• Secured Creditors' Rights in Chapter 11 Cramdown
  • November 24, 2017 | Author: Lawrence D. Coppel
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • Under Chapter 11 of the United States Bankruptcy Code, a secured creditor may be required to comply with a debtor’s plan of reorganization so long as the plan’s treatment of the secured claim is “fair and equitable.” If the plan proposes to pay the claim over a period of time, then the Bankruptcy Code provides that the creditor must receive the present value of its claim. However, the Bankruptcy Code does not specify how interest that must be paid on the claim is to be calculated. In a 2004 decision, the United States Supreme Court, in Till v. SC Credit Corp., held (in a plurality opinion) that the appropriate interest rate for a “cramdown” of a secured creditor should be calculated by using the national prime rate of interest and adjusting it upward to account for the risk of nonpayment. Till was a Chapter 13 case involving a $4,000 truck loan at a 21% contract rate. In a footnote, the Supreme Court noted that its “formula rate” may not be applicable to Chapter 11 where “it might make sense to ask what an efficient market would produce.” Nevertheless, since the decision in Till many bankruptcy courts have used the formula approach to calculate the interest rate to cramdown a secured creditor under a Chapter 11 plan. The formula rate is usually lower than the rate that would be charged if the debtor were to obtain exit financing. On October 20, 2017, the United States Court of Appeals for the Second Circuit reversed confirmation of a Chapter 11 plan that crammed down senior lien holders by using the formula rate. The Second Circuit held that the bankruptcy court should have used the market rate if it is shown by the creditors that an efficient market exists for comparable debt financing. The Second Circuit stated that it was not bound by the Till decision and referred to the Supreme Court’s footnote regarding whether the formula rate should be used in Chapter 11. The case was remanded so that the lower courts could consider whether an efficient market exists for the making of loans to a Chapter 11 debtor. The method of calculation of the interest rate for cramdown of a secured creditor’s claim is an open issue in the Fourth Circuit where Maryland is located. If the Second Circuit’s approach is followed, then secured creditors who prove that an efficient market exists for the making of loans to a Chapter 11 debtor should benefit by receiving a higher rate on their claims than would be the case if interest is calculated using the formula approach.