The bankruptcy court has no “equitable discretion” to disallow interest during the pendency of a chapter 11 case at the default rate if the secured claim is to be paid in full but is impaired by the confirmed plan, according to a March 31 opinion from the Ninth Circuit Bankruptcy Appellate Panel.

The lender declared a default, and the secured loan matured before the chapter 11 filing. The lender’s claim was fully secured by value in the real property. During the reorganization, the lender received monthly adequate protection payments.

The confirmed chapter 11 plan extended the maturity of the loan and set a “cramdown” interest rate to be paid after confirmation until the loan matured with a balloon payment. Believing there was “equitable discretion” under the Ninth Circuit’s Entz-White opinion from 1998, the bankruptcy court disallowed the lender’s claim for interest at the default rate between the date of the chapter 11 filing and implementation of the plan. The lender did not contest the post-confirmation interest rate imposed by the plan and approved by the court.

On appeal, the appellate panel reversed in an opinion written by Bankruptcy Judge Ralph Kirscher. He began with the proposition that the lender’s claim was impaired, thus precluding reliance on the arm of the Entz-White opinion that disallows default interest when a secured claim is paid in full immediately on confirmation.

The key to Judge Kirscher’s decision was the Ninth Circuit’s 2008 decision in Future Media. That case modified Entz-White and adopted the position of a majority of circuits by holding that default interest is presumptively allowed unless the debtor shows it would be unenforceable under nonbankruptcy law.

Because the default rate was a modest 2% increase over the nondefault contract rate, the lender was entitled to so-called pendency interest at the default rate, Judge Kirscher held.