Entz-White Lumber and Supply, Inc., In re

• Decision Date: 28 June 1988
• Docket Number: No. 87-2428,ENTZ-WHITE,87-2428
• Parties: , 18 Bankr.Ct.Dec. 83, Bankr. L. Rep. P 72,380 In reLUMBER AND SUPPLY, INC., Debtor. GREAT WESTERN BANK & TRUST, now known as Citibank (Arizona), an Arizona banking corporation, Plaintiff-Appellant, v. LUMBER AND SUPPLY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1338

850 F.2d 1338

98 A.L.R.Fed. 831, 18 Bankr.Ct.Dec. 83,

Bankr. L. Rep. P 72,380

In re ENTZ-WHITE LUMBER AND SUPPLY, INC., Debtor.

GREAT WESTERN BANK & TRUST, now known as Citibank (Arizona), an Arizona banking corporation, Plaintiff-Appellant, v. ENTZ-WHITE LUMBER AND SUPPLY, INC., Defendant-Appellee.

No. 87-2428.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 14, 1988.

Decided June 28, 1988.

Richard L. Epling, Cathy M. Holt, Brown & Bain, P.A., Phoenix, Ariz., for plaintiff-appellant.

Randolph J. Haines, Lewis and Roca, Phoenix, Ariz., for defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before CHOY, SNEED and HUG, Circuit Judges.

SNEED, Circuit Judge:

Great Western Bank & Trust (Great Western), an Arizona banking corporation, challenged the Chapter 11 plan filed by Entz-White Lumber & Supply (Entz-White), on the ground that it impermissibly undervalued Entz-White's liability to Great Western. Specifically, Great Western insists that the plan used an incorrect post-maturity interest rate and that it failed to recognize that Entz-White had guaranteed an unpaid personal loan to Jack Entz made by Great Western. The bankruptcy court granted Entz-White's motion for summary judgment on Great Western's objections to the plan. The district court affirmed, and Great Western now appeals. We affirm the grant of summary judgment.

I. FACTS AND PROCEEDINGS BELOW

The source of Great Western's contentions is, first, a loan of $2 million by Great Western to Entz-White in March 1982. This loan was authorized by a corporate borrowing resolution. Second, at the same time, Great Western made personal loans to Jack Entz, an officer and director of Entz-White, and his wife, who used the proceeds to buy a controlling interest in Entz-White from Jack Entz's father. Entz-White borrowed another $600,000 from Great Western in February 1983.

Although the loans to Entz-White were to mature in June 1983, Great Western agreed to extend the due date of the loans to June 1984 and to loan another $591,000 to Entz-White on the condition that Entz-White guarantee the personal loans of Jack Entz and his wife to Great Western. On June 1, 1983, Jack Entz executed a corporate guarantee of payment of the personal loans. The third source of Great Western's claims is that it insists that Entz-White authorized Entz to execute that guarantee. Entz-White says it did no such thing.

Finally, on April 4, 1984, Entz-White executed and delivered to Great Western a promissory note in the original principal amount of $3,170,175. The note provided for an interest rate equal to Great Western's prime rate plus 1.5%. It also provided that "[a]ll obligations hereunder (including principal, interest, costs and fees) not discharged when due or upon 'demand' shall bear interest, until paid in full, at the greater of (i) a per annum rate equal to one hundred fifty percent (150%) of the rate set forth above, or (ii) eighteen percent (18%) per annum." Appellant's Excerpt of Record (E.R.) at 43. Much of the dispute between the parties with respect to the post-judgment interest rate revolves around the effect of this provision.

The note was due by its own terms on June 1, 1984. Entz-White did not pay the amount due, and filed a Chapter 11 bankruptcy petition on August 17, 1984. On February 25, 1985, the bankruptcy court confirmed Entz-White's reorganization plan. Pursuant to the plan, Entz-White paid Great Western $3,492,471 on April 26, 1985. This amount included the full principal balance owed as well as interest accrued at the rate of 1.5% in excess of Great Western's prime. Had Entz-White paid post-default interest at the 18% rate, as Great Western insists it should have, an additional $190,617 would have been paid.

Great Western had filed a secured proof of claim in November 1984, which stated, inter alia, that Entz-White was liable to Great Western for the post-maturity interest and the personal loans to Jack Entz. In June 1985 Entz-White objected to these two portions of Great Western's claim. The two parties filed cross-motions for summary judgment. The bankruptcy court granted Entz-White's motion for summary judgment and the district court affirmed in June 1987. Great Western timely appealed.

II. JURISDICTION

There are no jurisdictional flaws that require attention. The bankruptcy court had jurisdiction under 28 U.S.C. Sec. 157(b)(2)(B) and the district court's rested on 28 U.S.C. Sec. 158(a). The decision of the district court was a final decision; therefore, this court has jurisdiction under 28 U.S.C. Sec. 1291. See In re Exennium, Inc., 715 F.2d 1401, 1402 (9th Cir.1983); In re Seidel, 752 F.2d 1382, 1383 (9th Cir.1985).

III. STANDARD OF REVIEW

The appropriate standard of review is de novo. In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc., 819 F.2d 214, 215 (9th Cir.1987); see Bankr.R. 7056 (making Fed.R.Civ.P. 56 applicable to summary judgments in bankruptcy proceedings).

IV. THE POST-MATURITY INTEREST RATE

The Bankruptcy Code broadly states that a Chapter 11 reorganization plan shall "provide adequate means for the plan's implementation, such as ... curing or waiving of any default." 11 U.S.C. Sec. 1123(a)(5)(G). The Code does not define "cure." In In re Taddeo, 685 F.2d 24, 26-27 (2d Cir.1982), the Second Circuit said, "A default is an event in the debtor-creditor relationship which triggers certain consequences.... Curing a default commonly means taking care of the triggering event and returning to pre-default conditions. The consequences are thus nullified. This is the concept of 'cure' used throughout the Bankruptcy Code." See also In re Metz, 820 F.2d 1495, 1497 (9th Cir.1987) (the cure provisions of Chapter 13 allow "the debtor to 'cure' (i.e., pay or bring current) arrearages on the debt and thereby reinstate the debt"); In re Clark, 738 F.2d 869, 872 (7th Cir.1984) ("as the term relates to defaults, 'cure' means to restore matters to the status quo ante"). ¹

Entz-White argues that its plan, by paying the arrearages on the debt, "cured" its default. It insists that this "cure" nullified any consequences of the default, including a post-maturity higher interest rate. The bankruptcy court and district court agreed with this argument.

Although Entz-White's argument seems to conform to the broad language of section 1123, Great Western argues that this appearance is deceiving, and that a closer reading of the Code reveals that Congress intended to allow debtors to cure only those defaults the consequences of which are solely acceleration of the remaining payments due. Default on the Entz-White debt had no such consequence. The note of Entz-White naturally "matured" before it filed for bankruptcy. Entz-White, therefore, must pay the higher rate of interest provided for by the terms of the contract. This rate is not a "consequence" of default. ²

Great Western points to 11 U.S.C. Sec. 1124, which determines whether a party is impaired by a Chapter 11 reorganization plan. ³ Subsection 1124(2), in pertinent part, states:

[A] class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan--

* * *

(2) notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default--

(A) cures any such default that occurred before or after the commencement of the case under this title ...; (B) reinstates the maturity of such claim or interest as such maturity existed before such default;

(C) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law; and

(D) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest....

Great Western points to the "notwithstanding" clause of subsection (2) to support its claim that "cure" is applicable only to obligations that have been accelerated due to default. We find this a strained reading of the statute, as did the bankruptcy court and district court. Section 1123 speaks of "any default" while the notwithstanding clause of section 1124 refers to "a default." The natural reading of these sections is that plans may cure all defaults ⁴ without impairing the creditor's claim, and that such defaults include, but are not limited to, those defaults resulting in acceleration. See R. Broude, Reorganizations Under Chapter 11 of the Bankruptcy Code Sec. 10.02, at 10-7 (1987) ("[W]ith respect to any monetary defaults (or indeed any kind of default other than one resulting from the filing of the bankruptcy case accompanied by an ipso facto or similar type clause), the default can and must be cured."); Taddeo, 685 F.2d at 28-29 ("[C]uring a default, even though it inevitably changes a contractual acceleration clause, does not thereby 'impair' a creditor's claim.") (emphasis added).

Great Western, in support of its narrow reading of the statute, cites the Senate Report on the bill that became section 1124, which states that "a claim or interest is unimpaired by curing the effect of a default and reinstating the original terms of an obligation when maturity was brought on or accelerated by the default." S.Rep. No. 95-989, 95th Cong., 2d Sess. 120 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5906 (emphasis added). Great Western argues that this language shows that Congress intended to limit the section to defaults that result in acceleration. We reject this argument for two reasons. First, a basic rule of statutory construction is that "[a]bsent a clearly expressed legislative intention to the contrary, [the language of the statute] must ordinarily be regarded as conclusive." American Tobacco Co. v. Patterson, 456 U.S. 63,...