The Bankruptcy Code gives secured creditors certain rights and protections. For secured creditors whose collateral is worth more than the creditor’s claim, these rights may include payment of attorney’s fees and post-petition interest at a rate agreed to in the debtor’s and creditor’s prepetition agreement. A chapter 11 bankruptcy plan, however, may have provisions in it that expressly takes away a secured creditor’s right to post-petition interest. A recent memorandum opinion in the Linn Energy, LLC (“Linn”) and Berry Petroleum Company, LLC (“Berry”) bankruptcy eliminated a secured creditor’s right to post-petition interest at a default rate, because of conflicting plan provisions, one of which seemed to allow post-petition interest, while the other prohibited it.

Wells Fargo, N.A., was the administrative agent under prepetition credit facilities for Berry and Linn (“Lender”). As typical in credit agreements, the prepetition credit facilities had provisions dealing with payment of principal and interest in situations that constitute an “event of default.” Linn and Berry filed bankruptcy on May 11, 2016. The bankruptcy filing constituted an event of default under the prepetition credit facilities, and allowed the Lender to collect a “default interest.”

Linn and Berry filed their separate plans of reorganizations (the “Plans”), which were substantively similar in defining the Lender’s claims and the treatment under the Plan[1]. The Lender did not object to either the Linn Plan or the Berry Plan, and each Plan was subsequently approved by the bankruptcy court.

Prior to the Plans going effective, the Lender filed a motion, requesting the bankruptcy court to order the payment of post-petition default interest. The reorganized Berry and Linn disagreed that the Lender was entitled to post-petition default interest under the Plans.

The dispute between the reorganized entities and the Lender centered around two conflicting provisions: Article III.B.3 and Article VI.F.

Article VI.F of the Berry Plan prohibited the Lender from collecting post-petition default interest, unless some other provision in the Berry Plan or Confirmation order “specifically provides for” default interest:

No Postpetition or Default Interest on Claims.

Unless otherwise specifically provided for in the Plan or Confirmation Order, and notwithstanding any documents that govern the Berry Debtors’ prepetition funded indebtedness to the contrary, (a) postpetition and/or default interest shall not accrue or be paid on any Claims and (b) no holder of a claim shall be entitled to: (i) interest accuring on or after the Petition Date on any such Claim; or (ii) interest at the contract default rate, as applicable; provided, however, that nothing herein shall affect the payment of postpetition interest and/or adequate protection payments made to the Berry Lenders pursuant to the Cash Collateral Order.

Berry argued that Article VI.F only allowed the Lender to collect on post-petition interest at the contract rate pursuant to the Cash Collateral Order, not the default rate.

In opposition, the Lender argued that Article III.B.3 provided for the payment of default interest because the proof of claim[2] referenced in the definition of “Berry Lender Claims” contains a statement that interest continues to accrue at a “Default Rate.” Article III.B.3 provides:

Allowance: Notwithstanding any other provision of the Plan to the contrary, the Berry Lender Claims[3] are Allowed as fully Secured Claims under section 506(b) of the Bankruptcy Code, having first lien priority in the amount of approximately $898 million on account of unpaid principal, plus unpaid interest, fees, expenses, and other obligations arising under or in connection with the Berry Lender Claims, as set forth in the Berry Credit Agreement or the other Loan Documents (as defined in the Berry Credit Agreement) in each case, not subject either in whole or in part to off-set, disallowance or avoidance under chapter 5 of the Bankruptcy Code or otherwise, recharacterization, recoupment, or subordination or any equitable theory (including, without limitation, subordination, disallowance, or unjust enrichment), or otherwise, and any other claims or Causes of Action that any Person, including but not limited to the Berry Debtors and their estates may be entitled to assert against the Berry Lenders or the Berry Lender Claims.

The Court found, that “the general allowance language of Article III.B.3, its reference to the [Berry Lender’s Proof of Claim] and a single statement that the Berry and Linn Lenders continue to accrue postpetition interest is too weak a reed upon which to form a specific provision in the Plan or Confirmation Order to the contrary providing for payment of default interest.” More importantly, the Court stressed that it found troubling that a “sophisticated party for whom the Court allowed significant professional expenses to be paid remained silent and knowingly allowed the Court to make a decision on erroneous information.”

The aggregate amount of post-petition default interest that the Lender was originally entitled to was $45,519,267.22. Had the Lender objected to the Berry and Linn Plans prior to confirmation, then it may have received its post-petition default interest.

In short, focusing on a single favorable provision in a plan isn’t enough. Creditor’s attorneys need to take an extra step to ensure there is no conflicting language. In this case, it would have been worth $45,519,267.22.

The Judge’s memorandum opinion may be found here.[4]