§ 77.2     Interest Rate Anarchy: Present Value before Till
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 77.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Prior to the Supreme Court’s decision in Till v. SCS Credit Corp.1 there was no consensus among the courts as to what discount factor or interest rate should be used for § 1325(a)(5)(B) purposes. The Code offers no particular guidance on the question. The interest rate to ensure present value under § 1325(a)(5)(B)(ii) varied from jurisdiction to jurisdiction, was sometimes different within a jurisdiction depending on the kind of collateral and the duration of the plan, and was even seen to vary from judge to judge within a district in different cases involving the same kind of collateral.

[2]

If there was a plurality position in the pre-Till decisions, it was that the current market rate for similar loans in the region provides present value to secured claim holders at confirmation in Chapter 13 cases. Current market rate was an appealing concept, but on deeper analysis it revealed very little specific information about interest rates. The current market rate for a new car may be 14 percent at one dealership or bank and 1.9 percent at the dealership down the street that is running a manufacturer’s promotion. The market rate for a washing machine loan will typically be different from the market rate to purchase a car or a boat. Real estate loans will vary dramatically depending on whether they are first or second (or worse) mortgages, what the loan-to-value ratio is, the term of the loan, the number of points paid, and so forth. Does “similar loan” mean a loan to a debtor in a Chapter 13 case? Is the “market” bank loans? finance company loans? credit union loans? What if there are no similar loans because no known lender offers a 36-month payout on a water bed? In a current-market-rate jurisdiction, the rate could vary depending on the collateral, the length of the term proposed in the plan, outside market forces such as competition for specific kinds of loans and general economic trends—as interest rates moved, some kinds of loans were more elastic than others. There was much room for negotiation and little certainty in this approach.

[3]

The debtor or creditor stubborn enough to litigate interest rate in a current-market-rate jurisdiction needed expert testimony or at least survey or compilation data to prove market conditions. Lay testimony or anecdotal evidence of market rate was not very useful (and not always admissible). It was not enough for a banker from the institution that made the loan to come to court and testify that one bank would charge “X” interest rate on a similar loan. The market rate for similar loans, if it was a meaningful concept, had to include some blending of various kinds of lending institutions (and noninstitutions?).

[4]

The current market rate approach was launched by the U.S. Court of Appeals for the Sixth Circuit in 1982 in Memphis Bank & Trust Co. v. Whitman.2 In Whitman, in the context of a car loan, the Sixth Circuit rejected the bankruptcy court’s “arbitrary” 10 percent rate of interest at confirmation and instead held “in the absence of special circumstances, bankruptcy courts should use the current market rate of interest used for similar loans in the region.”3 The court explained that current market rate would work well in Chapter 13 cases because bankruptcy courts “are generally familiar with current conventional rates on various types of consumer loans” and, when the parties cannot agree on an interest rate, “proof can easily be adduced.”4 In a footnote (why is it always in a footnote?), the Sixth Circuit did not define market rate but preserved plenty of wiggle room for bankruptcy courts engaged in the search:

The District Court noted that it could not include future or unmatured interest in the “allowed unsecured claim.” This appears to be a correct reading of § 502(b) and § 1305. This rule on unsecured claims does not preclude adjusting the market rate on the secured claim up or down, however, when there is a substantial difference between the market rate and the rate the parties agreed on by contract. The Bankruptcy Court should have leeway to adjust the market rate on secured claims based on special circumstances. But when the Bankruptcy Court deviates from the market rate, it should have good reasons for doing so, and it should explain these reasons.5
[5]

Three years later, the Sixth Circuit tried again in Cardinal Federal Savings & Loan Association v. Colegrove.6 This time in the context of home mortgage arrearages, the Sixth Circuit fixed the interest rate as “the prevailing market rate of interest on similar types of secured loans at the time of allowance of the creditor’s claim and the confirmation of the plan in bankruptcy with a maximum limitation on such rate to be the underlying contract rate of interest.”7 The Colegrove panel cited Whitman for this outcome, although no search of Whitman reveals a contract rate limitation. Again, in a footnote, the Sixth Circuit explained, “by limiting the interest rate to that found in the contract, we have struck a fair compromise between what has been agreed on by the parties, and what is dictated by simple economics.”8

[6]

Four years after Colegrove, the Sixth Circuit made it a trilogy with United States v. Arnold.9 This time in the context of a real estate cramdown in a Chapter 12 case, the debtors argued for the 1 percent and 5 percent interest rates available to them from the Farmers Home Administration under a special hardship lending program. The FmHA contended that the current market rate it charged for new loans was the appropriate interest rate at cramdown. The Sixth Circuit held that Whitman (the car case), not Cardinal (the real estate mortgage case) controlled because the FmHA was being forced to accept a “cramdown,” and the current market rate, not the creditor-specific program rate, was proper.

[7]

But three tries was not enough. On the 21st anniversary of Whitman, in Household Automotive Finance Corp. v. Burden (In re Kidd),10 again in a car case, the Sixth Circuit retraced its interest rate journey, steadfastly stuck to its “market rate” mandate and rejected the contract rate connection some folks found in Colegrove:

There is . . . absolutely no indication in [United States v. Arnold, 878 F.2d 925 (6th Cir. 1989)] or in other Sixth Circuit decisions that use of the phrase “its market rate” mandates assessment in this case of interest at the rate at which a loan would be made by Household to borrowers identical to the Kidds in all relevant respects. In fact, adoption of such a rate is tantamount to endorsement of the automatic application of a contract rate of interest, a principle clearly at odds with the clear language of [Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982)]. Rather, it is more likely that use by the panel in Arnold of the modifier “its” to describe the appropriate market rate was intended solely to limit consideration to rates relevant to the particular types of loans at issue. . . . [T]he language used in Memphis Bank & Trust clearly negates application of an interest rate that can be determined only on a case-by-case basis through analysis of information provided and controlled by the creditor. . . . [W]e conclude that the proper interest rate to be applied in Chapter 13 cram down is the current conventional market rate used for similar loans in the region, and not necessarily the contract rate. Such a determination does not entail an analysis of any particular debtor’s credit rating but rather involves a more objective determination of the value of money over time so as to compensate a creditor according to the present value of its secured claim.11
[8]

Kidd was a brave statement by the Sixth Circuit that the present value payable at confirmation in a Chapter 13 case is not bound by the original contract or trapped in the specific relationship between the debtor and a prepetition lender. As demonstrated in detail below, during the 21 years between Whitman and Kidd, dozens of decisions from other courts of appeals and bankruptcy courts took issue with the Sixth Circuit’s view and marched off in other directions to embrace “contract rate” as a presumption founded on several different theories with evil names such as “coerced loan.”

[9]

That having been said, it is still understandable that bankruptcy courts in the Sixth Circuit are a bit befuddled by Whitman, Colegrove, Arnold and Kidd.12 In four looks, the Sixth Circuit has steadfastly refused to prescribe a methodology for determining current market rate. The Arnold panel did not reveal why the discount factor necessary to provide present value is different at cramdown in a Chapter 13 case than elsewhere the Bankruptcy Code requires present value. The contract rate cap imposed in Colegrove was lifted in Arnold at least with respect to “cramdown” interest rates, but home mortgage holders in the Sixth Circuit were scratching their heads about why only they were penalized with respect to the present value of arrearages when market rates were higher at confirmation than at the time of contract. Kidd eschewed contract rates and creditor-specific rates in favor of an “objective determination of the value of money over time”—the very notion for which the “current market rate” avatar was first conceived in Whitman.

[10]

This outcome is defensible: “present value” is an objective concept in the economic sense that it is not bound by this debtor or this lender or this contract; it can only be approximated by market interest rates—the risk lenders are willing to take mimics the time value of money at confirmation. Arguably, no finer instructions are necessary. Unfortunately, most other courts of appeals were not convinced by the Sixth Circuit’s quadruplet.

[11]

Other courts, including the U.S. Courts of Appeals for the Third and Fourth Circuits, corrupted the current market rate approach to mean the rate of interest that this secured creditor would charge for a new loan similar in character, amount, and duration to the “forced loan” at confirmation under § 1325(a)(5)(B).13 As explained by the Third Circuit:

[Section 1325(a)(5)(B)(ii)] seeks to put the secured creditor in an economic position equivalent to the one it would have occupied had it received the allowed secured amount immediately. . . . In determining present value, we therefore look to the additional value that the secured creditor could be expected to generate in the regular course of its business if the plan provided for an immediate, rather than a deferred, payment of the allowed secured amount. . . . A plan under Chapter 13 thus effectively coerces a new extension of credit in which the creditor is required to assume not only the cost of the capital over the deferral period but also the cost of sustaining the lending relationship over that period. . . . Any creditor extending credit anticipates that over the course of the loan it will recover, in interest, its cost of capital and its cost of service, as well as a profit. . . . It is only by acknowledging the coerced loan aspects of a cramdown and by compensating the secured creditor at the rate it would voluntarily accept for a loan of similar character, amount and duration that the creditor can be placed in the same position he would have been in but for the cramdown. . . . [T]he appropriate rate is that charged by the particular creditor forced to extend credit. If that creditor receives interest at a rate equal to the rate it charges in the regular course of its business in the region for loans of similar character, amount and duration, that creditor will be placed in approximately the same position it would have occupied had it been able simply to repossess the collateral at the time of the bankruptcy. . . . [B]ecause the objective of § 1325(a)(5)(B)(ii) is to put the creditor in the same position it would have been in if it had been allowed to end the lending relationship at the point of the bankruptcy filing by repossessing the collateral, we believe it would be inappropriate to attempt to exclude consideration of “profit” from a determination of the § 1325 interest rate.14
[12]

Although agreeing in principle with the Third Circuit, the Fourth Circuit’s version of this “individual-creditor-based market rate” excluded some of the costs and expenses that would be specific to an individual creditor. The Fourth Circuit described the calculation as follows:

[T]he purpose of including interest as part of the installment payments is to place the secured creditor in the same economic position as if the debtor had surrendered the collateral to the secured creditor. . . . [I]t is fairer to treat the value of the collateral retained by the debtor under the “cram down” provision of Chapter 13 as a new loan and to match its rate of return to the secured creditor with that which the creditor would otherwise be able to obtain in its lending market. . . . [T]he court must be wary of placing the secured party in a better position than that in which it would have been if the debtor surrendered the collateral. . . . If the Bank generally makes the loan directly to consumers, the interest rate it collects, adjusted for its expenses, may be used to determine the appropriate rate of interest under the “cram down” provision. But if the Bank generally purchases the finance contracts, the rate reflected by the discounted purchase price is used. In neither case, however, is the gross rate of interest paid by consumers for similar loans used without accounting for the Bank’s expenses.15
[13]

The Third and Fourth Circuits did not agree on how the original contract rate of interest fit into this creditor-based calculation. The Third Circuit adopted the view that the original contract rate was a “rebuttable presumption” of the appropriate rate of interest at confirmation in a Chapter 13 case, which could be exceeded upon appropriate evidence from the creditor or reduced if the debtor proved that the creditor’s current rate was less than the contract rate.16 In contrast, the Fourth Circuit capped its creditor-based interest rate at the rate in the original contract to preclude a “windfall” to the secured claim holder.17

[14]

These creditor-based approaches to interest rates at confirmation in Chapter 13 cases are nightmares of logic and application. Nothing in § 1325(a)(5)(B)(ii) suggests that “value, as of the effective date of the plan” is a creditor-specific concept. If present value varies from creditor to creditor depending on facts specific to each creditor’s financial condition, management and lending practices, then the interest rate at confirmation in a Chapter 13 case will be different with respect to every claim, with respect to every creditor, with respect to every day and all the relevant evidence is proprietary to the holder of the secured claim. It is not imaginable that Congress intended “value, as of the effective date of the plan” to mean that inefficient, poorly managed lenders get higher interest rates than well managed, better capitalized lenders. What if a particular lender has no interest rate at which it would make the particular “coerced loan” proposed by a Chapter 13 debtor’s plan? This will often be the case because Chapter 13 plans extend the repayment period for allowed secured claims beyond the terms the lender would voluntarily offer in the marketplace. Surely, evidence of other creditors in the marketplace who would make such a loan is relevant to determine the discount factor at confirmation of a Chapter 13 case.

[15]

This individual-creditor-based definition of present value would have perplexing implications if applied to other Code sections that use the same “value, as of the effective date of the plan” language. For example, identical present value language appears in the best-interests-of-creditors test in § 1325(a)(4).18 If “value, as of the effective date” means the rate of interest that a specific creditor could realize in the marketplace for a similar loan, then every unsecured claim holder is entitled to an individualized (different) interest rate when a Chapter 13 debtor must pay interest to unsecured claim holders to satisfy the best-interests-of-creditors test.19

[16]

The adjustments to the creditor-based discount rate calculation required by the Fourth Circuit20 make application of the test very difficult. What are the “bank’s expenses” that are properly accounted for as a reduction in the interest rate payable at confirmation in a Chapter 13 case? Are bankruptcy courts supposed to examine the balance sheets and income statements of every financial institution with a secured claim in every Chapter 13 case? If the goal is to match the rate of return that the secured creditor would otherwise obtain “in its lending market,”21 then why is the original contract rate a cap on interest rates at confirmation in a subsequent Chapter 13 case? In this respect, the Third Circuit is more honest to its theory than the Fourth Circuit—the Third Circuit would allow the creditor to prove that its current rate of interest is higher than at the time of the original contract;22 the Fourth Circuit would preclude proof that interest rates have gone up since the original contract.23

[17]

Application of the creditor-specific formulas produced strange and difficult opinions in the Third and Fourth Circuits. In DeSarno v. Allegheny (In re DeSarno),24 the creditor was a municipality with a claim for real estate taxes. Applying the Third Circuit’s opinion in Jones, the bankruptcy court concluded (logically) that the “hypothetical creditor” was a government and the appropriate interest rate would be found in the municipal bond market:

The hypothetical “creditor” contemplated by the Third Circuit’s test in GMAC v. Jones [(In re Jones), 999 F.2d 63 (3d Cir. 1993)] was not a lien creditor, but rather a bank or other similar type of financial institution. Municipalities and counties such as the Claimants are not in the business of lending money, therefore, the “coerced loan” theory does not fit neatly. However, this court believes that the “coerced loan” theory can apply to the Claimants if the interest rate reflects the reasonable cost of interest to the municipality and the county, as of the effective date of the plan, over a 60 month period. The market rate of interest for a municipal creditor varies from the rate charged by a consumer or commercial lender because municipal interest is free of federal tax to the owner. . . . Daily trade publications such as the Bond Buyer publish the historical interest rates for municipal bonds. This court believes that such interest rates best reflect a “loan similar in character” under these circumstances. The Debtors may apply such appropriate interest rates, as published in the Bond Buyer or a like publication, for debt with a 5 year term or longer for a “AA” rated county . . . and an “A” rated municipality.25
[18]

On appeal, the Third Circuit held that the bankruptcy court misapplied Jones, explaining that the closest analogue for the current market rate of a “forced loan” by a municipality would be the state statutory interest rate:

[T]o be properly compensated, consistent with [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)] postpetition interest rates must be set in accordance with the municipalities’ costs of maintaining their creditor relationship. . . . [T]he closest analog to the market loan in Jones is the statutory interest rate here. While the analog is not perfect, it is sufficient: an entity forced to delay payment that it is entitled to receive is, in effect, extending a loan. And the rate that the municipality charges for those that coerce loans by not paying their property tax bills is twelve percent. . . . Political and financial market forces will generally operate to keep the statutory rate reasonable.26
[19]

One bankruptcy court tied itself in knots in an earnest attempt to apply the Fourth Circuit’s formula in Hall to determine the discount rate on arrearages to an oversecured mortgage holder provided for under § 1322(b)(5):27

To apply the principles set forth in [United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993)], the court must first determine the market interest rate of similar loans in the area as of the date of the contested confirmation hearing. The court should then put a dollar value on the amount of interest to be paid (interest charge) at the market rate on the total debt (not just the arrearage) at the contractual payment. From this figure, the court should deduct the hypothetical expenses of liquidating the real property if possession was surrendered by the debtor and the hypothetical expenses NationsBanc would actually incur in making a new loan. The resulting total (adjusted interest charge) should then be translated to a corresponding interest rate for repayment of the total debt at the contractual monthly payment. This interest rate should be rounded to the nearest one-tenth of a percent. The resulting interest rate should be used as the discount rate under § 1325(a)(5)(B)(ii) for the payment on the arrearage, (so long as this rate does not exceed the contract rate), even if the resulting interest rate is less than the interest rate originally proposed in the plan. Prior to Hall, this court used a discount rate set on an annual basis by a court sanctioned committee. The discount rate as set June 1, 1993 was 7%. . . . In this case, the debtor’s proposed interest rate equals or exceeds the 7% rate set by committee and is, therefore, presumptively reasonable. The debtor, therefore, has satisfied his burden of proof. . . . The only evidence offered at the hearing regarding NationsBanc’s current lending rates was the rates published in the Greenville News. Of the various rates listed for NationsBanc, the highest rate appears to be 8.375%. NationsBanc offered no evidence or argument to dispute debtor’s claim that this is NationsBanc’s current interest rate. . . . [N]o evidence was presented regarding the expenses of liquidation or of making a new loan in the marketplace. Evidence of these expenses would serve only to reduce the amount of interest which the debtor would have to pay on the arrearage claim. Moreover, the creditor would be the only source of the information required to present evidence of these expenses. To place the burden of producing such evidence upon the debtor, therefore, would be impractical and inequitable. Accordingly, this court finds that the debtor has met his burden of establishing that the interest rate proposed in his Chapter 13 Plan meets the requirements of Section 1325(a)(5) and this more than compensates NationsBanc for the delay it will experience in receiving payments on its arrearage claim.28
[20]

Try to explain the Fourth Circuit’s logic in Hall to the car lender in In re Jones.29 The contract rate on GMAC’s car loan in Jones was 2.9 percent. At confirmation of the debtor’s Chapter 13 plan, the prevailing market interest rate in the Middle District of North Carolina was 9 percent. Applying the contract rate cap from Hall, the “economic position” for GMAC at cramdown was nothing close to the “rate of return . . . which the creditor would otherwise be able to obtain in its lending market”:30

[D]espite the fact that the secured creditor in [United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993)] had presented evidence that the market rate was higher than the contract rate, the Fourth Circuit held that the use of a higher rate would result in a windfall to the creditor. . . . Based upon the holding in Hall . . . Chapter 13 cram down provisions in this district use the lower of either a “presumptive” market rate which fluctuates along with prevailing interest rates in this geographic area (currently around 9%) or the contract rate to which the secured creditor originally agreed. . . . The court finds that a cap on the interest rate as set forth in Hall is applicable in this case.31
[21]

Outside the Third and Fourth Circuits, Hall and Jones were dissected and modified to produce a fruit salad of decisions that pays lip service to current market rate as the discount formula at confirmation in Chapter 13 cases, but the embellishments sometimes obscure the underlying present value theory altogether.32 Bankruptcy courts in the Tenth Circuit have flirted with Hall and Jones,33 but also applied Hardzog v. Federal Land Bank of Wichita (In re Hardzog),34 without reaching any consensus on the details for calculating interest rates at confirmation in Chapter 13 cases.35

[22]

The Fifth Circuit, after one false start,36 adopted the Third Circuit’s creditor-specific approach from Jones: the cramdown interest rate in a Chapter 13 case is “‘that which the secured creditor would charge, at the effective date of the plan, for a loan similar in character, amount and duration to the credit which the creditor will be required to extend under the plan.’”37 To “‘reduce litigation expense’” the Fifth Circuit adopted the same additional contract rate rule as the Third Circuit:

In the absence of a stipulation regarding the creditor’s current rate for a loan of similar character, amount and duration, we believe it would be appropriate for bankruptcy courts to accept a plan utilizing the contract rate if the creditor fails to come forward with persuasive evidence that its current rate is in excess of the contract rate. Conversely, utilizing the same rebuttable presumption approach, if a debtor proposes a plan with a rate less than the contract rate, it would be appropriate, in the absence of stipulation, for a bankruptcy court to require the debtor to come forward with some evidence that the creditor’s current rate is less than the contract rate.38
[23]

This creditor specific formula for interest rates at confirmation in a Chapter 13 case is inexplicably hostile to Chapter 13 and its rehabilitative intent.39 The uncertainty of calculation inevitable in any individual-creditor-based interest rate theory is reason enough to consider alternative approaches that are at least equally supported by the present value language in § 1325(a)(5)(B).

[24]

As if to prove the point, the U.S. Court of Appeals for the Second Circuit used some of the same words as the Third, Fourth and Fifth Circuits to describe the appropriate discount factor at confirmation in a Chapter 13 case, but reached a completely different conclusion. In GMAC v. Valenti (In re Valenti),40 the Second Circuit agreed that “market rate of interest” is the appropriate standard at cramdown under § 1325(a)(5)(B)(ii). But the Second Circuit rejected the “forced loan” approach in Jones and Hall in favor of a market rate based on treasury instruments adjusted with a risk premium:

We believe that courts adopting the “forced loan” approach misapprehend the “present value” function of the interest rate. The objective of § 1325(a)(5)(B)(ii) is to put the creditor in the same economic position that it would have been in had it received the value of its allowed claim immediately. The purpose is not to put the creditor in the same position that it would have been in had it arranged a “new” loan. . . . [T]he value of a creditor’s allowed claim does not include any degree of profit. There is no reason, therefore, that the interest rate should account for profit. . . . We agree with the district court that an interest rate based on a “cost of funds” approach more appropriately reflects the present value of a creditor’s allowed claim. This approach, however, is difficult for bankruptcy courts to apply efficiently and inexpensively. . . . Therefore, we hold that the market rate of interest under § 1325(a)(5)(B)(ii) should be fixed at the rate on a United States Treasury instrument with a maturity equivalent to the repayment schedule under the debtor’s reorganization plan. This method of calculating interest is preferable to either the “cost of funds” approach or the “forced loan” approach because it is easy to apply, it is objective, and it will lead to uniform results. . . . Because the rate on a treasury bond is virtually risk-free, the § 1325(a)(5)(B)(ii) interest rate should also include a premium to reflect the risk to the creditor in receiving deferred payments under the reorganization plan. . . . [T]he risk premium has been set by bankruptcy courts at from one to three percent. . . . The actual rate will depend upon the circumstances of the debtor, including prior credit history as well as the viability of the reorganization plan. We hold that a range from one to three percent is reasonable in this Circuit but leave it to the bankruptcy court in the first instance to make a specific determination.41
[25]

Valenti and Kidd have the better of this debate: Market rate should not be specific to a particular lender’s condition or practices. But even Valenti was not simple to apply.

[26]

Why were risk premiums below 1 percent and above 3 percent excluded by the Second Circuit? Would the same range of risk premiums apply if the creditor is oversecured or the collateral is not depreciating?42 The “viability of the reorganization plan” is a difficult factor to apply in this context. Every confirmed Chapter 13 plan is viable in the sense that it must pass the feasibility test for confirmation in § 1325(a)(6).43 If viability means something different from feasibility, then some feasible plans will be more or less viable than others, and this subtle difference will make as much as a 2 percent difference in the interest rate the debtor must pay to accomplish confirmation. Ironically, less viable plans would probably require a higher risk premium under the Second Circuit’s construct, causing the debtor to pay more interest and higher monthly payments and further threatening both viability and feasibility of the plan. It is hard to imagine what the Second Circuit contemplated when it included prior credit history as a factor bearing on interest rate at confirmation in a Chapter 13 case.

[27]

Other courts of appeals paid lip service to market rate as the appropriate discount factor, but with twists and turns that further complicated the picture. In United States v. Roso (In re Roso),44 the Eighth Circuit held that current market rate for purposes of § 1325(a)(5) did not include consideration of a “subsidized” rate of interest for beginning farmers admittedly available from the Farmers Home Administration.45 In Roso, FmHA testified that the agency had two rates of interest for real estate loans—a subsidized rate for beginning farmers and a regular rate.46 At the time, the subsidized rate was 5 percent; the regular rate, 8 percent. The bankruptcy and district courts confirmed the debtor’s proposal to pay 6½ percent interest as the reasonable market rate. The Eighth Circuit disagreed, offering the curious explanation that market rate did not necessarily include consideration of all rates available in the market:

We conclude that the Bankruptcy Court should not have considered the subsidized interest rate available to new farmers. By definition, a subsidized rate of interest is not a market rate of interest. It is a rate of interest below the market rate. The government administers a program, designed to assist new farmers, in which the new farmer pays only 5% interest on his or her FmHA loan. The 5% rate is below the market rate of interest. The difference between the 5% rate and the market rate is a subsidy provided by the government to the subsidized borrower. . . . The best rate of interest that Roso would hope to obtain . . . is 8%.47
[28]

The Eighth Circuit’s approach in Roso was somewhat like the creditor-specific market rates described by the Third and Fourth Circuits in Jones and Hall. The Eighth Circuit did not look beyond the loan programs available from the FmHA to find the relevant market. However, once turned inward upon the creditor, the Eighth Circuit was picky about what aspects of this creditor’s portfolio figured into the market rate. Would the Roso logic apply to car loans and General Motors Acceptance Corporation? If GMAC was running a “1.9 APR special” alongside a “standard” 20 percent car loan, was the promotional rate ignored for § 1325(a)(5) purposes in the Eighth Circuit? On careful scrutiny, most lenders offer many different “regular” interest rates for the same loan. Roso seemed to require the bankruptcy courts in the Eighth Circuit to parse through each lender’s portfolio to find the right market rate; there was no guidance for the bankruptcy courts to include some available rates and reject others.48

[29]

Things weren’t much clearer in the Seventh Circuit. First, there was Koopmans v. Farm Credit Services of Mid-America, ACA,49 a Chapter 12 case in which the Seventh Circuit interpreted the similar present value language in § 1225(a)(5). The Koopmans panel concluded that the cramdown interest rate is the market rate measured as “the rate of interest [the creditor] could have obtained had it foreclosed and reinvested the proceeds in loans of equivalent duration and risk. Nothing else gives the creditor the indubitable equivalent of its nonbankruptcy entitlement.”50 The Seventh Circuit affirmed the bankruptcy court’s use of a prime rate based discount factor but cautioned that this was not the only route to the market rate.

[30]

Putting aside that “indubitable equivalent” is a term of art at cramdown in Chapter 11 cases only,51 the new farmer loan rate rejected by the Eighth Circuit in Roso was a loan of “equivalent duration and risk” offered by the FmHA. Applying Koopmans, the new farmer in Roso might have won the interest rate sweepstakes by pulling up stakes in North Dakota and going to farm in Indiana. Koopmans was inconsistent with the Second Circuit’s analysis in Valenti and at least different from the market rates described by the Third and Fourth Circuits in Jones and Hall. But consistent with all the other market rate pronouncements, Koopmans produced no certainty or predictability in the interest rate decisions by bankruptcy courts in the Seventh Circuit.52

[31]

Six years after Koopmans, the Seventh Circuit tried again in In re Till.53 The Tills were Chapter 13 debtors who financed a used car through a sub-prime lender at an interest rate of 21 percent. The Chapter 13 plan confirmed by the bankruptcy court provided a present value interest rate calculated from the testimony of a finance professor that the prime rate plus a risk premium of 1.5 percent produced an interest rate of 9.5 percent. The bankruptcy court found this methodology in Koopmans. The district court rejected the bankruptcy court’s reading of Koopmans and defaulted to the 21 percent rate in the original contract. The Tills appealed.

[32]

Elaborating on Koopmans—some would say, rewriting its earlier decision—the Seventh Circuit embraced the “coerced loan” approach from the Third and Fifth Circuits with a rebuttable presumption that the current market rate is the original contract rate between the parties:

[Koopmans v. Farm Credit Services of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996)] did not endorse a formula approach and should not be read to have endorsed such an approach. . . . [I]t adopted the coerced loan method, the specific application of which led to the prime-plus rate. . . . By determining the rate that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy . . . we are approximating . . . the present value of the collateral to the creditor . . . . [L]ike our colleagues in the Third Circuit, see [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)], and Fifth Circuit, see [Green Tree Financial Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997)], we believe that the old contract rate will yield a rate sufficiently reflective of the value of the collateral at the time of the effectiveness of the plan to serve as a presumptive rate. Therefore, in the absence of a stipulation regarding the creditor’s current rate for a loan of similar character, amount and duration, we believe it would be appropriate for bankruptcy courts to accept a plan utilizing the contract rate if the creditor fails to come forward with persuasive evidence that its current rate is in excess of the contract rate. Conversely, utilizing the same rebuttable presumption approach, if a debtor proposes a plan with a rate less than the contract rate, it would be appropriate for a bankruptcy court to require the debtor to come forward with some evidence that the creditor’s current rate is less than the contract rate.54
[33]

Till broke no new ground in the interest rate debate. The coerced loan market rate analysis in Till was thoroughly briefed in Jones and Smithwick. The two-edged contract rate presumption in Till springs from Hall in the Fourth Circuit. The 21 percent outcome in Till was bad news for the debtors, but worse news for the unsecured creditors who would underwrite the payment of interest at sub-prime rates for the debtors’ use of a used car. But it was Till that finally inspired the Supreme Court to accept certiorari in a Chapter 13 cramdown interest rate case.55

[34]

The Ninth Circuit, also in a Chapter 12 case, approved something called the “case-by-case ‘market’ approach: the appropriate discount rate must be determined on the basis of the rate of interest which is reasonable in light of the risks involved . . . . The court must consider the prevailing market rate for a loan of a term equal to the payout period, with due consideration of the quality of the security and the risk of subsequent default.”56 Acknowledging that “the cases differ drastically in their interpretation of how a ‘market’ rate is to be determined,”57 the Ninth Circuit approved the use of the “formula approach”: “taking the prime rate on the date of plan confirmation . . . and adding a . . . risk factor.”58 This formula approach has been applied by the bankruptcy courts in the Ninth Circuit at confirmation in Chapter 13 cases, though the “prime rate” is not always the platform for the calculation.59

[35]

The bankruptcy courts in the Eleventh Circuit struggled, perhaps more than anywhere else, to guess what the court of appeals would do in a Chapter 13 cramdown interest rate case. In 1983, in a Chapter 11 case, United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.),60 the Eleventh Circuit held that the appropriate rate of interest to compensate for the deferred payment of priority taxes was “the prevailing market rate for a loan of a term equal to the payout period, with due consideration of the quality of the security and the risk of subsequent default.”61 Some bankruptcy courts within the Eleventh Circuit interpreted Southern States to require a “formula approach” to the present value calculation whenever required by the Bankruptcy Code; other bankruptcy courts are equally sure that Southern States adopted the “coerced loan” theory discussed above. Straining to apply Southern States to the present value of secured claims at confirmation in Chapter 13 cases, bankruptcy courts in the Eleventh Circuit applied practically every theory and methodology apparent in the circuit court decisions from other circuits.62

[36]

In other circuits without clear appellate authority, some bankruptcy courts adopted the market rate standard, but the methodologies used to determine market rate and the outcomes in individual cases are at least as diverse as those produced by the courts of appeals.63 One Massachusetts bankruptcy court gave this especially honest explanation of the absence of a certain definition of market rate of interest at cramdown in Chapter 13 cases:

This Court shall not apply a single litmus test to determine the proper interest rate for Chapter 13 cramdown plans. It is inappropriate for a court or a district to precisely fix in advance, by case law or local rule, a rate of interest for all the Chapter 13 cramdown plans pending before it. . . . Market rates of interest vary from day to day and the particular facts of each case vary with each debtor . . . . A case-by-case approach, in this Court’s view, is the only fair and equitable way to proceed. . . . First, the Court shall determine the market rate of interest for similar loans in the marketplace in the region. Secondly, after determining the market rate, the Court shall then determine whether an upward adjustment of this base rate is warranted in the particular case, through the introduction of competent evidence or the parties’ stipulation with respect to the following non-exhaustive list of factors: the type and the value of the collateral; the length and terms of the modified loan; the debtor’s financial history, . . . the lender’s risk factors in extending the forced credit; the lender’s lost opportunity costs and expenses; and any extenuating circumstances of the debtor, such as the debtor’s net disposable income, the reasons for the debtor’s financial trouble, and the other provisions of the debtor’s reorganization plan. . . . [T]he parties must be prepared to introduce expert testimony or other admissible evidence to prove the prevailing market rate of interest for similar loans, as well as evidence on the other factors set forth above.64
[37]

In the search for certainty, some of the decisions cited above selected present value rules that tell the parties without litigation or consultation with experts exactly what the interest rate should be in the next Chapter 13 case. Several reported decisions, including one inconclusive decision by the U.S. Court of Appeals for the Fifth Circuit, use the original contract rate between the parties.65 Contract rate has the obvious benefit of ease of determination. But contract rate includes the profit, market and other risk factors the lender built into the original loan. Several courts rejected contract rate for § 1325(a)(5)(B) purposes because “value, as of the effective date” does not entitle lenders to realize the profit included in the original contract.66 Contract rate shares some of the same shortcomings as the creditor-specific market rate cases discussed above. A particular creditor negotiates for a contract rate specific to the capital structure, the management expertise, the submarkets and so forth in which the lender works. The discount factor required by § 1325(a)(5) is not creditor-specific and should not be controlled by the interest rate negotiated by the parties.

[38]

The contract rate may be unfair to the debtor or to the creditor based purely on the passage of time. If current market rates have gone up since the date of the original contract, then the lender is penalized for the timing of the debtor’s filing. Not only will the amount of the creditor’s secured claim be limited to the value of its collateral,67 but the creditor will also be forced to accept a present value of that collateral based on a lower interest factor than the market might otherwise provide. The reverse will be true if interest rates have gone down since the original contract—the debtor will be required to give the lender a higher return through the Chapter 13 plan than the lender could get relending at the time of confirmation.

[39]

Changes in the market rate of interest from the time of the original contract will be magnified if the term of repayment through the Chapter 13 plan is longer than the term of the original contract. For example, if the original contract called for 10 percent interest and one year to pay for a water bed, a proposal to pay for the water bed over three years through the plan at the contract rate exposes the lender to longer risk of repayment. The original 10 percent rate—though indeed the product of a bargain between the debtor and the lender—is not representative of the loan that will be forced on the creditor by the plan. That the debtor may have written down the amount of the creditor’s claim to the value of the collateral adds insult to injury: the creditor is forced to accept a 100 percent loan-to-value ratio repaid over a longer period of time with an interest rate based on a completely different set of assumptions.

[40]

And what about other creditors in the Chapter 13 case? Unless the debtor can pay all creditors in full—a rare circumstance—there is an inverse relationship between interest that must be paid to secured claim holders and the dividend available for unsecured creditors. In a very real sense, it is the unsecured creditors that are paying the interest to secured creditors in most Chapter 13 cases. A creditor-specific or contract-based discount factor means that each secured claim holder gets a different rate of interest at confirmation and those rates typically maximize the return to each lender based on prebankruptcy factors. In contrast, the present-value concept in § 1325(a)(5) (and elsewhere in the Bankruptcy Code) is a leveling concept—it treats all similarly situated creditors the same way for purposes of distributions under the plan. All secured claim holders get the same discount factor if fairness prevails. Any creditor-specific or contract-based methodology for calculating present value inevitably carries into the bankruptcy case the disparities of treatment among creditors that characterize the prebankruptcy financial circumstances of debtors.

[41]

A uniform discount factor evenly shares the bankruptcy risk for purposes of distributions to unsecured claim holders. The principle of equality of distribution among similarly situated creditors is hardly served by a rule that pays 21 percent interest to the used-car lender and 2.9 percent to the new car lender based on differences in contract rates, then pays nothing to unsecured creditors because the 21 percent used-car contract sucks all of the money out of the case.

[42]

In the end analysis, contract rate does have certainty and ease of calculation but little else to recommend it as the appropriate rate of interest to provide present value at confirmation under § 1325(a)(5)(B).

[43]

Another sizable group of courts used an interest rate based on the sale of treasury bills, sometimes with a premium, as the discount factor at confirmation in Chapter 13 cases.68 The theory of these cases is that discounting to present value is a profitless calculation not bound by the characteristics of any particular creditor or market. Instead, secured claim holders are entitled to a “riskless rate of interest,” most easily approximated as the rate of interest that the U.S. government would pay on treasury bills.69 This approach was criticized.70

[44]

Courts adopting a treasury bill standard were not in agreement as to which form of treasury instrument is the appropriate reference. Some used the sale of 52-week treasury bills closest in time to the date of confirmation.71 Others chose the yield for treasury bills due to mature on the date of the completion of payments under the debtor’s plan.72 A third view used the average auction rate of three-month treasury bills calculated on the Monday of the week of the filing of the petition.73 One reported case cited a local rule that started the interest rate calculation with the 30-year treasury bond rate.74

[45]

There was also disagreement whether to add interest above the treasury bill rate and, if so, what amount. Several courts concluded that the riskless rate of interest measured as the yield on a U.S. government treasury bill is not alone compensatory for the delay in payment and additional risks of the Chapter 13 case. In In re Fisher,75 the court found the appropriate add-on to be 1 percent. Another court held that a “one-two percent upward adjustment” is appropriate “to account for default under the plan.”76 The Bankruptcy Court for the Eastern District of Pennsylvania used a 1 percent add-on risk factor.77 In the Western District of Missouri that add-on was 2 percent,78 or 3 percent.79 In nonfarm cases, the Bankruptcy Court for the Southern District of Iowa used the treasury bond yield rate plus a 1 percent risk factor.80 Another court concluded that the discount rate should not exceed half of 1 percent above the average auction rate of three-month treasury bills.81 Several reported decisions added risk premiums in the 3 percent to 5 percent range.82 The U.S. Court of Appeals for the Second Circuit pegged the interest rate at cramdown to a U.S. Treasury instrument with a maturity “equivalent to the repayment schedule under the debtor’s reorganization plan,” adjusted to reflect “the risk to the creditor in receiving deferred payments under the reorganization plan . . . from one to three percent . . . . [T]he actual rate will depend upon the circumstances of the debtor, including prior credit history as well as the viability of the reorganization plan.”83

[46]

It is easy to consult a financial newspaper to determine the interest rate on treasury bills of various kinds. The treasury bill rate is one of the economic factors that influences interest rates in the financial markets generally. But the add-on factors used by many courts were arbitrary. There was no evidence in the reported decisions of the precise relationship between treasury bill rates, the add-ons and market factors such as risk or return on investment. Does a longer plan always mean larger add-ons? If market interest rates are falling, should add-ons adjust also? Should fully secured claim holders get fewer add-on points than an undersecured lender? The reported cases provided little useful analysis of the function of the add-ons.

[47]

The Supreme Court’s opinion in Associates Commercial Corp. v. Rash84 perhaps supports an argument that interest rate risk premiums should be reduced or eliminated as a component of the discount rate at confirmation. As detailed above,85 in Rash the Supreme Court valued a truck for cramdown purposes in a Chapter 13 case at replacement cost—an amount typically greater than the amount a secured creditor would realize upon repossession of its collateral. The Supreme Court explained this replacement-value standard as a protection for secured claim holders against the risks that the debtor would fail to make plan payments and that the collateral might depreciate. Several courts cited this risk analysis from Rash as a reason why a second measure of risk protection should not be built into the discount rate at cramdown for purposes of § 1325(a)(5)(B).86

[48]

Many other rates for discounting or providing present value under § 1325(a)(5)(B) were offered in the reported decisions. As if reacting to the confusion in the “market rate” cases discussed above, some reported decisions found discount rates in trade publications or on the Internet in lists of loan rates compiled from or published by lending industry members.87 Courts chose the rate fixed for interest on delinquent taxes in the Internal Revenue Code.88 Several courts focused on the legal rate of interest on judgments fixed by state law in the jurisdiction where the transaction occurred or the court resides.89 Several courts averaged a number of rates.90 And then there were other rates, fact-bound to the peculiar circumstances at hand.91

[49]

A contender for the interest rate rule that came on strong for awhile but now seems retired to the Ninth Circuit was the prime rate. Correctly viewed as a discount rate, the present value language of § 1325(a)(5)(B)(ii) was interpreted by several courts to mean the prime rate for a reliable borrower at the filing of the Chapter 13 case, sometimes with adjustments.92 The theory of these cases was that the Bankruptcy Code protects the secured claim holder’s interest in property. If the lender had its collateral in hand, it would liquidate and reloan the proceeds to new customers. If prevented by confirmation from repossessing and liquidating its collateral, then the creditor must raise capital or borrow the money that it uses to make loans. As the court explained in In re Hudock:93 “[T]o protect the creditor’s property interest, the discount rate should be comparable to [the creditor’s] cost of borrowing. . . . [T]o set the discount rate at the contract rate or the retail consumer rate would be to award the institutional creditor . . . a higher rate than it would have to pay to borrow.” The court in In re Jordan94 elaborated:

We conclude that . . . market rate . . . is most accurately measured . . . by the cost of funds approach, which seeks to compensate the creditor at a rate equal to the creditor’s cost of borrowing to replace funds that would otherwise be available upon liquidation of its collateral. . . . [T]he most current and accurate estimate of the present worth of a stream of payments to a secured creditor, as measured by the creditor’s cost of borrowing, is the prime rate or the rate at which the creditor borrows money to replace the funds that would otherwise be realized from liquidating its collateral. . . . The prime rate reflects the cost of money, ascertainable on a daily basis, to commercial borrowers.
[50]

There is much to be said for the prime rate approach. It does not engage courts, debtors and creditors in the frustrating search for nonexistent markets and nonexistent similar loans. It minimizes the profit factor—a problem with the cases adopting the rates charged by retail lenders making consumer loans. Unlike the creditor-specific approaches in the Third95 and Fourth96 Circuits, the prime rate is a more general statement of the condition of the financial markets, and its use avoids increases or decreases in interest rate that reflect only the strengths or weaknesses of a particular lender. It is easily ascertainable on a daily basis. Arguably, prime rate reflects a well-managed creditor’s current cost of doing without the value of its collateral, thereby resolving problems inherent in the contract rate cases. The prime rate already accounts for some of the risk factors that can only be estimated by adding arbitrary percentage points to the treasury bill rate. Prime rate is linked to the economic loss experienced by the creditor—the time value of money measured by the cost to replace the present value of the collateral retained by the debtor.

[51]

But as evidenced in the notes, despite appealing logic, the decisions adopting prime rate at confirmation in Chapter 13 cases were almost all overruled outside the Ninth Circuit.97 The cost of funds theory that underlies the prime rate decisions was not embraced by any circuit court. So much for good ideas in this complex area of Chapter 13 practice.

[52]

A footnote about interest rates at cramdown in Chapter 13 cases: watch out for debtors on active duty in the armed forces. The Soldiers and Sailors Civil Relief Act98 and the Service Members Civil Relief Act of 200399 both contain provisions that cap the amount of interest that can be charged to a debtor on active duty in the armed forces, absent evidence that the debtor is able to pay at a higher rate. The cap under these statutes is 6 percent and the lender bears the burden of showing that an active duty service person has the ability to pay at a higher interest rate. It has been held that the interest rate cap in the Soldiers and Sailors Civil Relief Act applies in Chapter 13 cases and limits the interest rate used as a discount factor at confirmation.100

[53]

Most interest rate decisions at confirmation in Chapter 13 cases are made by negotiation between debtors, creditors and the trustee. Experienced players take into consideration the kind of collateral, the condition of the collateral, the length of the proposed plan, the term of the original loan, the original contract interest rate and so forth. In the jurisdictions that have adopted a precise standard like the treasury bill rate or the original contract rate, the focus of the negotiation shifts to the value of the collateral or the length of repayment through the plan. Mathematically, the total yield to the creditor is adjusted by negotiation of one variable or another to reflect the market perceptions of lenders and the realities of individual debtors. Given the tremendous number of secured claims dealt with in Chapter 13 cases, the number actually litigated and resulting in reported decisions is negligible. Perhaps the chaos in the courts has produced a semblance of tranquility in the hallways.


 

1  541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

2  692 F.2d 427 (6th Cir. 1982).

 

3  692 F.2d at 431.

 

4  692 F.2d at 431.

 

5  692 F.2d at 431 n.3.

 

6  771 F.2d 119 (6th Cir. 1985).

 

7  771 F.2d at 123.

 

8  771 F.2d at 123 n.4.

 

9  878 F.2d 925 (6th Cir. 1989).

 

10  315 F.3d 671 (6th Cir. 2003).

 

11  315 F.3d at 676–78.

 

12  See In re Richards, 243 B.R. 15, 23 (Bankr. N.D. Ohio 1999) (Applying United States v. Arnold, 878 F.2d 925 (6th Cir. 1989), Cardinal Federal Savings & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985), and Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), cramdown interest rate is not contract rate of 20.95% nor is it the rate of interest for a high-risk borrower; rather the discount rate is “the conventional market rate for automobile loans in this region” determined by using “the midpoint of the average interest rate and the highest rate assessed on automobile loans in this region.” Court looks to a local Business Journal and selects the midpoint between the average interest rate for a 60-month automobile loan and the highest rate quoted for an automobile loan.); In re Glueck, 223 B.R. 514, 520–23 (Bankr. S.D. Ohio 1998) (Applying Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), Cardinal Federal Savings & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985), and United States v. Arnold, 878 F.2d 925 (6th Cir. 1989), current market rate for cramdown of undersecured car lender will be rebuttably presumed to be the contract rate unless contrary evidence is submitted. “In light of Memphis Bank, Colegrove and Arnold, this court must identify the appropriate interest rate to be paid on Household’s allowed secured claim based on the current market rate of interest for similar loans in the region. Household’s claim is partially unsecured, so the contract rate maximum set forth in Colegrove does not apply.” Because Memphis Bank adopted a “coerced loan” approach, “interests rates offered to low risk borrowers are not necessarily appropriate for cram down under § 1325(a)(5)(B).” The “current market rate” and “similar loans” language in Memphis Bank “requires the Court to establish an interest rate available to borrowers with similar creditor histories to that of the relevant debtors.” “If the debtor presents a plan with a proposed cram down interest rate below the contract rate, the court should require the debtor to present evidence that the creditor’s current market rate of interest is below the contract rate. . . . This approach results in a ‘rebuttable presumption’ that the contract rate of interest is appropriate for cram down under § 1325(a)(5)(B). . . . [E]vidence of the relevant creditor’s recent loan rate for similar loans within the region will be instrumental for setting the proper cram down interest rate. Absent such lender specific evidence, the contract rate of interest can be introduced as evidence of the appropriate market rate of interest for similar loans within the region . . . . If the parties present credible evidence that the market rate of interest for similar loans is different than the contract rate, the Court will adjust the cram down interest rate accordingly. . . . Household’s witnesses . . .  testified that the current market rate of interest for similar loans ranged from 18.95% to 24.95%. The Court believes that the reduced risk associated with Debtors’ payments to the Chapter 13 trustee, and discharge of debts on completion of their Chapter 13 plan supports the use of the interest rate at the low end of Household’s ‘range’, and will set 18.95% as the interest rate.”); In re Stanley, 216 B.R. 929, 931–32 (Bankr. S.D. Ohio 1997) (Applying Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), current market rate is not confined to the market for high risk auto loans but begins with a more conventional rate for various consumer loans and is then adjusted upward or downward to reflect special circumstances. “Memphis Bank instructs that this Court first determine the market rate and, if special circumstances exist, adjust up or down from the market rate when there is a substantial difference between the market rate and the contract rate, while clearly explaining the reasons for deviating from the market rate. . . . Confining the inquiry to automobile loans made to high risk borrowers, as First Lenders argues, eliminates any substantial difference between market rates and contract rates. . . . Even in the presence of special circumstances such an interpretation eviscerates Memphis Bank and guarantees that First Lenders receive the contract rate. Memphis Bank does not support such a predetermined result. . . . This Court, being ‘generally familiar with the current conventional rates on various types of consumer loans,’ . . . holds that 9 percent currently reflects the market rate for automobile loans in this region. Further, this Court finds no special circumstance exist[s] for deviating from the current 9 percent market rate.” The contract rate was 21%.); In re Cameron, 192 B.R. 880, 881 (Bankr. N.D. Ohio 1995) (Reconciling Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), Cardinal Federal Savings & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985), and United States v. Arnold, 878 F.2d 925 (6th Cir. 1989), undersecured claim holder is entitled to present value interest at the market rate without limitation, but oversecured creditor is entitled to market rate up to rate in the contract. “One can read Colegrove and Memphis Bank [Whitman] together to provide that when a creditor is undersecured, the market rate of interest should be used without limitation, but when the creditor is fully secured, the market rate should be used to the extent that it does not exceed the contract rate. The Sixth Circuit has apparently agreed with this interpretation [in Arnold ].”).

 

13  GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993); In re Felipe, 229 B.R. 489 (Bankr. S.D. Fla. 1998); In re Rivera, 144 B.R. 614 (Bankr. D.P.R. 1992).

 

14  GMAC v. Jones (In re Jones), 999 F.2d 63, 66–71 (3d Cir. 1993).

 

15  United Carolina Bank v. Hall, 993 F.2d 1126, 1130–31 (4th Cir. 1993).

 

16  GMAC v. Jones (In re Jones), 999 F.2d 63, 71 (3d Cir. 1993) (“In the absence of a stipulation regarding the creditor’s current rate for a loan of similar character, amount and duration, we believe it would be appropriate for bankruptcy courts to accept a plan utilizing the contract rate if the creditor fails to come forward with persuasive evidence that its current rate is in excess of the contract rate. Conversely, utilizing the same rebuttable presumption approach, if a debtor proposes a plan with a rate less than the contract rate, it would be appropriate, in the absence of a stipulation, for a bankruptcy court to require the debtor to come forward with some evidence that the creditor’s current rate is less than the contract rate.”). See Flood v. Chrysler Fin. Corp., No. CIV. 99-6309, 2000 WL 356376, at *2 (E.D. Pa. Apr. 6, 2000) (Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), cramdown interest rate is the contract rate when the debtor produces no evidence that this creditor’s current rate is less than the contract rate. “The proper interest rate to be charged in the Chapter 13 cramdown plan was a matter of law, and not a matter of factual dispute. . . . [T]he third circuit has held that a bankruptcy court should assume that the proper interest rate for a cramdown plan is the contract interest rate and that if the debtor believes that the creditor’s rate is less than the contract rate, she bears the burden of proving that fact. As such, it would not suffice for a debtor to try to prove other lenders may have lower rates. She must indeed establish that her creditor’s current lending rate is lower than her contract rate. . . . [T]he bankruptcy court properly granted summary judgment to Chrysler. The appropriate interest was not a disputed material fact as the third circuit has held that, as a ‘rule of practice,’ the contract rate of interest is the proper interest rate in a cramdown. The contract rate of interest is what Chrysler requested and was a part of the record available to the bankruptcy court at the time it rendered its judgment, as it was attached to Chrysler’s Proof of Claim. If [the debtor] believed that a lesser interest rate was applicable, she had the affirmative duty ‘to come forward with some evidence that the creditor’s current rate is less than the contract rate’ for a loan of a similar character, amount, and duration in her response to Chrysler’s motion. [The debtor] failed to do so. At the hearing on the summary judgment motion, she offered some newspaper articles which allegedly showed the ‘market rate for automobiles.’ . . . That proffer did not create a possible genuine issue of fact as to the rate Chrysler was then charging for loans like [the debtor’s].”); In re Vincente, 257 B.R. 168, 183 (Bankr. E.D. Pa. 2001) (Arguably in dicta, debtor failed to prove that 6% interest satisfied § 1325(a)(5). Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), the interest rate in the parties’ agreement is “presumptively the appropriate rate” when the debtor fails to provide any evidence to support a different rate.); Winston v. Chrysler Fin. Corp. (In re Winston), 236 B.R. 167, 172–73 (Bankr. E.D. Pa. 1999) (Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), “Neither party has presented any evidence tending to establish that the appropriate ‘market rate’ of a ‘coerced loan’ secured by the Car should be in excess of or less than the twenty (20%) percent rate set forth in the Contract.”); Peoples First Nat’l Bank v. Haraschak (In re Haraschak), 169 B.R. 325 (Bankr. M.D. Pa. 1994) (Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), in the absence of contrary evidence, the interest rate in the original mortgage contract controls the discount rate at confirmation under § 1325(a)(5)(B).).

 

17  United Carolina Bank v. Hall, 993 F.2d 1126, 1131 (4th Cir. 1993) (“Finally, so as to eliminate a windfall benefit to the secured creditor, the district court capped any interest rate used in the ‘cram down’ situation at the contract amount to which the secured creditor had originally agreed. . . . As a matter of equity, we agree with that limitation.”). Accord In re Ibarra, 235 B.R. 204, 215 (Bankr. D.P.R. 1999) (For § 1325(a)(5)(B)(ii) purposes, “in order to determine the present value of the claim to be paid under the plan, the appropriate discount rate to be applied at the date of confirmation is the market rate, that is, the interest on a loan disbursed in that region at that time which is similar in character, amount and duration. . . . The present value determination should include an interest rate which incorporates costs and fees, including profits, because the Creditor is not only being deprived of the funds but the business that could be generated as a result. However, to prevent a windfall to the secured creditor at the expense of the unsecured creditors, the interest amount should never exceed the amount of interest provided in the original contract as previously agreed upon by the parties. . . . Moreover, to reduce litigation expenses associated with an individualized discount rate determination, this Court adopts the rebuttable presumption that the contract rate is the proper interest rate in a Chapter 13 case.”).

 

18  See discussion of best-interests-of-creditors test beginning at § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.

 

19  See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.

 

20  United Carolina Bank v. Hall, 993 F.2d 1126, 1130 (4th Cir. 1993).

 

21  993 F.2d at 1130.

 

22  GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993).

 

23  United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993).

 

24  169 B.R. 329 (Bankr. W.D. Pa. 1994).

 

25  169 B.R. at 335.

 

26  DeSarno v. Allegheny (In re DeSarno), 89 F.3d 1123, 1129–30 (3d Cir. 1996).

 

27  For contracts entered into before October 22, 1994, the payment of interest on arrearages to an oversecured mortgage holder provided for under § 1322(b)(5) is required by the Supreme Court’s decision in Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993). See § 83.1  In General: Rake and Contracts before October 22, 1994.

 

28  In re Harris, 167 B.R. 813, 816–17 (Bankr. D.S.C. 1994).

 

29  No. 03-51675, 2003 WL 22399716 (Bankr. M.D.N.C. Oct. 14, 2003) (unpublished).

 

30  United Carolina Bank v. Hall, 993 F.2d 1126, 1130 (4th Cir. 1993).

 

31  2003 WL 22399716, at *2–*3.

 

32  See, e.g., Washington v. Abshire (In re Smith), 192 B.R. 563, 568 (Bankr. W.D. Okla. 1996) (Adopting GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), interest rate at cramdown is market rate—“the rate currently charged on like loans by the particular creditor which originally extended the credit and which will be required to extend the credit under the Chapter 13 plan.” “Rule of practice” that the inquiry begin with the contract rate is “logical and consistent with the statutory objective. Under this approach, Chapter 13 debtors who wish to pay interest under § 1325(a)(5)(B)(ii) at a rate below the contract rate must show that the creditor’s current market rate is below the contract rate. Similarly, a creditor who asserts a right to an interest rate greater than the original contract rate must prove the market rate has floated upward. In the absence of such evidence from either the creditor or the debtor, the market rate will be the contract rate.); In re Rienhardt, 187 B.R. 433, 436–37 (Bankr. N.D.N.Y. 1995) (Citing GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993) and United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993), current market rate with a presumption in favor of the contract rate is the present value factor for motor vehicles. “‘[O]nly by compensating the secured creditor at a rate it would voluntarily accept for a loan of similar character, amount and duration can the creditor be placed in the same position he would have been but for the cramdown.’ . . . [T]he market rate of interest is most appropriate. . . . [I]n the absence of evidence to the contrary, the contract rate is presumed to accurately reflect the market rate . . . where the collateral is a motor vehicle. Sales of motor vehicles usually involve short term contracts in which one would not anticipate a significant change in the market rate of interest during the term of the contract. . . . In this case, less than one and a half years had elapsed between the sales contract with Chrysler and the date Debtors filed their Petition, making it appropriate to require the Debtors to provide for a [contract] rate of 17.99% in their Plan. However, the Court wishes to emphasize that Chrysler is entitled to present evidence that the market rate is actually higher than the contract rate and should be applied to the ‘new loan’ being proposed in the Plan.”), overruled by GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997); In re Hollins, 185 B.R. 523, 526–27 (Bankr. N.D. Tex. 1995) (“This court . . . will apply the interest rate, as of the plan’s effective date, ‘for a loan similar in character, amount and duration to the credit which the creditor [must] extend under the plan’ [citing GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)]. . . . Section 1325(a)(5)(B)(ii) seeks to put the secured creditor in the same economic position it would have occupied had it received the allowed secured amount as of the plan’s effective date. . . . [T]he interest rate should incorporate opportunity costs for the creditor’s inability to re-loan these funds. . . . [A]n interest rate should compensate a secured creditor for lost profits. . . . Capping the interest rates at the contract rate appears inappropriate. . . . Neither will this court deduct for the bank’s traditional loanmaking expenses.”).

 

33  See, e.g., In re Smith, 192 B.R. 563, 568 (Bankr. W.D. Okla. 1996) (Adopting GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), interest rate at cramdown is market rate—“the rate currently charged on like loans by the particular creditor which originally extended the credit and which will be required to extend the credit under the Chapter 13 plan.”).

 

34  901 F.2d 858 (10th Cir. 1990) (In Chapter 12 cases, in the absence of “special circumstances such as the market rate being higher than the contract rate,” bankruptcy courts should use current market rate for similar loans in the region as the cramdown interest rate.).

 

35  See In re Oglesby, 221 B.R. 515, 523–24 (Bankr. D. Colo. 1998) (“This Court is bound by the precedent established in [Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990)] to accept the ‘coerced loan’ approach. Implementation of the ‘coerced loan’ approach is best achieved by viewing the ‘market rate of interest’ mandated by Hardzog, as the market rate for similar loans in the region which, at least as a benchmark, will be best exemplified by a particular creditor’s actual loans recently made in the marketplace in this region. . . . [A]ny evidence produced by a debtor can serve to reduce, or otherwise modify, the capitalization rate. . . . This Court will equate ‘similar’ loan with a loan that the creditor regularly extends to other borrowers who are not in bankruptcy but who are otherwise similarly situated to the debtor. This Court believes that this will be best exemplified by the actual, average rate charged by a particular creditor on loans it has recently and routinely extended to similarly situated borrowers in comparable transactions in this region.”); In re Segura, 218 B.R. 166, 173–76 (Bankr. N.D. Okla. 1998) (Applying Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990), and departing from [In re Smith, 192 B.R. 563 (Bankr. W.D. Okla. 1996),] adoption of GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), “the proper starting point for a cramdown interest rate is ‘the current market rate for similar loans made in the region at the time the new loan is made,’ where ‘similar loan’ means a loan by the particular secured creditor to a borrower with a credit record similar to that of the debtor at the time the original loan was made, and ‘current market rate’ is the rate at which the particular creditor charges for such ‘similar loans’ in the region, as of the effective date of the plan. The creditor objecting to the proposed interest rate has the burden of proving the breadth of its current rates and the criteria under which loans are made at such rates, and must establish why the debtor would fall within such rate criteria. Downward adjustment of such rate shall be made by the Court, if and when appropriate, in recognition of a debtor’s favorable attributes as a reorganized debtor, including the reduction in risk and servicing costs, if applicable. The debtor has the burden of establishing any additional actual avoided costs to the creditor, such as dealer overrides, etc., or proving other ‘special circumstances’ envisioned but not defined by Hardzog. Finally, according deference to the Tenth Circuit in Hardzog, and in fairness to debtors, this Court will consider the contract rate the maximum rate a debtor will be required to pay in a chapter 13 plan.” Court explains that Jones “has as its core the assumption that the creditor would reinvest the proceeds of liquidated collateral. Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997), however, requires that the present value of the sum representing the replacement value of the collateral, rather than the liquidation value, be paid out over the life of the chapter 13 plan. . . . Since Rash, the Jones rationale rests upon a faulty premise and is unfairly advantageous to the creditor.” In this case, the contract rate was 21%. Car lender’s current market rate for similar loans was 20.09%. Car lender paid overrides to car dealers for the referral of high risk borrowers, and it was appropriate to deduct the “average dealer override,” leaving a 19.2% interest rate. Court then found “improvements” in the debtor’s financial condition, including restructuring through the Chapter 13 plan, a decrease in the risk of default because of the Chapter 13 case, a wage deduction order, a reduction in the creditor’s serving costs and administration by a Chapter 13 trustee, supporting a further reduction of 2%, resulting in a rate of 17.2%.); In re Cheek, 195 B.R. 151, 153–54 (Bankr. W.D. Okla. 1996) (Current market rate for payment of secured claim of IRS is presumptively statutory underpayment rate found in 26 U.S.C. § 6621, adjusted if debtors offer evidence that a different rate is available in open market. “[T]he appropriate standard is the market rate of interest. Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990). . . . [I]n these circumstances there is no underlying agreement providing a contract rate of interest to serve as the presumptive market rate, unlike the situation in [In re Smith, 192 B.R. 563 (Bankr. W.D. Okla. 1996),] or [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993),] . . . . This court is of the view that utilizing the interest rate provided by 26 U.S.C. § 6621(a)(2) as the starting point, i.e. as the presumptive market rate of interest in cases such as this, subject to rebuttal, is consistent with the holding in Hardzog. Such an approach would permit debtors to offer evidence that a loan could be obtained at a lesser rate from another source in the region, the proceeds of which could be employed to pay the claim of USA. The rate provided by 26 U.S.C. § 6621(a)(2), of course, would be the ‘ceiling.’”); In re Mellema, 124 B.R. 103 (Bankr. D. Colo. 1991) (Applying Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990), the proper market rate of interest payable to secured claim holders at “cram down” in a Chapter 13 case is, in the absence of special circumstances, the prevailing market rate of interest used for similar loans in the region, best exemplified by loans recently made in the marketplace by this creditor or similar creditors. Special circumstances would include where the prevailing market rate of interest exceeds the creditor’s contract rate of interest—to avoid a windfall to the creditor, the lesser contract rate may be appropriate.).

 

36  See O’Connell v. Troy & Nichols, Inc. (In re Cabrera), 99 F.3d 684 (5th Cir. 1996) (Interest rate on arrearages is 10.5% contract rate. “On the facts presented here—and without opining on the correctness of the [In re Sauls, 161 B.R. 794 (Bankr. S.D. Tex. 1993),] rationale as applied to other cases—we believe the secured claim for the arrearage should bear interest at the rate provided for in the note rather than at the lower rate proposed by the Cabreras, in order to comply with the present value requirement of 11 U.S.C. § 1325(a)(5)(B)(ii).”).

 

37  Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211, 213 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998).

 

38  121 F.3d at 213–14.

 

39  See, e.g., In re Gray, 285 B.R. 379, 385 (Bankr. N.D. Tex. 2002) (Applying Green Tree Financial Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), the “rebuttable presumption in favor of the contract rate” requires 21% when there is no evidence of changes in interest rates between the 1999 contract date and the 2001 Chapter 13 petition.); In re Richard, 241 B.R. 403, 406, 409–10 (Bankr. E.D. Tex. 1999) (Applying Green Tree Financial Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), evidence from debtors’ economist with respect to riskless rates of interest could not overcome presumption of contract rate because expert did not consider lending practices specific to affected creditors. “Smithwick has not only established a rebuttable presumption that the interest rate utilized in the original contract between the parties is the proper rate to utilize for the purpose of complying with the requirements of § 1325(a)(5)(B)(ii), it is also imposed upon this Court a creditor-specific evidentiary standard for rebutting the contract rate presumption in Chapter 13 cases. Accordingly, in order to impose an interest rate other than the contract rate in a Chapter 13 case, a party must demonstrate by stipulation or by a preponderance of the evidence, that the proposed interest rate is that which is actually being received by the affected creditor for a loan made in the same geographic region and of similar character, duration and amount as of the effective date of the plan. . . . [M]ost Chapter 13 debtors will not possess the resources necessary to finance a full-scale litigation of the presumption issue . . . . Thus, the practical impact of Smithwick is that the contract rate will simply be substituted for whatever interest rate had been generally established in Chapter 13 cases in a particular court . . . . [S]uch a de facto resolution creates concern because it may not actually reflect the true economic realities of that particular debtor-creditor relationship and will likely be funded at the expense of other creditors of the estate. . . . [N]ow that [Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997)] requires that a Chapter 13 debtor pay the present value of a sum representing the replacement value of the collateral, as opposed to a lower liquidation value, the strict imposition of the [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)] methodology may be unfairly advantageous to the creditor.”).

 

40  105 F.3d 55 (2d Cir. 1997).

 

41  105 F.3d at 63–4.

 

42  See In re Laraway, No. 02-1150, 2003 WL 1342981 (Bankr. D. Vt. Mar. 17, 2003) (unpublished) (Applying GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997), property tax claim is entitled to interest at the treasury bill rate plus a 2% risk factor.); In re Dominick, 244 B.R. 51, 55 (Bankr. N.D.N.Y. 2000) (Applying Key Bank v. Milham, 141 F.3d 420 (2d Cir. 1998), and GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997), oversecured tax claim is entitled to interest at the state statutory rate through the date of confirmation and thereafter to a discount rate equal to the interest rate of a treasury instrument with an equivalent maturity to the plan plus a risk factor of 1%. “This court is mindful of the distinctions between the present case and Milham, but they do not rise to a level that compels a different result. This is especially true because the Milham computation includes a variable risk factor which is designed to accommodate any factual distinctions that may arise. . . . The risk factor in the present real property case is negligible. The creditor is oversecured and unlike personal property such as a motor vehicle, real property and the buildings attached thereto, are not as easily subject to damage and destruction. Even if a catastrophe should occur the land would still be of value such that the County would be oversecured. Therefore, this court holds that the proper risk factor in this case is 1%.”).

 

43  See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1  Able to Make Payments and Comply with Plan.

 

44  76 F.3d 179 (8th Cir. 1996).

 

45  Accord United States v. Arnold, 878 F.2d 925 (6th Cir. 1989), discussed above in this section.

 

46  76 F.3d at 180.

 

47  76 F.3d at 181.

 

48  See, e.g., In re Gorham, 247 B.R. 272, 275 (Bankr. W.D. Mo. 2000) (Reaffirming In re Ehrhardt, 240 B.R. 1 (Bankr. W.D. Mo. 1999), discount rate at cramdown in a Chapter 13 case is appropriately determined by local rule: “Local Rule 3084-1.E is predicated on the market rate approach and calculates market rate by combining a riskless investment component (the interest rate of a 30-year treasury bond) with a 3% risk component.”); In re Ehrhardt, 240 B.R. 1, 10 (Bankr. W.D. Mo. 1999) (Bankruptcy court earnestly defends local rule that fixes cram down interest rate at the rate for a 30-year treasury bond plus 2% adjusted semi-annually. “Our Local Rule 3084-1.E was established and implemented . . . to avoid the burdens on limited resources . . . while . . . attempting to adhere to the Eighth Circuit’s mandate that we apply a market rate of interest. . . . [A] local rule such as Rule 3084-1.E may seem contrary to the Eighth Circuit’s mandate that the market rate of interest be determined on a case-by-case basis. However, the cases in which the Eighth Circuit made that ruling did not call upon the Eighth Circuit to address the administrative problems peculiar to Chapter 13 cases by virtue of the sheer number of cases in Chapter 13 and the relatively small resources in Chapter 13 cases as compared to the typical Chapter 11 and 12 cases.”).

 

49  102 F.3d 874 (7th Cir. 1996).

 

50  102 F.3d at 875.

 

51  See 11 U.S.C. § 1129(b)(1)(A)(ii).

 

52  See, e.g., Onyx Acceptance Corp. v. Hartzol, No. 02 C 0733, 2002 WL 908714, at *3 (N.D. Ill. May 6, 2002) (unpublished) (Prime rate is presumptively the appropriate cramdown interest rate at confirmation in Chapter 13 cases; but debtor and creditor must be given opportunity to present evidence to overcome the presumption. “[T]he use of the prime rate for the cramdown of automobile loans is presumptively appropriate. . . . [T]he use of the prime rate will provide the secured creditor the ‘undubitable equivalence.’ However, the bankruptcy court must give the secured creditor or the debtor, whichever the case may be, the opportunity to rebut the presumption.”); In re Knight, 254 B.R. 227, 229–30 (Bankr. C.D. Ill. 2000) (With respect to cars, “[t]his Court finds that the majority of Courts which have addressed this issue have found that the appropriate rate of interest to be applied is the prime rate at the time of the filing of the Chapter 13 plan, plus an additional amount added for a risk factor. . . . The risk factor need not be large given the protections that creditors enjoy under Chapter 13 of the Bankruptcy Code. . . . [T]he appropriate risk premium in the cases now before it is 2 1/2% to be added to the prime rate.”); In re Scott, 248 B.R. 786, 790–93 (Bankr. N.D. Ill. 2000) (Prime rate is presumptively the appropriate discount rate at cramdown for an undersecured car lender in a Chapter 13 case because the replacement value required by [Associates Commercial Corp. v. Rash (In re Rash), 31 F.3d 325 (5th Cir. 1994)] includes a risk component. “[T]he decisions dealing with the proper ‘market rate’ for cramdown can be placed into three general approaches. Cost of funds. . . . [A]n interest rate equivalent to what the creditor would have to pay to borrow money . . . . New (“forced”) loan to the debtor. . . . [T]he interest rate that they would have obtained had they made new loans in the amount of the value of the collateral retained by the debtor. . . . ‘Risk plus’ formula. . . . [C]alculates the appropriate interest rate for cram down by adding a ‘risk factor’ interest premium to some standard measure of ‘risk-free’ lending. . . . [T]he Seventh Circuit’s rationale is that of the ‘forced loan’ decisions; [Koopmans v. Farm Credit Service of Mid-America, ACA, 102 F.2d 874 (7th Cir. 1996)] cites [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993)] for the proposition that the cramdown interest rate may be greater than the contract rate. . . . Elsewhere in the opinion, Koopmans states that the ‘market rate’ of interest to which the crammed down lender is entitled is ‘the price that it must pay to its own lenders, plus the costs of making and administering loans, plus reserves for bad debts’ . . . . The difficulty in applying Koopmans to the present case is that, in this case, the creditor’s claim is undersecured . . . . For such undersecured loans . . . the secured creditor is already compensated for the risk of non-repayment through the manner in which § 506(a) is applied. . . . [T]he Supreme Court determined in its Rash decision . . . that the value of a secured claim under § 506(a) should not be measured by the value that a secured creditor could obtain after taking possession of the collateral, but rather on the usually higher price that the debtor would have to pay to obtain a replacement for the collateral. Indeed, the Supreme Court explained that replacement value is required under § 506(a) precisely for the purpose of providing protection to the secured creditor against the risks that the debtor might not make the proposed plan payments and that the collateral might rapidly deteriorate in value. . . . [S]ince replacement value, in the context of automobile loans, generally provides the secured creditor risk-protection in the form of a substantially greater secured claim than the value the creditor would obtain on repossession outside of bankruptcy, a contract rate of interest cannot be applied to that claim without overcompensating the secured creditor. . . . The prime rate, as noted in Koopmans, is ‘the benchmark rate for the banks’ most creditworthy customer,’ but still ‘includes some compensation for the risk of non-repayment,’ 102 F.3d at 875, and so the prime rate is a presumptively appropriate one for the cramdown of automobile loans. . . . Of course, the prime rate will not be appropriate in all cases of cramdown. If, as in Koopmans, the claim is fully secured, there will be no risk protection included in amount of the secured claim.”); In re Carson, 227 B.R. 719, 723–24 (Bankr. S.D. Ind. 1998) (“The Court chooses to instead follow the lead of the Seventh Circuit in Koopmans v. Farm Credit Services of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996), and adopt a prime-plus rate. . . . [T]he prime rate is a better starting place than the T-bill rate, because no creditor (other than the United States government) borrows at the lower, risk-free T-bill rate. The best commercial borrowers pay the higher prime rate, and less credit-worthy commercial borrowers pay rates sometimes well above the prime rate. . . . The risk factor need not be large. . . . [C]reditors enjoy several protections against risk in Chapter 13. At confirmation, a Chapter 13 debtor must show that he is financially able to make all payments under the plan. The disclosure and review requirements of Chapter 13 provide creditors with an enhanced ability to assess the debtor’s ability to service debt. Wage orders can be used in Chapter 13 to eliminate the risk of a debtor inadvertently defaulting on a monthly payment. The risk of default on a Chapter 13 secured debt is further reduced by the debtor’s reduction of, or restructure of, unsecured debt. . . . [C]osts of collection, such as garnishment and self-help repossession, are eliminated in Chapter 13, and costs of administration are largely borne by the Chapter 13 trustee. The Second Circuit has chosen a risk premium of 1–3%, to be added to the appropriate T-bill rate. [GMAC v. Valenti (In re Valenti),] 105 F.3d 55 (2nd Cir. 1997) . . . . In Koopmans . . . the Seventh Circuit affirmed the lower court’s application of a 1.5% risk premium (to be added to the prime rate). . . . 1.5% , will be the standard for cases before this Court.”); In re Palmer, 224 B.R. 681, 684 (Bankr. S.D. Ill. 1998) (Koopmans v. Farm Credit Services of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996), endorsed the “coerced loan” method of determining cramdown interest rates in the Seventh Circuit, but Koopmans is “somewhat opaque concerning the method to be employed in determining a cram down rate.” The Seventh Circuit identified the “market rate of interest” for loans of equivalent duration and risk and “unequivocally rejected use of the parties’ original contract rate as either a minimum or maximum rate. . . . [A]ny of the various methods of calculating cram down rates is valid so long as credible evidence is introduced showing that the resulting rate constitutes the market rate of interest.” An evidentiary hearing was ordered to determine whether the rates argued by the parties were current market rates.); In re Jones, 219 B.R. 506, 509 (Bankr. N.D. Ill. 1998) (Adopting In re Hudock, 124 B.R. 532 (Bankr. N.D. Ill. 1991), discount rate at cramdown of an undersecured car lender is prime rate. “Judge Barliant’s thorough analysis of this issue in Hudock led him to conclude that the prime rate was an appropriate rate for discounting a secured creditors claim to present value. . . . Thus, the prime rate as of May 2, 1997 (the effective date of the plan) will be applied.”).

 

53  301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

54  301 F.3d at 592–93.

 

55  See § 112.2 [ Present Value After Till ] § 77.3  Present Value after Till.

 

56  In re Fowler, 903 F.2d 694, 697 (9th Cir. 1990).

 

57  903 F.2d at 697.

 

58  903 F.2d at 698.

 

59  See, e.g., In re Pluma, 289 B.R. 151, 156–57 (Bankr. S.D. Cal. 2003) (Market rate of interest used by the Ninth Circuit in a Chapter 12 case, In re Fowler, 903 F.2d 694 (9th Cir. 1990), is best implemented using the “formula approach” rather than the “similar loan approach” in a Chapter 13 case with respect to real property taxes. “[T]he formula approach lends itself to the unique aspects of a chapter 13 case where a debtor’s tax obligation is small relative to the value of the property involved, and where the taxing authority has a statutory right to a first priority position above all other lienholders. . . . [E]mphasis on the nature of the security, rather than the risk of default is appropriate in a chapter 13 case when determining the ‘risk factor’ under the formula approach.” Court accepts prime rate of 4.25% plus a risk factor of .01% for a tax claim of $1,932 secured by property valued at $260,000.); In re Williams, 273 B.R. 834, 837 (Bankr. S.D. Cal. 2002) (Applying market rate approach from In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503 (9th Cir. 1987), interest rate at confirmation with respect to a tax lien “is determined by starting with a base rate, either the prime rate or the rate on treasury obligations, and then adding a factor on the risk of default and the nature of the security.” Prime rate of 4.75% was increased to 4.8% to reflect low risk that first-priority tax lien would not be recovered in full.); In re Marquez, 270 B.R. 761, 769–772 (Bankr. D. Ariz. 2001) (“The Ninth Circuit has specifically approved the use of a formula approach in determining the cram down rate. In re Fowler, 903 F.2d 694 ([9th Cir.] 1990). . . . [T]he court will adopt a formula approach which uses the average interest rate for conventional used car loans for a 36 month term in this region as a base. . . . [A]n additional .75% should be added to the base as a risk premium. . . . [B]ecause ABC’s secured claim is the replacement rather than the liquidation value of the Dodge, adopting the ABC’s contract rate would overcompensate it for its claim at the expense of the unsecured creditors. . . . [T]he average regional interest rate for conventional used car loans is a more accurate measure of the interest rate associated with the used car market than the prime rate . . . . [C]onventional loan rates for used car purchases are now regularly published on the Internet . . . . Because the Dodge’s cram down value is its replacement value rather than its liquidation value, ABC is receiving greater risk protection than it would receive on repossession of the Dodge outside of Bankruptcy . . . . However, because ABC is now making a loan at a 100% loan to value ratio and because of the inherent risk in every Chapter 13 case that the plan may fail the court finds that a .75% should be added to the base rate as a risk premium.”).

 

60  709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984).

 

61  709 F.2d at 652.

 

62  See, e.g., EvaBank v. Baxter, 278 B.R. 867, 884–85 (N.D. Ala. 2002) (Applying United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984), bankruptcy court inappropriately imposed formula to determine interest rate at cramdown with respect to a car. “[T]his Court need not in this case decide that one method of ascertaining the prevailing market rate of interest required under Southern States is the method. . . . [T]here are no facts in the record before this Court on which the Bankruptcy Court could have ascertained whether . . . the five year treasury bill rate plus a three to five percent risk premium was appropriate for Debtor’s chapter 13 plan. . . . [A] one formula fits all approach for the interest rate factor for discounting payments over time to the § 506(a) valuation as of confirmation is . . . wrong.” District court holds that interest rate on the creditor’s proof of claim controls.), vacating, In re Baxter, 269 B.R. 458, 462 (Bankr. N.D. Ala. 2001) (Prevailing market rate from United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984) is determined at cramdown in a Chapter 13 case by applying the “formula method” from In re Hollinger, 245 B.R. 691 (Bankr. N.D. Fla. 2000). With respect to a 1996 Dodge Stratus, when plan stretches out original contract payoff two years, five-year treasury bill rate of 4.83% is adjusted by 5% to 9.83%. “Although the Court recognizes that a three to five percent risk premium may not be appropriate in all cases involving used cars, the Court believes that it is appropriate here in light of the risks involved in this case.”); In re Olson, 300 B.R. 96, 98 (Bankr. S.D. Ga. 2003) (When contract interest rate was 0% in August of 2001, cramdown rate at confirmation in December of 2002 is 12%—the “default rate” under local bankruptcy court rule. “The current, as of the date of filing, interest rate necessary for the creditor to receive the present value of the collateral controls, not the contract interest rate. . . . The interest rate in the contract of August 2001 has no bearing on the appropriate interest to be paid.”); In re Swafford, 296 B.R. 66, 69 (Bankr. N.D. Ga. 2002) (Applying In re Southern States Motor Inns, Inc., 702 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984), cramdown interest rate is prevailing market rate, which can only be determined after an evidentiary hearing. “The creditor is to be compensated for the risks associated with the anticipated payments under a plan through consideration of the length of time for payout, the quality of the security, and the risk of subsequent default. . . . [T]his determination would be further assisted by testimony regarding additional factors such as the debtor’s work history, job stability, cash flow, disposable income, existence of repeat bankruptcy filings, nature of Debtor’s unsecured debts, and plan contents, as well as current interest rates (cost of funds) and the original contract rate.”); In re Pledger, 275 B.R. 394, 398–99 (Bankr. N.D. Ala. 2002) (Cramdown interest rate is rebuttably presumed to be contract rate. Interpreting United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984), “this Court determines that the coerced loan approach is the best method for creditors to be ‘placed in as good a position as they would have been had the present value of their claims been paid immediately.’ . . . [A] rebuttable presumption should be created in favor of the original contract rate of interest. . . . [T]he burden of proof will be on the party seeking a deviation from the contract rate. . . . [T]he evidence to be presented as to the market rate is not restricted to loans made by the specific secured claimant. The market rate considers the lending practices of other lenders making loans of similar character, amount, and duration . . . using a regional perspective.”); In re Chiodo, 261 B.R. 499, 504 (Bankr. M.D. Fla. 2000) (Adopting In re Hollinger, 245 B.R. 691 (Bankr. N.D. Fla. 2000), cramdown interest rate for undersecured car lender is five-year treasury bill rate plus high-risk premium of 5%. “A high-risk premium of 5% is appropriate to address the possibility that [the debtor] may encounter future financial downturns. The high-risk premium also protects Tidewater from any loss due to the depreciating value of the car in the event Chiodo fails to make his Chapter 13 payments.”), rev’d on other grounds, No. 6:00-CV0396-3A06-JGG (M.D. Fla. May 30, 2001); In re Senior, 255 B.R. 794, 798–99 (Bankr. M.D. Fla. 2000) (Bankruptcy court attempts guidelines for implementing coerced loan approach to interest rates at cramdown in Chapter 13 cases. “Rather than continuing to rely on the parties to present evidence of a nonexistent market, the Court will establish clear parameters for that market and will provide a non-inclusive list of factors to be considered in fine tuning the cram-down interest rate. . . . [T]he proper cram-down interest rate to be paid out on a secured claim over the life of a three-year plan should fall between 9% and 13%. . . . [T]he proper cram-down interest rate to be paid out on a secured claim over the life of a plan longer than three years may vary between 11% and 15%. . . . In fine-tuning the interest rate, the Court will take into account any relevant factors, including, but not limited to, 1. The percentage of a creditor’s total claim that is secured by collateral as valued; 2. The percentage of a creditor’s unsecured claim to be paid out through pro rata distribution; 3. The age and condition of the collateral . . . 4. The number of prior cases filed by a debtor . . . and whether a debtor made any payments under those plans; 5. Whether a debtor has consistently maintained insurance . . . 6. The proximity of the date that the debt was incurred to the petition date. . . . [G]arden-variety Chapter 13 plans will not be adjusted. Only plans whose length-based interest rate fails to reflect a unique risk to a creditor or unique indices of creditworthiness of a debtor will be adjusted to a rate outside the range proper for a plan of that particular length. . . . The Court adds three caveats to the guidelines here established. . . . First, as a matter of policy, the Court will approve any post-petition outside financing for collateral that a debtor can obtain at an interest rate that results in a lower monthly payment than that deemed proper for a debtor’s particular plan under the above guidelines. . . . Second, the Court will generally not afford to a secured creditor a cram-down interest rate greater than the rate provided for by the original financing contract. . . . Finally, the Court will not impose these guidelines on interest rates not brought to it in dispute.” Because under the debtors’ plan car lender would receive no distributions in the first eight months after confirmation, cramdown interest rate is adjusted to 15% to reflect “heightened risk.”); In re Haskell, 252 B.R. 236, 241–42 (Bankr. M.D. Fla. 2000) (Oversecured tax claim is entitled to 18% statutory rate. “This Court adopts the dominant view and finds that the ‘current market rate’ of interest should be determined by the ‘coerced loan’ approach, whereby a court must look to interest rates charged by the creditor making a loan to a third party with similar terms, duration, collateral, and risk. In the current case, the evidence supports application of an eighteen percent (18%) interest rate. Florida Statute § 197.172 . . . sets forth the interest rate at which delinquent real estate taxes accrue.”); In re Hollinger, 245 B.R. 691, 693–98 (Bankr. N.D. Fla. 2000) (Adopting the formula method, appropriate interest rate at cramdown with respect to a used car is three to five points above the interest rate on a treasury bill of equivalent term to the Chapter 13 plan. “The federal circuit courts agree that a creditor should receive interest at the market rate to obtain the present value of its claim. . . . However, the circuits disagree on the proper method for determining the market rate. Some circuits hold that a cram down is essentially a ‘coerced loan’ and thus the interest rate under the terms of the parties’ contractual agreement (or a similar type of loan) is the proper measure of market rate. . . . Other circuits endorse a ‘formula’ method, applying the interest rate on risk-free investments such as United States Treasury notes and adding a risk premium specifically crafted toward the debtor. . . . A third approach used by some bankruptcy courts, the ‘cost of funds’ method, grants the secured creditor interest on its claim at the rate at which that creditor borrows capital.” Analyzing United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984), court concludes that the Eleventh Circuit has not adopted the coerced loan method as the exclusive measure of interest rates. “In the present case, the appropriate interest rate to be paid on a secured creditor’s claim in a reorganization case is the prevailing market rate using the factors laid out in Southern States. . . . [T]he formula method is the better approach because it uses an objective interest rate with risk points added for risks associated with a particular case. . . . In contrast, the coerced loan method is flawed because there is no market for the type of ‘loan’ made in a reorganization. . . . The coerced loan method has also been criticized for its inclusion of profit as part of the market rate of interest. . . . The coerced loan method thus overcompensates the creditor at the expense of the debtor’s estate. Further, the coerced loan method bases the interest rate on the creditor’s situation and is thus too subjective. . . . [T]he coerced loan method . . . hinders, not fosters economy because it necessitates holding evidentiary hearings regarding what the market would charge to make the proposed loan. . . . The court in [GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997),] found that most bankruptcy courts set a risk premium from one to three percent, based upon the debtor’s circumstances. . . . [T]hree risk points may be too low to protect HAFC’s interests because its security is a used vehicle. The value of a vehicle declines at a faster rate than other types of collateral . . . . [T]he risk premium for used vehicles should be three to five percent. Because the Debtor’s proposed interest rate is three to five risk points above the treasury rate, HAFC is receiving the present value of its claim through the plan payments. . . . I conclude that the most appropriate method for determination of the market rate is the formula method. The formula shall be calculated by using the United States treasury bill rate for a term equivalent to the Chapter 13 payout period and then adding a risk premium to reflect the quality of the security and the risk of subsequent default.”); In re Felipe, 229 B.R. 489, 490, 495 (Bankr. S.D. Fla. 1998) (“Because the Eleventh Circuit in [United States v. Southern States Motor Inns, Inc. (In re Southern States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983), cert. denied, 465 U.S. 1022, 104 S. Ct. 1275, 79 L. Ed. 2d 680 (1984),] clearly endorses a ‘coerced loan’ approach for Chapter 11 cases that is identical to the approach for Chapter 13 cases adopted by the Tenth Circuit in [Hardzog v. Federal Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990),] . . . this Court adopts the ‘coerced loan’ approach for determining the ‘current market rates’ of interest for allowed secured claims in Chapter 13 cramdown cases. Therefore, an evidentiary hearing must be held to determine what [this creditor] would charge third parties, with credit records similar to those of the Debtors, but for filing bankruptcy, over the same term, for the purchase of the same vehicle, in the same region.”); In re Sarkese, 189 B.R. 531, 537 (Bankr. M.D. Fla. 1995) (Eleventh Circuit requires “market rate.” Neither mortgage holder nor debtor provided any evidence. “The Court therefore turns to the agreement between the parties to calculate the appropriate interest rate. The mortgage and promissory note provided for a ten and one-half percent (10.5%) per annum [sic] interest rate.”).

 

63  See, e.g., In re Chang, 274 B.R. 295 (Bankr. D. Mass. 2002) (Oversecured tax lien is entitled to cramdown interest rate of “market rate plus”: annual rate of interest for a 30-year fixed rate mortgage at the time of confirmation plus a 1% risk factor based on the debtor’s history of defaults.); In re Ibarra, 235 B.R. 204, 215 (Bankr. D.P.R. 1999) (For § 1325(a)(5)(B)(ii) purposes, “in order to determine the present value of the claim to be paid under the plan, the appropriate discount rate to be applied at the date of confirmation is the market rate, that is, the interest on a loan disbursed in that region at that time which is similar in character, amount and duration. . . . The present value determination should include an interest rate which incorporates costs and fees, including profits, because the Creditor is not only being deprived of the funds but the business that could be generated as a result. However, to prevent a windfall to the secured creditor at the expense of the unsecured creditors, the interest amount should never exceed the amount of interest provided in the original contract as previously agreed upon by the parties. . . . Moreover, to reduce litigation expenses associated with an individualized discount rate determination, this Court adopts the rebuttable presumption that the contract rate is the proper interest rate in a Chapter 13 case.”); In re St. Cloud, 209 B.R. 801, 807, 808–09 (Bankr. D. Mass. 1997) (Cramdown interest rate should be “the current market rate for a loan similar to the original loan between the Debtor and the secured party that is now available to a reliable borrower with a good credit rating as of the date of the confirmation . . . [with] adjustments made to the base rate [to] adequately compensate the secured party for the forced nature of the extension of credit to Chapter 13 debtors, the 100 percent loan to value ratio, and the risks of additional defaults associated with a loan to a person with a poor credit record and a history of default. Thus, the Court may adjust the base rate through the application of various factors, including the type and value of the collateral, the terms of the plan, the debtor’s financial history and prospects, the lender’s risk factors and lost opportunity costs.” Court took “average annual interest rate for 30-year fixed residential mortgages” and added “one percentage point because of the Debtors’ history . . . one point because of the substantial prepetition mortgage arrearage . . . one percentage point because of the Debtors’ proposed balloon payment.” Because property was likely to appreciate and duration of plan was less than the original loan maturity date, 3% adjustment was sufficient. Court rejected “coerced loan” rate because “[i]t unfairly enhances the position of and profit to the lender. If the mortgagee were granted relief from the automatic stay to foreclose on its collateral, it would simply reinvest the monies realized from its foreclosure at the prevailing market rate. . . . [A] ‘coerced loan’ rate prejudices the debtor’s unsecured creditors . . . . This Court also rejects the ‘cost of funds’ approach as one that would be impossible to consistently apply with any degree of predictability.”).

 

64  In re Galvao, 183 B.R. 23, 26–27 (Bankr. D. Mass. 1995).

 

65  O’Connell v. Troy & Nichols, Inc. (In re Cabrera), 99 F.3d 684, 685 (5th Cir. 1996) (Interest rate on arrearages is 10.5% contract rate. “On the facts presented here—and without opining on the correctness of the [In re Sauls, 161 B.R. 794 (Bankr. S.D. Tex. 1993),] rationale as applied to other cases—we believe the secured claim for the arrearage should bear interest at the rate provided for in the note rather than at the lower rate proposed by the Cabreras, in order to comply with the present value requirement of 11 U.S.C. § 1325(a)(5)(B)(ii).”); Flood v. Chrysler Fin. Corp., No. CIV. 99-6309, 2000 WL 356376 (E.D. Pa. Apr. 6, 2000) (Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), cramdown interest rate is the contract rate when the debtor produces no evidence that this creditor’s current rate is less than the contract rate.); In re Vincente, 257 B.R. 168, 183 (Bankr. E.D. Pa. 2001) (Applying GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993), the interest rate in the parties’ agreement is “presumptively the appropriate rate” when the debtor fails to provide any evidence to support a different rate.); In re Kennedy, 177 B.R. 967 (Bankr. S.D. Ala. 1995) (In the absence of other evidence, the 27.9% “lawful commercial rate” charged in an automobile loan contract is allowed over the objection of the lender.); In re Smith, 42 B.R. 198 (Bankr. N.D. Ga. 1984); In re Frey, 34 B.R. 607 (Bankr. M.D. Pa. 1983), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Einspahr, 30 B.R. 356 (Bankr. E.D. Pa. 1983), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Evans, 20 B.R. 175 (Bankr. E.D. Pa. 1982), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Rogers, 6 B.R. 472 (Bankr. S.D. Iowa 1980); In re Smith, 4 B.R. 12 (Bankr. E.D.N.Y. 1980), overruled by GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997). See GMAC v. Chapman (In re Chapman), 135 B.R. 11 (Bankr. M.D. Pa. 1990) (“I believe that the 12.25% interest rate agreed to by the parties when the loan was taken should be used to amortize the cram down value of the vehicle. Taking into account the underlying purpose of the Code to provide the debtor with a fresh start, I can envision other cases where circumstances would warrant a lower interest rate than the contract rate. The essential goal is fairness to both the creditor and debtor.”).

 

66  See, e.g., In re Hudock, 124 B.R. 532 (Bankr. N.D. Ill. 1991), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); In re Richards, 106 B.R. 762 (Bankr. M.D. Ga. 1989).

 

67  See § 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1  Valuation, Claim Splitting and Dewsnup.

 

68  GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997); Fleet Fin., Inc. v. Ivey (In re Ivey), 147 B.R. 109 (M.D.N.C. 1992), overruled by United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993); In re Frost, 47 B.R. 961 (D. Kan. 1985); In re Baxter, 269 B.R. 458 (Bankr. N.D. Ala. 2001); In re Chiodo, 261 B.R. 499 (Bankr. M.D. Fla. 2000), rev’d on other grounds, No. 6:00-CV0396-3A06-JGG (M.D. Fla. May 30, 2001); In re Gorham, 247 B.R. 272 (Bankr. W.D. Mo. 2000); In re Hollinger, 245 B.R. 691 (Bankr. N.D. Fla. 2000); In re Dominick, 244 B.R. 51 (Bankr. N.D.N.Y. 2000); In re Ehrhardt, 240 B.R. 1 (Bankr. W.D. Mo. 1999); In re Dingley, 189 B.R. 264 (Bankr. N.D.N.Y. 1995); In re DeMaggio, 175 B.R. 144 (Bankr. D.N.H. 1994); Oglesby v. Associates Nat’l Mortgage Co. (In re Oglesby), 150 B.R. 620 (Bankr. E.D. Pa. 1993), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Breisch, 118 B.R. 271 (Bankr. E.D. Pa. 1990), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Lassiter, 104 B.R. 119 (Bankr. S.D. Iowa 1989); In re Mitchell, 77 B.R. 524 (Bankr. E.D. Pa. 1987), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Corliss, 43 B.R. 176 (Bankr. D. Or. 1984); In re Mitchell, 39 B.R. 696 (Bankr. D. Or. 1984); In re Fisher, 29 B.R. 542 (Bankr. D. Kan. 1983); In re Redeker, 27 B.R. 734 (Bankr. D. Kan. 1983); In re Jewell, 25 B.R. 44 (Bankr. D. Kan. 1982); GMAC v. Willis, 6 B.R. 555 (Bankr. N.D. Ill. 1980), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

69  See, e.g., In re Fisher, 29 B.R. 542 (Bankr. D. Kan. 1983).

 

70  See Dominion Bank v. Cassell (In re Cassell), 119 B.R. 89 (W.D. Va. 1990) (Court rejects the “treasury bills plus a risk factor” formula. The market rate is the proper discount rate for the payment of secured claims in a Chapter 13 case. It is appropriate to use a predetermined formula if the rate so determined is used merely as a rebuttable presumption of the market rate. Any such formula would “probably contain a base rate, possibly a prime rate or a treasury bill or bond rate, that would move in tandem with the market rate. The bankruptcy court, in initially determining the formula, would then add a factor to the base rate so that the sum of the two amounts equals the market rate as determined by testimony and other competent evidence. . . . The use of a formula would establish only a rebuttable presumption.”), overruled by United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993).

 

71  See, e.g., In re Redeker, 27 B.R. 734 (Bankr. D. Kan. 1983).

 

72  GMAC v. Valenti (In re Valenti), 105 F.3d 55, 64 (2d Cir. 1997) (“Market rate” is the appropriate cramdown interest rate in a Chapter 13 case, measured as “the rate on a United States Treasury instrument with a maturity equivalent to the repayment schedule under the debtor’s reorganization plan.”). Accord Fleet Fin., Inc. v. Ivey (In re Ivey), 147 B.R. 109, 117 (M.D.N.C. 1992) (“The yield on a treasury bond of like maturity to the plan.”), overruled by United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993); In re Baxter, 269 B.R. 458 (Bankr. N.D. Ala. 2001) (Five-year treasury bill rate matching the expected years of payment of car contract through plan.); In re Chiodo, 261 B.R. 499 (Bankr. M.D. Fla. 2000) (Five-year treasury bill rate.), rev’d on other grounds, No. 6:00-CV0396-3A06-JGG (M.D. Fla. May 30, 2001); In re Hollinger, 245 B.R. 691, 698 (Bankr. N.D. Fla. 2000) (“The formula shall be calculated by using the United States treasury bill rate for a term equivalent to the Chapter 13 payout period.”); In re Dominick, 244 B.R. 51 (Bankr. N.D.N.Y. 2000) (A discount rate equal to the interest rate of a treasury instrument with an equivalent maturity to the plan.); In re Dingley, 189 B.R. 264, 271 (Bankr. N.D.N.Y. 1995) (“[A] United States Treasury instrument (with a maturity that best matches the proposed payout term on the allowed secured claim).”); In re DeMaggio, 175 B.R. 144 (Bankr. D.N.H. 1994) (The government bond rate for a five-year bond.); In re Mitchell, 77 B.R. 524 (Bankr. E.D. Pa. 1987), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993).

 

73  GMAC v. Willis, 6 B.R. 555 (Bankr. N.D. Ill. 1980), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

74  In re Ehrhardt, 240 B.R. 1 (Bankr. W.D. Mo. 1999) (Bankruptcy court earnestly defends local rule that fixes cram down interest rate at the rate for a 30-year treasury bond plus 2% adjusted semi-annually.). Accord In re Gorham, 247 B.R. 272, 275 (Bankr. W.D. Mo. 2000) (Reaffirming In re Ehrhardt, 240 B.R. 1 (Bankr. W.D. Mo. 1999), discount rate at cramdown in a Chapter 13 case is appropriately determined by local rule: “Local Rule 3084-1.E is predicated on the market rate approach and calculates market rate by combining a riskless investment component (the interest rate of a 30-year treasury bond) with a 3% risk component.”).

 

75  29 B.R. 542 (Bankr. D. Kan. 1983). Accord In re Dominick, 244 B.R. 51, 55 (Bankr. N.D.N.Y. 2000) (Oversecured tax claim is entitled to a discount rate equal to the interest rate of a treasury instrument with an equivalent maturity to the plan plus a risk factor of 1%.); In re DeMaggio, 175 B.R. 144 (Bankr. D.N.H. 1994) (“Riskless rate”—the government bond rate for a five-year bond—plus 1% is the appropriate discount rate at confirmation for property tax lienholder.).

 

76  Fleet Fin., Inc. v. Ivey (In re Ivey), 147 B.R. 109 (M.D.N.C. 1992), overruled by United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993).

 

77  In re Breisch, 118 B.R. 271 (Bankr. E.D. Pa. 1990), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Mitchell, 77 B.R. 524 (Bankr. E.D. Pa. 1987), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993).

 

78  In re Ehrhardt, 240 B.R. 1 (Bankr. W.D. Mo. 1999).

 

79  In re Gorham, 247 B.R. 272 (Bankr. W.D. Mo. 2000).

 

80  In re Lassiter, 104 B.R. 119 (Bankr. S.D. Iowa 1989).

 

81  GMAC v. Willis, 6 B.R. 555 (Bankr. N.D. Ill. 1980), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

82  See, e.g., In re Baxter, 269 B.R. 458, 462 (Bankr. N.D. Ala. 2001) (“Although the Court recognizes that a three to five percent risk premium may not be appropriate in all cases involving used cars, the Court believes that it is appropriate here in light of the risks involved in this case.”); In re Chiodo, 261 B.R. 499 (Bankr. M.D. Fla. 2000) (Cramdown interest rate for undersecured car lender is five-year treasury bill rate plus high-risk premium of 5%.), rev’d on other grounds, No. 6:00-CV0396-3A06-JGG (M.D. Fla. May 30, 2001); In re Hollinger, 245 B.R. 691, 698 (Bankr. N.D. Fla. 2000) (“[T]he risk premium for used vehicles should be three to five percent . . . above the treasury rate.”).

 

83  GMAC v. Valenti (In re Valenti), 105 F.3d 55, 64 (2d Cir. 1997). Accord In re Laraway, No. 02-1150, 2003 WL 1342981 (Bankr. D. Vt. Mar. 17, 2003) (unpublished) (Applying GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997), property tax claim is entitled to interest at the treasury bill rate plus a 2% risk factor.); In re Dingley, 189 B.R. 264, 271 (Bankr. N.D.N.Y. 1995) (“[T]his court is persuaded that the rate on a United States Treasury instrument (with a maturity that best matches the proposed payout term on the allowed secured claim) with up to a three percent risk premium both provides present value and facilitates the expedient administration of cases.”).

 

84  520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997).

 

85  See §§ 109.1 [ Rash and Valuation ] § 76.5  Rash and Valuation and 110.1 [ Valuation after Rash ] § 76.6  Valuation after Rash.

 

86  See In re Marquez, 270 B.R. 761, 772 (Bankr. D. Ariz. 2001) (“Because the Dodge’s cram down value is its replacement value rather than its liquidation value, ABC is receiving greater risk protection than it would receive on repossession of the Dodge outside of Bankruptcy . . . . However, because ABC is now making a loan at a 100% loan to value ratio and because of the inherent risk in every Chapter 13 case that the plan may fail the court finds that a .75% should be added to the base rate as a risk premium.”); In re Scott, 248 B.R. 786, 792–93 (Bankr. N.D. Ill. 2000) (“[T]he Supreme Court determined in its [Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997)] decision . . . that the value of a secured claim under § 506(a) should not be measured by the value that a secured creditor could obtain after taking possession of the collateral, but rather on the usually higher price that the debtor would have to pay to obtain a replacement for the collateral. Indeed, the Supreme Court explained that replacement value is required under § 506(a) precisely for the purpose of providing protection to the secured creditor against the risks that the debtor might not make the proposed plan payments and that the collateral might rapidly deteriorate in value. . . . [S]ince replacement value, in the context of automobile loans, generally provides the secured creditor risk-protection in the form of a substantially greater secured claim than the value the creditor would obtain on repossession outside of bankruptcy, a contract rate of interest cannot be applied to that claim without overcompensating the secured creditor.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

87  See, e.g., In re Marquez, 270 B.R. 761, 769–772 (Bankr. D. Ariz. 2001) (“[T]he court will adopt a formula approach which uses the average interest rate for conventional used car loans for a 36 month term in this region as a base. . . . [T]he average regional interest rate for conventional used car loans is a more accurate measure of the interest rate associated with the used car market than the prime rate . . . . [C]onventional loan rates for used car purchases are now regularly published on the Internet.”); In re Richards, 243 B.R. 15 (Bankr. N.D. Ohio 1999) (Court looks to a local Business Journal and selects the midpoint between the average interest rate for a 60-month automobile loan and the highest rate quoted for an automobile loan.).

 

88  Corona v. IRS (In re Corona), 230 B.R. 204 (Bankr. N.D. Ga. 1997) (IRS’s secured claim is entitled to postpetition interest under § 1325(a)(5) at the rate set forth in 26 U.S.C. § 6621.); In re Johnson, 8 B.R. 503 (Bankr. S.D. Tex. 1981), overruled by Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998).

 

89  Rankin v. DeSarno (In re DeSarno), 89 F.3d 1123, 1129–30 (3d Cir. 1996) (Postpetition interest on oversecured tax lien accrues for purposes of § 1325(a)(5) at the state statutory rate. Prepetition interest accrues at 12% rate under Pennsylvania law. “[T]he district court plainly erred by looking solely to plaintiffs’ cost of funds in assessing the appropriateness of the proposed postpetition interest rates in this case. . . .  [T]o be properly compensated, consistent with [GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993),] postpetition interest rates must be set in accordance with the municipalities’ costs of maintaining their creditor relationship. . . . [T]he closest analog to the market loan in Jones is the statutory interest rate here. While the analog is not perfect, it is sufficient: an entity forced to delay payment that it is entitled to receive is, in effect, extending a loan. And the rate that the municipality charges for those that coerce loans by not paying their property tax bills is twelve percent. . . . Political and financial market forces will generally operate to keep the statutory rate reasonable.”); In re Haskell, 252 B.R. 236, 241–42 (Bankr. M.D. Fla. 2000) (Oversecured tax claim is entitled to 18% statutory rate. “This Court adopts the dominant view and finds that the ‘current market rate’ of interest should be determined by the ‘coerced loan’ approach, whereby a court must look to interest rates charged by the creditor making a loan to a third party with similar terms, duration, collateral, and risk. In the current case, the evidence supports application of an eighteen percent (18%) interest rate. Florida Statute § 197.172 . . . sets forth the interest rate at which delinquent real estate taxes accrue.”); In re Mitchell, 191 B.R. 957, 963 (Bankr. M.D. Ga. 1995) (“Not unlike the creditor in [In re Richards, 106 B.R. 762 (Bankr. M.D. Ga. 1989),] GMAC in the present case introduced no evidence of any other prevailing interest rate for any financial instrument other than that provided in the contract between the parties. . . . Therefore, the court finds that the appropriate interest which GMAC is entitled to receive on the allowed secured portion of its claim is the state legal rate of interest of twelve percent (12%) per annum.”); In re Clark, 168 B.R. 280, 284 (Bankr. W.D.N.Y. 1994) (The state statutory interest rate on judgments is the appropriate present value discount for city property taxes to be paid under § 1325(a)(5)(B)(ii). “[T]he New York State judgment interest rate is an appropriate post-confirmation interest rate under Section 1325(a)(5)(B)(ii) to be paid to the City of Rochester for unpaid taxes on a Chapter 13 debtor’s residence. . . . [I]t is a rate which New York State and this Court believe adequately compensates a creditor for the decrease in value of a claim caused by delayed payment. . . . [I]t will provide an administratively convenient rate for the payment of post-confirmation interest. . . . [I]t fairly compensates the City of Rochester for delayed payments. . . . [I]t will help stabilize City neighborhoods. . . . [I]t will not have a significant negative impact on the City’s ability to provide necessary services. . . . [I]t would not be inequitable to the City or its taxpayers.”), probably overruled by GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997); In re Johnston, 44 B.R. 667 (Bankr. W.D. Mo. 1984); In re Crockett, 3 B.R. 365 (Bankr. N.D. Ill. 1980), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

90  In re Klein, 10 B.R. 657 (Bankr. E.D.N.Y. 1981) (Using average of the legal rate in New York and the contract rate.), probably overruled by GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997); In re Kibler, 8 B.R. 957 (Bankr. D. Haw. 1981) (Using average of contract rate and the prevailing rate charged by credit unions.).

 

91  See In re Chang, 274 B.R. 295 (Bankr. D. Mass. 2002) (Oversecured tax lien is entitled to cramdown interest rate of “market rate plus”: annual rate of interest for a 30-year fixed rate mortgage at the time of confirmation plus a 1% risk factor based on the debtor’s history of defaults.); In re Senior, 255 B.R. 794, 798–99 (Bankr. M.D. Fla. 2000) (Bankruptcy court attempts guidelines for implementing coerced loan approach to interest rates at cramdown in Chapter 13 cases. “Rather than continuing to rely on the parties to present evidence of a nonexistent market, the Court will establish clear parameters for that market and will provide a non-inclusive list of factors to be considered in fine tuning the cram-down interest rate. . . . [T]he proper cram-down interest rate to be paid out on a secured claim over the life of a three-year plan should fall between 9% and 13%. . . . [T]he proper cram-down interest rate to be paid out on a secured claim over the life of a plan longer than three years may vary between 11% and 15%. . . . In fine-tuning the interest rate, the Court will take into account any relevant factors, including, but not limited to, 1. The percentage of a creditor’s total claim that is secured by collateral as valued; 2. The percentage of a creditor’s unsecured claim to be paid out through pro rata distribution; 3. The age and condition of the collateral . . . 4. The number of prior cases filed by a debtor . . . and whether a debtor made any payments under those plans; 5. Whether a debtor has consistently maintained insurance . . . 6. The proximity of the date that the debt was incurred to the petition date. . . . [G]arden-variety Chapter 13 plans will not be adjusted. Only plans whose length-based interest rate fails to reflect a unique risk to a creditor or unique indices of creditworthiness of a debtor will be adjusted to a rate outside the range proper for a plan of that particular length. . . . The Court adds three caveats to the guidelines here established. . . . First, as a matter of policy, the Court will approve any post-petition outside financing for collateral that a debtor can obtain at an interest rate that results in a lower monthly payment than that deemed proper for a debtor’s particular plan under the above guidelines. . . . Second, the Court will generally not afford to a secured creditor a cram-down interest rate greater than the rate provided for by the original financing contract. . . . Finally, the Court will not impose these guidelines on interest rates not brought to it in dispute.” Because under the debtors’ plan car lender would receive no distributions in the first eight months after confirmation, cramdown interest rate is adjusted to 15% to reflect “heightened risk.”); In re Collins, 167 B.R. 842, 844, 846 (Bankr. E.D. Tex. 1994) (Appropriate interest rate for car lender at confirmation under § 1325(a)(5)(B)(ii) is a base rate of interest reflecting a “risk free loan to which an additional risk factor of interest is added based on the relevant considerations of the case.” The debtor’s expert economist testified that “a weighted blend of the prevailing three month treasury bill rate . . . multiplied by a factor of one added to the prevailing three year treasury bill rate multiplied by a factor of three” produced the “risk free” discount rate for an investment over the term of four years. The debtor proposed to pay the creditor approximately 2.8% more than this base “risk free” discount rate—a premium which the court found was adequate to compensate the car lender for any risk inherent in the Chapter 13 plan. The court rejected the “coerced loan theory,” finding that the coerced loan theory and all “market rate” theories inappropriately include a lender’s profit and costs. “The pursuit of profit and recovery of loan related costs are not relevant to present value analysis in bankruptcy.”), overruled by Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998); In re Richards, 106 B.R. 762 (Bankr. M.D. Ga. 1989) (Rejecting contract rate, court accepts debtor’s proposal of 12%.); In re Ferrill, 137 B.R. 623 (Bankr. S.D. Miss. 1988) (“[T]he appropriate interest rate on deferred payments to each allowed secured creditor in a Chapter 13 plan is the lesser of . . . the contract rate, or the prevailing market rate for a loan of a term equal to the payout period, with due consideration of the quality of the security and the risk of subsequent default.”), overruled by Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998); In re Hugee, 54 B.R. 676 (Bankr. D.S.C. 1985), overruled by United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993) (In the absence of contrary evidence, 14% interest will adequately protect oversecured claim holder for any loss caused by the deferred payment of its claim.); In re Chapman, 51 B.R. 663 (Bankr. D.D.C. 1985) (When secured claim holder offered to grant debtor 20-year, 3% loan, debtor need pay no more than 3% interest on creditor’s secured claim to comply with present-value requirement.); American Bank v. Coburn, 36 B.R. 550 (Bankr. W.D. Mo. 1983) (Interest should be payable at the contract rate “up to the point where the total amount of principal, interest and fees and costs equal the value of the security. Thereafter, interest should be payable only at the ‘market rate’ or ‘legal rate’ on the principal balance or the value of the collateral, whichever is lower.”); In re Hatcher, 34 B.R. 566 (Bankr. W.D. La. 1983) (When the present yield on U.S. treasury bonds is approximately 10.90%, the reasonable capitalization rate for secured claims is 13%.), overruled by Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998); In re Moore, 29 B.R. 27 (Bankr. D. Colo. 1983) (“[T]his court tries to set an appropriate rate by considering all of the rates concerning the use of money and then attempts to approximate the present value of money which would neither provide the creditor a profit or cause the creditor to suffer a loss.”); In re Minguey, 10 B.R. 806 (Bankr. W.D. Wis. 1981) (Rate of interest must be determined by “equitable principles.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); GMAC v. Lum, 1 B.R. 186 (Bankr. E.D. Tenn. 1979) (Considering the Tennessee statutes and economic conditions, 10% is appropriate.). See also In re McLeod, 5 B.R. 520 (Bankr. N.D. Ga. 1980); Ford Motor Credit v. Miller, 4 B.R. 392 (Bankr. S.D. Cal. 1980).

 

92  See In re Fowler, 903 F.2d 694 (9th Cir. 1990) (In a Chapter 12 case, approves discount factor of prime rate plus a risk premium.); Onyx Acceptance Corp. v. Hartzol, No. 02 C 0733, 2002 WL 908714, at *3 (N.D. Ill. May 6, 2002) (unpublished) (Prime rate is presumptively the appropriate cramdown interest rate at confirmation in Chapter 13 cases; but debtor and creditor must be given opportunity to present evidence to overcome the presumption. “[T]he use of the prime rate for the cramdown of automobile loans is presumptively appropriate. . . . [T]he use of the prime rate will provide the secured creditor the ‘undubitable equivalence.’ However, the bankruptcy court must give the secured creditor or the debtor, whichever the case may be, the opportunity to rebut the presumption.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); Green Tree Fin. Servicing Corp. v. Smithwick, 202 B.R. 420, 423–24 (S.D. Tex. 1996) (Determination of cramdown interest rate is a finding of fact reviewed under the clearly erroneous standard; bankruptcy court did not err in fixing interest rate for an oversecured lender pursuant to a local rule at “two percent plus the prime rate set in the Money Rates Section of the Wall Street Journal on the date the petition initiating the Chapter 13 case was filed.” “Local Rule 3020(d) of the United States Bankruptcy Court for the Southern District of Texas is a rule of administrative, judicial, and economic convenience, and its formula for determining the discount rate properly reflects the time value of money as well as existing market conditions. . . . [W]here, as in the instant case, a lienholder participates in the bankruptcy proceeding, the creditor should know that its lien is likely to be affected, altered or extinguished. [Citing In re Penrod, 50 F.3d 459 (7th Cir. 1995)].”), rev’d, 121 F.3d 211 (5th Cir. 1997), cert. denied, 523 U.S. 1074, 118 S. Ct. 1516, 140 L. Ed. 2d 669 (1998); In re Pluma, 289 B.R. 151 (Bankr. S.D. Cal. 2003) (Market rate of interest used by the Ninth Circuit in a Chapter 12 case, In re Fowler, 903 F.2d 694 (9th Cir. 1990), is best implemented using the “formula approach.” Court accepts prime rate of 4.25% plus a risk factor of .01% for a tax claim of $1,932 secured by property valued at $260,000.); In re Williams, 273 B.R. 834, 837 (Bankr. S.D. Cal. 2002) (Applying market rate approach from In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503 (9th Cir. 1987), interest rate at confirmation with respect to a tax lien “is determined by starting with a base rate, either the prime rate or the rate on treasury obligations, and then adding a factor on the risk of default and the nature of the security.” Prime rate of 4.75% was increased to 4.8% to reflect low risk that first-priority tax lien would not be recovered in full.); In re Knight, 254 B.R. 227, 229–30 (Bankr. C.D. Ill. 2000) (Appropriate rate of interest at cramdown in a Chapter 13 case is the prime rate at the time of the filing of the case, plus an additional amount for a risk factor. “The risk factor need not be large given the protections that creditors enjoy under Chapter 13 . . . . [T]he appropriate risk premium in the cases now before it is 2 1/2% to be added to the prime rate.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); In re Scott, 248 B.R. 786, 792–93 (Bankr. N.D. Ill. 2000) (“The prime rate . . . is ‘the benchmark rate for the banks’ most creditworthy customer, but still ‘includes some compensation for the risk of non-repayment,’ . . . and so the prime rate is a presumptively appropriate one for the cramdown of automobile loans. . . . Of course, the prime rate will not be appropriate in all cases of cramdown.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); In re Jones, 219 B.R. 506, 509 (Bankr. N.D. Ill. 1998) (Adopting In re Hudock, 124 B.R. 532 (Bankr. N.D. Ill. 1991), discount rate at cramdown of an undersecured car lender is prime rate. “Judge Barliant’s thorough analysis of this issue in Hudock led him to conclude that the prime rate was an appropriate rate for discounting a secured creditor’s claim to present value. . . . Thus, the prime rate as of May 2, 1997 (the effective date of the plan) will be applied.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); In re Jordan, 130 B.R. 185 (Bankr. D.N.J. 1991), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993); In re Hudock, 124 B.R. 532 (Bankr. N.D. Ill. 1991), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004); In re Carson, 227 B.R. 719, 723–24 (Bankr. S.D. Ind. 1998) (“The Court chooses to instead follow the lead of the Seventh Circuit in Koopmans v. Farm Credit Servs. of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996), and adopt a prime-plus rate. . . . [T]he prime rate is a better starting place than the T-bill rate, because no creditor (other than the United States government) borrows at the lower, risk-free T-bill rate. The best commercial borrowers pay the higher prime rate, and less credit-worthy commercial borrowers pay rates sometimes well above the prime rate. . . . The risk factor need not be large. . . . [C]reditors enjoy several protections against risk in Chapter 13. At confirmation, a Chapter 13 debtor must show that he is financially able to make all payments under the plan. The disclosure and review requirements of Chapter 13 provide creditors with an enhanced ability to assess the debtor’s ability to service debt. Wage orders can be used in Chapter 13 to eliminate the risk of a debtor inadvertently defaulting on a monthly payment. The risk of default on a Chapter 13 secured debt is further reduced by the debtor’s reduction of, or restructure of, unsecured debt. . . . [C]osts of collection, such as garnishment and self-help repossession, are eliminated in Chapter 13, and costs of administration are largely borne by the Chapter 13 trustee. The Second Circuit has chosen a risk premium of 1–3%, to be added to the appropriate T-bill rate. [GMAC v. Valenti (In re Valenti),] 105 F.3d 55 (2nd Cir. 1997) . . . . In Koopmans . . . the Seventh Circuit affirmed the lower court’s application of a 1.5% risk premium (to be added to the prime rate). . . . 1.5% , will be the standard for cases before this Court.”), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004). See also American Gen. Fin., Inc. v. Kleinknecht, 230 B.R. 207, 210–12 (M.D. Ga. 1999) (Prime rate of 8.5% plus 3.5% adjustment for a total of 12% was sufficient to compensate lender for present value at cramdown notwithstanding contract rate of 22.9%. “[I]f a court truly wishes to leave a secured creditor in the same position that it would have been in had the collateral been surrendered, that court must take lost profits into consideration when calculating the appropriate interest rate in a Chapter 13 cram down. . . . Three different methods of selecting a cram down interest rate have emerged . . . . [A] ‘coerced loan’ theory, whereby a bankruptcy court uses the current market rate of interest for a similar loan in the region. . . . [T]he ‘cost of funds’ approach . . . a rate that will compensate a creditor for the expenses it incurs when it has to borrow money for new loans because of the debtor’s deferred payments. . . . [A] ‘formula’ method, where some risk-free rate, such as a U.S. Treasury Bond or the prime rate, is used as a baseline from which a risk premium is added to reflect the characteristics of the particular debt. . . . [T]his Court believes that either [the coerced loan or formula] approach is an appropriate method of selecting the applicable rate in a Chapter 13 cram down, so long as the bankruptcy court gives appropriate consideration to all relevant factors. In the instant case, the court below, using the formula approach, felt that a 12 percent rate of interest, where the prime rate as 8.5 percent, was sufficient to compensate the lender for the present value of its claim. . . . [I]n light of the fact that a significant equity cushion exists in this case, and the fact that the collateral is insured, the Court cannot say that a risk premium of 3.5 percent is too small.”).

 

93  124 B.R. 532, 534 (Bankr. N.D. Ill. 1991), probably overruled by In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).

 

94  130 B.R. 185, 190–91 (Bankr. D.N.J. 1991), overruled by GMAC v. Jones (In re Jones), 999 F.2d 63 (3d Cir. 1993).

 

95  GMAC v. Jones (In re Jones), 999 F.2d 63, 66–71 (3d Cir. 1993).

 

96  United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993).

 

97  The Seventh Circuit’s endorsement of a prime rate based discount calculation in Koopmans v. Farm Credit Servs. of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996), was luke-warm at best and was abandoned altogether in In re Till, 301 F.3d 583 (7th Cir. 2002), rev’d, 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004). See above in this section.

 

98  See 32 U.S.C. §§ 502 et seq.

 

99  Pub. L. No. 108-189, 117 Stat. 2835 (2003).

 

100  See, e.g., In re Watson, 292 B.R. 441, 443–44 (Bankr. S.D. Ga. 2003) (Chapter 13 debtor on active duty in the Army is covered by Soldiers and Sailors Civil Relief Act; interest rates in confirmed plan are reduced to 6% in absence of evidence that debtor is able to pay at 12% rate in plan. “The Debtor is entitled to the protections provided for in the SSCRA. 50 App. U.S.C.A. § 511, 516; 32 U.S.C.A. § 502. . . .  The Debtor is a member of the South Carolina Army National Guard and has been called to federal active duty in the United States Army for or in support of an operation during time of war. . . . Section 526 of the SSCRA applies to any interest-bearing obligation or liability incurred prior to the soldier’s entry into active duty and the interest rate reduction is automatic. The only exception to this reduced rate is if in the opinion of the court, and upon application by the obligee, the ability of the person in military service to pay interest in excess of 6% is not affected by reason of such service. . . . Generally, this requirement means that the person is making less money in the military than he did as a civilian. The lender bears the burden of showing that the serviceman has the ability to pay at the original interest rate. . . . These lenders have not brought forth any evidence suggesting that the Debtor is able to pay at the original interest rate of 12%. . . . Section 526 of the SSCRA applies to reduce the interest rates established on allowed secured claims in a debtor’s confirmed Chapter 13 plan.”).