The Ninth Circuit BAP recently discussed on appeal the issue of whether a bankruptcy court may use the “fair and equitable” standard for confirmation in § 1129(b) to deny an oversecured creditor default interest on its claim to which it would otherwise be entitled under § 506(b). In Wells Fargo Bank, N.A. v. Beltway One Development Group, LLC (In re Beltway One Development Group, LLC), 547 B.R. 819 (9th Cir. BAP 2016), the Ninth Circuit BAP concluded that the fair and equitable standards for confirmation deal with treatment of an allowed claim post-confirmation, but that allowance of an oversecured claim is governed by § 506(b). The BAP held the bankruptcy court erred In using § 1129(b) to deny Wells Fargo default interest on its claim.
The facts in Beltway One were straightforward. The value of the bank’s collateral exceeded the amount the bank was owed. The debtor’s plan, however, provided that the bank would not be entitled to any default interest on its claim, and treated the claim by modifying its terms and providing for payment amortized over 30 years. The plan further provided that any pre-effective date defaults would be deemed to have been cured. The debtor’s argument was that the default was “cured” because it was paid with a new loan; therefore, under the Ninth Circuit’s decision in Great Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (In re Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), the default had been cured and the bank was not entitled to default interest during the pendency of the case. Wells Fargo opposed confirmation, asserting the plan did not meet the “fair and equitable” test under § 1129(b)(1). The bankruptcy court agreed with the debtor, concluding the new loan under the plan “paid” the debt within the meaning of Entz-White, and confirmed the plan.
The BAP reversed. The BAP noted a major factual difference between the Beltway One plan and the Entz-White plan in that the debtor in Entz-White actually cured the defaults on its secured creditor’s debt by paying the debt in full on the effective date of the plan, whereas Beltway One merely restructured the terms of its secured debt with Wells Fargo. Consequently, the BAP concluded Entz-White was not applicable to the present case. The BAP stated that determining post-petition interest on an oversecured claim under § 506(b) “is an issue separate and distinct from the fair and equitable test for plan confirmation under § 1129(b). The BAP held that determination of interest on an oversecured debt is a claim issue, not a confirmation issue.
This holding did not end the inquiry, however. The BAP also concluded that entitlement to default interest during the pendency of the case “is not automatic but may be allowed upon demonstrating that it meets certain requirements.” The BAP stated that the determination is accompanied with a presumption that the contract’s default interest rate is reasonable unless the debtor introduces evidence that it is not. The BAP based its conclusion on the Ninth Circuit’s decision in Gen. Elec. Capital Corp. v. Future Media Prods., Inc. (In re Future Media), 536 F. 3d 969 (9th Cir.), amended 547 F.3d 956 (9th Cir. 2008), which held that, if Entz-White does not apply, then the bankruptcy court must evaluate the viability of the contractual default interest rate by using applicable “substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.” In other words, the bankruptcy court should apply a presumption of allowability for the contract default interest rate, provided the rate is not unenforceable under applicable non-bankruptcy law. The creditor enjoys a presumption that the contracted for rate is reasonable, and the debtor bears the burden of demonstrating it is not, or that the rate is not enforceable under applicable non-bankruptcy law.