Default rate interest provisions are standard language in business loan agreements. A borrower’s default on a loan triggers consequences, including higher default rate interest. A borrower can generally “cure” the default and reinstate the loan to its original terms. Disputes over claims for default rate interest arise in the context of bankruptcy cases filed by financially distressed borrowers. In their article “9th Circuit Limits a Borrower’s Ability to ‘Cure’ in Chapter 11,” published in the Daily Journal, David Kupetz and Asa Hami discuss the concept of cure in the context of a chapter 11 bankruptcy reorganization case and the impact of a recent 9th Circuit decision.
The Bankruptcy Code incorporates the concept of cure under a chapter 11 plan. The 9th Circuit’s 1988 decision in Entz-White held that a debtor who cures a default under a plan “is entitled to avoid all consequences of the default—including higher post default interest rates.” In 1994, the Bankruptcy Code was amended by enacting a section providing that, if a plan proposes to cure a default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.” Until very recently, the 9th Circuit had not revisited the merits of Entz-White.
In New Investments, the 9th Circuit held that Entz-White’s rule of allowing a debtor to avoid a contractual post-default interest rate in a loan agreement is no longer valid. Mr. Kupetz and Mr. Hami note that the ruling in New Investments is consistent with the traditional concept of “cure,” the concept of impairment under a chapter 11 plan, and the balance chapter 11 was designed to strike between a debtor’s interest in a reorganization and a fresh start and creditor rights.