Pacifica L 51 LLC v. New Investments Inc.
840 F.3d 1137
| 9th Cir. | 2016Background
- New Investments borrowed about $3.05 million from Pacifica’s predecessor to buy a hotel; the note set an 8% interest rate and a 5% contractual increase upon default.
- New Investments defaulted and filed Chapter 11 after Pacifica began nonjudicial foreclosure; its plan proposed to cure by selling the property and paying the loan at the pre-default rate.
- Bankruptcy court confirmed the plan, directing payment to Pacifica at the pre-default rate and reserving funds for Pacifica’s disputed claim and fees; Pacifica appealed.
- The Ninth Circuit panel considered whether Entz-White (allowing a curing debtor to avoid contractually higher post-default interest) remains valid after Congress added 11 U.S.C. § 1123(d) in 1994.
- Section 1123(d) provides that, when a plan proposes to cure, "the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable non-bankruptcy law."
- The majority reversed the bankruptcy court, holding § 1123(d) supersedes Entz-White and requires payment under the contract’s post-default interest rate; Judge Berzon dissented, arguing Entz-White remains controlling.
Issues
| Issue | Plaintiff's Argument (New Investments) | Defendant's Argument (Pacifica) | Held |
|---|---|---|---|
| Whether a debtor who proposes to cure may avoid a contractual post-default interest rate | "Cure" returns parties to pre-default conditions so debtor may pay pre-default interest (Entz-White) | § 1123(d) requires cure amount be determined by the underlying contract and state law, so post-default rate applies | Majority: § 1123(d) displaces Entz-White; post-default rate required |
| Whether § 1123(d) was intended to overrule Entz-White | § 1123(d) does not define "cure" and legislative history focuses on Rake, so Entz-White still controls | § 1123(d)’s plain text directs courts to underlying agreement and nonbankruptcy law, thus displacing Entz-White | Majority: Plain language of § 1123(d) controls; Entz-White is no longer good law |
| Whether Washington law can be "applicable non-bankruptcy law" under § 1123(d) despite automatic stay | Cure should reflect pre-default status; stay does not change cure concept | Washington deed-of-trust provisions govern cure amounts; automatic stay does not render state law inapplicable | Majority: State foreclosure law is "applicable non-bankruptcy law" and applies |
| Whether stare decisis required following Entz-White | Entz-White is binding precedent defining "cure"; panel must follow it absent clear legislative or higher-court change | Congress changed the rule by enacting § 1123(d) which limits cure to contract and non-bank law | Dissent: Entz-White remains binding; majority departure unwarranted |
Key Cases Cited
- In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988) (held a curing debtor may avoid contractual post-default interest and other default consequences)
- Rake v. Wade, 508 U.S. 464 (1993) (held secured creditor entitled to interest on arrearages paid in Chapter 13 cure)
- Union Bank v. Wolas, 502 U.S. 151 (1991) (statutory text controls even where some consequences are unforeseen)
- In re Sylmar Plaza, L.P., 314 F.3d 1070 (9th Cir. 2002) (discussing creditor impairment and relevance of Entz-White)
- Di Pierro v. Taddeo (In re Taddeo), 685 F.2d 24 (2d Cir. 1982) (definition of "cure" as returning to pre-default conditions)