Ninth Circuit Abandons Entz-White: Default-Rate Interest Required To Cure And Reinstate Secured Debt Under Chapter 11 Plan

In 1994, Congress amended the Bankruptcy Code to add section 1123(d), which provides that, if a chapter 11 plan proposes to "cure" a default under a contract, the cure amount must be determined in accordance with the underlying agreement and applicable nonbankruptcy law. Since then, a substantial majority of courts, including the U.S. Court of Appeals for the Eleventh Circuit, have held that such a cure amount must include any default-rate interest required under either the contract or applicable nonbankruptcy law. See, e.g., JPMCC 2006-LDP7 Miami Beach Lodging, LLC v. Sagamore Partners, Ltd. (In re Sagamore Partners, Ltd.), 620 Fed. Appx. 864, 2015 BL 280922 (11th Cir. Aug. 31, 2015).

Until this year, courts in the Ninth Circuit were outliers in this debate, adhering to a contrary approach articulated nearly three decades ago by the U.S. Court of Appeals for the Ninth Circuit in Great Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988). In Entz-White, the Ninth Circuit held that the payment of default-rate interest is not required to cure and reinstate a defaulted secured debt under chapter 11 because cure effectively nullifies all aspects of the default and rolls back the status quo to a time prior to its occurrence.

Despite the enactment of section 1123(d) and the weight of judicial authority in other circuits rejecting the Entz-White approach, Ninth Circuit courts, including the Court of Appeals, remained faithful to the Entz-White rule for 28 years, albeit sometimes reluctantly. See General Elec. Capital Corp. v. Future Media Productions, Inc., 536 F.3d 969 (9th Cir. 2008) (declining to rule that Entz-White was overruled by section 1123(d)); In re Phoenix Bus. Park Ltd. P'Ship, 257 B.R. 517, 522 (Bankr. D. Ariz. 2001) (finding that "Entz-White remains good law in the Ninth Circuit" because "Congress did not legislatively overrule Entz-White" when it enacted section 1123(d)).

However, the primacy of Entz-White finally ended this year. In In re New Invs., Inc. (Pacifica L 51 LLC v. New Invs., Inc), 2016 BL 368939 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that "Entz-White's rule of allowing a curing debtor to avoid a contractual post-default interest rate in a loan agreement is no longer valid in light of § 1123(d)."

Cure and Reinstatement Under a Chapter 11 Plan

In a chapter 11 case, the debtor-in-possession or other plan proponent can propose a plan that...