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LEGAL INFORMATION INSTITUTE -- CORNELL LAW SCHOOL
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TILL V. SCS CREDIT CORP. (02-1016)
Web-accessible at:
http://supct.law.cornell.edu/supct/html/02-
1016.ZS.html
Argued December 2, 2003 -- Decided May 17, 2004
Opinion author: Stevens
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Under the so-called "cram down option" permitted by
the Bankruptcy Code, a Chapter 13 debtor's proposed debt
adjustment plan must provide each allowed, secured
creditor both a lien securing the claim and a promise of
future property disbursements whose total value, as of
the plan's date, "is not less than the [claim's] allowed
amount," 11 U.S.C. sect. 1325(a)(5)(B)(ii).When such
plans provide for installment payments, each installment
must be calibrated to ensure that the creditor receives
disbursements whose total present value equals or
exceeds that of the allowed claim. Respondent's retail
installment contract on petitioners' truck had a secured
value of $4,000 at the time petitioners filed a Chapter
13 petition. Petitioners' proposed debt adjustment plan
provided the amount that would be distributed to
creditors each month and that petitioners would pay an
annual 9.5% interest rate on respondent's secured claim.
This "prime-plus" or "formula rate" was reached by
augmenting the national prime rate of 8% to account for
the nonpayment risk posed by borrowers in petitioners'
financial position. In confirming the plan, the
Bankruptcy Court overruled respondent's objection that
it was entitled to its contract interest rate of 21%.
The District Court reversed, ruling that the 21%
"coerced loan rate" was appropriate because cram down
rates must be set at the level the creditor could have
obtained had it foreclosed on the loan, sold the
collateral, and reinvested the proceeds in equivalent
loans. The Seventh Circuit modified that approach,
holding that the original contract rate was a
"presumptive rate" that could be challenged with
evidence that a higher or lower rate should apply, and
remanding the case to the Bankruptcy Court to afford the
parties an opportunity to rebut the presumptive 21%
rate. The dissent proposed a "cost of funds rate" that
would simply ask what it would cost the creditor to
obtain the cash equivalent of the collateral from
another source.
Held: The judgment is reversed, and the case is
remanded.
301 F.3d 583, reversed and remanded.
Justice Stevens,
joined by Justice Souter, Justice Ginsburg, and Justice
Breyer, concluded that the prime-plus or formula rate
best meets the purposes of the Bankruptcy Code. Pp. 7-
18.
(a) The Code gives little guidance as to which of
the four interest rates advocated by opinions in this
case Congress intended when it adopted the cram down
provision. A debtor's promise of future payments is
worth less than an immediate lump sum payment because
the creditor cannot use the money right away, inflation
may cause the dollar's value to decline before the
debtor pays, and there is a nonpayment risk. In
choosing an interest rate sufficient to compensate the
creditor for such concerns, bankruptcy courts must
consider that: (1) Congress likely intended bankruptcy
judges and trustees to follow essentially the same
approach when choosing an appropriate interest rate
under any of the many Code provisions requiring a court
to discount a stream of deferred payments back to their
present dollar value; (2) Chapter 13 expressly
authorizes a bankruptcy court to modify the rights of a
creditor whose claim is secured by an interest in
anything other than the debtor's principal residence;
and (3) from a creditor's point of view, the cram down
provision mandates an objective rather than a subjective
inquiry. Pp. 7-10.
(b) These considerations lead to the conclusion
that the coerced loan, presumptive contract rate, and
cost of funds approaches should be rejected, since they
are complicated, impose significant evidentiary costs,
and aim to make each individual creditor whole rather
than to ensure that a debtor's payments have the
required present value. Pp. 10-12.
(c) The formula approach has none of these defects.
Taking its cue from ordinary lending practices, it looks
to the national prime rate, which reflects the financial
market's estimate of the amount a commercial bank should
charge a creditworthy commercial borrower to compensate
for the loan's opportunity costs, the inflation risk,
and the relatively slight default risk. A bankruptcy
court is then required to adjust the prime rate to
account for the greater nonpayment risk that bankrupt
debtors typically pose. Because that adjustment depends
on such factors as the estate's circumstances, the
security's nature, and the reorganization plan's
duration and feasibility, the court must hold a hearing
to permit the debtor and creditors to present evidence
about the appropriate risk adjustment. Unlike the other
approaches proposed in this case, the formula approach
entails a straightforward, familiar, and objective
inquiry, and minimizes the need for potentially costly
additional evidentiary hearings. The resulting prime-
plus rate also depends only on the state of financial
markets, the bankruptcy estate's circumstances, and the
loan's characteristics, not on the creditor's
circumstances or its prior interactions with the debtor.
The risk adjustment's proper scale is not before this
Court. The Bankruptcy Court approved 1.5% in this case,
and other courts have generally approved 1% to 3%, but
respondent claims a risk adjustment in this range is
inadequate. The issue need not be resolved here; it is
sufficient to note that courts must choose a rate high
enough to compensate a creditor for its risk but not so
high as to doom the bankruptcy plan.
Pp. 12-14.
Justice Thomas
concluded that the proposed 9.5% rate will sufficiently
compensate respondent for the fact that it is receiving
monthly payments rather than a lump sum payment, but
that 11 U.S.C. sect. 1325(a)(5)(B)(ii) does not require
that the proper interest rate reflect the risk of
nonpayment. Pp. 1-7.
(a) The plain language of sect. 1325(a)(5)(B)(ii)
requires a court to determine, first, the allowed amount
of the claim; second, what is the property to be
distributed under the plan; and third, the "value, as of
the effective date of the plan" of the property to be
distributed. This third requirement, which
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