UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 97-10474
_______________________
IN THE MATTER OF:
THE SOUTHLAND CORPORATION,
Debtor.
THE SOUTHLAND CORPORATION,
Appellant,
v.
TORONTO-DOMINION,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
_________________________________________________________________
December 2, 1998
Before REYNALDO G. GARZA, JONES, and DeMOSS, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This dispute is about what interest rate should apply to
seven and one-half months of repayments under a commercial credit
agreement -- the base rate in the contract or the specified default
rate. The bankruptcy court determined that the higher default rate
applies for the entire period between the pre-bankruptcy default
and the effective date of the reorganization plan. The district
court affirmed. We also affirm.
I.
The underlying Credit Agreement between the debtor-
appellant (“Southland”) and the secured creditor-appellees (“the
Banks”) dates from 1987. Section 2.05(d) of the Credit Agreement
provided that, “effective upon notice from the Agents or the
Requisite Senior Lenders at any time after the occurrence of an
Event of Default ..., the principal balance of all Loans then
outstanding shall bear interest payable upon demand at a rate which
is two percent (2%) per annum in excess of the rate of interest
otherwise payable under this agreement....”
During the summer of 1990, Southland was attempting to
recapitalize. On July 19, the agent banks sent a letter (“July 19
Letter”) notifying Southland it was in default.1 These were the
key parts of the July 19 Letter from the agent banks:
[W]e are writing to notify [Southland] that the increased
interest rate prescribed in Section 2.05(d) of the Credit
Agreement is effective due to the occurrence of an Event of
Default.
In the event that a Capital Restructuring ... is
consummated on terms acceptable ... before December 1, 1990,
then this notification shall automatically be rescinded,
without any further action ..., and such rescission shall be
effective as of the date hereof.
No demand for payment of the additional interest ... is
being made by the Requisite Senior Lenders at this time, but
the right to make demand pursuant to that Section is expressly
and unconditionally reserved.
The contemplated restructuring did not occur before December 1.
1
One event of default had to do with missed interest payments
to third-party bondholders (i.e., not to the Banks). The second
event of default was Southland’s having $75 million in revolving
loans when the amended Credit Agreement permitted only $50 million.
2
Southland failed to restructure its bond indebtedness
with solicitations for tender of debt securities approved by the
SEC. The final solicitation became Southland’s disclosure
statement when it filed a voluntary Chapter 11 petition and a Plan
of Reorganization on October 24, 1990. The disclosure statement
indicated that Southland was still working to get the Banks to
agree to cure, waive, or rescind all defaults.
In December 1990, the Banks, although oversecured, filed
proofs of claim that did not explicitly refer to the contractual
default interest rate. The amounts of prepetition interest
expressly claimed, however, were based on the default interest
rate.
The Plan was confirmed in February 1991, with none of the
Banks (an impaired class) having voted against it. Section 5.01 of
the confirmed Plan provided:
On the Confirmation Date, the Credit Agreement and the Claims
arising thereunder or in connection therewith will be
reinstated in full. ... All liens, encumbrances, and other
charges securing payment and performance of the Claims arising
under or in connection with the Credit Agreement are unaffected
by the Plan.
None of the amendments to the Credit Agreement as reinstated made
any reference to interest rates.
Later, in March 1991, Southland filed its objections to
the Banks’ claims. The Banks responded by specifying that their
claims included interest at the default rate. The bankruptcy court
conducted a hearing on the objection and response in October 1991,
based on partially stipulated facts and an uncontroverted
3
affidavit. The bankruptcy court overruled Southland’s objection,
awarding the Banks interest at the default rate for both the
prepetition and relevant postpetition periods. Southland and the
Official Bondholders’ Committee timely appealed to the district
court, which affirmed the bankruptcy court’s award of default
interest.
On appeal, Southland raises three issues: (1) that the
Banks did not adequately demand the default interest; (2) that the
Plan’s “reinstatement” of the Credit Agreement returned Southland
and the Banks to their pre-default state; and (3) that the lower
courts erred in balancing the equities to determine whether default
interest was appropriate.
II.
The proper standard of review is the usual one: clearly
erroneous as to findings of fact. See Orix Credit Alliance, Inc.
v. Harvey (In re Lamar Haddox Contractor, Inc.), 40 F.3d 118, 120
(5th Cir. 1994). No change is effected by the presence of a wholly
documentary record. See Anderson v. City of Bessemer City, 470
U.S. 564, 574, 105 S. Ct. 1504, 1511-12 (1985). A finding of fact
premised on an improper legal standard “loses the insulation of the
clearly erroneous rule,” and conclusions of law are “subject to
plenary review.” Faden v. Insurance Co. of N. Am. (In re Faden),
96 F.3d 792, 795 (5th Cir. 1996) (internal quotations omitted). A
balancing of equities is reviewed for abuse of discretion. See
4
Mendoza v. Temple-Inland Mortgage Corp. (In re Mendoza), 111 F.3d
1264, 1270 (5th Cir. 1997).
III.
Southland argues that neither the Banks’ July 19 Letter
nor their proofs of claim were adequate to trigger the Banks’
contractual right to default interest.
Whether the Letter fulfilled the terms of the Credit
Agreement is a question of New York contract law. Southland
focuses on the language in the Credit Agreement saying that the
default interest is “payable upon demand.” It contrasts this with
the July 19 Letter, which explicitly said that “[n]o demand for
payment of the additional interest ... is being made ... at this
time.”
Southland’s reading of the Credit Agreement neglects the
first part of the provision at issue. The Agreement says that the
higher interest rate is “effective upon notice ... at any time
after the occurrence of an Event of Default.” The “upon demand”
language applies to when the default interest is payable, not when
the balance begins bearing it. This dichotomy was precisely what
the July 19 Letter contemplated. It began by “notify[ing]”
Southland that the default rate was “effective due to an occurrence
of an Event of Default,” but then said “[n]o demand for payment ...
is being made ... at this time.” The further conditional waiver of
the default interest (if restructuring occurred by December 1) did
not affect the underlying notification. Nor did the condition in
5
the waiver come to pass. The July 19 Letter was sufficient to make
the default interest rate effective.
After Southland’s bankruptcy petition intervened and the
December 1 deadline passed, the Banks did not make a formal demand
for the default interest, but Southland should not be able to use
bankruptcy’s automatic stay to argue that the Banks failed to
complete the steps to demand their increased interest. See In re
Texaco Inc., 73 B.R. 960, 968 (Bankr. S.D.N.Y. 1987). Nor may
Southland claim that the December 1 restructuring deadline was
somehow extended post-bankruptcy.
Given the prior notification that the higher interest
rate was in effect and the failure of Southland to meet the
condition in the July 19 Letter’s waiver, the proofs of claim filed
on behalf of the banks -- although the banks were oversecured and
proofs of claim were strictly speaking unnecessary2 -- sufficiently
included by their computation the prepetition amount of interest at
the higher rate.3
2
See Simmons v. Savell (In re Simmons), 765 F.2d 547, 551
(5th Cir. 1985); see also Fed. R. Bankr. P. 3002, Advisory
Committee Note.
3
Southland’s argument that the Banks’ receipt of adequate
protection payments at the non-default contract rate of interest
somehow waived their right to assert a higher rate as part of a
confirmed plan is meritless. Adequate protection payments are
different from § 506(b) interest on oversecured claims. See
generally Financial Sec. Assurance v. T-H New Orleans Ltd.
Partnership (In re T-H New Orleans Ltd. Partnership), 116 F.3d 790
(5th Cir. 1997).
6
IV.
Southland argues that, even if the Banks properly
triggered the default interest, the Plan’s reinstatement of the
Credit Agreement mooted default interest by restoring the parties
to their pre-default state. The bankruptcy court disagreed. It
read “reinstate[ment]” according to its dictionary meaning and took
account of the prepackaged plan that served as the foundation for
the Reorganization Plan.4 The bankruptcy court determined that the
Debtor’s intent in the Plan was “to leave the Banks’ claims
unaltered, to wit: to treat the Banks’ claims as if bankruptcy had
not been filed” -- not as if the default had never occurred. The
bankruptcy court’s interpretation of the Plan was correct as a
matter of law.
Most of the cases cited by Southland deal with a Code
provision that is inapplicable here. For a class to be considered
unimpaired, and hence unable to vote on a reorganization plan,
§ 1124(2) requires both the “cure” of any prepetition default and
the “reinstate[ment]” of maturity to pre-default status. Several
cases have interpreted this provision to deny default interest
rates to unimpaired creditors. See Florida Partners Corp. v.
Southeast Co. (In re Southeast Co.), 868 F.2d 335 (9th Cir. 1989);
4
In the disclosure statement from the failed exchange
restructuring that preceded bankruptcy, Southland acknowledged that
it still needed to reach an agreement with the Banks for waiver of
defaults. Southland correctly points out that this language about
still needing waivers was not in the Plan. That omission does not,
however, lend support to any affirmative inference that the Plan
contemplated a “cure” of defaults.
7
Great Western Bank & Trust v. Entz-White Lumber & Supply, Inc. (In
re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir.
1988); Levy v. Forest Hills Assocs. (In re Forest Hills Assocs.),
40 B.R. 410 (Bankr. S.D.N.Y. 1984). Because the Banks’ claims were
impaired, § 1124 does not apply. Nevertheless, Southland argues
that the concept of “cure” is fungible throughout the Code, and a
plan may cure or waive any default under § 1123(a)(5)(G). See Di
Pierro v. Taddeo (In re Taddeo), 685 F.2d 24, 29 (2d Cir. 1982).
This is true as far as it goes, but Southland has not
demonstrated that all reinstatements in cases under the Code are
accompanied by cures (as they must be to have an unimpaired class
under § 1124). Some poorly-reasoned cases have denied default
interest to creditors by extending the Entz-White reasoning beyond
§ 1124 cures.5 One factually similar bankruptcy court decision
cited by Southland fails to support the remedy Southland advocates
-- denial of any default-rate interest. Instead, the court found
a sufficient “cure” to balance the equities against the higher
postpetition default interest rate only when the debtor had already
paid “all prepetition interest and charges at the default rate.”
In re Johnson, 184 B.R. 570, 574 (Bankr. D. Minn. 1995) (emphasis
5
One of these cases plainly misreads Entz-White’s ultimate
holding. See Citybank v. Udhus (In re Udhus), 218 B.R. 513, 514
(B.A.P. 9th Cir. 1998) (interpreting § 1123 of the Code rather than
§ 1124). A second case, Casa Blanca Project Lenders v. City
Commerce Bank (In re Casa Blanca Project Lenders), 196 B.R. 140,
146 (B.A.P. 9th Cir. 1996), appears to apply “cure” to a sale of
assets under § 363 of the Code where there is no statutory
reference to that term.
8
added). Unlike Johnson, however, we see no reason to discuss, much
less apply, Entz-White where the raison d’être of the Ninth Circuit
decision, an issue of impairment under § 1124, does not exist.6
In this case, as the bankruptcy court correctly found,
Southland’s Plan language was not intended to be a cure of
defaults. The intent to effect a “cure” could not be inferred from
§ 1124 because the Banks were not an unimpaired class. Southland
attempts to invoke a § 1124 mantra of “cure and reinstatement,” but
the Plan merely “reinstated in full” the Credit Agreement. No part
of the Code compels the inference of cure. The bankruptcy court’s
reading of the Plan’s language was not erroneous. It is entirely
sensible to interpret “reinstate[ment]” as returning the parties to
their pre-bankruptcy status, rather than their pre-default status.
V.
Finally, Southland argues that the bankruptcy court
clearly erred in finding that the balance of the equities allowed
default interest for the postpetition period.
Section 506(b) of the Bankruptcy Code provides: “[t]o the
extent that an allowed secured claim is secured by property the
value of which ... is greater than the amount of such claim, there
6
Apart from the doubtfulness of adopting Entz-White or
extending its reasoning in this circuit, we note that Congress, in
bankruptcy amendments enacted in 1994, arguably rejected the Entz-
White denial of contractual default interest rates. See Grant T.
Stein and Ralph S. Wheatly, The Impact of Cure and Reinstatement on
Default Interest, Amer. Bankr. Inst. J., Jul.-Aug. 1997, at 1. The
1994 amendments (adding § 365(b)(2)(D), adding § 1123(d), and
deleting § 1124(3)), however, are inapplicable to this case because
Southland’s petition was filed in 1990.
9
shall be allowed to the holder of such claim, interest on such
claim....” There is no dispute in this case that the Banks were
oversecured and entitled to postpetition interest. But Supreme
Court precedent on § 506(b) “does not address the issue of what
rate of interest is applied.” Bradford v. Crozier (In re Laymon),
958 F.2d 72, 74 (5th Cir. 1992). In Laymon, this court held that
“when an oversecured creditor’s claim arises from a contract, the
contract provides the rate of post-petition interest.” Id. at 75.
To reach this result, Laymon looked to pre-Code law, which “took a
flexible approach” and disallowed a higher default rate if it
“‘would produce an inequitable or unconscionable result.’” Id.
(quoting In re W.S. Sheppley & Co., 62 B.R. 271, 277 (Bankr. N.D.
Iowa 1986)(internal quotation omitted)). Laymon remanded for the
lower court to determine whether a default rate or pre-default rate
should apply “by examining the equities involved in this bankruptcy
proceeding.” Id.
Even though the bankruptcy court issued its opinion six
months before Laymon, it did analyze the equities to determine
whether the Banks should receive default interest. Southland
presents three challenges to the bankruptcy court’s balancing of
the equities: the bankruptcy court improperly placed the burden of
proving inequity on Southland; the bankruptcy court did not
consider the appropriate factors in balancing the equities; and the
equities favored applying the lower pre-default interest rate to
the Banks’ claims.
10
A.
The bankruptcy court concluded its opinion by finding
that “the Debtor has failed to meet the burden of proof necessary
to rebut the Banks’ prima facie case.” This was probably an
artifact of the procedural context of the bankruptcy court’s
decision, since the Banks’ proofs of claim were prima facie valid
until Southland produced evidence of equal probative force
defeating the proof of claim. See Simmons v. Savell (In re
Simmons), 765 F.2d 547, 552 (5th Cir. 1985).
Nevertheless, in the context of determining what interest
rate to apply, another presumption did properly operate against
Southland. The cases find that a default interest rate is
generally allowed, unless “the higher rate would produce an
inequitable ... result.” Laymon, 958 F.2d at 75 (quoting Sheppley,
62 B.R. at 277). See also In re Terry Ltd. Partnership, 27 F.3d
241, 243 (7th Cir. 1994) (“What emerges from the post-Ron Pair
decisions is a presumption in favor of the [default] contract rate
subject to rebuttal based upon equitable considerations.”).
B.
Southland argues that the bankruptcy court failed to
consider the appropriate equitable factors because it ruled
“[w]ithout the benefit of the subsequently released Laymon
decision.” In articulating the need to examine the equities,
Laymon quoted Sheppley and parenthetically noted Sheppley’s
discussion of six other cases. Southland implies that the
11
bankruptcy court improperly failed to consider the five equitable
factors identified in Sheppley.
Apart from the fact that the bankruptcy court cited
Sheppley and mentioned some of its factors, Southland’s suggestion
that a balancing of the equities requires resort to a particular
list of factors is by definition flawed. The very purpose of
equity is to exalt the individual circumstances of a case over
law’s hard and fast rules. Thus, Laymon referred to “the equities
involved in this bankruptcy proceeding.” 958 F.2d at 75 (emphasis
added). Sheppley itself stressed “flexibility” and articulated its
list of “pertinent factors” after “[r]eviewing the record in the
present case.” 62 B.R. at 278. Even courts that enumerate the
Sheppley factors do not decide their cases exclusively upon them.
See, e.g., Fischer Enters., Inc. v. Geremia (In re Kalian), 178
B.R. 308, 316 n.19 (Bankr. D.R.I. 1995); In re Consolidated
Properties Ltd. Partnership, 152 B.R. 452, 457-58 (Bankr. D. Md.
1993).
C.
We find that the bankruptcy court did not abuse its
discretion in balancing the equities. In addition to some of the
factors we highlight below, the bankruptcy court observed that
other classes besides the Banks were “unscathed” by the bankruptcy,
that the Banks did not “ambush” Southland with their claims for
default interest, and that Southland failed to disclose its
prepetition restructuring fees to those voting on the Plan.
12
Although there is no set list of equitable factors to
consider, we also note that several factors articulated by other
courts militate against a finding of inequity here. The 2% spread
between default and pre-default interest rates is relatively small.
See Terry Ltd. Partnership, 27 F.3d at 244 (3% spread not
unreasonable); In re Ace-Texas, Inc., 217 B.R. 719, 724 (Bankr. D.
Del. 1998) (2% spread reasonable and appropriate given other cases
allowing 3 and 4.3%). The four-month confirmation of the Plan
shows that, unlike in Sheppley, the Banks were not obstructing the
process.7 See Ace-Texas, 217 B.R. at 726 (ten-month confirmation).
We find it especially significant -- as did the bankruptcy court --
that no junior creditors will be harmed if the Banks are awarded
default interest. See id. at 725.
That the Banks received restructuring fees before
bankruptcy does not mean that they should be deprived of their
additional, bargained-for default interest, which compensates them
for the unforeseeable costs of default. See Terry Ltd.
Partnership, 27 F.3d at 244. Likewise, as the bankruptcy court
noted, it is not inequitable to ask that old and new equity holders
wait for the secured creditors to be paid off, especially in light
of the original disclosure statement.
7
Southland’s claim in its reply brief that the Banks were all
the while scheming to assert their claim to default interest only
after confirmation is not believable.
13
VI.
Because the Banks triggered the default interest under
the contract, the plan did not “cure” defaults, and default
interest at the contract rate was not inequitable, the decision to
award the Banks interest at the default rate both pre- and post-
petition is AFFIRMED.
AFFIRMED.
14