Central District Consumer Bankruptcy Attorney's Association

Friday, May 20, 2016
In *Wells Fargo Bank, N.A. v. Beltway One Dev. Grp., LLC (In re Beltway One
Dev. Grp., LLC)*, 547 B.R. 819 (B.A.P. 9th Cir. 2016), the Ninth Circuit
Bankruptcy Appellate Panel recently held that an oversecured creditor is
entitled to pendency default interest, i.e., default interest accruing
during the bankruptcy case, before plan confirmation where the secured
creditor's claim is not cured under a debtor's reorganization plan.
*Beltway One* involved a $10 million matured, secured loan made by Wells
Fargo Bank, N.A., which precipitated Beltway One's voluntary bankruptcy.
The parties agreed that Wells Fargo was oversecured. Beltway One's
reorganization plan proposed extending the maturity date of the loan for 30
years, while providing a "cramdown" interest rate of 4.25% with a balloon
payment at maturity. Wells Fargo objected, arguing, among other things,
that as an oversecured creditor it was entitled to pendency default
interest under Bankruptcy Code section 506(b) because its claim was not
cured under the plan and, indeed, could not be cured. Beltway One
conceded that Wells Fargo's claim was not cured, but argued that under *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
bankruptcy court had "equitable discretion" to limit pendency interest. The
bankruptcy court agreed, disallowed Wells Fargo's claim for pendency
interest, and confirmed the Beltway One's plan.
On appeal, the BAP reversed the bankruptcy court, holding that "an
oversecured creditor can record pendency interest as part of its allowed
claim, at least to the extent it is oversecured." The BAP found
*Entz-White* inapplicable
noting that Wells Fargo's claim was impaired (i.e., not cured) under
Beltway One's plan because it provided a new term, new interest rate, and
new amortization schedule. The BAP further explained that a court's
"equitable discretion" under Entz-White in awarding interest is limited to
circumstances where a plan "cures and nullifies all consequences of
default, but fails to establish the appropriate postpetition interest rate
under the contract or applicable state law." The BAP also relied on *General
Elec. Capital Corp. v. Future Media Prods., Inc.*, 536 F.3d 969, 973 (9th
Cir.), amended 547 F.3d 956, 960 (9th Cir. 2008) that an oversecured
creditor is entitled to "a presumption of allowability for the contracted
default rate of interest provided that the rate is not unenforceable under
applicable non-bankruptcy law." Accordingly, the debtor, not the
oversecured creditor, bears the burden of establishing that the pendency
default interest rate is unenforceable under applicable non-bankruptcy law.
In sum, the BAP's decision in *Beltway One* clarified that when an
oversecured creditor's claim is not cured by a reorganization plan, the
secured creditor is entitled to pendency interest at the contractual rate,
including default interest, unless a debtor can prove the rate is
unenforceable under applicable non-bankruptcy law.
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