Daily Development for

Thursday, June 3, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Another interesting and valuable report from Jim Stillman:

BANKRUPTCY; INTEREST; SECURED CREDITORS; DEFAULT RATE: A fully secured creditor is entitled to accrue interest at the contractual default rate until the effective date of the plan of reorganization.

In re Southland Corporation, 160 F.3d 1054 (5th Cir. 1998).

Although the plan "reinstated" the underlying credit agreement in the sense that it returned the parties to the position they had been in before bankruptcy, i.e., in unresolved work-out negotiations, the plan did not affirmatively cure and reinstate the credit agreement. Hence, even if the Court of Appeals were inclined to adopt the Ninth Circuit's reasoning that no default rate interest can be collected on loans that are "cured and reinstated" in the plan, see, e.g., In re Southeast Co., 868 F.2d 335 (9^th Cir. 1989), that reasoning would not apply here. To the extent it was required to do so, the Bankruptcy Court adequately balanced the equities of the situation, and correctly found default rate interest allowable where the spread was relatively small (2 percentage points), the creditor had engaged in no "obstructive" behavior during the case, and no junior creditors stood to harm from the allowance. In any event, it ought to be the Debtor's burden of proof on the question whether the higher rate would produce an inequitable result.

Reporter's Comment: In her emphatic and unwaveringly confident style, Judge Jones writes for the Fifth Circuit in an opinion that strongly endorses the fully secured creditor's right to default rate interest during the case, probably in all cases. Judge Jones considers it "doubtful" that the Ninth Circuit's reasoning in Southeast Co. and Entz-White [850 F.2d 1338] would be extended in the Fifth Circuit whatever the facts; indicates that Congress has probably overruled the opinions, in the 1994 amendments to the Bankruptcy Code; and damns Entz-White progency, such as In re Udhus (Bankr.

9th Cir. 1998) and In re Casa Blanca Project Lenders (Bankr. 9th Cir. 1996), as poorly reasoned, "misreadings" even of Entz-White, and without "statutory reference." Casa Blanca is the worst of the lot: there, a creditor was denied default rate interest where only equity stood to benefit, and on the theory that the plan "cured" the loan by proposing to pay it off in a series of future sales by parcel. The "equitable considerations" identified in this opinion -- degree of spread, obstructiveness (i.e., delay) and junior creditors -- really cut to the heart of the matter.

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