Client Alert from the Scheer Law Group: Default Interest: Get it While you Can!

To All SLG Clients and Affiliates.

From: Spencer Scheer
Date: 11/8/2016
Client Alert: From the Scheer Law Group:
Subject: 9th Circuit Rules that Default Interest Can be Charged in Bankruptcy Proceedings.

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The case of In re New Investments, Inc, No. 13-36194, 2016 WL 6543520, at *2 (9th Cir. Nov. 4, 2016) is good news for lenders seeking to impose default interest in a bankruptcy proceeding.  This case now upholds this right.

While it may come as a surprise to some, default interest is generally not allowed in a bankruptcy proceeding. The logic is that when a debtor cures a default (pursuant to a plan) that the default cure provisions specified in 11 USC §1123(d), result in the right to eliminate all incidents of the pre-bankruptcy payment default on the amount to be paid. Translation: So called penalty provisions such as late charges and  default interest are eliminated under the fiction that a brand new cure is taking place as if there never was a default.

Under this holding, if the loan agreement provides for such charges upon default and state law (WA in this case) does not render such provisions invalid, the provisions can now be enforced. This is a substantial change in prior case law (See In re Entz–White Lumber &Supply, Inc.), 850 F.2d 1338, 1340 (9th Cir. 1988).

Note: In almost all instances, default interest cannot be enforced on a consumer loan.

The decision in this case was issued four days ago. There is already rumblings that Congress or the Supreme Court should reinterpret this case to give debtors more protection under §1123(d), which was originally thought to protect debtors from these types of provisions. If your loan documents provide for it, and you are not seeking to enforce your rights to default interest in a bankruptcy proceeding, you should be.  Failure to object to proposed plans will almost certainly result in the removal of such rights. Asking for the right to collect default interest as “adequate protection” in the context of stay relief motions,  or cash collateral agreements should also be considered.

Please call me if you would like to discuss

Spencer Scheer