FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GENERAL ELECTRIC CAPITAL No. 07-55694
CORPORATION,
Petitioner-Appellant, D.C. No.
v. BK-SV-06-10170-
GM
FUTURE MEDIA PRODUCTIONS INC.,
OPINION
Respondent-Appellee.
Appeal from the United States District Court
for the Central District of California
Geraldine Mund, Bankruptcy Judge, Presiding
Argued and Submitted
June 9, 2008—Pasadena, California
Filed July 3, 2008
Before: Stephen S. Trott, Sidney R. Thomas, and
Raymond C. Fisher, Circuit Judges.
Opinion by Judge Trott
8105
GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8107
COUNSEL
Michael K. Maly, Hannah L. Blumenstiel, Winston & Strawn
LLP, San Francisco, California, for the appellant.
Harry D. Hochman, Pachulski Stang Ziehl & Jones LLP, Los
Angeles, California, for the appellee.
OPINION
TROTT, Circuit Judge:
General Electric Capital Corporation (“GECC”), an overse-
cured creditor, appeals the bankruptcy court’s order denying
it default interest and attorneys’ fees. GECC argues that the
bankruptcy court improperly applied a per se rule against
default interest to the facts of this case. We have jurisdiction
pursuant to 28 U.S.C. § 158(d)(2)(A), and we reverse and
8108 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
remand to the bankruptcy court with instructions to apply the
rule adopted by the majority of federal courts and to then
determine if an award of attorneys’ fees is proper.
BACKGROUND
GECC and Future Media Productions, Inc. (“Debtor”) were
parties to a Loan and Security Agreement (“loan agreement”),
dated August 13, 2004. The loan agreement included a $10.5
million, 42-month term loan, as well as a $5 million revolving
line of credit. Interest under the loan agreement accrued prior
to default (“pre-default rate”) at the Index Rate plus 1.5% per
annum, with additional interest of 2% per annum after default
(“default rate”). The loan agreement, governed by New York
law, obligated Debtor to pay attorneys’ fees and costs
incurred by GECC in connection with any dispute relating to
the loan agreement. All advances under the loan agreement
were secured by a perfected, first priority security interest in
substantially all of Debtor’s assets.
On March 31, 2005, an event of default occurred, and the
loans began to bear interest at the default rate. Additional
events of default occurred thereafter. These difficulties, and
others, led Debtor to conclude that an orderly liquidation of
its assets would best serve its interests and those of its credi-
tors. On February 14, 2006, Debtor filed a petition for relief
under Chapter 11 of the Bankruptcy Code. After filing its
bankruptcy petition, Debtor had a need for cash to wind down
its operations and to prepare for the sale of its assets. GECC
agreed to Debtor’s use of GECC’s “cash collateral” subject to
the terms of a stipulation (“the stipulation”) executed by
GECC and Debtor on February 15, 2006. On February 16,
2006, Debtor filed a motion in the bankruptcy court request-
ing approval of the stipulation.
In the stipulation, Debtor represented that it had executed
an agency agreement to sell its assets in an auction, which
was guaranteed to produce at least $7,636,500 in net pro-
GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8109
ceeds. Debtor conceded that it owed GECC about $5.4 mil-
lion dollars including principal and interest under the loan
agreement. Debtor conceded also that this obligation was pay-
able to GECC and that the obligation was not subject to, nor
would Debtor assert, any defense of any kind to the obliga-
tion. The stipulation reserved the right of any other interested
party to object to GECC’s claim. Also, the stipulation permit-
ted Debtor to continue to maintain a “lockbox” account into
which it deposited its cash, including the proceeds of its asset
sales, and which GECC periodically “swept” for the purposes
of paying down Debtor’s obligation.
On February 21, 2006, the bankruptcy court provisionally
approved the stipulation and set a final hearing for March 3,
2006. On March 1, the Official Committee of Unsecured
Creditors (“the Committee”) was formed, and on March 2, the
Committee objected to the stipulation. At the March 3 hear-
ing, and a subsequent March 30 hearing, the bankruptcy court
continued the final hearing on the stipulation. During that
time, other issues arose between Debtor, the Committee, and
another creditor, preventing GECC and the Committee from
resolving their differences as to the stipulation.
On or about April 10, 2006, GECC and Debtor entered into
an amended stipulation (“the amended stipulation”). In
response, the Committee withdrew its original objection to the
payment of asset sale proceeds to GECC, subject to its request
for a ruling that GECC was not entitled to payment of interest
at the default rate, or alternatively that GECC’s right to inter-
est at the default rate as part of its allowed claim would be
determined by the court as if GECC had been paid in full
through a confirmed plan of reorganization.
On April 25, 2006, the bankruptcy court held a hearing on
approval of the amended stipulation. At that hearing, GECC’s
counsel proposed an interim solution to stop the accrual of
interest on GECC’s unpaid claim. The solution proposed that
GECC would be paid in full, including interest at the default
8110 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
rate as specified in the loan agreement, and any dispute about
default interest would be resolved at a later time. The parties
agreed, and the court approved the proposal—allowing the
default rate issue to be litigated independently. The Final
Cash Collateral Order was entered on May 4, 2006, and
GECC was paid $5,728,584.20, representing the amount
owed on its claims for unpaid principal and loan fees, interest
at the contract rate including default interest since the first
event of default occurred, plus all reimbursable expenses of
GECC, consisting of all remaining auditor fees and legal fees
through April 30, 2006.
On August 28, 2006, the Committee filed a motion in the
bankruptcy court requesting a determination of the interest
rate applicable to GECC’s secured claim. The Committee
asserted that the proper interest rate to be applied to GECC’s
oversecured claim was the pre-default rate rather than the
default rate, and that GECC should return the amount it had
collected over the pre-default rate (“the default rate differen-
tial”) in the amount of $164,995. GECC opposed this motion
and sought attorneys’ fees, costs, and expenses in connection
with this aspect of the controversy.
On November 15, 2006, the bankruptcy court entered an
order concluding that GECC was entitled to interest at the
pre-default rate and was not entitled to attorneys’ fees or
costs. The order required GECC to return the default rate dif-
ferential to Debtor pursuant to our holding in In re Entz-White
Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988).
Additionally, the court denied GECC’s request for attorneys’
fees and costs on the ground that GECC was not the prevail-
ing party. GECC appeals from the bankruptcy court’s order.
DISCUSSION
A. Standard of Review.
We review de novo a bankruptcy court’s conclusions of
law. In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005).
GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8111
B. Analysis.
[1] Bankruptcy Code § 506(b) provides that the claim of an
oversecured creditor “shall be allowed . . . interest . . . and any
reasonable fees, costs, or charges provided for under the
agreement or State statute under which such claim arose.” 11
U.S.C. § 506(b). The parties do not dispute that GECC is an
oversecured creditor entitled to interest. However, the parties
do dispute the type of interest due to GECC. The Committee
argues that the bankruptcy court correctly determined that
GECC is entitled to collect interest only at the loan agree-
ment’s pre-default rate, whereas GECC argues that it is enti-
tled to a presumption in favor of the loan agreement’s default
rate (an additional 2% interest), subject only to reduction
based upon any equities involved.
That disagreement presents three issues for our consider-
ation: 1) whether Entz-White applies to the case at bar; 2) if
Entz-White does not apply, how the bankruptcy court should
evaluate the viability of the contractual default interest rate on
remand; and 3) whether GECC is entitled to attorneys’ fees
and costs under § 506(b).
1. The Applicability of Entz-White.
[2] In Entz-White, we announced the rule that an overse-
cured creditor was not entitled to interest at the default rate
where its claim was paid in full pursuant to the terms of a
Chapter 11 plan. Entz-White, 850 F.2d at 1342.1 In the case
at bar, the bankruptcy court extended Entz-White to a claim
that was paid in full as a result of a series of asset sales out-
side of a Chapter 11 plan. Because a Chapter 11 plan impli-
cates provisions of the Bankruptcy Code that an asset sale
outside of a plan does not, we respectfully conclude that the
bankruptcy court’s extension of Entz-White was error.
1
Soon after, we again applied the same rule in a case involving a Chap-
ter 11 plan with substantially similar facts. See In re Southeast Co., 868
F.2d 335, 338 (9th Cir. 1989).
8112 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
[3] Our analysis starts from a general premise recently
articulated by the Supreme Court: “[c]reditors’ entitlements in
bankruptcy arise in the first instance from the underlying sub-
stantive law creating the debtor’s obligation, subject to any
qualifying or contrary provisions of the Bankruptcy Code.”
Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co.,
127 S. Ct. 1199, 1204-05 (2007). We read Travelers to mean
the default rate should be enforced, subject only to the sub-
stantive law governing the loan agreement, unless a provision
of the Bankruptcy Code provides otherwise.
[4] In Entz-White we identified such a “qualifying or con-
trary provision” of the Bankruptcy Code. There, the debtor’s
proposed treatment of the oversecured creditor’s claim was
presented in a Chapter 11 plan. A creditor’s claim is consid-
ered “impaired” for purposes of voting on a Chapter 11 plan
unless the plan leaves the creditor’s legal, equitable, and con-
tractual rights unaltered, or the debtor “cures” any default that
occurred prior to or during the bankruptcy case. See 11 U.S.C.
§ 1124(1)-(2). We have explained that the provision allowing
“cures” under § 1124(2)(A) “authorizes a plan to nullify all
consequences of default, including avoidance of default pen-
alties such as higher interest.” Southeast Co., 868 F.2d at 338
(quoting Entz-White, 850 F.2d at 1342). Because the Code
allows the debtor to “cure” defaults under a Chapter 11 plan,
we permitted the debtor to nullify the interest owed at the
default rate.2 See id. In the case before us today, however,
there was never any question of whether the debtor needed to
cure a default to render it unimpaired for voting on a Chapter
11 plan. Instead, GECC’s oversecured claim was paid through
a sale of assets governed by § 363, outside the context of a
Chapter 11 plan. As a result, the facts of Entz-White are dis-
tinguishable, and thus our per se rule from that case is inappli-
cable.
2
With the addition of the 1994 amendments, including § 1123(d), the
continued validity of our holding Entz-White is questionable. We, how-
ever, do not reach that issue today as the facts presented in this appeal—
grounded in a § 363 sale—are distinguishable from those in Entz-White.
GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8113
The Committee asks us to consider two cases in which
other courts have applied Entz-White’s rule against default
interest in contexts outside of a Chapter 11 plan, In re 433
South Beverly Drive, 117 B.R. 563 (Bankr. C.D. Cal. 1990),
and In re Casa Blanca Project Lenders, L.P., 196 B.R. 140
(B.A.P. 9th Cir. 1996). We have carefully reviewed these
cases, and find their analysis unpersuasive.
The bankruptcy court in South Beverly, and the Bankruptcy
Appellate Panel (“BAP”) in Casa Blanca, used our holding in
Entz-White as the basis for their analysis. Both courts noted
that “cure” as used in § 1124(2)(A) means a return to pre-
default status, which nullifies all consequences of default
including an obligation to pay default interest. South Beverly,
117 B.R. at 566; Casa Blanca, 196 B.R. at 143. Each court
noted also that the concept of a “cure” is not exclusive to
Chapter 11 plans; for example, trustees are permitted to cure
defaults in executory contracts under 11 U.S.C. § 365. South
Beverly, 117 B.R. at 566-67; Casa Blanca, 196 B.R. at 144.
The next step of both courts’ analyses, however, departed
from and improperly extended our holding in Entz-White.
Each court transposed the concept of “cure” from § 1124 and
§ 365 into 11 U.S.C. § 363. South Beverly, 117 B.R. at 566;
Casa Blanca, 196 B.R. at 144-45 (citing South Beverly, 117
B.R. at 566-67). The problem with that transposition is that
the text of § 363 does not mention “cure” and the procedures
set out in that section do not implicate the concept of “cure.”
See 11 U.S.C. § 363. In short, there is no “cure” of events of
default, de facto or otherwise, in the context of an asset sale.
Because the bankruptcy court in South Beverly and the BAP
in Casa Blanca improperly read “cure” into § 363, we do not
find those decisions compelling.
[5] Because the Bankruptcy Code does not provide a “qual-
ifying or contrary provision” to the underlying substantive
law here, the bankruptcy court’s extension of Entz-White to
the loan agreement’s default rate was error. Consistent with
the Supreme Court’s holding in Travelers, we hold that the
8114 GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA
parties’ arms length bargain, governed by New York law,
controls.
2. The Bankruptcy Court, on Remand, Should
Evaluate the Viability of the Default Rate Under the
Rule Adopted by the Majority of Federal Courts.
[6] Because we have decided that Entz-White does not con-
trol the analysis in this case, we remand to allow the bank-
ruptcy court to decide whether the default rate should apply
under the rule adopted by the majority of federal courts. That
rule simply stated is: The bankruptcy court should apply a
presumption of allowability for the contracted for default rate,
“provided that the rate is not unenforceable under applicable
nonbankruptcy law.” 4 Collier on Bankruptcy,
¶ 506.04[2][b][ii] (15th Ed. 1996) (“Most courts have
allowed, or at least recognized a presumption of allowability
for, default rates of interest, provided that the rate is not unen-
forceable under applicable nonbankruptcy law.”).
This rule has been applied in many bankruptcy courts and
in two of our sister circuits. See, e.g., In re Laymon, 958 F.2d
72, 75 (5th Cir. 1992) (holding “that when an oversecured
creditor’s claim arises from a contract, the contract provides
the rate of post-petition interest,” subject to examination of
“the equities involved in [the] bankruptcy proceeding”), cert.
den., 506 U.S. 917 (1992); In re Terry Ltd. P’ship, 27 F.3d
241, 243 (7th Cir. 1994) (noting the general rule that there is
a “presumption in favor of the contract rate subject to rebuttal
based on equitable considerations”).3
GECC argues that if we decide to apply the new rule we
need not remand because there is no evidence that the default
rate differential of 2% is unreasonable. We reject the creation
3
The majority rule is consistent with the Supreme Court’s decision in
Travelers as well as with the plain language of 11 U.S.C. § 1123(d) as
promulgated in the 1994 amendments to the Bankruptcy Code.
GENERAL ELECTRIC CAPITAL v. FUTURE MEDIA 8115
of a bright line rule that would accept 2% as an allowable
default rate differential. We reject also GECC’s assertion that
the Committee waived any argument as to the enforceability
of the default rate under New York law. Because the Commit-
tee initially prevailed in convincing the district court to reject
the default rate in its entirety, there was no need for further
argument. As a result, we remand the case for proper consid-
eration as prescribed under the majority rule.
3. The Issue of Attorneys’ Fees Should be Considered
on Remand in Light of Remand on the Merits.
[7] The bankruptcy court concluded that GECC was not
entitled to attorneys’ fees, costs, and expenses incurred in the
litigation to determine the applicability of the default rate
because GECC did not prevail. Because we remand for a
proper determination of the applicable interest rate, and
because GECC may prevail on the merits, we remand also the
issue of attorneys’ fees, costs, and expenses allowable under
506(b).
CONCLUSION
Because the bankruptcy court improperly applied our rule
from Entz-White to the facts of this case, we reverse and
remand with instructions to the bankruptcy court to apply the
rule adopted by the majority of federal courts and to then
determine if an award of attorneys’ fees is proper.
REVERSED and REMANDED.