Ninth Circuit Requires Debtors To Pay Interest At Default Rate To Cure Default

In the recent decision of Pacifica L51 LLC v. New Invs., Inc. (In re New Invs., Inc.), No. 13-36194, 2016 WL 6543520 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that Section 1123(d) of the Bankruptcy Code legislatively overruled Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and required debtors to pay interest at the default rate to cure a default pursuant to a plan of reorganization.

The debtor defaulted on a mortgage. The bankruptcy court confirmed a chapter 11 plan that allowed the debtor to cure the default by selling the property and using the sale proceeds to pay the loan off at the pre-default rate. At the same time, the court required the debtor to escrow nearly $800,000 as a disputed claim reserve should an appellate court require the debtor to pay default interest to effectuate the cure. On appeal, the Ninth Circuit reversed.

The Circuit Court ruled that "[t]he plain language of § 1123(d) compels the holding that a debtor cannot nullify a preexisting obligation in a loan agreement to pay post-default...