Eleventh Circuit Weighs In On Section 1123(D): Reinstatement Of Defaulted Loan Agreement Under Chapter 11 Plan Requires Payment Of Default-Rate Interest

In 1994, Congress amended the Bankruptcy Code to, among other things, add section 1123(d), which provides that, if a chapter 11 plan proposes to "cure" a default under a contract, the cure amount must be determined in accordance with the underlying agreement and applicable nonbankruptcy law. Since then, a majority of courts have held that such a cure amount must include any default-rate interest required under either the contract or applicable nonbankruptcy law. A ruling recently handed down by the U.S. Court of Appeals for the Eleventh Circuit endorses this view. In JPMCC 2006-LDP7 Miami Beach Lodging, LLC v. Sagamore Partners, Ltd. (In re Sagamore Partners, Ltd.), 2015 BL 280922 (11th Cir. Aug. 31, 2015), the Eleventh Circuit ruled in favor of a secured lender demanding payment of default-rate interest as a condition of curing the debtor's default and reinstating the original terms of the loan agreement through a chapter 11 plan and reversed the determination of the bankruptcy and district courts below that the lender had waived its entitlement to such default-rate interest.

Reinstatement and Cure Under a Chapter 11 Plan

Upon the occurrence of an event of payment default under a loan agreement, the lender generally has the right to accelerate the loan and exercise its legal and contractual collection remedies. However, if the borrower files for chapter 11 protection, the lender must refrain from exercising such remedies unless it obtains relief from the automatic stay to do so. Assuming that the stay remains in place, the borrower as chapter 11 debtor in possession may propose a plan which decelerates the loan, cures any defaults (with certain exceptions), and reinstates the original terms of the debt—in effect, "roll[ing] back the clock to the time before the default existed." MW Post Portfolio Fund Ltd. v. Norwest Bank Minn., N.A. (In re Onco Inv. Co.), 316 B.R. 163, 167 (Bankr. D. Del. 2004); see also 11 U.S.C. § 1123(a)(5)(G) (providing that a plan shall provide adequate means for its implementation, such as "curing or waiving of any default").

To the extent that its claim qualifies as unimpaired under the terms of the proposed plan, the lender will be deemed to have accepted the plan and will not be entitled to vote on it. See 11 U.S.C. § 1126(f). Even though the lender is precluded from enforcing its contractual right of acceleration, the lender's claim will be deemed unimpaired if the plan: (i) cures any defaults (other than defaults triggered by the bankruptcy filing or certain nonmonetary defaults, as specified in section 365(b)(2) of the Bankruptcy Code); (ii) reinstates the pre-default maturity of the debt; (iii) compensates the lender for any damages sustained due to reasonable reliance on its contractual or legal ability to accelerate the debt; (iv) compensates the lender for any actual pecuniary loss arising from the debtor's failure to perform a nonmonetary obligation; and (v) does not "otherwise alter the legal, equitable or contractual rights" of the...