In re: Beltway One Development Group, LLC
NV-14-1564-KiDJu
| 9th Cir. BAP | Mar 31, 2016Background
- Beltway One Development Group borrowed about $10M from Wachovia (later Wells Fargo) in 2008; the note matured May 16, 2011 and included a contractual default interest rate (default = +3%).
- Debtor defaulted prepetition; Wells Fargo declared acceleration and recorded a trustee’s sale; debtor filed Chapter 11 on July 13, 2011 to avoid foreclosure.
- Debtor’s confirmed Chapter 11 plan extended the loan maturity, set a cramdown interest rate of 4.25%, eliminated prebankruptcy covenants, and expressly stated Wells Fargo would not receive default interest, late fees, or other charges arising prior to the plan Effective Date.
- Wells Fargo filed an oversecured proof of claim including prepetition default interest and objected to confirmation, arguing § 506(b) entitles oversecured creditors to pendency (postpetition/pre-effective date) default interest.
- Bankruptcy court confirmed the plan, applied the pre-default rate (denying default pendency interest), relied on Ninth Circuit precedent (Entz-White/Future Media line), and denied Wells Fargo’s reconsideration motion; Wells Fargo appealed.
- The BAP reversed and remanded, holding the bankruptcy court applied the wrong legal standard and failed to make required equitable findings under Future Media when denying default pendency interest.
Issues
| Issue | Wells Fargo's Argument | Beltway's Argument | Held |
|---|---|---|---|
| Whether an oversecured creditor is entitled to contractual default rate as pendency interest under § 506(b) when the plan does not cure the prepetition default | § 506(b) allows an oversecured creditor to recover pendency interest at the contractual default rate; Entz-White is inapplicable because the plan did not cure the default | Plan may eliminate default consequences; bankruptcy court can deny default interest as part of fair-and-equitable confirmation analysis | Reversed: where plan does not cure, Future Media’s presumption favors the contractual default rate (subject to nonbankruptcy law and equitable rebuttal); Entz-White inapplicable |
| Whether the bankruptcy court may use the § 1129(b) fair-and-equitable test to eliminate pendency default interest | Plan treatment cannot strip § 506(b) pendency-rights by fair-and-equitable plan treatment; § 506(b) is a claims issue separate from § 1129(b) | Court may consider fairness at confirmation to justify denial of default interest | Held for Wells Fargo: § 506(b) pendency interest is a claims determination separate from § 1129(b); the court erred by conflating them |
| Burden to justify or rebut contractual default rate for pendency interest | Contractual default rate should be presumptively allowed; burden on debtor to show rate unenforceable or unreasonable (per Future Media) | Debtor argued equitable discretion and earlier BAP precedent requiring creditor show reasonableness | Held: Future Media places the burden on debtor to rebut presumption of allowability; bankruptcy court must make equitable findings if denying default rate |
| Whether Entz-White’s ‘‘cure’’ rule still controls when there is no cure | Entz-White’s per se no-default-interest rule applies only where plan effects a cure | Debtor relied on Entz-White and equitable discretion even without a cure | Held: Entz-White inapplicable here because the plan did not cure; its footnote on equitable discretion is narrow and not a basis to deny default interest absent findings |
Key Cases Cited
- Entz-White Lumber & Supply, Inc. v. Great W. Bank, 850 F.2d 1338 (9th Cir. 1988) (approved rule that a confirmed plan that cures a default may avoid contractual default-interest consequences)
- Future Media Prods., Inc. v. Gen. Elec. Capital Corp., 547 F.3d 956 (9th Cir. 2008) (presumption in favor of contractual default rate for pendency interest where no cure; debtor must rebut as unenforceable or unreasonable)
- Ron Pair Enters., Inc. v. Travelers Ins. Co., 489 U.S. 235 (U.S. 1989) (creditors’ entitlements arise from underlying substantive law; § 506(b) permits allowance of interest to oversecured creditors)
- In re Hassen Imps. P’ship, 256 B.R. 916 (9th Cir. BAP 2000) (when debt not cured, inquiry whether contractual default rate reasonably compensates creditor; placed evidentiary focus on reasonableness)
- Countrywide Home Loans, Inc. v. Hoopai (In re Hoopai), 581 F.3d 1090 (9th Cir. 2009) (discussion of pendency period and effective-date timing for plan interest)