 court’s decision to deny accrued postpetition, pre-effective date1 5 default interest on Wells Fargo’s allowed, oversecured claim 6 pursuant to the Debtor’s chapter 112 plan of reorganization, which 7 did not cure the prebankruptcy default. We REVERSE and REMAND. 8 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 9 A. Events leading to the bankruptcy case 10 Chapter 11 debtor, Beltway One Development Group, LLC, owns 11 and operates the Desert Canyon Business Park, a 15-acre master 12 planned business park located in Las Vegas. Debtor is managed by 13 Beltway One Management Group, LLC, which in turn is managed by 14 Todd Nigro. 15 On May 16, 2008, Debtor and Wells Fargo’s predecessor in 16 interest, Wachovia Bank, N.A., entered into a term loan agreement 17 18 1 The postpetition, pre-effective date interest rate determined under § 506(b) commences on the petition date and 19 continues until the effective date stated in the confirmed plan, after which the cramdown interest rate, determined under § 1129, 20 commences if the plan is confirmed. Unless the plan provides a specific date when it becomes effective, the effective date is the 21 confirmation date. See Countrywide Home Loans, Inc. v. Hoopai (In re Hoopai), 581 F.3d 1090, 1101 (9th Cir. 2009) (although a 22 chapter 13 case, discussion on effective date is applicable under § 1325(a)(5)(B)(ii) and § 1129(b)(2)(A)(i)(II)). In this appeal 23 we refer to this postpetition, pre-effective date interest rate as “pendency interest.” This pendency interest may be the 24 prepetition contractual interest rate or the contractual default interest rate depending on whether a cure or a noncure occurs in 25 the pending case and depending on what interest rate is provided in any contractual provisions. The cramdown interest rate or 26 “plan interest” is not an issue on appeal. 27 2 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

-2- 1 wherein Wachovia agreed to lend Debtor $10 million. In exchange 2 for the loan, Debtor executed a promissory note, a deed of trust 3 with assignment of rents and other documents in favor of Wachovia, 4 giving the lender a first position lien and security interest in 5 the real property and various personal property of Debtor.3 The 6 note matured on May 16, 2011, before the bankruptcy petition was 7 filed. 8 Per the terms of the agreement, the loan accrued interest at 9 a variable rate equal to 1-month LIBOR rate plus 2.10%. Upon 10 default, the interest rate would increase by 3% over the 11 nondefault rate of LIBOR plus 2.10%.4 12 In May 2010, Wells Fargo issued notices of default based on 13 an alleged loan-to-value ratio covenant default. Specifically, 14 Wells Fargo claimed the value of the property was $10.15 million 15 and therefore, in order to comply with the covenant requiring a 16 LTV ratio of not less than 70%, demanded that Debtor immediately 17 tender a payment of $2,793,419 to reduce the loan balance to 18 $7.105 million. Debtor was unable to meet the demand and tried to 19 negotiate a resolution, which the parties failed to accomplish. 20 Debtor did not pay the loan in full by its maturity date of 21 May 16, 2011. Wells Fargo sent Debtor and the loan guarantors a 22 letter declaring Debtor’s default and the acceleration of the 23 24 3 Specifically, Wells Fargo’s loan is secured by, among other things, one building in the Desert Canyon complex known as 25 “Building 11.” 26 4 The 30-day LIBOR rate was 2.48% when the note was executed in May 2008, resulting in an interest rate of 4.58%. The loan’s 27 nondefault interest rate has not exceeded 3.4% since January 2009, and remained at 2.4% throughout the bankruptcy case. Accordingly, 28 the default rate was 5.4% throughout the bankruptcy case.

-3- 1 debt, including the principal balance of $9,789,494.72 and accrued 2 interest of $18,011.56, for a total due of $9,807,506.28. On 3 July 8, 2011, Wells Fargo recorded its Notice of Trustee’s Sale 4 and advised Debtor it would be filing a complaint and seeking the 5 appointment of a receiver. To avoid foreclosure, Debtor filed its 6 chapter 11 bankruptcy petition on July 13, 2011. 7 B. Debtor’s bankruptcy case 8 Pursuant to a stipulated cash collateral agreement, Debtor 9 paid Wells Fargo monthly adequate protection payments of $30,000. 10 Debtor timely made each of these payments between July 2011 and 11 the Effective Date of Debtor’s chapter 11 plan. 12 Meanwhile, Wells Fargo filed its proof of claim on 13 November 15, 2011, asserting a prepetition debt of $9,877,741.20, 14 which consisted of $9,789,494.72 in unpaid principal, $36,060.70 15 in unpaid accrued nondefault interest, $47,315.89 in default 16 interest, and $4,869.89 in other charges. 17 1. Debtor’s plan and Wells Fargo’s objection 18 In Debtor’s amended chapter 11 plan of reorganization (the 19 “Plan”), for Wells Fargo’s claim Debtor proposed to: (1) extend 20 the loan term to March 31, 2017, with a balloon payment at the end 21 of the Plan term; (2) impose a cramdown interest rate of 4.25%; 22 (3) and eliminate various covenants (one being the LTV covenant) 23 and other loan terms. Debtor would make a $200,000 payment to 24 Wells Fargo just after the Plan’s Effective Date, and thereafter 25 make monthly payments for principal and interest (at the 4.25% 26 rate), amortized over 30 years. 27 The Plan expressly provided that Wells Fargo would “not be 28 entitled to any default interest, late fees, or other charges

-4- 1 resulting from a default occurring prior to the Effective Date.” 2 The Plan further provided that on the Effective Date, any pre- 3 Effective Date defaults under the Wells Fargo loan would be deemed 4 to have been “cured.” 5 In support of the Plan, Debtor offered a direct testimony 6 declaration from Mr. Nigro. He testified that even if Wells 7 Fargo’s claim were allowed as filed, including default interest, 8 Debtor would still have more than $2 million in equity at the new 9 maturity of the restructured loan under the Plan. 10 In opposing confirmation, Wells Fargo contended the Plan 11 failed the general “fair and equitable” test under § 1129(b)(1) 12 because it treated Wells Fargo as fully secured but deprived Wells 13 Fargo of its contractual right to default interest, late fees and 14 other charges arising from any default prior to the Effective 15 Date. Citing Future Media Productions, Inc.,5 Wells Fargo 16 contended that as an oversecured creditor, § 506(b) authorized 17 recovery of postpetition default interest on its claim and any 18 reasonable fees, costs or charges arising under the loan 19 agreement. Wells Fargo further contended that Debtor’s proposed 20 “cure” attempt was not permissible; Debtor could not “magically 21 cure” the maturity date default as required by § 1124(2)(A). 22 2. The Plan confirmation hearing and post-trial briefing 23 Following the four day Plan confirmation hearing, the parties 24 filed post-trial briefs. Reiterating the same arguments it had 25 raised in its Plan objection and citing Future Media, Wells Fargo 26 27 5 Gen. Elec. Capital Corp. v. Future Media Prods., Inc., 536 F.3d 969, 973 (9th Cir.), amended 547 F.3d 956, 960 (9th Cir. 28 2008).

-5- 1 contended that Debtor’s Plan failed the general “fair and 2 equitable” test under § 1129(b) by depriving it of default 3 interest prior to the Effective Date despite the loan documents’ 4 allowance for such charges and that § 506(b) provided oversecured 5 creditors like Wells Fargo recovery of any pendency interest. 6 Debtor acknowledged the Plan was not “curing” the Wells Fargo 7 loan and not restoring its formerly effective terms; rather, it 8 was creating a “new loan” by restructuring the debt. Debtor did 9 not generally disagree with the authority cited by Wells Fargo for 10 the payment of default interest, late fees and other charges. The 11 only caveat, according to Debtor, was that § 506 did “not allow 12 any such interest to exceed the value of the collateral.” 13 3. The bankruptcy court confirms the Plan. 14 With the Plan under submission for just over two years, the 15 bankruptcy court entered its Order and Memorandum Decision on 16 Final Approval of Disclosure Statement and Confirmation of 17 Chapter 11 Plan on March 25, 2014. The court adopted Debtor’s 18 valuation of $11.1 million for Building 11, which secured Wells 19 Fargo’s claim of approximately $9.9 million, and approved the 20 cramdown interest rate of 4.25%.6 In denying Wells Fargo pendency 21 interest, the court’s ruling was brief: 22 Modification of default interest rates and elimination of late fees and other costs is consistent with the Code 23 and supported by the case cited by Wells Fargo. In [Future Media], the Ninth confirmed its previous holding 24 in Great Western Bank & Trust v. Entz-White Lumber and 25 6 The bankruptcy court’s valuation of Building 11 at $11.1 26 million is not disputed on appeal. Therefore, it is undisputed that Wells Fargo is an oversecured creditor. See United States v. 27 Ron Pair Enters., Inc., 489 U.S. 235, 239 (1989) (a creditor is considered to be “oversecured” when the value of its collateral 28 exceeds the amount of the creditor’s allowed claim).

-6- 1 Supply, Inc. (In re Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), “that an oversecured 2 creditor was not entitled to interest at the default rate where its claim was paid in full pursuant to the 3 terms of a Chapter 11 plan.” 536 F.3d at 973. The circuit panel went on to emphasize that “the provision 4 allowing ‘cures’ under § 1124(2)(A) ‘authorizes a plan to nullify all consequences of default, including 5 avoidance of default penalties such as higher interest.’” Id., citing Fla. Partners Corp. v. 6 Southeast Co. (In re Southeast Co.), 868 F.2d 335, 338 (9th Cir. 1989). 7 Based on the foregoing, Section 1129(b) is satisfied. 8 9 Mem. Decision (Mar. 25, 2014) 15:3-14. 10 4. Wells Fargo’s motion to reconsider the Confirmation 11 Order 12 Wells Fargo moved to alter or amend judgment or for relief 13 from judgment respecting the Confirmation Order (“Motion to 14 Reconsider”). In short, Wells Fargo contended the Confirmation 15 Order had to be amended (1) to clarify that Entz-White and its 16 progeny were inapplicable in this case and (2) to require the 17 payment of postpetition default interest, charges, fees and 18 expenses as part of Wells Fargo’s allowed claim under § 506(b). 19 Wells Fargo argued that because its claim was impaired and 20 the Plan did not effect a “cure” within the meaning of Entz-White 21 or § 1124(2)(A) allowing Debtor to eliminate Wells Fargo’s right 22 to default interest, Wells Fargo could not be deprived of its 23 default interest recoverable under § 506(b) as an oversecured 24 creditor as set forth in Future Media. In other words, the 25 bankruptcy court was required under Future Media to enforce the 26 contractual default rate as to its pendency interest. 27 Alternatively, Wells Fargo argued that even if the Plan could be 28 interpreted to effect an Entz-White cure, the 1994 amendments to

-7- 1 the Code, namely § 1123(d), overturned Entz-White and its progeny, 2 and thus such “cures” eliminating default interest and other 3 charges available in the underlying agreement and applicable 4 nonbankruptcy law were no longer valid. 5 In opposition to the Motion to Reconsider, Debtor conceded 6 that no Entz-White cure was effected or even contemplated for 7 Wells Fargo’s claim under the Plan. Nonetheless, argued Debtor, 8 regardless of whether or not the Plan cured Wells Fargo’s claim, 9 the bankruptcy court was permitted to disallow default interest 10 under its equitable discretion and the authority granted it by 11 Future Media. Debtor contended that under Future Media the 12 allowance of default interest is subject to equitable 13 considerations, which is consistent with the holding in Entz-White 14 that bankruptcy courts have “broad equitable discretion” in 15 awarding postpetition interest. Debtor contended Entz-White was 16 still good law despite the enactment of § 1123(d). 17 In reply, Wells Fargo argued that nowhere in its Memorandum 18 Decision did the bankruptcy court discuss equitable considerations 19 or any other basis for eliminating default interest other than a 20 “cure.” However, if the bankruptcy court did rely on equitable 21 considerations to eliminate default interest, the Memorandum 22 Decision required amendment to articulate those considerations. 23 In any event, Wells Fargo contended that the “equities” in this 24 case clearly supported the enforcement of the parties’ contractual 25 default interest provisions. The default rate was a mere 3% 26 higher than the nondefault rate, which remained at 2.4% throughout 27 the bankruptcy case. Thus, Debtor had enjoyed an extraordinary 28 low interest rate for the length of the case, thereby allowing it

-8- 1 to stockpile over $2 million in cash. Eliminating Wells Fargo’s 2 claim for default interest allowed Debtors’ owners to reap 3 substantial equity in the property and over $2 million in cash at 4 the expense of Wells Fargo. Even after paying its claim for 5 default interest of $752,948.72, Wells Fargo argued that Debtor 6 would still be left with more than $2.4 million of equity, which 7 was hardly an inequitable result. 8 5. The bankruptcy court’s ruling on the Motion to 9 Reconsider 10 In its order denying the Motion to Reconsider, the bankruptcy 11 court’s analysis was again brief. The court first noted that in 12 approving the Plan, it had reached the legal conclusion that the 13 treatment of Wells Fargo’s claim was fair and equitable within the 14 meaning of § 1129(b)(1), and “[n]othing in the parties’ dispute 15 over the continued vitality of Entz-White change[d] this result.” 16 Order on Motion to Reconsider (Nov. 17, 2014) 6:5-6. The court 17 concluded that Entz-White was still good law, but even if it were 18 not, “its holding is not inconsistent with and is instructive in 19 the determination of whether a particular plan treatment is fair 20 and equitable to an objecting creditor.”7 Id. at 7:11-14. 21 Wells Fargo timely appealed. 22 II. JURISDICTION 23 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 24 and 157(b)(2)(L). We have jurisdiction under 28 U.S.C. § 158(b). 25 /// 26 7 Wells Fargo had also requested amendment to require Debtor 27 to include fees and expenses as part of Wells Fargo’s claim. The bankruptcy court ultimately allowed Wells Fargo’s professional 28 fees and expenses of $166,850 as part of its oversecured claim.

-9- 1 III. ISSUE 2 Did the bankruptcy court err in eliminating the prepetition 3 default interest rate as the pendency interest for Wells Fargo’s 4 oversecured claim? 5 IV. STANDARD OF REVIEW 6 When the denial of a claim for default interest is based on 7 statutory interpretation, a question of law, our review is de 8 novo. CityBank v. Udhus (In re Udhus), 218 B.R. 513, 515 (9th 9 Cir. BAP 1998). 10 V. DISCUSSION 11 Three categories of interest exist in bankruptcy cases: 12 (1) interest accrued prior to the filing of the bankruptcy 13 petition (prepetition interest); (2) interest accrued after the 14 filing of a petition but prior to the effective date of a 15 reorganization plan (pendency interest); and (3) interest to 16 accrue under the terms of a reorganization plan (plan interest). 17 Key Bank Nat’l Ass’n v. Milham (In re Milham), 141 F.3d 420, 423 18 (2d Cir.), cert. denied, 525 U.S. 872 (1998). The category of 19 interest at issue in this appeal is pendency interest. 20 Generally, the Code does not provide for pendency interest to 21 creditors, because the filing of the petition usually stops 22 interest from accruing. Id. Section 506(b), however, provides an 23 exception for oversecured creditors: 24 To the extent that an allowed secured claim is secured by property the value of which, after any recovery under 25 subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the 26 holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under 27 the agreement or State statute under which such claim arose. 28

-10- 1 § 506(b). Thus, an oversecured creditor can recover pendency 2 interest as part of its allowed claim, at least to the extent it 3 is oversecured. Rake v. Wade, 508 U.S. 464, 471 (1993), 4 superseded on other grounds by §§ 1123(d) and 1322(e); Ron Pair 5 Enters., Inc., 489 U.S. at 241; In re Hoopai, 581 F.3d at 1099- 6 1101 (pendency period includes from the petition date to the date 7 of plan confirmation as opposed to the “effective date,” unless 8 the plan specifically provides an effective date). Any 9 accumulated pendency interest determined under § 506(b) is added 10 to the allowed claim of an oversecured creditor and then paid 11 pursuant to the terms of the confirmed plan with plan interest 12 determined under § 1129(b)(2)(A)(i)(II). See 4 COLLIER ON BANKRUPTCY 13 ¶ 506.04[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 14 2016). 15 The issue before us is a narrow one: whether the bankruptcy 16 court was required to apply the default rate of interest to Wells 17 Fargo’s claim during the pendency period. While § 506(b) entitles 18 an oversecured creditor to recover pendency interest on its claim, 19 the statute does not specify the rate of interest to be applied. 20 Ron Pair held that a creditor’s entitlement to interest is not 21 dependent upon an agreement or contract between the parties, but 22 it did not address the question of the rate of interest to which a 23 creditor is entitled when an agreement exists. Arguably, this 24 Panel and the Ninth Circuit Court of Appeals have weighed in on 25 this issue. 26 A. Entz-White is inapplicable. 27 In the Ninth Circuit case, Entz-White, the chapter 11 debtor, 28 pursuant to a plan and upon confirmation, paid the oversecured

-11- 1 creditor the full principal balance owed and accrued interest at 2 the contract rate (the pre-default rate of prime plus 1.5%) under 3 the promissory note, which matured prepetition. The debtor argued 4 that by paying the arrearage on the creditor’s obligation, it had 5 cured the default under § 1124 and, thus, the plan could treat the 6 creditor’s claim as unimpaired under § 1124(2)(A) and eliminate 7 the consequences of default. The creditor objected to 8 confirmation because the plan did not allow for its claim of 9 default interest (a rate of 18%). The creditor contended the 10 § 1123(a)(5)(G)8 “cure” of the debtor’s default did not relieve 11 the debtor from paying default interest on the matured note. 850 12 F.2d at 1339-40. 13 The Ninth Circuit rejected the creditor’s argument. 14 Recognizing the Code does not define “cure,” the court adopted the 15 definition of “cure” adopted by the Second Circuit in Di Pierro v. 16 Taddeo (In re Taddeo), 685 F.2d 24 (2d Cir. 1982), that “[a] 17 default is an event in the debtor-creditor relationship which 18 triggers certain consequences . . . . Curing a default commonly 19 means taking care of the triggering event and returning to 20 pre-default conditions. The consequences are thus nullified. 21 This is the concept of ‘cure’ used throughout the Bankruptcy 22 Code.” Entz–White, 850 F.2d at 1340 (quoting In re Taddeo, 685 23 F.2d at 26–27). The court reasoned that “curing” a default 24 returns the parties to pre-default conditions, as if the default 25 had never occurred. Accordingly, because the oversecured 26 8 Section 1123(a)(5)(G) provides: “Notwithstanding any 27 otherwise applicable nonbankruptcy law, a plan shall provide adequate means for the plan’s implementation, such as curing or 28 waiving of any default.”

-12- 1 creditor’s claim was paid in full immediately on the plan’s 2 effective date and “cured,” the debtor was “entitled to avoid all 3 consequences of the default – including higher post-default 4 interest rates.” Id. at 1342. 5 In denying default interest under § 506(b), the Ninth Circuit 6 stated that the more “natural reading” of §§ 506 and 1124 is that 7 “the interest awarded should be at the market rate or at the 8 pre-default rate provided for in the contract.” Id. at 1343. 9 Despite this apparent bright-line rule of no default interest in 10 the case of a complete cure, the court stated in a footnote: “We 11 continue, of course, to recognize bankruptcy courts’ ‘broad 12 equitable discretion’ in awarding post-petition interest.” Id. at 13 1343 n.9 (citing Bank of Honolulu v. Anderson (In re Anderson), 14 833 F.2d 834, 836 (9th Cir. 1987)). 15 Wells Fargo argues, and Debtor has conceded, that no “cure” 16 within the meaning of Entz-White occurred here. Wells Fargo’s 17 claim was expressly impaired and the Plan did not provide for the 18 immediate payment of the outstanding indebtedness to Wells Fargo 19 upon confirmation, as was the case in Entz-White. Rather, under 20 the Plan, the original maturity date of the note was extended for 21 an additional five years; a new amortization schedule was 22 implemented; and new terms were substituted in lieu of the prior 23 obligation. Because Debtor’s Plan did not cure the default under 24 the Wells Fargo note, Entz-White is inapplicable. Accordingly, to 25 the extent the bankruptcy court relied upon Entz-White to deny 26 Wells Fargo any pendency interest at the default rate on the basis 27 that the prepetition default was “cured” pursuant to the terms of 28 the Debtor’s Chapter 11 plan, it erred.

-13- 1 Debtor contends that even if no Entz-White cure occurred 2 here, the bankruptcy court still had authority to modify the 3 default interest under its “broad equitable discretion” as 4 recognized in Entz-White, which the bankruptcy court appropriately 5 employed under § 1129(b)’s “fair and equitable” requirement. The 6 bankruptcy court did not “modify” the default rate; it eliminated 7 it, applying instead the pre-default rate. In its brief analysis, 8 the bankruptcy court did seem to employ the “fair and equitable” 9 standard for plan confirmation as a basis for denying default 10 interest under § 506(b). It appears to have done the same thing 11 in ruling on the Motion to Reconsider. Perhaps this is because 12 Wells Fargo had argued repeatedly that the Plan was not fair and 13 equitable due to Debtor’s treatment of Wells Fargo’s claim in not 14 paying default interest. 15 In any event, to the extent the bankruptcy court utilized the 16 “fair and equitable” test under § 1129(b) to deny default interest 17 under § 506(b), it erred. Determining pendency interest to be 18 included as part of an allowed secured claim as of the date of 19 confirmation under § 506(b) is an issue separate and distinct from 20 the fair and equitable test for plan confirmation under § 1129(b). 21 Essentially, application of the default rate to pendency interest 22 is a claims issue. The “fair and equitable” test under § 1129(b) 23 is a plan issue and concerns only the treatment of the allowed 24 claim after confirmation. Therefore, the bankruptcy court erred 25 in conflating the fair and equitable standard of § 1129(b) with 26 the elimination of pendency default interest under § 506(b). 27 Finally, we agree with Wells Fargo and interpret the footnote 28 in Entz-White regarding the court’s “broad equitable discretion”

-14- 1 in awarding postpetition interest as being limited to the very 2 narrow circumstance of a plan which cures and nullifies all 3 consequences of default but fails to establish the appropriate 4 postpetition interest rate under the contract or applicable state 5 law. That is not the case here.9 6 B. Hassen Imports 7 In a case presenting facts similar to those here, this Panel 8 held that when the debt is not being cured within the meaning of 9 Entz-White, the oversecured creditor is entitled to default 10 interest that reasonably compensates it for losses arising from 11 the default. Hassen Imps. P’ship v. KWP Fin. VI (In re Hassen 12 Imps. P’ship), 256 B.R. 916, 924-25 (9th Cir. BAP 2000), 13 superseded by § 506(b) (2005). In other words, entitlement to 14 contractual default interest is not automatic but may be allowed 15 upon demonstrating that it meets certain requirements. Id. at 16 924. 17 The Panel in Hassen Imports reviewed decisions from other 18 circuits, which presume reasonableness of contractual default 19 interest unless the debtor introduces evidence in rebuttal. In re 20 Hassen Imps. P’ship, 256 B.R. at 924 (citing Southland Corp. v. 21 Toronto-Dominion (In re Southland Corp.), 160 F.3d 1054 (5th Cir. 22 1998) (default interest rate is generally allowed unless the 23 higher rate would produce inequitable result); In re Terry Ltd. 24 P’ship, 27 F.3d 241, 243 (7th Cir.), cert. denied, 513 U.S. 948 25 (1994) (“What emerges from the post-Ron Pair decisions is a 26 27 9 Because we have determined Entz-White is not applicable, we need not determine whether it remains good law, which the parties 28 dispute.

-15- 1 presumption in favor of the [default] contract rate subject to 2 rebuttal based upon equitable considerations.”); Bradford v. 3 Crozier (In re Laymon), 958 F.2d 72, 74 (5th Cir.), cert. denied, 4 506 U.S. 917 (1992); Equitable Life Assurance Soc’y v. Sublett (In 5 re Sublett), 895 F.2d 1381 (11th Cir. 1990)). The Panel then held 6 that the debtor had sufficiently shifted the burden to the lender 7 when the lender’s officer testified that one purpose of the 8 default rate is to encourage timely payment — i.e., it was a 9 penalty as opposed to compensating the lender for any demonstrated 10 losses due to the default. Consequently, the Panel remanded for a 11 determination of whether the default rate reasonably compensated 12 the lender for actual loss. If so, then the bankruptcy court was 13 free to award such interest. 256 B.R. at 925. 14 C. Future Media 15 Finally, in Future Media, lender GECC loaned the debtor 16 $10.5 million with a $5 million revolving line of credit, secured 17 by a first priority security interest in substantially all of the 18 debtor’s assets. 547 F.3d at 958. The loan agreement provided 19 for a pre-default interest rate of the Index Rate plus 1.5% per 20 annum and a default rate of an additional 2% per annum. An event 21 of default occurred and the loans began to bear interest at the 22 default rate. After additional default events occurred, the 23 debtor filed a chapter 11 bankruptcy case. Id. 24 Subsequently, the debtor needed cash to wind down its 25 operations and prepare for a sale of its assets. GECC agreed to 26 debtor’s use of cash collateral, subject to a stipulation to which 27 the creditors’ committee objected. To stop the accrual of 28 interest on GECC’s unpaid claim, the parties agreed GECC would be

-16- 1 paid in full at the default interest rate and that any dispute 2 about default interest would be resolved at a later date. The 3 committee argued that GECC was only entitled to interest at the 4 pre-default rate and that GECC should return the amount it had 5 collected over that. The bankruptcy court, relying on Entz-White, 6 agreed and ordered GECC to return the difference. Id. at 958-59. 7 On appeal, the Ninth Circuit reversed and remanded. Because 8 the only dispute was what type of interest was due to GECC under 9 § 506(b), the court determined that the two relevant issues on 10 appeal were: (1) whether Entz-White applied; and (2) if it did 11 not, how the bankruptcy court should evaluate the viability of the 12 contractual default interest rate on remand. Id. at 959-60. 13 Distinguishing Entz-White on its facts, the court determined that 14 the bankruptcy court had erred in extending the per se rule from 15 Entz-White to the case at bar. Id. at 960. The court found that 16 “‘[c]reditors’ entitlements in bankruptcy arise in the first 17 instance from the underlying substantive law creating the debtor’s 18 obligation, subject to any qualifying or contrary provisions of 19 the Bankruptcy Code.’” Id. (quoting Travelers Cas. & Sur. Co. of 20 Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450 (2007)). Such a 21 “qualifying or contrary” provision of the Code was present in 22 Entz-White — the ability to cure a default in a chapter 11 plan 23 under § 1124(2)(A) — but was not present in the instant case — 24 paying the oversecured creditor’s claim in full through a § 363 25 asset sale. Id. In reviewing the Panel’s decision in Casa Blanca 26 Project Lenders, L.P. v. City Commerce Bank (In re Casa Blanca 27 Project Lenders, L.P.), 196 B.R. 140 (9th Cir. BAP 1996), 28 abrogated by Future Media Prods., Inc., 547 F.3d 956 (9th Cir.

-17- 1 2008), a similar asset sale case, the Ninth Circuit found that the 2 Panel had improperly extended Entz-White by “transposing” the 3 concept of “cure” from § 1124 and § 365 into § 363. Id. at 961. 4 The court reasoned that in the context of an asset sale, there is 5 no “cure” of events of default. Id. 6 Because Entz-White did not apply, the Future Media court 7 instructed the bankruptcy court on remand to apply the “rule 8 adopted by the majority of federal courts. That rule simply 9 stated is: The bankruptcy court should apply a presumption of 10 allowability for the contracted for default rate, ‘provided that 11 the rate is not unenforceable under applicable nonbankruptcy 12 law.’” Id. (quoting 4 COLLIER ON BANKRUPTCY, ¶ 506.04[2][b][ii] (15th 13 ed. 1996)). To reach its decision in favor of applying default 14 interest under § 506(b), the court relied specifically on two 15 circuit cases: the Fifth Circuit case, In re Laymon, and the 16 Seventh Circuit case, In re Terry Limited Partnership. Id. The 17 court declined GECC’s invitation to create a bright-line rule that 18 a default rate differential of 2% is reasonable. Id. at 962. 19 D. The bankruptcy court misapplied the law. 20 Clearly then, Future Media allows oversecured creditors to 21 recover pendency interest at the default rate, at least in some 22 instances. First, the presumption of the contractual default rate 23 applies only to those oversecured creditors whose claims to the 24 higher interest rate are enforceable under nonbankruptcy law. 25 Further, the court’s reliance on Laymon and Terry limited the 26 presumptive rule and gave bankruptcy courts discretion as to 27 whether the default rate will be applied. Laymon and Terry 28 expressly allowed bankruptcy courts to assess whether the higher

-18- 1 default rate was reasonable or otherwise equitable under the 2 circumstances. See In re Laymon, 958 F.2d at 75 (allowing default 3 rate interest depending on “the equities involved in [the] 4 bankruptcy proceeding”); In re Terry Ltd. P’ship, 27 F.3d at 243 5 (presumption in favor of contractual default rate is “subject to 6 rebuttal based on equitable considerations”). That is essentially 7 the rule the Panel set forth in Hassen Imports and Casa Blanca. 8 However, we recognize that to the extent these cases placed the 9 burden on the creditor to establish that the default rate 10 reasonably compensated the creditor for its loses arising from the 11 default, Future Media has overruled those decisions and has 12 shifted the burden to the debtor to demonstrate the rate’s 13 unreasonableness, or that it is not enforceable under 14 nonbankruptcy law. 15 One could arguably interpret the rule favoring default 16 interest set forth in Future Media as applying only to those cases 17 involving an asset sale under § 363. Although that case did not 18 involve a confirmed chapter 11 plan as did Entz-White, the real 19 focus in Future Media was the fact that no “cure” under 20 § 1124(2)(A) was being effected. Further, the court did not 21 appear to limit its holding to § 363 asset sale cases, even though 22 it did make the distinction between sale cases and cases involving 23 a confirmed chapter 11 plan. We do not see any reason why Future 24 Media would not apply in this case, where the plan does not 25 provide for a cure. 26 Accordingly, the bankruptcy court was required to apply the 27 presumptive rule that Wells Fargo was entitled to the default rate 28 for its pendency interest, provided that such rate is not

-19- 1 unenforceable under Nevada law. Nothing suggests the bankruptcy 2 court applied this rule. We decline Wells Fargo’s invitation to 3 make any findings as to what default rate may be appropriate in 4 determining the pendency interest in this appeal. 5 However, the presumptive rule for default interest is also 6 subject to rebuttal based on equitable considerations. The 7 bankruptcy court made no such “equity” findings here, other than 8 finding that denying default interest was “fair and equitable” 9 under § 1129(b), which we have concluded was error. Contrary to 10 Debtor’s position, and for the reasons stated above, § 1129(b) is 11 not the “qualifying or contrary provision” of the Code the Future 12 Media court was referencing. 13 VI. CONCLUSION 14 The bankruptcy court appears to have denied default interest 15 on either the erroneous basis that even though no cure was 16 effected in the Plan, Entz-White applied, or that it could deny 17 such interest on the basis that the Plan allowing for the 18 nondefault rate was fair and equitable under § 1129. Either way, 19 the court applied an incorrect standard of law. It also did not 20 articulate any findings as to the equitable considerations it 21 applied, if any. Accordingly, we REVERSE and REMAND the 22 Confirmation Order with respect to the bankruptcy court’s denial 23 of default interest so that it can apply the proper rule under 24 Future Media and make the appropriate findings. 25 26 27 28

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