Lenders Denied Default Interest Under Chapter 11 Plan
Recently, the United States Court of Appeals for the Fifth Circuit decided that a Chapter 11 plan of reorganization denied approximately $30.2 million in default interest on the secured lenders’ $1.9 billion claim. The court’s decision was based on a plan provision that denied default interest to any creditor “unless otherwise specifically provided for in the Plan or the Confirmation Order ….”
The lenders, which voted to accept the plan, argued in favor of default interest based on their loan documents (which provided for default interest) and a separate provision in the plan which allowed their claim “as fully Secured Claims … having first lien priority in the amount of $1.939 billion on account of unpaid principal, plus unpaid interest, fees, other expenses and other obligations arising under or in connection with” the lenders’ claims or loan documents.
Notwithstanding the fact that the latter provision made reference to “unpaid interest” and to the lenders’ loan documents, the Fifth Circuit applied New York contract law and ruled that since the provision did not “specifically provide” for default interest, the plan provision disallowing default interest controlled.
Practice Point: While debatable, the Fifth Circuit’s decision highlights the need for a secured lender that wants to maintain its right to default interest to insist that a Chapter 11 plan specifically provide for payment of default interest. If the plan does not include such language, the lender should vote to reject the plan and object to the plan’s confirmation.