In re New Investments
In re New Investments is a recent decision from the 9th
U.S. Circuit Court of Appeals that addressed this issue,
resulting in the 9th Circuit joining the majority of circuits
in enforcing a default interest rate, despite a confirmed
plan of reorganization calling to cure the default and roll
back to the pre-default contract rate.
In reaching its decision, the 9th Circuit revisited
its 1988 decision in Great Western Bank & Trust v.
Entz-White Lumber And Supply, which had held that a
borrower/debtor was “entitled to avoid all consequences
of the default, including higher post-default interest
rates.” The court needed to reconcile 1123(d) with
1123(a), which provides, “Notwithstanding any other-
wise applicable nonbankruptcy law, a plan shall … ( 5)
provide adequate means for the plan’s implementation,
such as … (G) curing or waiving of any default.”
Courts had long relied on 1123(a) to allow debtors
to roll back interest to the pre-default contract rate until
the enactment of 1123(d) that amended the Bankruptcy
Code in 1994. In the more than 22 years since the
amendment, certain courts have ignored 1123(d) and
allowed debtors to roll back default interest rates over
the objection of lenders.
In the 9th Circuit case, the debtor operated a hotel in
Washington State and obtained a $2.75 million mort-
gage loan from Frontier Bank. The debtor failed to repay
the loan when it matured, and the bank, by its successor,
imposed the default rate of interest and commenced a
non-judicial foreclosure, which was the catalyst for the
Chapter 11 filing. The debtor then proposed a plan of
reorganization that called for a sale of the hotel and
recast the loan back to the pre-default contract interest
rate. The dispute with the bank’s successor related to
the amount of the bank’s secured claim — specifically
its right to the default rate of interest. Since the case
Lenders make their money by collecting interest and fees. Employment of principal is utilization of their inventory in the hopes of turning a profit
(let alone covering their expense of doing business).
This concept is often lost on borrowers — especially
borrowers that have fallen into default. Unfortunately,
it is often lost on bankruptcy judges as well.
Section 1123(d) of the Bankruptcy Code provides:
… if it is proposed in a plan to cure a default,
the amount necessary to cure the default shall
be determined in accordance with the underlying agreement and applicable nonbankruptcy law.
In general, lenders charge a default rate of interest
to compensate for the increased credit risk that occurs
if a borrower defaults and to cover the additional labor
incurred in administering a defaulted loan.
Lenders that have not imposed a default rate of
interest before the borrower files for bankruptcy will typically not seek to impose a default rate during proceedings. However, if a default rate was imposed pre-petition,
the lender will often insist on recovering interest at the
default rate during the administration of the case and
often after a plan of reorganization is confirmed.
What’s Your Interest in Interest?
Lenders’ Rights to Post-Confirmation
Default Rate Interest
BY JEFFREY A. WURST AND SUZANNE MOURAD
Lenders often set a default rate of interest in a loan agreement as protection if the borrower defaults.
They expect the courts to honor the rate, but it doesn’t always happen. Attorneys Jeffrey Wurst and
Suzanne Mourad explain how conflicting clauses in the bankruptcy code often allow the borrower to roll
back the interest rate.
JEFFRE Y A. WURS T
Partner, Ruskin Moscou
Lenders that have not imposed a default rate of interest before the borrower
files for bankruptcy will typically not seek to impose a default rate during
proceedings. However, if a default rate was imposed pre-petition, the
lender will often insist on recovering interest at the default rate during the
administration of the case and often after a plan of reorganization is confirmed.