Pacifica L 51 LLC v. New Invs. Inc. (In re New Invs., Inc.)

• Decision Date: 04 November 2016
• Docket Number: No. 13-36194,13-36194
• Citation: 840 F.3d 1137
• Parties: In re New Investments, Inc, Debtor. Pacifica L 51 LLC, Creditor–Appellant, v. New Investments Inc., Debtor–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

840 F.3d 1137

In re New Investments, Inc, Debtor.Pacifica L 51 LLC, Creditor–Appellant,

v.New Investments Inc., Debtor–Appellee.

No. 13-36194

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 3, 2016—Seattle, Washington

Filed November 4, 2016

Dillon E. Jackson (argued) and Terrance J. Keenan, Foster Pepper PLLC, Seattle, Washington; Stuart P. Kastner, Stuart P. Kastner PLLC, Seattle, Washington; for Creditor–Appellant.

Lawrence K. Engel (argued), Bellevue, Washington, for Debtor–Appellee.

Before: Susan P. Graber, Marsha S. Berzon, and Mary H. Murguia, Circuit Judges.

Dissent by Judge Berzon

OPINION

MURGUIA, Circuit Judge:

In loan agreements—and any subsequent bankruptcy proceedings—a borrower “defaults” on a loan when he fails to fulfill a material obligation under the terms of the loan agreement, such as making a payment by a particular date. A default can trigger certain consequences, such as foreclosure on any property securing the loan, late fees and penalties, or “acceleration,” which occurs when the entire unpaid amount of the loan becomes immediately due and payable. But the borrower can also “cure” the default, most often by paying the arrearages and bringing the loan current. A cure generally allows the borrower to avoid the consequences of default, restores the loan to its original terms, and allows the borrower to keep the property.

The Bankruptcy Code incorporates the concept of cure. Chapter 11 provides that a debtor's plan of reorganization must “provide adequate means for the plan's implementation,” including the “curing or waiving of any default.”

11 U.S.C. § 1123(a)(5)(G). This statute means that a plan of reorganization may include a provision authorizing the debtor to remedy any breach of a loan agreement with a creditor and return to pre-default conditions. Great W. Bank & Tr. v. Entz–White Lumber & Supply, Inc. (In re Entz–White Lumber &Supply, Inc.) , 850 F.2d 1338, 1340 (9th Cir. 1988).

We held in Entz–White that a debtor who cures a default “is entitled to avoid all consequences of the default—including higher post-default interest rates.” Id. at 1342. In other words, if a loan agreement provided for a higher, post-default interest rate on arrearages in the event of default, a debtor who “cures” is entitled to repay the arrearages at the lower, pre-default interest rate. We concluded that “the power to cure under the Bankruptcy Code authorizes a plan to ify all consequences of default, including avoidance of default penalties such as higher interest,” even when the terms of the loan agreement called for a higher interest rate upon default. Id.

The case before us requires us to decide whether Entz–White 's rule that a debtor may ify a loan agreement's requirement of post-default interest remains good law in light of 11 U.S.C. § 1123(d), a provision that Congress enacted after Entz–White. Section 1123(d) provides 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.” 11 U.S.C. § 1123(d). We hold that Entz–White 's rule of allowing a curing debtor to avoid a contractual post-default interest rate in a loan agreement is no longer valid in light of § 1123(d).

I.

New Investments, Inc. (“New Investments”) borrowed $3,045,760.51 from Pacifica L 51, LLC's (“Pacifica”) predecessor in interest to purchase a hotel property in Kirkland, Washington. The note, which was secured by a deed of trust, provided for an interest rate of 8 percent. The note also specifically provided that in the event of default, the interest rate would increase by 5 percent.

New Investments defaulted on the note in 2009. When Pacifica commenced non-judicial foreclosure proceedings, New Investments filed for Chapter 11 bankruptcy. New Investments's plan of reorganization proposed to cure the default by selling the property to a third party and using the proceeds of the sale to pay the outstanding amount of the loan at the pre-default interest rate. Pacifica objected to the plan on the ground that, under the terms of the note, it was entitled to be paid at the higher, post-default interest rate.

The bankruptcy court confirmed New Investments's plan over Pacifica's objection and authorized the sale of the hotel for $6,890,000. Of the sale proceeds, $2,830,877.28 would be paid to Pacifica, reflecting the pre-default interest rate and extinguishing any other late penalties. Anticipating an appeal, the bankruptcy court ordered that $100,000 of the proceeds be reserved for Pacifica's attorney's fees on appeal and that $670,000 be set aside as a disputed claim reserve for Pacifica. Pacifica timely appeals from the confirmation order.

II.

We have jurisdiction under 28 U.S.C. § 158(d), and we review the bankruptcy court's interpretation of bankruptcy statutes de novo. Boyajian v. New Falls Corp. (In re Boyajian) , 564 F.3d 1088, 1090 (9th Cir. 2009). “When construing the meaning of a statute, we begin with the language of that statute.” Benko v. Quality Loan Serv. Corp. , 789 F.3d 1111, 1118 (9th Cir. 2015). “If the statutory text is ambiguous, we employ other tools, such as legislative history, to construe the meaning of ambiguous terms.” Id. “A party contending that legislative action changed settled law has the burden of showing that the legislature intended such a change.” Green v. Bock Laundry Mach. Co. , 490 U.S. 504, 521, 109 S.Ct. 1981, 104 L.Ed.2d 557 (1989).

III.

Chapter 11 of the Bankruptcy Code provides that a plan of reorganization must, among other things, “provide adequate means for the plan's implementation,” including the “curing or waiving of any default.” 11 U.S.C. § 1123(a)(5)(G). In Entz–White, we observed that the Bankruptcy Code did not define “cure.” 850 F.2d at 1340. We borrowed the Second Circuit's definition: “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 ified. This is the concept of ‘cure’ used throughout the Bankruptcy Code.” Id . (alteration omitted) (quoting Di Pierro v. Taddeo (In re Taddeo) , 685 F.2d 24, 26–27 (2d Cir. 1982) ). We held that “the power to cure under the Bankruptcy Code authorizes a plan to ify all consequences of default, including avoidance of default penalties such as higher interest.” Id. at 1342. As a result, a debtor whose plan proposed to cure a default would allow him to avoid having to pay a higher, post-default interest rate called for in the loan agreement.

Entz–White was decided in 1988. In 1994, Congress amended § 1123 to add subsection (d). Pub. L. No. 103–394, Title II, § 305, Oct. 22, 1994, 108 Stat. 4106. Subsection (d) provides:

Notwithstanding subsection (a) of this section and sections 506(b), 1129(a)(7), and 1129(b) of this title, 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.

11 U.S.C. § 1123(d).

Subsection § 1123(d) renders void Entz–White 's rule that a debtor who proposes to cure a default may avoid a higher, post-default interest rate in a loan agreement. Subsection (d) governs here because New Investments's plan proposes to cure a default. The underlying agreement—here, the promissory note—requires the payment of a higher interest rate upon default. And “applicable nonbankruptcy law”—here, Washington state law—allows for a higher interest rate upon default when provided for in the loan agreement.¹ See Wash. Rev. Code Ann. § 61.24.090(1)(a) (providing that a borrower may cure a monetary default by paying the trustee “[t]he entire amount then due under the terms of the deed of trust and the obligation secured thereby, other than such portion of the principal as would not then be due had no default occurred”). In other words, under § 1123(d), “the amount necessary to cure [New Investments's] default” is governed by the deed of trust and Washington law, which respectively require and permit repayment at a higher, post-default interest rate.

The plain language of § 1123(d) compels the holding that a debtor cannot ify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure. But even if we were to read ambiguity into the statute, the legislative history would not help New Investments. The House Report for the bill that became § 1123(d) states that Congress was primarily concerned with overruling the Supreme Court's decision in Rake v. Wade , 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). H.R. Rep. No. 103–835, at *55 (1994). Rake had held that a Chapter 13 debtor who proposed to cure a default was required to pay interest on his arrearages to a secured creditor even if the underlying loan agreement did not provide for such interest. 508 U.S. at 472, 113 S.Ct. 2187. Congress viewed this as an untoward result that allowed for “interest on interest payments” and provided an unbargained-for windfall to creditors. H.R. Rep. No. 103–835, at *55. The House Report states that § 1123(d) would “limit the secured creditor to the benefit of the initial bargain with no court contrived windfall.” Id. It further stated that it was “the Committee's intention that a cure pursuant to a plan should operate to put the debtor in the same position as if the default had never occurred.” Id.

The fact that Congress had a particular purpose in mind when enacting a statute does not limit the effect of the statute's text, a principle Entz–White itself recognized. See 850 F.2d at 1341 (noting that a Senate Report for the bill that became 11 U.S.C. § 1124 showed “only that the drafters in the Senate were concerned primarily with defaults resulting in acceleration; it does not show that they meant to confine the section to that situation”). Rather, “[t]he fact that Congress may not have...