O
n may 17, the U.S. SupremeCourt issued its decision in
Till v.SCS Credit Corp.
, 124 S. Ct. 1951.In that case, consumer debtorshad purchased a used truck pur-suant to a financing agreement by whichthey agreed to pay an annual interest rate of 21%. As part of their Chapter 13 plan, thedebtors proposed to pay interest to thefinance company on account of its lienagainst the truck, which was worth $4,000,at the rate of 9.5%. Over the financecompany’s objection that the interest ratedid not accurately reflect the present value of its security interest in the truck, thebankruptcy court confirmed the debtors’plan of reorganization, and the financecompany appealed.The question presented in this case wasby which method a court should calculatethe rate of interest that mustbe paid to asecured creditor when allowing a debtor to“cram down” a plan of reorganization. Acram down occurs when the bankruptcycourt confirms a plan of reorganization overthe objection of a secured creditor that it isbeing deprived of its contractual right topossession of the collateral and is, instead,being provided with the promise of install-ment payments over time. Such paymentsare supposed to equal or exceed the “value,as of the effective date of the plan,” of theallowed amount of such claim.The decision in
Till
is important for tworeasons. First, even though
Till
is a consumercase under Chapter 13 of the BankruptcyCode, there is a comparable version of thecram down provision in Chapter 11, whichapplies principally to corporate reorganiza-tions. Thus, the decision will have a signifi-cant impact on business cases throughoutthe country. Second, interest rates in thecurrent economic cycle have apparentlybottomed out. With interest rates on therise, it is important for debtors and creditorsto know to what extent a court’s interest ratecalculation will affecttheir claimsin abankruptcy case.The Supreme Court’s description of thedecisions by the lower courts demonstratesthe divergence of opinions on the subject.As the case made its way through the lowercourts, eachemployed a different approachfor calculating what it believed was theappropriate interest rate. Like the courtsbelow, the Supreme Court also failed to forma consensus. As a result, we are left toponder the different approaches set forth inthe plurality opinions.
A review of the approachesby the various courts
The bankruptcy court applied theformula rate approach in setting the interestrate in the debtors’ plan of reorganization.The starting point in determining thisrate is the national prime rate, which was8% at the time. The court then augmentedthis rate to account for the additional riskof nonpayment posed by borrowersin a similar financial condition to thedebtors. After considering evidence (includ-ing expert testimony) of what those riskswere and the role of the bankruptcy processin assessing that risk, the court set theinterest rate at 9.5%.On appeal, the district court reversed.It held that the 7th U.S. Circuit Courtof Appeals required application of theforced loan approach. Under that test, thecourt must consider what interest ratethe creditor could obtain if it had foreclosedon its loan, sold the collateral and reinvestedthe proceeds in loans of comparable durationand risk. Based upon the secured creditor’sunrebutted testimony in the case, thedistrict court determined that the rateshould be 21%.On further appeal, the 7th Circuitadopted the contract rate approach, whichwas characterized as a modified forced loananalysis. Beginning with the forced loanrate, the court looked to the rate set in theprebankruptcy contract between the parties.Either party could then object and seek tohave a higher or lower rate applied basedupon the particular circumstances of the caseand how they affectthe risk of nonpaymentunder the proposed reorganization plan.The 7th Circuit’s decision was notunanimous. The dissenting opinion advocat-ed utilizing either the formula approach or a“cost of funds” approach. Under the latter,the court would have to determine what the
WWW.NLJ.COM
THE WEEKLY NEWSPAPER FOR THE
LEGAL PROFESSION
MONDAY, SEPTEMBER 6, 2004
BANKRUPTCY LAW
The Importance of ‘Till’
By Craig Rankin and Christopher Alliotts
Craig Rankin
is a partner at Los Angeles-basedbankruptcy boutique Levene, Neale, Bender,Rankin &Brill.
Christopher Alliotts
is counselto the Menlo Park, Calif., office of Los Angeles-based SulmeyerKupetz.
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