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INTEREST AND BANKRUPTCY
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
In re “Till” Rate Interest Chart
Till v. SCS Credit Corp. (US Sup Ct 05/17/04 – No. 02-1016) Four justices conclude that the “prime-plus” or “formula rate” best meets the purposes of the Bankruptcy Code’s cram down provision; because the proposed 9.5% interest rate is higher than the risk-free rate, it is sufficient to account for the time value of money, which is all 11 U.S.C. section 1325(a)(5)(B)(ii) requires.
WILL TILL APPLY IF INTEREST IS LOWER THAT PRIME? The Prime Plus Approach will still apply when the contract rate is lower than the prime rate. In Till, the original loan had an interest rate of 21.0% per annum. 541 U.S. at 470. The prime rate was significantly lower at approximately 8.0%. Id. at 471. Thus, after Till, courts began to question whether the Prime Plus Approach still applies when the contract rate of interest is lower than the prime rate; ultimately, however, they have concluded that the contract rate is irrelevant. See, e.g., In re Taranto, 365 B.R. 85, 90 (B.A.P. 6th Cir. 2007); In re Tirey, 350 B.R. at 69; In re Soards, 344 B.R. 829, 832 (Bankr. W.D. Ky. 2006). Indeed, “[s]imply stated, where the plan proposes to pay the secured claim in installments over time, the Till rate of interest must be added to the payment to arrive at the present value of the claim and the contract rate of interest is irrelevant to the analysis.” In re Soards, 344 B.R. at 832.
Till Interest rate: Treasury or Prime?
Source: Till Interest Rate for a Bankruptcy Plan: Start with Treasury Rate or Prime Rate (In re Topp), Donald L. Swanson, Koley Jessen, P.C. 9/26/23.
Farm Credit Services of America, FLCA v Topp (In re Topp), case no. 22-2577 (8th Cir., decided August 2, 2023; Petition for rehearing denied on September 20, 2023). Chapter 12. This bankruptcy appeal arises from a dispute between a farmer and his creditor over their proposed repayment plan. The two could not agree on the appropriate discount rate that should apply to the farmer’s deferred payments so as to satisfy the creditor’s present claim. Unsurprisingly, the farmer’s proposed rate was lower than his creditor’s. The bankruptcy court sided with the farmer. We do too.
The Dispute
Farmer and Creditor agree that an interest rate determination calls for a “market rate” or “formula” approach, which says the appropriate interest rate should consist of:
- a low-risk or risk-free rate; plus
- additional interest to compensate for risks posed by the plan.
Where the disputing parties disagree is over the proper low-risk or risk-free starting point: i.e., the treasury bond rate or the prime rate. Both rates are reported daily in such publications as the Wall Street Journal.
The case law cited for the dispute is this:
- Debtor cites United States v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989), for the treasury rate; and
- Creditor cites Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (plurality opinion), for the prime rate.
Choosing Treasury Rate
Neither Doud nor Till chooses between the treasury rate or the prime rate.
–Doud
Doud approves starting with the treasury rate. But Doud does not actually choose between competing starting points:
- Doud affirms the bankruptcy court’s choice of an overall rate beginning with the treasury rate as not clearly erroneous, since the bankruptcy court provides a rational analysis of its preference for starting with the treasury rate; and
- around that time (the late 1980s and early 1990s), many courts are starting with the treasury rate before adjusting upward for risk.
–Till
Till comes later, in 2004. Around that time, some courts take a non-formula approach. But Till’s plurality favors the formula approach—characterized as beginning with the national prime rate and then adjusting upward for the risk of nonpayment in a bankruptcy.
But, like Doud, Till does not consider the merits of starting with the prime rate versus the treasury rate. Till’s plurality discusses the prime rate simply because that is the formula-approach used in that case.
As for the appropriate risk adjustment on top of the prime rate, the plurality does not decide: it merely observes that courts generally approve adjustments of 1% to 3%.
Onink v. Cardelucci (04/12/02 – No. 00-56541) (9th Cir. April 12, 2002) Awards of post-petition interest to creditors are to be calculated using the federal judgment interest rate, and not the rate set forth in the parties’ contract or state law; use of federal rate promotes uniformity of law and fairness among creditors, and does not violate due process. Court concluded that 11 USC Section 726(a)(5) mandates the use of federal judgment rate, rather than contract interest rate. Federal interest rate is calculated pursuant to 28 U.S.C. Section 1961(a). The issue is post-petition interest on a pre-petition judgment which was affirmed in the BK. Question – use judgment interest rate or BK (federal interest)?
In re Brown, 346 B.R. 246 (Bkrtcy.M.D.Ga. 2006) SECURED CREDITOR WITH PMSI FOR MOTOR VEHICLE IS ENTITLED TO PAYMENT IN FULL IN CHAPTER 13 WITH INTEREST BECAUSE ANTI-CRAMDOWN PROVISION DID NOT AFFECT SECURED STATUS UNDER § 506: INTEREST WOULD BE NOT THE CONTRACT RATE BUT “TILL” FORMULA § 506, § 1325(a) Debtor proposed to pay PMSI claim in full but at 7% interest, and argued that language of § 1325(a) removed the claim from status as a “secured claim” as provided at § 506. Court held that § 1325 prohibits cramdown and does not remove the claim from status as a secured claim. Creditor argued interest rate should 19% as provided in PMSI contract; court rejected that argument and held that the proper interest rate is that calculated pursuant to Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951 (2004).
Losing Momentive: A Roadmap to Higher Cramdown Interest Rates, explored how the judicial cramdown interest rate cap was not gaining widespread traction as feared by many in response to the 2014 Momentive bench ruling upheld in a 2015 decision by the District Court for the Southern District of New York. Advancing the “efficient market” approach beyond the Ninth Circuit roadmap for higher interest rates, the Second Circuit has now reversed the District Court order and joined the Sixth Circuit in adopting the “efficient market” approach to setting cramdown interest rates. Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, LLC)
Authors: David L. Lawton and Shannon Wolf
Do creditors receive interest on their claims in bankruptcy? It depends on several factors, such as: whether the claim is secured or unsecured, is the interest pre or post-petition (date of filing the bankruptcy), and whether the debtor is solvent or insolvent.
Unsecured creditors: are entitled to claim the interest owed as of the date the bankruptcy was filed, but not after that date, unless there is money left after all the allowed claims are paid. In that rare situation interest will be paid at the legal rate. Usually interest paid on pre-petition debt is the contract rate, so long as that rate is enforceable under the applicable law.
Secured creditors: are usually paid pre-petition interest at the contract rate. The Bankruptcy Code provides for payment of post-petition interest to creditors if the debt is less than the value of the collateral “oversecured”. If the value of the collateral is less than the claim amount, the creditor is not entitled to post-petition interest “undersecured”.
Solvent debtors must pay unimpaired, unsecured creditors post-petition interest at the contract rate
US Court of Appeals for the Ninth Circuit’s recent decision in In re PG&E Corp.,46 F.4th 1047 (9th Cir. 2022) holding that solvent debtors must pay unimpaired, unsecured creditors post-petition interest at the contract rate, as opposed to the federal judgment rate.
Equitable Factors Result in Disallowance of Default Interest on a Fully Secured Claim
In re Family Pharmacy Inc., 18-60521 (Bankr. W.D. Mo. July 2, 2019) (8th Cir) Chief Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo., drew a roadmap telling subordinate creditors how to block a fully secured lender from collecting default interest. Conversely, her July 3 opinion is a tutorial advising secured lenders on tactics to improve the chance of being paid default interest.
