Court Prohibits Secured Creditors from Recovering Over $31 Million in Default Interest
By: Emmanuelle Yeremou-Ngah
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff Member
Courts will generally interpret a contract according to its plain language, and any intent to incorporate a separate document must be clearly manifested with sufficient specificity. In In re Linn Energy, L.L.C., the United States Court of Appeals for the Fifth Circuit held that although a Chapter 11 plan provided for the recovery of unpaid interest to fully secured creditors, a conflicting provision of the plan clearly prohibited post-petition interest.[i] Pursuant to a certain credit agreement, the “Linn Lenders” collectively extended billions of dollars to the "Linn Debtors." [ii] The initial credit agreement provided that upon an "event of default," including a voluntary reorganization, outstanding loans would bear default interest at a rate of 2% above the applicable base rate.[iii] Following the Linn Debtors' voluntary filing for relief under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”), the United States Bankruptcy Court for the Southern District of Texas entered a cash collateral order that allowed the Linn Debtors to use cash that served as collateral for the Linn Creditors’ claims. The Linn Lenders reserved the right to assert claims later for default interest.[iv] The lenders then filed proofs of claim that included more than $31 million in "additional interest" at the default rate.[v] The court subsequently confirmed the Linn Debtors' chapter 11 plan (the “Plan”), which provided, among other things, that, “notwithstanding any other provision of [the] plan,” lenders’ claims were deemed fully secured “plus unpaid interest.”[vi] The Plan further provided that “[u]nless otherwise specifically provided for in the Plan … a postpetition and/or default interest shall not accrue or be paid on any Claims[.]”[vii] The Linn Lenders sought an entry of order directing payment of post-petition default interest, as allegedly required by terms of the confirmed Plan.[viii] Debtors invoked the Plan section stating “postpetition and/or default interest shall not accrue or be paid on any Claims.”[ix] The bankruptcy court denied the creditors’ motion, holding there was "no conflict of ambiguity,"[x] between the two provisions. There was no ambiguity because while the section of the Plan relied on by the Linn Creditors contained no "specific" reference to "post-petition default interest,"[xi] the Plan contained a provision that specifically and "expressly" forbade recovery of post-petition default interest.[xii] Thus, the Linn Creditors were denied additional default interest. The United States District Court for the Southern District of Texas affirmed the denial.[xiii] The Fifth Circuit agreed with both lower courts that the Plan unambiguously denied recovery of default interests on the creditors’ claim.
In the absence of ambiguity, courts generally enforce a contract according to its terms.[xiv] Incorporation of another document requires both that the document be "identified with sufficient specificity" and that there be “a clear manifestation of an intent to be bound by the terms of the incorporated instrument.”[xv] To analyze this, courts generally look solely to the language used by the parties.[xvi] Additionally, interpretations that render "at least one clause superfluous or meaningless" should be avoided. [xvii] But interpretations that give “a reasonable and effective meaning to all terms of a contract is generally preferred[.]"[xviii] The central issue here rested on whether the Plan "provide[d] for enforcement or instead the relinquishment of the right to post-petition default interest" mentioned in the original agreement.[xix] While the provision of the Plan purporting to provide for the right to that interest did not specify "default interest", the other provision's language was specific, "simple and to the point" in its denial of such recovery.[xx] Any other interpretation would have rendered the latter section meaningless. As such, the court enforced the clearer language.
As the Fifth Circuit stated, where there is unambiguity, courts will enforce the terms of a contract according to its terms. The parties’ intent will be inferred from the express language of the contract. If creditors really intend to reserve the right to recover default interest on their claims, they must do so expressly and with sufficient specificity.
[i] In re Linn Energy, L.L.C., 927 F.3d 350 (5th Cir. 2019)
[ii] Id. at 351.
[iii] Id. at 351–52.
[iv] Id. at 352.
[vi] In re Linn Energy, 927 F.3d at 351
[vii] Id. at 352
[viii] Id. at 350
[ix] Id. at 352
[x] Id. at 354.
[xii] In re Linn Energy, 927 F.3d at 352 (“The other relevant section of the Plan, Article VI.F, is captioned “No Postpetition or Default Interest on Claims.’”).
[xiv] Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) (“In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract's meaning.”).
[xv] Federated Mut. Ins. Co. v. Woodstock ’99, LLC, 140 F. Supp. 2d 225, 228 (N.D.N.Y. 2001).
[xvi] Vermont Teddy Bear Co., 1 N.Y.3d at 476.
[xvii] Galli v. Metz, 973 F.2d 145, 149 (2d Cir. 1992).
[xviii] Id. (citing Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir. 1985)).
[xix] In re Linn Energy, L.L.C., 927 F.3d 350, 354 (5th Cir. 2019).
[xx] Id. (“the Plan itself contains an Article entitled “No Postpetition or Default Interest on Claims”).