Postpetition interest is a thorny area of bankruptcy law.  The myriad rules, coupled with the inconsistent way in which they are often applied, provide fodder for litigation and opportunity for confusion.  In re Beltway One Development Group, LLC, a recent decision of the Bankruptcy Appellate Panel of the Ninth Circuit, demonstrates the need for increased clarity regarding the rate of interest that oversecured creditors are entitled to receive after a bankruptcy filing. 
Prior to bankruptcy, Beltway One Development Group, LLC – an owner and operator of a master-planned business park in Las Vegas – had approximately $9.9 million outstanding on a loan that was secured by the business park.  After defaulting on several covenants, Beltway One failed to repay the loan on its maturity date.  Beltway One tried unsuccessfully to negotiate new terms with Wells Fargo, the successor to the original secured lender.  After Wells Fargo began the process of foreclosing on the business park, Beltway One filed a chapter 11 case to stop the foreclosure process.
Under its chapter 11 plan, Beltway One sought to cram down Wells Fargo pursuant to section 1129(b)(2)(A) of the Bankruptcy Code.  Among other things, Beltway One and Wells Fargo disputed the proper calculation of Wells Fargo’s secured claim.  The parties agreed that Wells Fargo was significantly oversecured and was therefore entitled to include postpetition interest in the amount of its secured claim under section 506(b) of the Bankruptcy Code.  Beltway One asserted that the bankruptcy court should apply the prepetition nondefault contract rate to calculate Wells Fargo’s postpetition interest entitlement.  Wells Fargo, however, objected and asserted that the prepetition default rate was the proper rate for determining postpetition interest.  After the bankruptcy court overruled Wells Fargo’s objection and confirmed the plan, Wells Fargo appealed from the confirmation order.
On appeal, the Bankruptcy Appellate Panel of the Ninth Circuit reversed the confirmation order, explaining the framework applicable in the Ninth Circuit for determining when secured creditors are entitled to postpetition interest at their prepetition default rates.  In short, the BAP held that oversecured claims are presumptively entitled to postpetition interest at applicable prepetition default rates where those claims are impaired under a plan, subject to modification based on equitable considerations.
The BAP distinguished two situations from the facts of Beltway One.  First, it explained that the Ninth Circuit’s decision in In re Entz-White Lumber & Supply, Inc. holds that an oversecured claim that is unimpaired under a plan is entitled only to postpetition interest at the nondefault rate.  The Entz-White court reasoned that, because an unimpaired claim is by definition restored to its prepetition nondefault status, interest due under section 506(b) of the Bankruptcy Code accrues only at the prepetition nondefault rate.  Although the BAP seemed to suggest that Entz-White may no longer be binding precedent in the Ninth Circuit, it declined to consider that issue.
Second, the BAP explained that a post-Entz-White BAP decision, In re Hassen Imports Partnership had established that an oversecured claim that is impaired under a chapter 11 plan entitles its holder “to default interest that reasonably compensates it for losses arising from the default.”  This rule led to the development of a rebuttable presumption in favor of the secured creditor, in General Electric Capital Corp. v. Future Media Products, Inc. that the prepetition contractual default rate provides appropriate compensation.
In light of these cases, the BAP held that the facts of Beltway One were similar to those in Hassen Imports and Future Media and remanded to the bankruptcy court for a recalculation of Wells Fargo’s secured claim.
Beltway One demonstrates just one of the nuances that characterize the legal framework governing postpetition interest in bankruptcy.  Though this framework is frequently uncertain and constantly evolving, having a firm understanding of postpetition interest law adds significant value to restructurings by managing the execution risk of chapter 11 plans.
Scott Bowling is an Associate at Weil Gotshal & Manges, LLP in New York.