In fixing the interest rate to be imposed in a cramdown on a secured creditor, the Eighth Circuit holds that Till did not require using the prime rate as the starting point. As long as the risk-adjustment is adequate, the August 2 opinion allows the Treasury bill rate to be the starting point.
A family farmer in chapter 12 proposed a cramdown plan to compensate a secured lender who held a $595,000 mortgage on property worth $1.45 million. The loan had interest rates ranging from 3.5% to 7.6% on various tranches.
The lender and the debtor agreed on a 20-year loan to satisfy the secured claim in the chapter 12 plan. They disagreed about the interest rate.
The debtor proposed a 4% interest rate, derived by adding a 2% risk-adjustment to the 1.87% prime rate at the relevant time. The lender argued for a 5.25% rate, starting with the 3.25% prime rate at the time plus 2% for risk.
Bankruptcy Judge Anita L. Shodeen of Des Moines, Iowa, sided with the debtor and picked 4% as the interest rate on the secured claim under the plan. The lender appealed, but the district court affirmed. The lender appealed to the circuit, contending it was error to begin with the Treasury rate and saying that Till required starting with the prime rate. See Till v. SCS Credit Corp., 541 U.S. 465 (2004).
The parties agreed on using the so-called formula approach to fix the interest rate. The debtor advocated following U.S. v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989), a chapter 12 case. In his opinion for the appeals court, Circuit Judge Raymond Gruender explained that Doud was decided before Till and held that it was not clearly erroneous to begin with the Treasury rate and add a relevant risk-adjustment.
In the Supreme Court’s later Till decision, Judge Gruender said that the plurality “favored the formula approach, which it characterized as requiring a court to begin with the national prime rate and then adjust upward for the typically greater risk of nonpayment.” He went on to say:
Till did not explicitly analyze the merits of starting with the prime rate versus the treasury rate. The Court discussed the prime rate simply because that was what the formula-approach proponents used. As for the appropriate risk adjustment on top of the prime rate, the plurality did not decide; it merely observed that courts had generally approved adjustments of 1% to 3%.
Till, supra, 541 U.S. at 480.
Judge Gruender disagreed with “the proposition that the prime rate is the rate with which to start and that starting with the treasury rate is legal error.” [Emphasis in original.] He said that “Doud and Till are not cases about particular starting rates.”
Having found no error in starting with the Treasury rate, Judge Gruender said that “the appropriate risk adjustment depends on the risk already accounted for in the starting rate.” He cited a law review article for the proposition that the Treasury rate is risk-free and the prime rate includes a risk premium.
Consequently, Judge Gruender said that “the starting point will influence the risk adjustment” and that the lender’s argument “is simply a red herring.”
Reviewing for clear error, Judge Gruender found “none.” He said that the bankruptcy judge considered the length of the maturity period and the fact that the loan was “substantially over-secured.” The 4% rate approved by the bankruptcy court worked out to the 2% Treasury rate plus a 2% risk-adjustment.
Judge Gruender noted that the approved rate “happens to equal” the 3.25% prime rate plus “a modest risk adjustment of 0.75%.”
The appeals court affirmed Judge Shodeen’s judgment, because “focusing on the starting rate rather than the ultimate rate . . . was sufficient to ensure full payment on ‘the value, as of the effective date of the plan,’ of the secured claim. See § 1225(a)(5)(B)(ii).”
In fixing the interest rate to be imposed in a cramdown on a secured creditor, the Eighth Circuit holds that Till did not require using the prime rate as the starting point. As long as the risk-adjustment is adequate, the August 2 opinion allows the Treasury bill rate to be the starting point.
A family farmer in chapter 12 proposed a cramdown plan to compensate a secured lender who held a $595,000 mortgage on property worth $1.45 million. The loan had interest rates ranging from 3.5% to 7.6% on various tranches.
The lender and the debtor agreed on a 20-year loan to satisfy the secured claim in the chapter 12 plan. They disagreed about the interest rate.
The debtor proposed a 4% interest rate, derived by adding a 2% risk-adjustment to the 1.87% prime rate at the relevant time. The lender argued for a 5.25% rate, starting with the 3.25% prime rate at the time plus 2% for risk.