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Reevaluating Risk and Return in Chapter 11 Secured Creditor Cramdowns: Interest Rates and Beyond.

ABSTRACT

To confirm a chapter 11 plan over the objection of a secured creditor, the bankruptcy court must find that the plan treats the secured creditor fairly and equitably by, among other things, providing deferred cash payments with a pre' sent value of at least the amount of the secured portion of the claim. This "present value" requirement is generally understood to mean that the debtor must pay interest on deferred amounts at a rate equal to an appropriate discount rate. While there is some variation in the approaches courts use, most strive to identify the prevailing market rate for similar loans and then adjust (usually upward) to offset plan-related risks.

We believe that the prevailing approaches are misguided. For one thing, the interest rates these approaches generate fail to properly balance risk and return. More broadly, by focusing solely on interest as a means of compensating and protecting crammed-down secured creditors, they blind courts to other measures that can provide fairer and more efficient risk-offsets. To achieve these ends, we advocate for redesigning the framework courts currently use. To do so, we examine the economic risks that are inherent in the secured commercial lending relationship, both in and out of bankruptcy. Drawing from this understanding, a new and more rational approach emerges that will not only protect crammed-down secured creditors but will do so without unduly threatening plan feasibility or unfairly disadvantaging other creditors. Our findings are relevant not only to cramdowns but might also contribute to a deeper understanding of secured-creditor entitlements in a broader sense.
TABLE OF CONTENTS

Introduction
I.   A Hypothetical Case
II.  Background: Risks Faced by Secured Creditors
     A. Fraud and Credit Risks
     B. Time Value of Money and Inflation Risk
     C. Collateral Risk
     D. Prepayment Risk
     E. Investment Opportunity Risk
III. Analysis: Chapter 11 Secured-Creditor Cramdown Plans
     A. Secured-Creditor Cramdown Plans: Basic Elements
        1. Cash Payments
        2. Present Value
        3. Fixed Rate
        4. Feasibility
     B. Early Legislative and Judicial History of the
        Fair-and-Equitable Requirement
     C. The Circuit Court Search for a Market Rate
     D. The Supreme Court's Decision in Till
        1. Factual Background & Proceedings in the Lower Courts
        2. Three Supreme Court Opinions
           a. The Plurality Opinion
           b. The Concurring Opinion
           c. The Dissenting Opinion
        3. What is Tills Precedential Value, if Any?
     E. Circuit Court Cases After Till
     F. Recent Reform Proposals
IV.  Discussion: A Better Approach to Secured-creditor Risk Protection
     A. The Crammed-Down Secured Creditor's Increased Risks.
     B. The Limitations of Interest Payments for Controlling Risk
     C. Setting the Base Rate
     D. Addressing the Collateral Risk
     E. Addressing Lost Opportunity Costs, Transaction Costs,
        and Other Relevant Factors
     F. Summary of the Proposed Approach
V.   Conclusion


INTRODUCTION

When a bankruptcy court confirms (or "crams down") (1) a chapter 11 (2) plan of reorganization over the objection of a secured creditor, it must find, among other things, that the plan complies with the Bankruptcy Code's requirement that the creditor receive "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property." (3) Essentially, the court must find that the plan payments have a present value as of the effective date, using an appropriate discount rate, of at least the amount of the secured claim. Plans generally satisfy this requirement by providing that the deferred principal amount will bear interest at a rate equal to the discount rate.

Unfortunately, the Bankruptcy Code gives no statutory guidance for choosing or evaluating a discount or interest rate for cram-down purposes. (4) Over the years, secured creditors have pointed out the many risks they face under cramdown plans and have pushed for higher interest rates to compensate for the added risk. In seeking to identify an appropriate rate, courts have come to varying and inconsistent conclusions, leaving this body of case law in disarray. For instance, some courts conclude that a plan rate should not compensate for lost profit or the creditor's costs with respect to the loan; (5) other courts adopt a contrary stance, authorizing rates that clearly include these components. (6)

The Supreme Court had an opportunity to bring clarity to this area of law in 2004 when it decided Till v. SCS Credit Corp. (7) While Till was a consumer bankruptcy case presenting the question of the appropriate rate under a chapter 13 plan, the cram-down requirements in chapter 13 are very similar to those in chapter 11. Thus, many hoped that this decision would provide cohesive guidance for all reorganization cases.

Unfortunately, the Supreme Court rendered a fractured decision. A four-justice plurality believed that the claim should bear interest at a rate determined by a "'formula approach," which involves adding a risk adjustment to the U.S. prime rate. (8) The opinion did not explain how a court should make the adjustment, noting only that courts have approved upward adjustments of one to three percentage points. A concurring opinion argued for a risk-free rate with no risk adjustment. (9) Finally, a four-justice dissent believed that the rate should be presumptively equal to the prepetition contract rate, subject to adjustment for plan-related risks. (10) Thus, the justices in both the plurality and the dissent agreed that it is appropriate for a court to make risk adjustments. Otherwise, the case provided no clear rule for chapter 13 cases, much less for chapter 11 cases.

The plurality in Till further suggested in dictum that, in a chapter 11 cramdown, a court may determine whether there is an efficient market for loans similar to the secured claim in question and use the prevailing market rate or, if no such market exists, use the formula approach. (11) The circuit courts of appeal that have addressed the issue since Till have generally followed this recommendation. (12) And, while many commentators have weighed in with criticisms and proposals for reform, they have tended to focus narrowly on the mechanics of interest-rate determination rather than on the deeper assumptions underlying the jurisprudential framework.

It is time to take a step back and consider the fundamental underpinnings of this approach, including a broader understanding of secured-creditor risk, return, and entitlement. In doing so, we believe it will reveal that the prevailing approach is inconsistent with the Bankruptcy Code and fails to properly balance risk and return. Under the present approach, courts have focused too much on a quest to find the prevailing market rate and, as a result, have ignored other essential components of the fair-and-equitable analysis. In particular, they have evaluated rates in isolation from other factors that bear on whether the plan is fair and equitable, including whether the creditor has already been compensated for risk and its costs by other means. In fact, compensation for risk may be better managed through other devices. Armed with a more sophisticated understanding of risk and return, bankruptcy courts will be able to engage in a more precise, risk-centered inquiry that the present-value analysis demands. The threshold inquiry should be whether the crammed-down secured creditors continuing lien provides adequate protection. Then, with respect to the plan interest rate, courts should begin with the yield on Treasury securities with a remaining term to maturity that is equal to the plan term. Courts should subject this base rate to upward-only adjustments, expressly identifying the relevant factors with sup porting evidence. We suggest a nonexclusive list of factors that courts might consider.

At the outset, we acknowledge that a flexible, multi-factor approach of this sort might introduce undesirable levels of uncertainty and unpredictability, but we believe that the Bankruptcy Code calls for a more principled analysis. Furthermore, the current state of the law is far from a model of certainty and predictability, much less logical consistency. Over time, as courts and litigants apply the framework to a variety of cram-down scenarios and expressly identify the reasons for adjustments, they will generate a baseline level of understanding that will help guide settlements in future cases, thereby driving down costs and inefficiencies.

Finally, it is important to note that our analysis is based on the current language of the Bankruptcy Code. Congress used a rather arcane formulation in the secured-creditor cram-down provisions. Had Congress intended to require interest at the prevailing market rate for a similar loan, at the applicable prebankruptcy contract rate or at the prime rate plus a risk adjustment, it could have said so in much simpler terms than the current statutory language. The fact that it chose not to do so must be considered in applying the statute.

Part I of this article presents a hypothetical case, highlighting some of the issues and inconsistencies in the way courts and litigants have assessed secured-creditor risks and entitlements in chapter 11. Part II introduces some of the risks faced by secured creditors in the ordinary course of their commercial lending transactions, both in and outside of bankruptcy. Part III explores the murky jurisprudence surrounding secured-creditor cramdowns and how best to compensate the secured creditors increased risk through plan interest payments. Part IV offers what we believe is a more nuanced assessment of both the ways in which the debtor's financial distress and bankruptcy amplify the secured creditor's risk, as well as the ways in which the plan may compensate for or protect against these risks. Our approach is designed to be responsive to the basic principles that have been articulated both by courts and the drafters of the Bankruptcy Code and to be fairer and more equitable to all parties to the bankruptcy case. Part V concludes with a reconsideration of the hypothetical case, applying the recommended analysis.

I. A HYPOTHETICAL CASE

Imagine that a company in financial distress has filed a voluntary petition under chapter 11 of the Bankruptcy Code. Like most "persons" (13) who seek federal bankruptcy protection, the company is insolvent. (14) Among its many debts, the company owes its senior secured bank lender approximately twenty million dollars in outstanding principal and interest. The bank's loan is secured by, among other things, a lien on the company's real property, presently worth twenty-four million dollars. (15)

Because of its failure to comply with financial covenants in the credit agreement, the company had been in technical default of its obligations to the bank for several months before its bankruptcy filing. After negotiations failed to generate an out-of-court restructuring, the bank accelerated the debt, rendering it immediately due and payable. (16) The company sought bankruptcy protection to prevent the bank from exercising its other remedies. (17) The company now hopes to gain court approval of a plan that will enable it to retain its productive property (including the bank's collateral), shed some of its unsecured debts, and continue to service secured debt on more advantageous terms.

Predictably, the relationship between the now-bankrupt company and the bank has broken down. Soon after the case commenced, the bank submitted a proof of claim (18) setting forth the debtor's (19) obligations under the loan documents, including a so-called yield-maintenance (or "make-whole") prepayment premium of approximately four million dollars. Under the relevant provisions of the promissory note, (20) the debtor is required to pay the premium upon prepayment of the debt or acceleration of the debt upon default. According to the premium provision in the loan agreement, typical of premiums required in long-term fixed-rate commercial loans, the amount payable is:
   the difference between (a) the then present value of all unpaid
   installments of principal and interest due and payable
   under this Note, calculated from the date of the proposed
   prepayment to the Maturity Date, discounted at the "Reinvestment
   Rate" (as hereinafter defined) and (b) the outstanding
   principal balance under this Note on the date of the
   proposed prepayment....

....

   "Reinvestment Rate" shall be the yield to maturity on a
   United States Treasury bond or note (the choice of which
   security to be used for such purposes being in the sole discretion
   of [Lender]) having a maturity date [closest to the Maturity
   Date of the Note]. (21)


By compensating the bank for the yield lost because of the company's default or prepayment, yield-maintenance provisions of this sort enable lenders to receive their bargained-for yields even if they reinvest the prepaid funds in Treasury securities (22) rather than in riskier, higher-yield investments.

Our hypothetical debtor moved to disallow (23) the bank's yield-maintenance claim on the ground that it is unreasonable to calculate the premium with reference to a reinvestment factor based on the relatively low Treasury rate rather than the substantially higher yields for commercial loans, which would result in a lower premium. The debtor also argued that the yield-maintenance claim failed to account for the bank's own potential mitigation of its damages by doing exactly what it is in the business of doing: reinvesting the prepaid funds in a similar commercial-loan transaction in a comparable market. (24)

In response to the debtors objection, (25) the bank emphasized that the yield-maintenance premium is provided for under the plain language of the promissory note. (26) It framed the issue as one of certainty, efficiency, and freedom of contract. First, it argued that there is no guarantee that it would be able to extend commercial credit to another borrower on similar terms. Second, there is no published yield benchmark for commercial loans: "Thus, the only way to avoid extensive litigation over the appropriate amount of the accelerated debt is to use a benchmark such as a Treasury rate, which is easily ascertainable, published every business day by the United States government, and not subject to the risk factors inherent in commercial loans." (27) And finally, the loan was negotiated at arm's length between sophisticated parties represented by counsel; the debtor "agreed to bear the risk of interest rate fluctuations and the Court should not rewrite the contract to redistribute that risk." (28) In essence, the bank argued that, to the extent the court disallowed the yield-maintenance claim, it would be "retroactively grant[ing] Debtor the license to gamble with [the creditor's] money regarding the discount rate to be applicable to the prepayment premium." (29) Finding the bank's arguments convincing, the court upheld the bank's yield-maintenance claim.

After negotiations failed to produce a consensual plan, (30) our hypothetical debtor seeks to confirm a plan, retaining use of the bank's collateral over the bank's objections under the bankruptcy court's cramdown powers. The plan would not immediately distribute funds to the bank but would instead provide that the bank would retain its lien and receive a promise of deferred cash payments with a present value equal to the amount of the bank's allowable claims, (31) including the yield-maintenance claim. In essence, the debtor pro poses to decelerate the note, (32) extend the maturity date, and continue to service the obligations on new and more favorable terms.

The bank objects to the plan, primarily on the ground that the debtor's proposed discount rate is not one that "an efficient market would produce." (33) Framing the issue as one of fairness and equity, the bank urges the court to apply the same rate a lender would obtain in making a new loan in the same industry to a similarly situated, non-bankrupt debtor. It also signals its willingness to litigate, arguing that it could bring forth ample evidence at trial to establish the appropriate rate of interest: "There is an efficient market for large commercial real estate loans in this country, but no bank would ever extend the loan being proposed by the [debtor at the proposed rate] (or a rate even close to this amount).'" (34) Again finding the bank's arguments persuasive, the court directs the debtor to use a cramdown rate equal to that which the bank would have obtained had it "foreclosed [on the loan] and reinvested the proceeds in loans of equivalent duration and risk." (35) The court does not acknowledge that the bank is already being compensated through its yield-maintenance claim for the difference between its bargained-for yield and a risk-free Treasury rate. Although the court recognizes that the high rate of interest will threaten plan feasibility, the debtor amends the plan to include the higher rate--over the objections of junior creditors receiving mere pennies on the dollar for their claims--and the court confirms it.

On the surface, the bank's arguments addressed two different bankruptcy law considerations, each with its own jurisprudential framework that undoubtedly has shaped the discourse. More broadly, both situations grapple with the same vexing problems: how to compensate a secured creditor when the debtor's financial distress and bankruptcy frustrate commercial expectations and whether and to what extent market-based input can be relied on to determine the appropriate compensation.

In this respect, the bank's arguments appear inherently inconsistent. The bank's approach to the yield-maintenance premium is overly pessimistic so that the bank assumes that it would have poor prospects for reinvestment on the open market; therefore, it urges use of a risk-free reinvestment rate to calculate the yield-maintenance prepayment premium. Meanwhile, the bank's approach to cramdown is highly optimistic, such that the bank would have excellent prospects on the open market; therefore, it urges use of a higher market rate for commercial loans as the plan rate on its claim.

Finally, each set of arguments treats the bank's risks and costs as though they are occurring in isolation, with no regard for the fact that the bank may be receiving compensation for all or some of the economic burdens in other ways. For instance, the court's consideration of the yield-maintenance premium does not account for the possibility that the debtor will repay the bank over time at a competitive rate of interest; likewise, the court's consideration of the cram-down rate does not consider the possibility that some portion of the claim already includes compensation for future lost yield. Although this is a fictional example, the bank's arguments mirror those that have been made by secured creditors and accepted by bankruptcy courts in many high-profile chapter 11 cases. These inconsistencies suggest a need to harmonize the approaches used to assess the impact of bankruptcy on secured creditors.

II. BACKGROUND: RISKS FACED BY SECURED CREDITORS

A. Fraud and Credit Risks

For the most part, banks are in the business of providing liquidity. (36) In return for extending credit, they receive from borrowers the promise of future repayment as well as compensation in the form of interest and fees. While the business of lending can be very profitable, lenders naturally face considerable risks. (37) Of course, there is always a risk that the borrower has not been truthful about its creditworthiness, business operations, or the intended use of the borrowed funds; however, this so-called "fraud risk" usually is mitigated to manageable levels by the lender's careful diligence and portfolio diversification.

Still, even the most upstanding and thoroughly-vetted borrower may encounter financial distress, leading to serious impairment of the lender's commercial expectations. Thus, in every financing transaction, the lender also faces a "payment risk" or "credit risk," which refers to the possibility of the borrower's future insolvency and nonpayment of all or part of the obligations. Naturally, credit risk includes the danger that the borrower may eventually file for bankruptcy protection. (38) Lenders typically offset credit risk by requiring compensation from the borrower in the form of a higher interest rate and through other credit enhancements, such as collateral or guarantees from related persons. (39) Creditors may also use financial instruments, such as credit default swaps and other credit derivatives to fully or partially insure against the credit risk in certain transactions. (40)

B. Time Value of Money and Inflation Risk

Even when a borrower fully repays principal according to an agreed payment schedule, the lender may still suffer an economic cost that is typically expressed as the "time value of money." (41) Simply, to the extent money can be invested to earn a positive rate of interest, the same amount paid today is worth more than the same amount paid at any point in the future. (42) For this reason, interest payments are intended to compensate the lender for the time value of money. However, because the real interest rate of any given loan transaction is the rate that the lender receives after considering inflation, lenders also face a risk that inflation will erode the real interest rate over time. (43) Therefore, interest payments typically are calculated to compensate the lender for the likelihood of future inflation.

The Board of Governors of the Federal Reserve System publishes a daily summary of various market rates. (44) "Publication H. 15" provides current market rates, including the prime rate, Treasury constant maturity rates for various maturities of Treasury securities, and yield rates on Treasury inflation-protected securities (45) Treasury constant maturities ("TCM") rates are the "[y]ields on actively traded non-inflation-indexed issues adjusted to constant maturities." (46) For example, the five-year TCM rate reflects the yield on various Treasury securities maturing five years from the publication date based on the trading prices of those securities and regardless of their stated coupon interest rates or their original terms. Publication H.15's TCM rates provide a readily available, reliable indicator of a risk-free market rate for a wide range of maturity dates, ranging from one month to thirty years. That risk-free rate indicates the market's evaluation of the rate that is necessary to compensate a lender for the time value of money, considering the market's estimation of the inflation risk over the relevant term.

Publication H.15 also provides current yields adjusted to constant maturities for Treasury inflation-protected securities ("TIPS"). (47) TIPS "provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater." (48) Therefore, simply by deducting the yield on a TIPS from the yield on a TCM with the same maturity date, lenders can determine what part of the yield on a TCM compensates for the pure time value of money in an inflation-neutral environment and what part is the market's estimate of the likely inflation/deflation rate over the relevant period ending on the maturity date.

Commercial lenders have other benchmarks to assist them in their rate calculations, including the prime rate. Regularly compiled through survey data and published in Publication H.15 and by the Wall Street Journal, (49) the prime rate is the "[r]ate posted by a majority of [the] top 25 (by assets in domestic offices) insured U.S.-chartered commercial banks. Prime is one of several base rates used by banks to price short-term business loans." (50)

The prime rate, which is higher than Treasury rates, is also higher than the so-called federal-funds rate applicable to overnight federal-funds deposits by banks and credit unions. (51) To better understand how these benchmark rates compare to one another, consider the following example. The June 4, 2018 Publication H.15 reported a five-year TCM yield of 2.78% (52) and a five-year TIPS yield of 0.72%. (53) The difference indicates that, as of the reported date, the Treasury market demanded a 2.06% per year interest rate to compensate for anticipated inflation over the relevant five-year period and a 0.72% per year interest rate to compensate for the time value of money over that period. (54) It is interesting to note that the prime rate on the same date was 4-75%, (55) significantly greater than the five-year TCM yield. Obviously, the prime rate includes some factors other than the time value of money and an estimate of current inflation. It is impossible to know what those factors are, and in what proportions, although they likely include a profit component (56) and compensation for transaction costs. (57) Although the prime rate, by definition, also takes into account general credit risk, it is often used as a base rate to which lenders add percentage points as compensation for the specific credit risk and any other factors associated with a particular transaction.

C. Collateral Risk

In many cases, the borrower's (and any guarantor's) mere promise to repay principal with interest does not provide the lender with sufficient comfort so that additional credit enhancements are required. A lender typically will demand collateral. If the parties properly create and attach a lien securing all or certain of the obligations, then the lender becomes a secured creditor; in that event, in addition to the borrower's (and any guarantor's) promise to repay the debt, the lender may also enforce a contingent property interest in specified collateral in the event of default.

The presence of valuable collateral shifts the risk profile of a financing arrangement in important ways. This is because both bankruptcy and nonbankruptcy law acknowledge the secured creditor's basic contractual and property rights to realize on its collateral under the relevant foreclosure laws and apply the proceeds to its secured claim. Limitations, however, exist. Notably, under the Bankruptcy Code, a secured creditor's claim is treated as secured only "to the extent of the value of such creditor's interest" in the collateral, with the remainder of the creditor's claim treated as unsecured. (58) The value of the collateral is to "be determined in light of the purpose of the valuation and of the proposed disposition or use of such property," (59) a standard that the Supreme Court has defined to mean, in the case of secured-creditor cramdowns, "replacement" value. (60) Secured creditors may also be entitled to an award of postpetition interest, subject to certain limitations. The relevant provisions of the Bankruptcy Code allow oversecured creditors to receive interest (as well as reasonable fees, costs, and charges) to the extent of their so-called security cushion, while expressly precluding postpetition interest awards under virtually all other circumstances (61) Any such payments are allowed only as "provided for under the agreement or State statute under which such claim arose." (62)

Of course, given the importance of collateral in elevating and enhancing the lender's rights and protecting it against certain risks, both in and out of bankruptcy, the secured creditor faces the constant threat of deterioration in the value of collateral, such that the collateral may provide insufficient value to satisfy the secured claim in a foreclosure or provide an insufficient security cushion to allow postpetition interest. We refer to this as "collateral risk." Deterioration in value may be the result of, among other things, the mere passage of time, market forces, the debtors actions or inaction, accidents, or other unanticipated events. Outside of bankruptcy, lenders strive to manage the collateral risk by carefully selecting collateral that is likely to retain its value, requiring insurance, requiring that the debtor comply with covenants to maintain and protect the collateral, and requiring repayment of principal at a rate faster than the rate of depreciation of the collateral.

Within bankruptcy, the collateral risk is amplified by the fact that a bankruptcy filing imposes an automatic stay on all collection and enforcement activities, including repossession and foreclosure, notwithstanding the fact that the collateral may diminish in value during the pendency of the case. (63) The risk may be minimal or nonexistent for oversecured creditors with ample security cushions. However, to the extent that a secured creditor is or may become undersecured, upon request by the secured creditor, bankruptcy law may require the court to either lift the stay to allow the secured creditor to proceed against the collateral (64) or to condition the stay on the debtors provision of adequate protection for the duration of the case (65) In most cases, adequate protection takes the form of periodic cash payments or the granting of a lien on other property. (66)

D. Prepayment Risk

Lenders also face the risk that a borrower might prepay the loan or cause it to be accelerated because of default, thereby potentially avoiding the accrual of interest at the contract rate for the remainder of the original term and requiring the lender to redeploy the prepaid funds at a currently lower market rate. (67) This danger is especially high in declining-rate markets because the lender most likely would not be able to re-lend prepaid funds to a similarly situated borrower at the same rate. Further, the lender may incur prepayment fees to its own sources of funds. These risks are known as "prepayment risk" or "yield-loss risk."

Commercial lenders typically guard against prepayment risks by including provisions in their financing instruments to compensate the lender if and when the loan is prepaid. (68) What is often misunderstood is that, under the laws of the great majority of states, borrowers do not have the right to prepay obligations before their due dates unless the loan documents expressly provide that right. (69) That rule (sometimes referred to as the "perfect-tender-in-time" rule (70)) allows lenders to demand a prepayment premium in return for granting the right to prepay.

Although the precise language and mechanics may vary, provisions of this sort impose fees on borrowers for prepaying principal. (71) A variety of terms are used to describe these fees, including "yield-maintenance premiums," "make-whole payments," "prepayment premiums," "prepayment fees," and, more pejoratively, "prepayment penalties." (72) The amount of the fee might be a stated percentage of the prepaid amount (which often declines over the term of the loan), or it may be determined using a formula intended to give the lender an approximation of the true equivalent of the yield that it would have earned had the loan remained in place for its full term. (73) The latter type of provision is most often used in the commercial context (74) and is frequently referred to as a "yield-maintenance" clause or a "make-whole" clause. (75)

The specific wording of modern yield-maintenance provisions varies widely, but they typically determine the prepayment fee by means of a calculation along the lines of the four step-process described in Part III of this article (76) This calculation determines the difference between (i) the present value of the stream of future interest payments due under the loan calculated at the loan rate and (ii) the present value of that stream of future interest payments calculated at the Treasury-based reinvestment rate. Such yield-maintenance provisions often include a minimum prepayment fee (commonly one percent of the amount prepaid). These clauses are designed to provide the lender with a return on the prepaid funds equivalent to what it would have earned on the loan had it been paid according to its original payment schedule even if the lender reinvests the prepaid funds in low-yielding Treasury securities. Such clauses are referred to as "Treasury-flat." (77) A well-drafted provision applies not only to the borrowers voluntary prepayment but also to prepayment obligations that arise following the lender's exercise of its right to accelerate the debt.

In challenging yield-maintenance premiums, borrowers commonly take the position that they constitute unreasonable liquidated damages and, thus, are unenforceable penalties (78) In nonbankruptcy cases, courts tend to reject these arguments. (79) Under a liquidated-damages analysis, yield-maintenance provisions generally are enforced when a court finds that actual damages were difficult to ascertain at the time of contracting and the damages agreed upon by the parties are reasonable in light of the anticipated or actual loss caused by the breach. (80)

In response to borrowers' attempts to avoid paying yield-maintenance fees, lenders often argue that such fees are not liquidated damages but mechanisms by which parties agreed to an alternate method of contract performance. (81) Under this theory, the borrower may satisfy its obligations by making each payment on its scheduled due date until maturity, or it may elect to tender payment of the principal balance plus the negotiated yield-maintenance premium before maturity. Because voluntary prepayment constitutes an acceptable form of performance under the loan documents, and not a breach for which damages may be awarded, a liquidated-damages analysis is not applicable. (82)

In River East Plaza, L.L.C. v. Variable Annuity Life Insurance Co., the Seventh Circuit was faced with competing arguments from a borrower and lender as to which of these standards is appropriate when determining the enforceability of a yield-maintenance provision. (83) The case involved a commercial loan made to finance the purchase and development of a retail center. The loan documents included a typical yield-maintenance clause that required the borrower to pay a prepayment premium. (84) After electing to prepay approximately $12 million of principal in order to avoid roughly $13 million in future interest payments, the borrower brought suit challenging the $3.9 million yield-maintenance premium. (85) The trial court applied a liquidated-damages framework, holding that the yield-maintenance clause was an unenforceable penalty under Illinois law. (86) On appeal, the Seventh Circuit viewed the question before it as whether the yield-maintenance provision was an unenforceable penalty in disguise or an agreement between the parties for alternative performance. (87) Emphasizing that the borrower was given the opportunity to evaluate rates, to freely choose its preferred performance alternative, and to potentially obtain a sizeable benefit based on that choice, the Seventh Circuit rejected the trial court's use of the liquidated-damages rubric. The appellate court explained that liquidated damages, by definition, stem from a contract breach and no breach was present because voluntary prepayment did not constitute a default under the loan documents. (88) Other courts have used a similar analysis, finding that yield-maintenance provisions are enforceable. (89)

In bankruptcy, the analysis turns not only on state-law principles, but also on federal bankruptcy law. This is because, as a preliminary matter, bankruptcy courts look to state law to determine substantive contract and property rights, including the validity of claims. (90) Assuming that the underlying loan documents clearly and unambiguously provide for a yield-maintenance premium that is triggered by prepayment or by the lender's acceleration, and assuming such a provision is enforceable under the relevant state law, the next question is whether the yield-maintenance claim arose prepetition or postpetition. If the claim arose prepetition, then it is treated as any other claim. (91) If, in contrast, the claim arose postpetition, then it is only allowable to the extent that the creditor is oversecured (92) This is because, although the Bankruptcy Code does not normally allow creditors to collect "unmatured interest," (93) an oversecured creditor is allowed to recover "reasonable fees, costs, or charges" that are authorized by the relevant financing instrument. (94)

Although most bankruptcy courts have allowed yield-maintenance claims, (95) a handful of courts have applied heightened scrutiny. For instance, the U.S. Bankruptcy Court for the Eastern District of Louisiana interpreted the Bankruptcy Code's reasonableness analysis as requiring an examination not only of the purpose of the yield-maintenance clause but also the equities of the case (96) The court held that an oversecured creditor was not entitled to the yield-maintenance premium because it failed to demonstrate the relationship between the claimed premium and its actual damages and because the premium, if paid, would prevent other creditors--including junior secured creditors--from receiving distributions (97) Several other courts have applied mathematical formulas that are designed to determine whether a claimed prepayment premium reflects the creditors actual damages or whether it amounts to a windfall at the expense of junior stakeholders (98) However, the courts most likely to hear large commercial cases, such as the U.S. Bankruptcy Court for the District of Delaware (99) have rejected these approaches and erred on the side of respecting the parties' clear contractual agreements. (100)

E. Investment Opportunity Risk

Even when the credit relationship is enhanced with collateral and prepayment risks are controlled, the bankruptcy process may introduce other economic threats. Notably, a chapter 11 case may continue for many months or even years. From the lender's perspective, delays in receipt of its collateral or of a distribution of equivalent property from the bankruptcy estate prevent it from recouping its original capital investment and reinvesting the funds as it thinks best. (101) The economic costs of a lender's inability to reinvest funds elsewhere are frequently referred to as "lost-investment-opportunity costs," (102) or simply "lost-opportunity costs." (103) In any given case, a lender's lost-opportunity costs may be measured with reference to the compensation that the lender actually receives on similar, arm's-length financing transactions in the relevant market. (104)

In bankruptcy, the secured creditor's lost-opportunity costs are not necessarily compensable. Although some courts had previously interpreted the Bankruptcy Code's reference to a secured creditor's right to realize the "indubitable equivalent of [its] interest in ... property" (105) as entitling all secured creditors--including those that are undersecured--to payments for their lost-opportunity costs, the Supreme Court clarified in a 1988 decision that the secured creditor's right to immediate foreclosure is not an "interest in property" eligible for adequate protection. (106) Accordingly, undersecured creditors are not entitled to compensation in the form of interest on their collateral for the lost opportunity to reinvest the value of the collateral during the automatic stay. (107)

Having identified the main economic risks that are present in the normal secured lending relationship in and out of bankruptcy, the following discussion examines how cram-down plans may amplify these risks. We also consider how courts have struggled to provide appropriate protection and compensation to secured creditors not only for the risks imposed on them by bankruptcy generally, but specific provisions in chapter 11 plans that defer payment of secured claims.

III. ANALYSIS: CHAPTER 11 SECURED-CREDITOR CRAMDOWN PLANS

In preceding sections, we discussed the commercial expectations of secured creditors, the primary risks they face in the normal course of their lending relationships, and the ways in which a debtor's financial distress and bankruptcy have the potential to introduce new burdens. This section takes a closer look at how courts have struggled to treat secured creditors fairly and equitably and to protect them from undue risk when chapter 11 plans are crammed-down over their objections.

A. Secured-Creditor Cramdown Plans: Basic Elements

The Bankruptcy Code sets out requirements for a court to confirm a chapter 11 plan. (108) These requirements must be met in all cases, even if all classes consent to the plan, with one exception--the requirement that each impaired class must have accepted the plan need not be met if the plan fulfills chapter 11's so-called "cramdown" requirements. (109) In that event, the plan can be "crammed-down" on the objecting class or classes by the bankruptcy court.

Cramdown plans must, among other things, be "fair and equitable." (110) The Bankruptcy Code provides more detailed, but nonexclusive, provisions as to what treatment is fair and equitable to classes of secured claims, unsecured claims, and equity interests. With respect to holders of secured claims, the fair-and-equitable test includes a requirement that the holder of a secured claim retain its lien on the collateral property (111) and that it receive "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holders interest in the estate's interest in such property." (112) Although the Bankruptcy Code gives no guidance whatsoever for how courts should calculate the value of the deferred cash payments under the plan, Congress and the courts have articulated some basic elements. We introduce and discuss these elements in greater detail below.

1. Cash Payments

The plain language of the statute provides, in pertinent part, that one method of providing fair and equitable treatment is to pay the secured creditor "deferred cash payments" under a cramdown plan. (113) Although the phrase "deferred cash payments" is not defined in the Bankruptcy Code, the concept has been considered often by courts deciding whether to confirm a plan over the objections of creditors.

For instance, one bankruptcy court, interpreting [section] 1129(a)(9)(C), clarified that the term "cash" means "money instead of real property, goods, stock in the reorganized debtor, or a lien on its property." (114) This particular court parsed through the statutory text, equating "deferred" with "delayed," emphasizing that "[i]t means that the Chapter 11 debtor is not required to pay the ... claims in full in a lump sum payment on the effective date of the plan." (115)

Similarly, the bankruptcy court for the Southern District of Alabama explored the meaning of "deferred cash payments" in [section] 1129(a)(9)(C), finding that "[c]ommon usage ... suggests a flexible, rather than restrictive approach." (116) Examining legislative history of the phrase, the court found no evidence that Congress intended any particular payment terms, such as monthly debt service. (117) "Instead, Congress focused its concern on providing the debtor in possession with a breathing spell while contemporaneously ensuring that those creditors whose claims are proposed to be paid [over time] receive the present value of their claims." (118)

Although the phrase "deferred cash payments" does not on its face mandate any particular payment terms, courts deciding whether a cramdown plan is fair and equitable regularly interpret the language in accordance with customary commercial practice. For instance, the bankruptcy court for the Middle District of North Carolina explained in a 1987 decision that the term "deferred cash payments" means "periodic payments, the interval of which is determined by balancing the circumstances of the debtor with the reasonable right of the creditor to receive prompt payment of its claim." (119) Acknowledging that equal monthly payments of principal and interest are the norm for most financing arrangements and that there were "no special or unusual facts which would constitute grounds to vary the normal payment interval," the court rejected the debtors proposed balloon financing terms and required equal monthly payments of principal and interest. (120) For similar reasons, a bankruptcy court rejected a debtor's proposal to pay certain debts in one lump sum at the end of a five-year plan, (121) while another court rejected a plan that would pay certain debts on a semiannual basis when other creditors would receive monthly payments and the debtor presented no evidence of unusual circumstances to vary from the general rule. (122)

2. Present Value

For a plan to be confirmed, any contemplated deferred cash payments paid on account of an objecting secured creditor's claim must total at least the allowed amount of the secured claim and must have "a value, as of the effective date of the plan, of at least the value" of the creditor's interest in the collateral. (123) Legislative history of the Code confirms that this language was intended to take into account the time-value of money. (124) Compliance therefore requires calculation of a discount rate, as "the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value [as of the effective date of the plan] equals or exceeds that of the allowed claim." (125) Expressed another way, the creditor must be paid an appropriate rate of interest on the amount of the secured claim that is not satisfied in full on the effective date of the plan. (126) At the same time, the legislative history emphasizes that the plan rate should not be higher than the applicable discount rate, as the present value of the deferred cash payments should not exceed the allowed amount of the secured claim. (127)

The present-value requirement has generated considerable disagreement among courts and commentators about how to determine the discount rate and select an appropriate plan interest rate. Courts presiding over chapter 11 and chapter 13 cases have used a variety of methods, all of which appear to be built around a core assumption that the prevailing market rate of interest is the best measure of present value. As we discuss in more detail below, the Supreme Court has, in the context of a chapter 13 case, adopted the so-called "formula" approach (sometimes called the "prime-plus" approach). (128) This approach begins with a baseline rate, such as the prime rate, and then makes adjustments to account for the court's perception of the creditor's actual risk exposure. Other frequently used methods include the "coerced-loan" or "new-loan" approach, the "presumptive-contract-rate" approach, the "cost-of-funds" approach, and the "efficient-market" approach. (129) The coerced-loan approach considers the rate the creditor would have obtained if it foreclosed on the collateral and reinvested the funds in new loans of equivalent duration and risk. (130) In contrast, the presumptive-contract-rate approach uses as its starting point the rate reflected in the original financing arrangement negotiated between the creditor and the debtor, with the court empowered to make risk adjustments as it deems appropriate. (131) The cost-of-funds approach considers the rate that the creditor itself pays when borrowing in the credit markets. (132) Finally, the efficient-market approach looks to the rate that the debtor would actually pay in an efficient market for a similar loan, to the extent such an efficient market exists. (133) As discussed in more detail below, (134) courts and commentators have preferred one or another of these approaches over the rest, leading to a deeply splintered jurisprudence and a body of literature that is marked mostly by disagreement. (135)

3. Fixed Rate

Although there has been substantial disagreement regarding the appropriate method for determining cramdown interest rates, courts at least agree that the rate should be fixed rather than variable or "floating." (136) The Eighth Circuit held in a 1986 decision that a fixed rate is implied by the Bankruptcy Code's "requirement that present value be determined 'as of the effective date of the plan.'" (137) Applying this principle, the appellate court found that the lower court erred in confirming a plan that contemplated interest on deferred payments at the prevailing rate paid on thirteen-week Treasury bills at the time each payment was to be made. (138)

4. Feasibility

While not a component of the fair-and-equitable standard, in order to be confirmed, a chapter 11 plan must also satisfy a separate "feasibility" test. (139) A plan proponent must demonstrate that the plan, if confirmed, "is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan." (140) In any plan of reorganization, the debtor's ongoing obligations to its secured creditors are typically a major focus of the feasibility analysis. This is because, as the bankruptcy court for the Southern District of Alabama explained, if the "[d]ebtor were to become unable to service its secured obligations, its operations may cease and the distribution available to all creditors ... would be substantially less than the potential distribution available under the proposed plan of reorganization." (141)

Although courts are guided by the four elements described in this section, they have struggled to identify appropriate rates of interest for secured-creditor cramdown plans. And unfortunately, a 2004 Supreme Court decision on the issue only deepened the confusion. But before we dive into the modern jurisprudence, it is helpful to revisit the doctrinal origins of the broader fair-and-equitable standard that today includes the secured-creditor cramdown requirements. The following section explores the early legislative and judicial history of this essential creditor safeguard.

B. Early Legislative and Judicial History of the Fair-and-Equitable Requirement

As noted above, in order to be crammed-down, a plan must, among other things, be fair and equitable. (142) The phrase "fair and equitable" was used in several sections of the Bankruptcy Code's predecessor statute, the Bankruptcy Act of 1898, as amended (the "1898 Act"). (143) A series of Supreme Court cases from the first half of the last century elaborated on the meaning of this phrase as it was used in the 1898 Act. In particular, three opinions authored by Justice William O. Douglas emphasize that the concept is not susceptible of a mathematical or mechanical application and that what is fair and equitable in any given case depends on the court's careful consideration and balancing of a variety of factors.

The first of these three opinions, Case v. Los Angeles Lumber Products Co., (144) construed this requirement of the 1898 Act in the context of the absolute-priority rule, under which stockholders are not permitted to retain an interest in a reorganized company unless creditors are paid in full. (145) The Court stated that "such rule did not 'require the impossible, and make it necessary to pay an unsecured creditor in cash as a condition of stockholders retaining an interest in the reorganized company.'" (146) Rather, the creditors' claims could be satisfied "by the issuance, on equitable terms, of income bonds or preferred stock." (147) In this way, the Court recognized that payment of a secured creditor may be deferred, so long as the delay was on equitable terms. Presumably, that would include payment of a fair rate of interest.

Two years later, the Court considered the fair-and-equitable requirement again in Consolidated Rock Products Co. v. Du Bois. (148) In that case, the Court discussed how to value the future earning capacity of the debtor for the purpose of determining whether a plan that proposed to pay creditors over time was fair and equitable. Acknowledging that the standard necessarily "requires a prediction as to what will occur in the future," the Court cautioned that "an estimate, as distinguished from mathematical certitude, is all that can be made." (149) The Court went on to explain:
   Practical adjustments, rather than a rigid formula, are necessary.
   The method of effecting full compensation for senior claimants will
   vary from case to case ... [and] will be dependent on the facts and
   requirements of each case. So long as the new securities offered
   are of a value equal to the creditors' claims, the appropriateness
   of the formula employed rests in the informed discretion of the
   court.... So long as they receive full compensatory treatment and
   so long as each group shares in the securities of the whole
   enterprise on an equitable basis, the requirements of "fair and
   equitable" are satisfied. (150)


The Court took up the subject again in a 1943 decision, (151) citing Justice Brandeis for the proposition that "value ... gathers its meaning in a particular situation from the purpose for which a valuation is being made." (152) Furthermore, "compromises, settlements, and concessions are a normal part of the reorganization process," and "in discussing the method by which creditors should receive 'full compensatory treatment' for their rights[,] ... '[practical adjustments, rather than a rigid formula, are necessary.'" (153) The court cautioned against "creating] an illusion of certainty where none exists," through reliance on any mathematical formula. (154)

This line of cases makes clear that the fair and equitable requirement, as originally used in the 1898 Act, was intended to be flexible in nature and applied on a case-by-case basis in light of all relevant facts of a particular case. (155) But, as the following section highlights, modern courts struggling to construe similar language in the Bankruptcy Code's secured-creditor cramdown requirements have sought refuge in the mathematical formula approaches that the early jurisprudence repeatedly warned against.

C. The Circuit Court Search for a Market Rate

During the first several decades after the Bankruptcy Code took effect, courts of appeal from ten circuits issued opinions addressing cramdown interest rate determination in cases involving various chapters of the Bankruptcy Code and various types of claims subject to some version of the "value as of the effective date of the plan" requirement. (156) Three general themes emerge from these decisions. First, all the courts took the view that the plan rate should be market-based, reflecting an assumption that the prevailing market rate offers the best approximation of the appropriate discount rate. But they differed in their responses to various other questions, including whether to rely on publicly-available benchmark rates to discern the market rate, how to adjust for plan-related risks, whether profit to the creditor or the cost of making a new loan should be included in the plan rate, and whether interest should be capped at the prepetition contract rate. Second, the courts did not make significant distinctions based on the chapter of the Bankruptcy Code involved or the nature of the creditors claim. We discuss a selection of leading opinions from each of the relevant circuit courts.

The earliest cases emphasize the importance of the prevailing-market rate to the present-value analysis. For instance, in a 1982 decision, (157) the Sixth Circuit addressed the modification of a loan secured by an automobile in a chapter 13 case, adopting what came to be known as the "coerced-loan" theory. (158) The court reasoned that "[t]he theory of the statute is that the creditor is making a new loan to the debtor in the amount of the current value of the collateral" (159) In that event, "the most appropriate interest rate is the current market rate for similar loans at the time the new loan is made, not some other unrelated arbitrary rate." (160)

Of course, the Sixth Circuit's approach reflects the long-standing view in bankruptcy that "the best way to determine value is exposure to a market." (161) But to the extent it emphasizes the current market rate as the starting point for the analysis, (162) it also echoes opinions expressed in the highly influential treatise, Collier on Bankruptcy. From as far back as the 1979 edition, the treatise has explained that the present-value analysis should contemplate the secured creditors risks under the plan, urging courts to "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." (163) Some of the first trial courts to consider secured-creditor cramdowns under the Bankruptcy Code seemed to rely heavily on Collier, (164) weaving its guidance into their published decisions.

Several years later, the Eleventh Circuit similarly emphasized the prevailing market rate, but also acknowledged the need to make specific adjustments. (165) In a chapter 11 case involving a priority federal-tax claim, the court focused its inquiry on [section] 1129(a)(9)(C), which applies to certain tax claims and requires that they be paid in cash "of a total value, as of the effective date of the plan, equal to the allowed amount of the claim.'" The bankruptcy court set the plan rate at the statutory interest rate on tax claims, (166) but made a downward adjustment for "rehabilitation aspects." (167) The Eleventh Circuit, citing Collier, agreed that the appropriate rate to use in a chapter 11 cramdown is the "prevailing market rate" for a similar loan, taking into account "the length of the payout period, the quality of the security, and the risk of subsequent default." (168) Suggesting that the inquiry should be strictly creditor-focused rather than debtor- or estate-focused, it held that it was improper to make a deduction from that rate for "rehabilitation aspects." (169) The court reversed and remanded the case for further proceedings but did not give any substantial guidance about how to determine the prevailing market rate for a tax claim.

The Eighth Circuit tackled the issue in a chapter 11 case involving a mortgage loan on farmland. (170) The contract rate was thirteen percent per year, increasing to fifteen percent on overdue installments. (171) The court affirmed the district court's reinstatement of the contract rate, citing the Eleventh Circuit's earlier decision and the same section from Collier to support the proposition that the plan rate should reflect the "prevailing market rate." (172) The Eighth Circuit found it persuasive that the mortgage was only two years old, the plan term was the same as the loan term, and the plan provided the lender with its prepetition collateral. (173) The court stated: "Lacking any evidence correlating other rates with the 'coerced loan' contemplated by the plan, the district court did not err in reinstating the contract rate of interest" (174)

The Eighth Circuit considered the issue again in 1989 in United States v. Doud, a chapter 12 case involving a farm loan. (175) The court held that the same analysis should apply in chapter 12 as in chapter II (176) and again cited Collier for the proposition that courts should consider the prevailing market rate. (177) However, the court did not require use of the prepetition contract rate. Rather, it affirmed the bankruptcy court's formula approach, which began with a risk-free Treasury rate and added two percentage points to account for plan-related risk. (178) The court explained: "If the bankruptcy court has correctly considered all of the elements involved in computing a discount rate, determination of the proper discount rate in a particular case is a factual inquiry." (179)

By the time the Eighth Circuit decided Doud, most courts seemed to embrace the view that plan rates ought to reflect the prevailing market rate. (180) However, they still disagreed as to how courts should go about discerning the market rate. For instance, the following year, the Tenth Circuit addressed a mortgage loan in a chapter 12 case and viewed the prepetition contract rate as presumptively reflective of the market rate. (181) At the time of the bankruptcy, the relevant loan had been in place for twelve years and had eighteen years remaining on its term. (182) The debtor proposed to pay the claim over fifteen years at an interest rate of 7-5%. (183) The creditor objected to the plan, arguing that it was entitled to the prepetition contract rate of 12.5%. (184) The bankruptcy court approved an interest rate of 10%, determined by adding a.7 percentage point risk factor to the creditor's 9.3% cost of funds. (185) The court of appeals considered other approaches, ultimately holding that, "in the absence of special circumstances, such as the market rate being higher than the contract rate, Bankruptcy Courts should use the current market rate of interest used for similar loans in the region." (186) Implicit in the court's rationale is a view that the plan rate should be capped at the contract rate. Although the court did not explain this point, it may have been influenced by the fact that the plan proposed to shorten the term of the loan by three years. (187) The court may not have required the cap if the plan had contemplated an extension of the term.

The Ninth Circuit seemed to embrace a formula approach to identifying the prevailing market rate in Farm Credit Bank of Spokane v. Fowler (In re Fowler), a chapter 12 decision addressing the treatment of two secured creditors. (188) The Farm Credit Bank ("FCB") had made two thirty-five-year loans secured by real property. (189) The Interstate Production Credit Association ("IPCA") had made a one-year loan secured by livestock and equipment. (190) Both creditors were fully secured. (191) The debtor proposed to repay FCB over twenty-five years at 9.5% interest (with interest deferred during the first three years resulting in negative amortization) and to repay IPCA over seven years at the same rate. (192) The interest rate was based on the prime rate at confirmation plus a.75% for risk. (193) The district court, in an unpublished order, reversed and set the interest rate at 10.5%. (194) Following the Eighth Circuit, the court of appeals adopted a formula approach under which "the court starts with a base rate, either the prime rate or the rate on treasury obligations, and adds a factor based on the risk of default and the nature of the security." (195) The court concluded that the bankruptcy court had used the correct method of determining the market rate but remanded the case for more specific findings because the court had not explained how it arrived at the.75% risk factor. (196)

In contrast, the Fourth Circuit emphasized the creditor's own lending rate when it considered the matter in a chapter 13 case involving a loan secured by a mobile home. (197) The debtor proposed to shorten the term of the loan and reduce the interest rate from thirteen to ten percent. (198) The bankruptcy court confirmed the plan after taking judicial notice that the prime rate was 8.5% and determining that a 1.5% risk adjustment was appropriate. (199) The district court rejected that approach in favor of one based on the "consumer credit market rate" advocated by the creditor. (200) Ultimately, the court of appeals adopted a rule that "look[ed] to the secured creditor's lending market in determining what rate of interest best provides the secured creditor with its present value" but deducted its "expenses in obtaining those loans" (which costs would not be incurred in connection with the plan) and capped the rate at the prepetition contract rate. (201)

In the same year, the Third Circuit considered the issue in General Motors Acceptance Corp. v. Jones, which was an appeal from two separate chapter 13 cases, each of which dealt with a loan secured by a truck. (202) In both cases, the lenders were undersecured, and the plans proposed to reduce the interest rate to ten percent. (203) The bankruptcy court ruled that the presumptive indicator of the prevailing market rate--and, therefore, the appropriate rate--is the prime rate, and the district court affirmed without opinion. (204) In so doing, the lower courts ignored the fact that in the lending markets, the prime rate is used to price short-term loans or ones on which the interest rate is adjusted each time the prime rate changes; it is not used to price long-term fixed-rate loans (rather, the yields on Treasury securities of an equivalent maturity are used for that purpose). (205) Further, the prime rate may include a profit component and some compensation for the costs of originating and administering the loan, all of which are elements some courts have said should be excluded. (206) The Third Circuit, sharing the lower courts' belief that the cramdown rate should be the market rate, but finding the lower courts' reliance on the prime rate improper, endorsed the coerced-loan approach. (207) It held that the contract rate is an appropriate rate to use as the plan rate in the absence of evidence to the contrary:
   The appropriate interest rate for this purpose is the rate of
   interest currently being charged by the creditor in the regular
   course of its business for loans similar in character,
   amount and duration to the loan being coerced in the
   cramdown. It is further appropriate ... for a bankruptcy
   court to treat the contract rate as a proxy for the creditor's
   current rate in the absence of a stipulation or evidence to the
   contrary. (208)


Unlike some courts, however, the Third Circuit did not reduce the rate for either the costs involved in making a new loan or the lender's profit. (209) The court did not consider it appropriate to make the contract rate a cap on the plan rate, at least "where the creditor is not undersecured and, accordingly, has not had its expectations frustrated through the 'bifurcation' provisions of [section] 506(a)." (210)

A few years later, the Seventh Circuit decided Koopmans v. Farm Credit Services of Mid-America, ACA, a chapter 12 case where the objecting creditor was an oversecured farm-mortgage lender. (211) Approving a formula approach, the court reasoned that "the creditor must get the market rate of interest, at the time of the hypothetical foreclosure, for loans of equivalent duration and risk" and described the lower courts' treatment of the plan rate issue as follows:
   The bankruptcy judge approximated this by starting with
   the prime rate ..., which it found prevalent for new 20-year
   well-secured agricultural loans at the time, and adding 1.5
   percent because it deemed this extension of credit more risky
   than the norm in light of the Koopmans' sorry repayment
   record. This produced a floating rate, 10.5 percent (9 percent
   + 1.5 percent) at the time the bankruptcy judge approved
   the plan. The district court affirmed, surveying the
   cases and concluding that the bankruptcy judge's approach--often
   called the "coerced loan" method--represents
   the dominant though not exclusive view among the courts of
   appeals. (212)


The Seventh Circuit affirmed the ruling, explaining that while the "prime-plus" approach is not the only way to calculate an appropriate rate, the court must take care to identify the market rate because the crammed-down secured creditor is "entitled to the rate of interest it could have obtained had it foreclosed and reinvested the proceeds in loans of equivalent duration and risk." (213) Based on reasoning that appears to be at odds with the Supreme Court's earlier decisions on adequate protection, (214) the Seventh Circuit explained that a secured creditor is entitled to a market rate of interest because "[n]othing else gives the creditor the indubitable equivalent of its non-bankruptcy entitlement." (215) The court further held that the creditors profit need not be excluded in setting an appropriate plan rate. (216)

The following year, the Second Circuit disagreed with the Seventh Circuit when it took up the question in a chapter 13 case involving a claim secured by an automobile. (217) The bankruptcy court confirmed a plan with an interest rate of nine percent. (218) The creditor argued that the rate should have been 15.7%, which is the rate it charged in the debtors' geographic area at the time the plan was confirmed. (219) The Second Circuit seemed to challenge the prevailing understanding, holding that the objective of the present-value requirement 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" and "not to put the creditor in the same position that it would have been in had it arranged a 'new' loan." (220) It further held that "the value of a creditor's allowed claim does not include any degree of profit." (221) Finally, it held that "the market rate of interest ... 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" plus a reasonable risk premium of one to three percentage points. (222)

The Fifth Circuit weighed in in a 1997 chapter 11 case involving a mortgage loan secured by a hotel. (223) The court of appeals affirmed the bankruptcy court's confirmation of a plan setting the interest rate at the 11.5% prepetition contract rate and rejected the creditor's "blended-rate" analysis, which would have resulted in a higher rate. (224) The court described the blended rate approach supported by the creditor as follows:
   [T]he first component would comprise 60-70% of the debt
   and would carry a 9.75% interest rate because a debt service
   ratio of 1.4 would be available. This component was determined
   by adding 3.25% to two-year treasuries which were
   6.7% as of October 3, 1994. The second component, comprising
   10% of the debt (described as mezzanine financing),
   would carry a 12.75% interest rate. The third component
   would be serviced as to interest only, no amortization, and
   would carry a 16.25% interest rate. The fourth component
   would not receive current interest or amortization and
   would carry a 25% interest rate. (225)


The court acknowledged its reticence to "establish a particular formula," recognizing that "courts have used a wide variety of different rates as benchmarks in computing the appropriate interest rate." (226) Although the court did not hold that the prepetition contract rate is always the correct rate, it found that the bankruptcy court did not err in selecting that rate. (227) Two months later, the Fifth Circuit considered the appropriate cramdown rate in a chapter 13 case in which it appears to have followed the Third Circuit's approach. (228) Seemingly adopting the coerced-loan approach, the court held that, in the absence of a stipulation or evidence of the creditor's current rate for a similar loan, the prepetition contract rate is the appropriate rate to use in a cramdown proceeding. (229) It further held that profit is an appropriate element of a cramdown rate and that the rate should be one that places the creditor in the same position it would have been in if it were allowed to foreclose on the collateral and reinvest the proceeds. (230) The court reversed the bankruptcy court's confirmation of a plan with an interest rate calculated according to the applicable local court rule, which in chapter 11 cases, required the use of the prime rate plus two percentage points. (231) As this section reveals, circuit courts considering the issue have seemed to agree that the prevailing market rate is the best approximation of the appropriate discount rate. But they have struggled to decide how best to discern the prevailing market rate, how to deal with situations when there is no relevant market, whether and to what extent adjustments should be made to account for plan-related risks, and whether to exclude components of profit, compensation for costs of loan origination, or the creditor's cost of funds. Against this deeply fractured backdrop of circuit court decisions, the Supreme Court entered the arena in 2004. (232) The following section introduces and analyzes that decision.

D. The Supreme Court's Decision in Till

The Supreme Court famously stepped into the cramdown interest rate fray in Till v. SCS Credit Corp. (233) Before turning to the murkier parts of the decision, we wish to emphasize what the Court appeared to be trying to do. In a plurality decision that refers repeatedly to the various economic risks faced by secured creditors, Justice Stevens, joined by Justices Souter, Ginsberg, and Breyer, explained that the proper interest rate should be "high enough to compensate the creditor for its risk." (234) At the same time, the plurality warned against overcompensating secured creditors (or any senior claimants or interest holders, for that matter). (235) After all, any such overcompensation would constitute a windfall to the creditor at the expense of other legitimate claimants. In other words, the plurality emphasized the importance of identifying a rate of interest that properly balances risk and reward--not only for the benefit of the crammed-down secured creditor, but to achieve the fairest and most efficient outcome for all stakeholders. Because of the importance of the Till case, we discuss it in some detail below.

1. Factual Background and Proceedings in the Lower Courts

Till involved a dispute over confirmation of the individual debtors' chapter 13 plan. (236) The objecting secured creditor had financed the debtors' purchase of a truck and held a security interest in the truck. (237) At the time of the bankruptcy filing, the debtors still owed the creditor nearly $5,000, and the parties stipulated that the truck was only worth $4,000. (238) Therefore, the creditor had a secured claim of $4,000 and an unsecured claim for the balance of the debt. (239)

The debtors' proposed plan contemplated that the debtors would keep the truck and satisfy the creditors secured claim over time, paying interest at a rate of 9.5% per year. (240) The debtors arrived at that rate by starting with the prime rate (which, at the time, was approximately eight percent per year) and augmenting it to "account for the risk of nonpayment." (241) The secured creditor objected on the basis that the proposed interest rate was insufficient because the creditor was "entitled to interest at the rate of 21%, which is the rate ... it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan" originally made to the debtors (242)

Although the plan in Till was a chapter 13 plan, the controlling statutory test for chapter 13 secured-creditor cramdowns (243) employs very similar, although not identical, language as the corresponding statutory provision in chapter 11. (244) Specifically, chapter 13 requires, with respect to each secured claim, that "the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim." (245)

The bankruptcy court, following the formula approach, overruled the creditor's objection and confirmed the debtors' proposed plan. (246) On appeal, the district court reversed the bankruptcy court's decision and, adopting the coerced-loan approach, concluded that twenty-one percent per year was the appropriate interest rate, given the unrebutted testimony concerning the market for subprime loans. (247) On appeal to the Seventh Circuit, in a 2-1 decision, the majority followed a modified coerced-loan approach, holding that the original contract rate on the loan in dispute should be the presumptive interest rate for a cramdown plan and that the debtor and the creditor should be allowed to present evidence that a lower or higher rate should apply. (248) The Seventh Circuit majority opinion provided additional explanation of its earlier decision in Koopmans, (249) suggesting that it had not intended to endorse a formula approach. (250) Rather, it had intended to adopt the coerced-loan method, the specific application of which simply led to the prime-plus rate used in that case. (251)

2. Three Supreme Court Opinions

The Supreme Court issued three opinions in Till. None of the three secured a majority vote. Four justices joined in Justice Stevens' plurality opinion; Justice Thomas wrote a separate concurring opinion; and four justices joined in Justice Scalia's dissent. (252) The three opinions evaluated in detail the formula, presumptive-contract-rate, coerced-loan, and cost-of-funds approaches. (253) In so doing, the Court left many lingering questions. At the same time, it articulated several qualitative principles that offer some guidance to courts struggling to evaluate the present value of future plan payments.

a. The Plurality Opinion

Justice Stevens's plurality opinion rejected the presumptive-contract-rate, coerced-loan, and cost-of-funds approaches, primarily on the grounds that "[e]ach of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor's payments have the required present value." (254) Instead, the plurality opinion adopted the formula approach. (255)

In rejecting the coerced-loan approach, Justice Stevens explained that it requires bankruptcy courts to consider evidence about the market for comparable loans--"an inquiry far removed from such courts' usual task of evaluating debtors' financial circumstances and the feasibility of their debt adjustment plans." (256) He also cautioned that the approach "overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders' transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cramdown loans." (257) In this way, the plurality opinion seemed to challenge earlier decisions' reliance on the prevailing market rate as the best approximation of the appropriate discount rate.

Likewise, the plurality explained that the presumptive-contract-rate approach "improperly focuses on the creditor's potential use of the proceeds of a foreclosure sale." (258) The approach also places a significant evidentiary burden on the debtor that hopes to defend its proposed rate because it must "obtain information about the creditors costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate." (259) The plurality criticized the cost-of-funds approach for many of the same reasons, asserting that "it mistakenly focuses on the creditworthiness of the creditor rather than the debtor." (260) It also poses a significant evidentiary burden because "a debtor seeking to rebut a creditor's asserted cost of borrowing must introduce expert testimony about the creditor's financial condition." (261)

In adopting the formula approach, the plurality opinion emphasized the advantages of that approach over the others it considered. Specifically, Justice Stevens explained that the formula approach is straightforward and objective and reflects "ordinary lending practices" in that it relies on a published reference rate as its starting point. (262) The approach arguably is more efficient, placing the evidentiary burden appropriately on the secured creditor to demonstrate the need for upward adjustments. (263) And, any such evidence is likely to be squarely within a bankruptcy court's expertise and may already be part of the case record. (264)

The plurality devoted considerable time to explaining the mechanics of the formula approach. As the name implies, the approach prescribes a specific method for calculating cramdown interest rates. In what appears as a departure from the circuit-court jurisprudence, the plurality casts the present-value analysis as one of determining the creditor's actual risk exposure, rather than one of discerning the prevailing market rate as the best measure of present value.
   [T]he approach begins by looking to the national prime rate,
   reported daily in the press, which reflects the financial market's
   estimate of the amount a commercial bank should
   charge a creditworthy commercial borrower to compensate
   for the opportunity costs of the loan, the risk of inflation,
   and the relatively slight risk of default. (265)


Then, based on the plurality's assumption that "bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers," the approach contemplates risk adjustments that account for "such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan." (266)

Unfortunately, because the issue was not before the Court, the plurality was less clear regarding the specific premium that should be added to the prime rate to compensate for risk. (267) It did, however, note that courts have generally approved adjustments of one to three percentage points (268) Then, citing the Seventh Circuit's dissenting opinion in Till, Justice Stevens cautioned: "If the court determines that the likelihood of default is so high as to necessitate an 'eye-popping' interest rate, the plan probably should not be confirmed." (269)

The plurality did not consider the level of risk adjustment (both for the inflation risk and the credit risk) that is already built into the prime rate. (270) It also did not address the fact that the prime rate, being a rate at which lenders are actually willing to lend to some borrowers, potentially includes components of profit, costs of originating the loan, and costs of administering the loan. (271)

b. The Concurring Opinion

Justice Thomas rendered a separate concurring opinion because, although he agreed with the plurality that the debtor's proposed interest rate was acceptable, he reached this conclusion through very different legal reasoning. (272) As he interpreted the plain text of the Bankruptcy Code, the chapter 13 cramdown provision "does not require a debtor-specific risk adjustment that would put creditors in the same position as if they had made another loan." (273) This is because the relevant statutory language refers to the value of "property to be distributed under the plan," rather than the value of the debtor's promise to distribute such property in the form of future cash payments. (274) Arguing that the plurality opinion and the dissent incorrectly assume that the Bankruptcy Code requires that courts weigh the value of the debtor's promise and make necessary risk adjustments, Justice Thomas countered that cramdown interest payments need only compensate secured creditors for the time-value of money and inflation risk; therefore, "the appropriate risk-free rate should suffice." (275)

The concurring opinion also returned to the Court's earlier decision in Associates Commercial Corp. v. Rash, (276) acknowledging that the crammed-down secured creditor may already have received an important risk-offsetting benefit in the form of the valuation of the collateral used to establish the amount of the creditor's secured claim. (277) In Rash, the Supreme Court held that when a debtor proposes to retain collateral under a chapter 13 plan, the amount of the creditor's secured claim should be determined based on replacement cost to the debtor rather than on foreclosure value to the creditor. (278) Thus, when the debtor proposes to retain the collateral, the secured portion of an undersecured creditor's claim is set based on replacement cost, even though the creditor would net much less from liquidation if the debtor abandoned the collateral to foreclosure. In Justice Thomas's view, this creditor-favorable valuation of the secured claim can help to offset a lower plan rate. (279)

c. The Dissenting Opinion

Justice Scalia wrote a dissenting opinion, in which three other justices joined. (280) The dissent argued that the cramdown rate should presumptively be the contract rate (281) Justice Scalia argued that the plurality's reliance on the prime rate as the starting point for a judicial determination was inappropriate, because this rate is far too low and courts cannot be relied upon to make sufficient upward adjustments to properly compensate secured creditors. (282) Clearly an advocate of a market-based approach, he urged adoption of the contract rate as the starting point, as this is "generally a good indicator of actual risk" because it is the bargained-for rate for the very transaction that generated the claim. (283)

Justice Scalia acknowledged that bankruptcy courts may make adjustments as needed based on the facts and circumstances of the case. Such risk adjustments, however, are likely to be much smaller than those that courts must make under the formula approach. (284) The dissent also harshly criticized the method by which the 1.5 percentage point risk adjustment was determined:
   Petitioners' economics expert testified that the 1.5% risk premium
   was "very reasonable" because Chapter 13 plans are "supposed to be
   financially feasible" and "the borrowers are under the supervision
   of the court." Nothing in the record shows how these two platitudes
   were somehow manipulated to arrive at a figure of 1.5%. It bears
   repeating that feasibility determinations and trustee oversight do
   not prevent at least 37% of confirmed Chapter 13 plans from
   failing. On cross-examination, the expert admitted that he had only
   limited familiarity with the subprime auto lending market and that
   he was not familiar with the default rates or the costs of
   collection in that market. In light of these devastating
   concessions, it is impossible to view the 1.5% figure as anything
   other than a smallish number picked out of a hat. (285)


In his distinctively sharp-witted style, Justice Scalia concluded that: "Today's judgment is unlikely to burnish the Court's reputation for reasoned decisionmaking." (286) The following section builds on this discussion of the three Till opinions, addressing whether and to what extent the decision applies beyond chapter 13.

3. What is Till's Precedential Value, if Any?

Although there was no majority opinion in Till, at least five justices rejected the presumptive-contract-rate and coerced-loan approaches. Attempting to clarify the decision's precedential value, the Fifth Circuit concluded in a chapter 13 case that "the Till plurality's adoption of the prime-plus interest rate approach is binding precedent in cases presenting an essentially indistinguishable factual scenario." (287) In a contrary vein, another court explained:
   An interpretation of Till that identifies a binding rule is an
   interpretation that makes many assumptions about facts or
   relationships staying constant. Put differently, the opinion of
   five Justices makes the law of the land, but the opinion of four
   Justices makes interesting reading.

   The Till court had no majority concerning the meaning of the phrase
   "the value, as of the effective date of the plan, of property to be
   distributed under the plan...." Thus, this court must look
   elsewhere for guidance on the proper rate of interest.... (288)


Even setting aside the thorniness of the precedential value of a plurality opinion, (289) questions remain as to whether and to what extent Tills formula approach to determining cramdown rates in chapter 13 cases should also be used in chapter 11 cases. (290) On one hand, the statutory language is similar. As Justice Stevens noted, "the Bankruptcy Code includes numerous provisions that, like the cramdown provision, require a court to 'discoun[t] ... [a] stream of deferred payments back to the[ir] present dollar value,' to ensure that a creditor receives at least the value of its claim." (291) In a footnote to that statement, the court referred to a number of provisions of chapters 11, 12 and 13 of the Bankruptcy Code that require such discounting. The plurality opinion went on to explain that it was likely that Congress intended the same approach to be used for all these provisions:
   We think it likely that Congress intended bankruptcy judges and
   trustees to follow essentially the same approach when choosing an
   appropriate interest rate under any of these provisions. Moreover,
   we think Congress would favor an approach that is familiar in the
   financial community and that minimizes the need for expensive
   evidentiary proceedings. (292)


On the other hand, there are naturally many contextual differences between chapter 13 consumer bankruptcies and chapter 11 business bankruptcies. Thus, despite the plurality's earlier statement regarding the similarity of approach from chapter to chapter, Justice Stevens went on to suggest in dictum that the approach might be different in chapter 11 cases:
   This fact helps to explain why there is no readily apparent
   Chapter 13 "cram down market rate of interest": Because
   every cramdown loan is imposed by a court over the objection
   of the secured creditor, there is no free market of willing
   cramdown lenders. Interestingly, the same is not true in the
   Chapter 11 context, as numerous lenders advertise financing
   for Chapter 11 debtors in possession. Thus, when picking a
   cramdown rate in a Chapter 11 case, it might make sense to
   ask what rate an efficient market would produce. In the
   Chapter 13 context, by contrast, the absence of any such
   market obligates courts to look to first principles and ask
   only what rate will fairly compensate a creditor for its
   exposure. (293)


The Fifth Circuit explained in a chapter 11 case:
   Till was a splintered decision whose precedential value is
   limited even in chapter 13. While many courts have chosen
   to apply the Till plurality's formula method under chapter
   11, they have done so because they were persuaded by the
   plurality's reasoning, not because they considered Till binding.
   Ultimately, the plurality's suggestion that its analysis
   also governs in the Chapter 11 context--which would be
   dictum even in a majority opinion--is not "controlling ...
   precedent" (294)


E. Circuit Court Cases After Till

In the years following Till, a number of circuit courts of appeal have published opinions on the appropriate cramdown interest rate in chapter 11 cases. (295) For instance, the Sixth Circuit stated that while the Till plurality was clear that the formula approach is the preferable method for chapter 13 cases, it "is less clear about cases in the Chapter 11 context." (296) The court went on to discuss the views of various commentators and the rulings of two bankruptcy courts that came to opposing results on the question, ultimately deciding not to "blindly adopt Tilts endorsement of the formula approach ... in the Chapter 11 context." (297)

Relying on footnote 14 of Till--and apparently taking this dictum to mean that prevailing market rates may still be the best approximation of the appropriate discount rate--the Sixth Circuit adopted a two-step "nuanced approach" to rate determination in chapter 11. (298) Specifically, the court recommended using the prevailing market rate to the extent that there exists an efficient market for lending to a chapter 11 debtor; when such a market does not exist, then the Till formula approach would apply. (299)

Ultimately, the Sixth Circuit affirmed the lower courts1 confirmation of the debtors proposed plan with a cramdown rate of 6.785%, explaining that the 12.16% rate advanced by the creditors as the rate that an efficient market would produce "appears to fall under the 'eye-popping' category described unfavorably by Till" and was approximately eight percentage points over the prime rate. (300) The court noted that the bankruptcy court had "sought to determine what an efficient market would have produced for the loan that the lenders provided, albeit under the rubric of the coerced loan theory." (301) The circuit court stated that the market rate should be used when there is an efficient market, (302) but did not address the fact that any such rate would likely include components that the Till plurality and concurrence believed should not be included--such as profit, transaction costs, and the lender's cost of funds. Further, the court neither gave any indication of what would constitute an efficient market, what evidence would be sufficient to establish that an efficient market existed, or how similar the loans available in the market would have to be to the situation of the secured creditor under the plan in order for a particular efficient market to be relevant to the issue before the court.

A number of courts have adopted this two-step approach.303 But the approach has proven difficult for courts to actually implement; notably, although many courts have looked for an efficient market, very few have found one. (304) Perhaps in light of these challenges, other courts considering the issue have questioned whether adherence to Till requires courts presiding over chapter (11) cases to first look for an efficient market or if they may skip this step and go straight to application of the formula approach. (305)

The Fifth Circuit addressed cramdown rates when the parties had stipulated that Tills formula approach should be used. (306) However, the creditor used a "blended rate" approach, "taking the weighted average of the interest rates [and equity rates of return] the market would charge for a multi-tiered exit financing package comprised of senior debt, mezzanine debt, and equity" (307) This approach "yielded a 'blended' market rate of 9.3%" (more than six percentage points over the then-current prime rate). (308) The court held that such a blended-rate approach does not equate to an efficient market for the type of exit financing proposed and that "it bears no resemblance to the single, secured loan contemplated under a cramdown plan." (309) The court ultimately affirmed the lower courts' confirmation of the debtor's plan with a 5% interest rate (which included a 1.75% risk adjustment above prime). (310) In doing so, it noted that the "vast majority of bankruptcy courts have taken the Till plurality's invitation to apply the prime-plus formula under Chapter 11," (311) but it declined to regard Tills formula approach as binding in chapter 11 cases, stating:
   We will not tie bankruptcy courts to a specific methodology
   as they assess the appropriate Chapter 11 cramdown rate of
   interest; rather, we continue to review a bankruptcy court's
   entire cramdown-rate analysis only for clear error. (312)


Finally, the Fifth Circuit stated, "we do not suggest that the prime-plus formula is the only--or even the optimal--method for calculating the Chapter 11 cramdown rate." (313)

Most recently, the Second Circuit addressed cramdown rates in Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, L.L.C.), in which the secured creditors had argued that the debtor should use the efficient-market approach to determine an appropriate, market-based rate. (314) Rejecting the creditors' argument, the bankruptcy court proceeded directly to a modified version of the Till formula approach, using an equivalent term Treasury rate, rather than the prime rate, as the base on which to add a risk adjustment. (315) On review of the bankruptcy court's decision, the district court stated:
   Judge Drain chose the Treasury rate because it is "often used
   as a base rate for longer-term corporate debt such as the
   [Replacement [N]otes." In contrast, the prime rate may be
   "a more appropriate base rate for consumers, although [the
   Second Circuit in] Valenti chose the Treasury rate." The
   Court agrees with Judge Drain that Till does not obligate a
   bankruptcy court to choose the national prime rate as the
   risk-free base rate. (316)


Other courts have also used a Treasury rate as the base rate for a formula approach, (317) and, outside of bankruptcy, federal courts routinely use Treasury yields to set post-judgment interest awards. (318) The bankruptcy court in MPM Silicones acknowledged that the Treasury rate "does not include any risk, given that the United States government is the obligor, whereas an element of risk is inherent in the prime rate." (319) In light of this, the bankruptcy court added another 0.5 and 0.75 percentage points (320) to reflect the use of a risk-free Treasury base rate. (321) It did not, however, explain how it arrived at this particular adjustment. In the initial appeal, the district court expressed its approval of Tills formula approach, explaining that much of the Supreme Court's reasoning in Till applied to chapter (11) cases as well. (322) However, in a possible nod to the Fifth Circuit's desire to promote flexibility, the district court approved the bankruptcy court's use of a Treasury rate rather than the prime rate. (323)

On appeal to the Second Circuit, the particular nuances of the bankruptcy court's implementation of the formula approach were no longer the subject of judicial scrutiny. Rather, the parties asked the appellate court to focus its review on the question of whether the bankruptcy court erred by proceeding directly to the formula approach without first evaluating evidence of an efficient market for similar loan transactions. (324) On this issue, the Second Circuit held "that the lower courts erred in categorically dismissing the probative value of market rates of interest." (325) Remanding this aspect of the decision, the court instructed the bankruptcy court to "ascertain if an efficient market rate exists and, if so, apply that rate, instead of the formula rate." (326) In other words, the Second Circuit embraced the Sixth Circuit's two-step approach. (327) Unfortunately, the decision does little to address the confusion and uncertainty surrounding the actual implementation of the approach, including how best to identify an efficient market for similar loans.

Although the legal reasoning may be different, all of the cases discussed in this section have concluded that the Till plurality opinion does not necessitate use of a formula approach based on the prime rate in determining cramdown rates in chapter 11 cases. The post-Till decisions have also struggled to integrate the plurality opinion's dictum regarding the possibility of an efficient market for similar loans in chapter 11. And, as before Till, the circuits continue to follow different approaches. Unfortunately, this has left courts, parties, and commentators struggling to determine how best to identify fair and equitable plan rates.

F. RECENT REFORM PROPOSALS

In 2014, the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11--made up of some of the most prominent bankruptcy and restructuring professionals in the United States--published the results of its in-depth, three-year study of commercial restructurings under chapter 11. (328) With respect to secured-creditor cramdown rates, the commissioners counseled against application of the Till formula approach to chapter 11 cases, recommending in its place a more contextual analysis. (329) Specifically, they endorsed a somewhat nebulous "general market approach," which appears similar to the Sixth Circuit's two-step approach in that it directs courts to determine a market rate for the reorganized debtor or, when no such efficient market exists, a "risk-adjusted rate" reflecting "the actual risk posed in the case of the reorganized debtor." (330) The analysis would take into account "factors such as the debtor's industry, projections, leverage, revised capital structure, and obligations under the plan." (331) However, as of this writing, Congress has taken no steps to adopt this or any other reform proposals included in the final report. And so it is that the law governing cramdown interest rate determination in chapter 11 is even murkier now than it was before Till was decided. (332) To help bring clarity to this area of law, we introduce a new approach in the following sections.

IV. DISCUSSION: A BETTER APPROACH TO SECUREDCREDITOR RISK PROTECTION

As the previous sections illustrate, the law regarding secured-creditor cramdowns in chapter 11 remains confusing and inconsistent. Although courts characterize their efforts as a search for a risk-adjusted, market-based rate, they frequently misunderstand the various benchmark rates that are commonly used in the capital markets and then make inexplicable adjustments to them. Courts have also wavered in their underlying assumptions regarding the role of market rates in the present-value analysis. Many published opinions suggest that the prevailing market rate is the best measure of the appropriate discount rate. Others suggest that the present-value analysis should strive to measure the creditor's actual risk exposure, with the prevailing market rate serving merely as one data point. Courts also have demonstrated a fundamental misunderstanding of the actual risks faced by crammed-down secured creditors and whether and to what extent these risks are introduced or amplified by the bankruptcy process. (333) Finally--and most importantly--courts seem to have focused so much on the plan rate that they have lost sight of other key considerations of the fair-and-equitable test and of plan confirmation standards generally.

In light of these and other criticisms, we propose a new approach to compensating crammed-down secured creditors that follows the statutory requirements, legislative history, and general principles discussed above, while avoiding many of the contradictions in the approaches taken by courts in the past. We begin by identifying and exploring the risks that crammed-down secured creditors face and the best means of protecting against those risks.

A. The Crammed-Down Secured Creditor's Increased Risks

Returning to the concepts introduced in Part II, the following section considers how cramdown plans may actually amplify a secured creditor's risks. We believe that the goal of bankruptcy law should be to provide the crammed-down secured creditor with appropriate protection from the increased costs and risks truly imposed by the plan, rather than to eliminate all economic burdens, many of which exist in the absence of a plan providing for deferred payment of secured claims.

Crammed-down secured creditors face the following costs and risks when a plan proposes to pay their secured claims over time:

1. the economic cost, expressed as the pure time-value of money, resulting from payment in the future rather than immediately;

2. inflation risk, particularly as the cramdown plan extends payments far into the future;

3. the credit risk, that the debtor will not make plan payments as scheduled;

4. collateral risk, or the risk that the value of the collateral will deteriorate to the point that, if the creditor must foreclose after a plan default, the collateral will no longer be adequate to satisfy the remainder of the secured claim;

5. transaction costs, such as the cost of funds to the creditor and the cost of administering the loan that would not be incurred if the secured claim were paid immediately; and

6. lost-opportunity costs, because the very nature of a deferred payment plan prevents a secured creditor from recouping its capital and reinvesting the funds in an alternative investment in which it might earn a higher return.

These burdens are discussed extensively in the jurisprudence, but often not in a logically satisfying manner. In the following sections, we discuss each of them and consider which are appropriate to address through the plan rate, which are not, and how devices other than interest payments may more fairly and equitably address some of the risks. First, however, we provide a cautionary note regarding the limitations of interest payments as a means of controlling risk.

B. The Limitations of Interest Payments for Controlling Risk

As noted many times, the Bankruptcy Code requires that the crammed' down holder of a secured claim receive "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property." (334) However, because the Bankruptcy Code also requires that the crammed-down secured creditor maintain its lien, two potential sources of deferred cash payments exist: the cash payments that must be made to the creditor (which may be further broken down into principal payments and interest payments) and any cash the creditor would later receive by foreclosing or otherwise realizing on its collateral if the debtor defaults and the creditor is permitted to foreclose ("collateral recovery payments").

Although interest payments may be effective devices for compensating for the time-value of money and any inflation risk,335 they are less effective in addressing credit and collateral risks. Indeed, it is especially problematic to rely on increases in the plan rate to protect against the risk of payment default. This is because an increase in the rate only increases the credit risk (i.e., the risk of default increases with the increased plan payment resulting from the increased interest rate). Unfortunately, the post-Till cases focus narrowly on credit risk and strive to address it by increasing the plan rate. (336) In our view, that is plainly wrong.

Although it is true generally that lenders charge higher interest rates when they perceive greater credit risk, it is not necessarily the case that a similar risk adjustment is appropriate for a bankruptcy cramdown. At least four reasons for this emerge. First, professional lenders tend to hold a portfolio of similar loans, only some of which will go into default. Therefore, the higher rates charged across the entire portfolio help to offset the losses on loans that default, even those that end up being crammed-down in bankruptcy. As a result, the higher rates charged on the good loans compensate the lender for its losses on the defaulted loans including the defaulted loan that is the subject of the cramdown proceeding. (337) Second, and relatedly, most loans that are being adjusted in bankruptcy were performing loans for a period (sometimes an extended period) before bankruptcy. As a result, during the pre-default period, the debtor paid a risk premium that was priced into the original loan. (338) Third--and most importantly--bankruptcy, by definition, involves scarcity such that courts must be mindful of overcompensating one claimant at the expense of junior stakeholders who otherwise would have received greater distributions. Many other stakeholders are subject to the same risk that they will not be paid what is promised under the plan; increasing the interest rate paid to the crammed-down secured creditor only increases that risk for the other creditors. And, as a doctrinal matter, we construe the Bankruptcy Code's secured-creditor cramdown provisions to mean that the credit risk is addressed primarily by the maintenance of the creditor's lien. In other words, our proposal urges courts to focus on minimizing the collateral risk to ensure that the creditor is protected if and when the credit risk materializes.

Of course, if a crammed-down secured creditor is and remains fully secured during the term of the plan (in the sense that the collateral is always worth enough that, even after deducting the likely costs of foreclosure, the collateral will yield proceeds sufficient to satisfy the remainder of the secured claim), then it will always be able to receive the full principal amount of the secured claim by foreclosing on its collateral. In some situations, actual collateral risk is nonexistent so that no real credit risk exists. (339) In the more typical situation when collateral risk is genuine, however, we believe it is illogical to try to protect against it by increasing the interest rate on the secured claim. Higher interest payments do nothing to protect against collateral risk because the increased amounts paid under the plan do not reduce the principal balance of the secured claim.

Even if increasing the plan rate to compensate for the credit and/or cob lateral risk were appropriate, case law suggests that no principled method exists to make the adjustment. Justice Scalia's dissent in Till argued that the risk adjustment used in that case was nothing more than "a smallish number pulled out of a hat." (340) The bankruptcy court for the Northern District of Texas also made this point when it discussed expert testimony presented by the debtor and the secured creditor on the issue of the appropriate risk adjustment with respect to a claim arising out of a mortgage loan on a hotel. (341) Each expert considered the same five factors bearing on the plan's risk: quality of the debtor's management, commitment of the debtor's owners, health and future prospects of the debtor's business, quality of the collateral, and feasibility and duration of the plan. (342) Each then testified as to the amount by which the base rate should be adjusted up or down based on that factor. (343) Based on that process, the debtor's expert concluded that the appropriate rate was (4). (25)% per year, and the creditor's expert concluded that it was (10). (38)% per year. (344) If either expert had any way of determining the amount of the adjustment for each factor, the lengthy reported opinion does not describe it. The court nevertheless found that the debtor's risk adjustment was too low and the creditor's was too high. (345)

It simply is not possible to describe what the courts do in adjusting plan rates for risk as being anything other than arbitrarily adding one to three percentage points to the base rate because a lot of other courts have done so, or, even worse, using the risk adjustment as cover for moving the interest rate up or down for other, unstated reasons. Finally, by focusing almost exclusively on interest payments to compensate crammed-down secured creditors for plan-related risk, courts have underemphasized the role of collateral recovery payments. We address this point in subsequent sections.

C. Setting the Base Rate

We propose that courts begin with a risk-free base rate, such as the yield rate on a Treasury security with a term equivalent to the plan term. Such a rate would compensate the creditor for the time value of money and the inflation risk, as determined by the highly liquid market for Treasury securities. (346) The Treasury yield rate can easily be determined from a reliable publication issued by the Federal Reserve Board. Courts have taken judicial notice of the interest rates published in Publication H.15. (347) By using a TCM rate for the relevant maturity date (i.e., a five-year TCM rate for a plan with a five-year payment term), a court can establish a risk-free fixed rate that excludes any substantial transaction costs. (348) The TCM rate has the important benefit that it is a benchmark actually used in the credit markets to set long-term fixed interest rates. (349) Upward adjustments would be made, as needed, based on relevant factors discussed in subsequent sections.

D. Addressing the Collateral Risk

Of course, if cramdown interest payments are to protect the creditor against inflation risk and compensate it for the time-value of money, then some additional mechanism is needed to address the collateral risk, i.e., the risk that the value of the collateral might deteriorate between the effective date of the plan and a later default under the plan. (350) The appropriate way to protect the creditor against such collateral risk is by means of the familiar concept of adequate protection. (351) Pursuant to the Bankruptcy Code, one alternative to deferred cash payments that can be crammed-down on nonconsenting secured creditors in a plan is treatment that provides "for the realization by such holders of the indubitable equivalent of such claims." (352) Clearly, "abandonment, or other unqualified transfer of the collateral, to the secured creditor satisfies this requirement" (353) by allowing the creditor to foreclose on its collateral immediately. Thus, if the plan preserves the foreclosure right of the creditor during the term of the plan so that the creditor is in no worse position than it would have been had it foreclosed on the effective date of the plan, then this should satisfy the need for risk protection.

Depending on the type of collateral, collateral risk protection can be provided more rationally by requiring: maintenance of an existing security cushion, plan payments in excess of the risk-free rate to be applied to principal (rather than treated as interest), provision of additional collateral, and/or adjustments based on reasonably anticipated appreciation in the value of the collateral. It may also be provided by preserving the ability of the creditor to come back to the court during the plan term to seek either further adequate protection or the right to foreclose on its collateral if the initial protection proves insufficient.

The specifics means of adequate protection could vary significantly depending on a wide variety of factors including: whether the type of collateral involved tends to increase or decrease in value over time; the economic life of the collateral as compared to the term of the plan; the degree, if any, to which the secured claim is oversecured (354) and, therefore, protected by a security cushion; the resources other than the collateral available to the debtor to make payments; how rapidly the principal amount of the secured claim is paid down by the proposed plan payments; whether the plan provides for current payment of accruing interest or for deferral of interest (i.e., negative amortization); (355) and whether the plan proposes for the debtor to retain and use the collateral or sell it. The range and complexity of these factors highlight just how unrealistic it is to suggest that simply adding one to three percentage points to a base rate would provide a secured creditor with appropriate protection against the risk inherent in any plan, especially since increasing the interest rate would increase the risk of default. If a court believes the debtor should pay the creditor some amount above the otherwise applicable rate due to collateral risk, why is it appropriate for that additional amount to be in the form of added interest? If the risk is that the creditor will not receive the principal amount of its claim, would it not be more appropriate that the additional amount be treated as a principal payment, thereby actually paying a portion of the principal that is deemed to be at risk?

Of course, there is also the issue of setting the collateral value for cramdown purposes. Recall that the Bankruptcy Code provides that the collateral value for purposes of establishing the amount of a secured claim "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest." (356) In Rash, (357) the Supreme Court interpreted this statutory language to mean that, if the debtor proposes to retain the collateral under the plan, the court should value the collateral based on what it would cost the debtor to replace it rather than on the (usually lower) net amount the creditor would receive in a foreclosure sale. (358) Dual valuation methods are possible, under the plain language of the Bankruptcy Code, such that the collateral could be valued at the replacement cost for purposes of setting the amount of the secured claim on which the interest rate and payments under the plan are based but valued at the foreclosure value for purposes of establishing the amount of a decline in value that would trigger the creditor's right to adequate protection. Nothing in the statute appears to preclude such a dual valuation when the valuations are done for different purposes and when the creditor would receive only the foreclosure value if the debtor's plan provides for abandoning the collateral to foreclosure in the first place. A dual valuation would recognize that the replacement-cost valuation would be appropriate in light of the debtor's retention of the collateral under the plan, and the lower foreclosure valuation would be appropriate in light of what would occur if the debtor were to default on the plan and the creditor were to foreclose. (359)

In sum, if the interest rate paid on the secured claim compensates the creditor for the time-value of money and the inflation risk, and if the interest rate is paid until default by the debtor and the value of the collateral does not decrease below the allowed amount of the secured claim after the effective date of the plan, then the crammed-down secured creditor's claim is never imperiled. At any time, if there is a payment default and the creditor is permitted to promptly foreclose on its collateral, it will have received payment of the principal amount of the secured claim (via foreclosure) plus compensation for the delay in receiving it and for inflation and other actual costs during the interim (via the interest payments). Any credit risk would have been fully offset by the presence of valuable collateral, while the collateral risk would have been managed by the court's provision of adequate protection.

The following examples illustrate how this approach could guard more effectively against most of the real economic burdens faced by the crammed-down secured creditor than could an arbitrary "risk adjustment" of one to three percentage points to a base rate:

Example 1: The creditor is oversecured on the effective date of the plan so that its secured claim is equal to the entire amount of the outstanding obligations. Its collateral consists only of the debtor's accounts receivable, which are constantly turning over as old receivables are paid and new ones are generated. The value of the receivables, as determined by the bankruptcy court in allowing the claim, is 25% more than the creditor's claim. The plan could provide that if the value of the receivables securing the claim were to drop below a specified amount, the debtor would be required to pay the claim down to achieve the required ratio of collateral to debt that is provided for in the plan.

Example 2: The creditor is oversecured on the effective date of the plan so that its secured claim is equal to the entire amount of the outstanding obligations. Its collateral is a first priority lien on a desirable piece of real estate in an area with a generally rising market. The secured claim is in an amount less than half of the current property value. The creditor is protected by the large equity cushion in the property and the likelihood that the value of the collateral will increase over the term of the plan and, therefore, needs little or nothing more to protect it against collateral risk.

Example 3: The creditor is undersecured on the effective date of the plan so that its secured claim is reduced to the value of the collateral securing the claim, as determined by the bankruptcy court in allowing the claim. Its collateral consists of a parcel of real estate in a desirable urban area where property values are steadily rising in the current market. The plan could provide that, if the market were to change after the effective date of the plan so that the collateral value decreased (or became in imminent danger of decreasing) to below the amount of the claim, the creditor could apply to the court for an order requiring the debtor to provide it with adequate protection, which could be in various forms including a pay-down on the principal of the claim or the provision of additional collateral of a value deemed adequate by the creditor or the court. Failing that, the creditor would be allowed to foreclose on its collateral.

Example 4: The creditor is undersecured on the effective date of the plan so that its secured claim is reduced to the value of the collateral securing the claim. Its collateral consists of a truck used daily in the debtors business. The truck is subject to relatively predictable depreciation in value and is insured against damage or destruction in an accident. The plan could protect against collateral risk by proposing amortizing plan payments that would pay down the principal amount of the secured claim at a rate equal to or faster than the projected rate of depreciation and by giving the creditor the right to apply to the court for further adequate protection if the collateral were to decrease in value faster than projected.

Example 5: The creditor has a claim of $80,000 secured by a federally insured, blocked bank account from which the debtor cannot make withdrawals. The account has a balance of $100,000. The creditor needs nothing further in the way of protection against collateral risk.

Any number of further examples could be conceived to illustrate more effective alternatives to the prime-plus approach for addressing the secured creditors collateral risk.

E. Addressing Lost Opportunity Costs, Transaction Costs, and Other Relevant Factors

We have not yet addressed the lender's lost-opportunity and transaction costs. With respect to the latter, the secured creditor simply could be required to submit evidence as to the actual transaction costs, if any, that it reasonably expects to incur as a result of the cramdown. The court may either order the debtor to pay any allowable transaction costs at the time of plan confirmation or roll them into the deferred cash payments.

The lenders lost-opportunity costs may be more difficult to address. Indeed, the tireless search for the prevailing market rate of interest suggests that judges have long believed that the lender's lost-opportunity costs should be of foremost concern. In contrast, we believe that the lender's lost-opportunity costs should be one of many relevant factors considered after the court applies the more systematic approach laid out above. The following could be part of a nonexclusive list of such factors:

* Term of the plan. The longer the term of the plan--particularly where the plan extends repayment beyond the term of the prepetition obligation--the fairer it seems to require an interest rate reflective of a reasonable estimate of what the debtor would have to pay outside of bankruptcy, whether determined on the basis of what lenders charge for reasonably similar loans, what statutory rate the obligation would bear outside bankruptcy (e.g., for judgment or tax claims), or otherwise as evidence presented by the parties indicates. If, on the other hand, the plan proposes a short term during which the borrower will either sell the collateral or allow the creditor to foreclose on it, then it may not be necessary to make upward adjustments to the base rate.

* Inclusion of a prepayment premium or default rate interest in the claim. In some cases, the creditor's allowed secured claim may include a prepayment premium or make-whole fee that constitutes a form of compensation for the failure or possible failure to pay the anticipated yield over the term of the loan. Such a premium or fee may effectively take the place of interest that was to be paid on the loan; in that event, it may reduce any otherwise appropriate upward adjustments to the base rate. (360) Similarly, if the creditor has received interest at a default rate substantially higher than its pre-default rate during the period of default before the effective date of the plan, then the court should consider the overall return to the creditor over the period after default.

* How well-capitalized the debtor is. If the debtor is solvent and appears to be using the bankruptcy process primarily to reduce its interest costs for the benefit of equity owners, it may be appropriate to require a plan rate equal to the prepetition contract rate.

* Relationship between the amount of claim and collateral value. When the creditors secured claim has been valued at a replacement cost to the debtor that is much higher than the foreclosure value to the creditor, a lower interest rate might be appropriate. For example, if an undersecured creditors collateral is a large, expensive piece of mining equipment specially designed and constructed at a mine in a remote location in Alaska, it might have a replacement cost to the debtor (on application of the Rash valuation rule) far higher than what the creditor could obtain by foreclosing, removing, and selling the collateral. In such a situation, the creditor is being compensated under the plan (by way of collateral valuation) in a manner that favors the creditor so that it may be fair and equitable to give the creditor a lower interest rate than would be appropriate if that were not the case.

In considering these factors to decide whether a proposed cramdown interest rate is appropriate such that the plans treatment of a secured creditor is fair and equitable, courts would consider evidence introduced by the parties. Careful attention to these and other relevant factors would allow courts to more carefully assess the crammed-down secured creditor's lost opportunities and other economic costs of the debtors financial distress and bankruptcy. Such a process is consistent with the text and legislative history of the Bankruptcy Code, the history of the fair-and-equitable requirement, and the early Supreme Court cases that counsel against mathematical formulas to accomplish what is an inherently imprecise, case-by-case endeavor.

F. Summary of the Proposed Approach

To summarize, we propose that courts approach secured-creditor cramdown-rate determinations as follows:

1. Ensure that the plan preserves the right of the creditor to foreclose on its collateral during the term of the plan and take steps to ensure adequate collateral risk protection, if necessary;

2. Set plan payments (after making appropriate provision for the creditors actual transaction costs) with a risk-free base interest rate, such as the yield rate on a Treasury security with a term equivalent to the plan term; and

3. Make upward-only adjustments to the base rate based on express findings supported by appropriate evidence in respect of one or more relevant factors.

This approach would satisfy the statutory elements as well as other guiding principles articulated by Congress and the courts. The crammed-down secured creditor would receive "deferred cash payments" under the plan as required by the Bankruptcy Code. (361) If the debtor were to become unable to make payments as provided in the plan, the creditor could foreclose on its collateral, thereby receiving the "indubitable equivalent" (362) of the principal of the secured claim (so long as it was adequately protected against a decrease in the value of the collateral). The cash payments would have "a value, as of the effective date of the plan, of at least the value" (363) of the creditor's interest in the collateral because the creditor would be paid an appropriate fixed rate of interest on the secured claim to compensate it for the time-value of money and inflation risk.

The base rate could easily be determined from a reliable daily publication issued by the Federal Reserve Board. Courts would be relieved of the burden of considering evidence on whether an efficient market for similar loans exists and, if one exists, adjusting market rates to exclude things that are not to be compensated in a plan rate, such as profit. The plan rate would be largely unrelated to the individual circumstances of the creditor or the debtor and would, therefore, be more economical and efficient for the parties and the courts to determine. The rate would be fixed for the term of the plan. It would be based on rates that are used in the credit markets to price long-term, fixed-rate loans, rather than on rates used to price short-term, floating-rate loans.

The creditor would be appropriately compensated for its actual transaction costs and the time-value of money and protected against inflation risk, credit risk, and collateral risk introduced or amplified by the plan. Such protection would be provided in a manner much better suited to offset the actual risks to the creditor. Lost-opportunity costs and other relevant factors would be considered and evaluated against the totality of circumstances. This approach would also contribute to, rather than detract from, achievement of chapter 11's "feasibility" requirement (364) because it would not burden the debtor with a higher--and largely arbitrary--risk premium to protect the creditor against risks that are not clearly defined and that are only exacerbated by a higher interest rate.

We acknowledge that multifactor, case-by-case analyses of this sort do not necessarily enhance certainty and predictability for market participants. At the same time, we believe that the approach has the potential to bring greater clarity to this important area of bankruptcy law because it channels judicial discretion in more precise ways and demands a more reasoned and explicit process for rate determination. Over time, as courts and litigants apply the framework to a variety of cramdown scenarios and expressly identify the reasons for any adjustments, they generate a baseline understanding that may help to guide settlements in future cases, thereby driving down costs and inefficiencies.

We also understand that judges may be reticent to adopt an approach that requires continued postconfirmation oversight obligations, such as the obligation to determine whether payments need to be made to compensate for declines in collateral value. However, the limited intervention we propose is squarely within a bankruptcy court's continuing subject-matter jurisdiction to resolve postconfirmation issues because it would be necessary to advance the confirmation order and ensure successful implementation of the plan. (365) Furthermore, courts could reduce the need for postconfirmation oversight by taking steps to ensure minimal collateral risk at the outset or by including springing provisions in the confirmation order that are only triggered if and when there is a violation of the required ratio of collateral to debt provided for in the plan.

We also note a commentator's recent argument that debtors should be required to pay a market rate under a cramdown plan in order to discourage them from opportunistically filing for bankruptcy to obtain a rate lower than the prebankruptcy contract rate. (366) Although that may be a valid concern, (367) the proposed solution is problematic for several reasons. First, requiring the debtor to pay a market rate as of the time of plan confirmation, rather than the prebankruptcy contract rate, would not discourage a debtor from filing for bankruptcy if market rates declined to less than the contract rate (at least absent an enforceable yield-maintenance provision in the underlying loan documents). Second, the approach would be difficult to implement in practice. No relevant benchmark rate exists for many types of secured claims and, if there is a prevailing market rate, it likely will require expert testimony and expensive fact-finding by the court to determine what it is. (368) Third, the strict-market-rate approach does not recognize and address the fact that various provisions of the Bankruptcy Code require, in similar or identical language, that a creditor receive cash payments or other property "of a value, as of the effective date of the plan" (369) at least equal to some amount.

For example, the cramdown provisions provide that unsecured creditors must receive property "of a value, as of the effective date of the plan" equal to the amounts of their claims unless no junior class receives or retains any estate property; (370) and that holders of interests must receive property "of a value, as of the effective date of the plan" equal to the greatest of certain specified amounts unless no junior class receives or retains any estate property). (371) What benchmark rate would a court use to calculate the present value of plan distributions under these provisions to holders of equity interests or to tax or judgment creditors? Moreover, there is nothing to indicate that Congress intended the identical language in the three provisions to provide different interest rates to holders of the three types of claims and interests. Had Congress intended to provide that deferred payments bear interest at a prime-plus rate or at a market rate for similar obligations or at the rate applicable to the claim outside bankruptcy, it would have stated so expressly. The fact that Congress used variations on the "value as of the effective date of the plan" formulation in multiple contexts and with respect to a wide variety of claims and interests suggests that it had something else in mind--something less amenable to a simple formula. The early Supreme Court precedents regarding the fair-and-equitable requirement discussed above lend further support to this view.

Ultimately, a strict-market-rate approach creates more problems than it solves. It is possible, however, that courts could use other means to discourage the opportunistic filing of chapter 11 cases to achieve a lower interest rate. More broadly, the chapter 11 cramdown provision provides that, to be crammed-down, a plan must be "fair and equitable," (372) which requires that a plan "include[ ]" the specific requirements of the subsections of [section] 1129(b)(2), including the present-value requirements. Section 102(3) provides that the word "includes," when used in the Bankruptcy Code, is "not limiting." (373) Therefore, a court can refuse to cram-down a plan that meets the present-value requirement when it finds the plan not to be fair and equitable for other reasons.

For example, in 1989, the Fifth Circuit found that a chapter 11 plan was not fair and equitable to a crammed-down secured creditor when it provided for a fifteen-year term, negative amortization, no principal reduction until the end of the twelfth year, and a large balloon payment at the end of the plan term. (374) Similarly, a court could refuse to confirm a plan on fair-and-equitable grounds when an otherwise financially sound debtor attempts to use chapter 11 simply to obtain a lower interest rate. Depending on the facts of the individual case, a court also could refuse to confirm a plan with an excessively long term or inadequate protection of collateral value. Alternatively, the court may require a higher interest rate for a secured creditor when the plan proposes an otherwise unreasonably long payment term.

In this way, the recommended approach is more holistic. Instead of myopically focusing on interest rates and other forms of secured-creditor compensation, it encourages courts to consider offsetting the secured creditors actual risk exposure through means specifically targeted at that form of risk. Considering the nature of the various risks and the ways in which parties normally go about mitigating them outside bankruptcy, this approach is not only more consistent with the legal doctrine, it also better reflects commercial practice.

V. CONCLUSION

Given the law's lack of clarity with respect to secured-creditor cramdown interest rates, one thing is clear: secured creditors are entitled to protection from certain actual risks and costs imposed by the plan. In this Article, we have proposed a new approach to secured-creditor cramdowns that flows directly from this most fundamental proposition. It looks beyond interest payments as a compensatory tool and considers other protective devices that may offset more effectively the secured creditor's real economic burdens.

Returning to our introductory hypothetical, the secured creditor should enjoy the benefit of its bargain and have its yield-maintenance claim--which arose prepetition--allowed in bankruptcy. At the time the parties initiated the financing arrangement, the bank and the debtor both acknowledged the prepayment risk and included provisions to address it specifically. The debtor's financial distress and bankruptcy need not deny the bank the benefit of this bargain, and the security cushion is sufficient to secure this portion of the obligations.

With respect to cramdown, the bank faces several other risks. Naturally, there is the time-value of money to consider because the debtor proposes to make deferred cash payments rather than satisfy the claims in full through an immediate cash distribution. Meanwhile, the cramdown plan also exposes the bank to new or amplified inflation risks, credit risks, collateral risks, and investment-opportunity risks, particularly given the fact that the debtor proposes to extend the maturity date. The bank may also incur certain transaction costs associated with administering the loan. Unfortunately, the court in our hypothetical did not thoroughly assess these real economic costs of the cramdown plan. Nor did it determine whether and to what extent such costs were already compensated for elsewhere in the plan, such as through the yield-maintenance claim. Through its overreliance on a so-called market rate of interest, the court sidestepped these and many other important considerations of the fair-and-equitable test for plan confirmation. We urge courts presiding over secured-creditor cramdown plans to set aside, once and for all, the quest for the prevailing market rate, and instead engage in a more comprehensive assessment of risk and return that contemplates all aspects of the proposed plan.

(1) So-called cramdowns are authorized under 11 U.S.C. [section] 1129(b)(1) (2012), which provides that a plan that satisfies all other requisite provisions of [section] 1129(a) may be confirmed over the objection of one or more classes.

(2) 11 U.S.C. [section][section] 1101-1174 (2012) (providing for reorganization of bankrupt persons).

(3) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012) (emphasis added).

(4) For simplicity, we refer to the rate to be applied under a plan as an "interest rate." We note, however, that referring to it as a "discount rate" is probably technically more correct and closer to the statutory language.

(5) See, e.g., GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997).

(6) See, e.g., infra notes 201-208 and accompanying text.

(7) 541 U.S. 465 (2004).

(8) Id. at 478-79 (Stevens, J.) (plurality opinion); see discussion infra Section III.D.2.a.

(9) Till, 541 U.S. at 480 (Thomas, J., concurring); see discussion infra Section III.D.2.b.

(10) Till, 541 U.S. at 492 (Scalia, J., dissenting); see discussion infra Section III.D.2.c.

(11) Till, 541 U.S. at 476 n.14 (Stevens, J.) (plurality opinion); see infra note 302 and accompanying text.

(12) See discussion infra Section III.E.

(13) "Person" is defined to include an "individual, partnership, or corporation." 11 U.S.C. [section] 101(41) (2012).

(14) The Bankruptcy Code primarily uses a balance-sheet test for insolvency. See 11 U.S.C. [section] 101(32)(A) (2012) (defining "insolvent" for business entities and individuals as the "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at fair valuation").

(15) In other words, the creditor is oversecured as of the petition date, meaning that the value of its collateral exceeds the amount of its outstanding obligations. Accordingly, the bank is entitled to interest on its claim and reasonable contractual fees and costs. 11 U.S.C. [section] 506(b) (2012).

(16) Under common law, installment payments are not collectible until they are due; accordingly, lenders may only enforce remedies with respect to overdue installments. See, e.g., Briggs v. Briggs, 711 A.2d 1286, 1289 (Me. 1998). However, if the note or contract includes an acceleration clause, then the lender may accelerate the entire debt, rendering all the obligations due and collectible. See, e.g., Costa v. Deutsche Bank Nat'l Trust Co. 247 F. Supp. 3d 329, 340 (S.D.N.Y. 2017).

(17) The filing of a bankruptcy petition initiates an automatic stay against collection and enforcement actions against the debtor and any property of the estate. 11 U.S.C. [section] 362(a) (2012).

(18) See 11 U.S.C. [section] 101(5)(A) (2012) (defining "claim" to mean a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured"); 11 U.S.C. [section] 501(a) (2012) (setting forth a creditor's obligation to file a proof of claim).

(19) See 11 U.S.C. [section] 1101(1) (2012) (defining "debtor in possession" to mean the debtor except when a trustee has been appointed). The debtor in possession "generally has the authority to exercise the same powers as a trustee." Weingarten Nostat, Inc. v. Serv. Merch. Co., 396 F.3d 737, 742 n.4 (6th Cir. 2005) (citing 11 U.S.C. [section][section] 1107(a), 1108 (2000)). Unless the context indicates otherwise, references herein to the "debtor" mean the debtor in possession.

(20) Assume that the promissory note contains language substantially similar to Stuart M. Saft, Form--Promissory note (detailed), in 5 Com. Real Estate Forms 3d [section] 16:6 (2016) [hereinafter Form-Promissory note (detailed)].

(21) This is the yield-maintenance clause considered by the Seventh Circuit in River East Plaza, L.L.C. u. Variable Annuity Life Insurance Co., 498 F.3d 718 (7th Cir. 2007), as quoted in the district court opinion at River East Plaza, L.L.C. v. Variable Annuity Life Co., No. 03 C 4354, 2006 WL 2787483 (N.D. 111. Sept. 22, 2006).

(22) Provisions of this sort are based on the reasonable assumption that Treasury securities will be available in unlimited amounts and with little to no transaction costs.

(23) 11 U.S.C. [section] 502(a) (2012) provides that a proof of claim "is deemed allowed, unless a party in interest ... objects." See also Fed. R. Bankr. P. 3001(f) ("A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim"). If an objection is made, then the court must determine the amount of the claim. 11 U.S.C. [section] 502(b).

(24) A debtor made this argument on reply in support of its objection to a creditor's proof of claim in Nevada in 2013. See Reply to Response to Debtor's Objection to Proof of Claim No. 3 Filed by CW Capital Asset Management, LLC at 11-12, In re CBS I, LLC, No. 12-16833-mkn (Bankr. D. Nev. Apr. 24, 2013), ECF No. 193. The creditor had pointed out that, as a securitized trust, it was not permitted to reinvest prepaid funds. See Response to Debtor's Objection to Proof of Claim No. 3 Filed by CW Capital Asset Management, LLC, at 9, In re CBS I, LLC, No. 12-16833-mkn (Bankr. D. Nev. Apr. 18, 2013), ECF No. 186.

(25) When a party in interest objects to a proof of claim, a hearing is required on the contested matter. See 11 U.S.C. [section] 502(b); Fed. R. Bankr. P. 3007(a).

(26) See Form--Promissory note (detailed), supra note 20.

(27) The argument was made in the Objection and Response to Motion for Disallowance of Make-Whole Premium Asserted by GMAC Commercial Mortgage Corporation at 10, In re Acme Petroleum & Fuel Co., No. 02-34041 (Bankr. W.D.N.C. Sept. 29, 2003).

(28) Id. at 11.

(29) Suggestions in Opposition to Objection to Proof of Claim of California Public Employees' Retirement System, at 5, In re CP Holdings, Inc., No. 03-43750-abl7 (Bankr. W.D. Mo. Apr. 23, 2004).

(30) In addition to meeting all other confirmation requirements, a plan of reorganization must meet the requirements of 11 U.S.C. [section] 1123 (2012).

(31) The court may confirm a plan over the objection of a secured creditor if the plan is "fair and equitable" to the secured creditor. 11 U.S.C. [section] 1129(b)(1) (2012). The described test is one of several used to determine whether a plan meets this requirement. See 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012); see also infra Section III.A.

(32) If a plan reinstates or decelerates a promissory note that was accelerated prepetition, the debtor or another party in interest may challenge the claim for prepayment consideration. Although the creditor may argue that the prepayment consideration must be paid because it would have been payable in the event of a hypothetical chapter 7 liquidation, creditors sometimes agree to waive the previously allowed claim or, alternatively, agree to settle the claim for some lesser amount with the court's approval. See, e.g., Debtors' Motion for Entry of Interim and Final Orders (I) Authorising Debtors to (A) Obtain Postpetition Financing Pursuant to 11 U.S.C. [section][section] 105, 361, 362, 364(c)(1), 364(c)(2), 364(d)(1), and 364(e) and (B) Use Cash Collateral Pursuant to 11 U.S.C. [section] 363, (II) Granting Adequate Protection Pursuant to 11 U.S.C. [section][section] 361, 362, 363, and 364, and (II) Scheduling Final Hearing Pursuant to Bankruptcy Rules 4001(b) and (3), In re Milagro Holdings, LLC, No. 15-11520-KG (Bankr. D. Del. July 15, 2015), ECF No. 12 (evidencing negotiations of this sort).

(33) Till v. SCS Credit Corp., 541 U.S. 465, 476 n.14 (2004).

(34) The argument was made in Amended Motion of Landesbank Baden-Wurttemberg, New York Branch, for Relief from Automatic Stay at 27, In re FX Luxury Las Vegas I, LLC, No. 10-17015-bam (Bankr. D. Nev. July 9, 2010), ECF No. 378.

(35) Koopmans v. Farm Credit Servs. of Mid-Am., 102 F.3d 874, 875 (7th Cir. 1996).

(36) See generally Allen N. Berger & Christa H.S. Bouwman, Bank Liquidity Creation and Financial Crises (2015).

(37) We do not claim to address all the risks encountered by commercial lenders, generally, or by secured creditors, specifically.

(38) Considerable efforts have been made to develop predictive models that may help to quantify this risk. See, e.g., Advances in Credit Risk Modelling and Corporate Bankruptcy Prediction (Stewart Jones & David A. Hensher eds., 2008) (analyzing modern approaches to evaluating credit risks, including the risk of a bankruptcy filing).

(39) See, e.g., Jay Lawrence Westbrook, Two Thoughts About Insider Preferences, 76 Minn. L. Rev. 73, 85 (1991) (exploring common reasons why creditors require guarantees).

(40) See generally Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. Cin. L. Rev. 1019 (2007).

(41) This concept is explored in Pamela Peterson Drake & Frank J. Fabozzi, Foundations and Applications of the Time Value of Money (2009).

(42) Id. at 1-3.

(43) See, e.g., John C. Hull, Risk Management and Financial Institutions 175-200 (4th ed. 2015) (describing inflation risk).

(44) Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates (Daily), http://www.federalreserve.gov/releases/Hl5/ (last visited Dec. 11, 2018) [hereinafter H.15].

(45) See id.

(46) Id. at n.9.

(47) Board of Governors of the Federal Reserve System, Treasury Inflation-Protected Securities (TIPS), https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm (last updated Sept. 27, 2013).

(48) Id.

(49) See Wall St. J., Market Data Center, http://www.wsj.com/mdc/public/page/2_3020-moneyrate.html.

(50) H.15, supra note 44, at n.7.

(51) "The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight." Fed. Reserve Bank of St. Louis, Effective Federal Funds Rate (DFF) (Dec. 13, 2018), https://fred.stlouisfed.org/series/DFF.

(52) Historical H.15 data is available through the Board of Governors of the Federal Reserve System data download program, available at https://www.federalreserve.gov/datadownload/Choose.aspx?rel=Hl5.

(53) Historical TIPS data is available from the Federal Reserve Bank of St. Louis Economic Research website, at https://fred.stlouisfed.org/series/DFII5.

(54) It is also possible that the 2.06% portion of the total interest rate includes a premium for insuring that the principal of the security will keep pace with the Consumer Price Index (or will protect against possible deflation), or that it reflects some degree of skepticism that the Consumer Price Index is an accurate measure of actual inflation.

(55) Historical prime rate data is also available from the Federal Reserve Bank of St. Louis Economic Research website, at https://fred.stlouisfed.org/series/PRIME.

(56) See Till v. SCS Credit Corp, 541 U.S. 465, 497 (2004) (Scalia, J. dissenting) (noting that the "prime lending rate includes banks' overhead and profits").

(57) Of course, in the market for commercial loans, lenders are often compensated for transaction costs by means of loan fees and direct reimbursement of the lender's out-of-pocket loan costs.

(58) 11 U.S.C [section] 506(a)(1) (2012). Alternatively, an undersecured creditor holding a valid lien on the debtor's property may elect to have its claim treated as fully secured by making an election under 11 U.S.C. [section] 1111(b).

(59) 11 U.S.C [section] 506(a)(1).

(60) Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 956 (1997).

(61) 11 U.S.C [section] 506(b).

(62) Id.

(63) 11 U.S.C. [section] 362(a) (2012).

(64) 11 U.S.C. [section] 362(d) authorizes the bankruptcy court to grant relief from the stay "for cause, including the lack of adequate protection of an interest in property of [a] party in interest," or "with respect to a stay of an act against property ... if the debtor does not have an[y] equity in such property[] and [the] property is not necessary to an effective reorganization."

(65) 11 U.S.C. [section] 361 (2012). The phrase "adequate protection" is not defined in the Bankruptcy Code. Instead, [section] 361 provides that "adequate protection may be provided" using one of three non-exclusive approaches. See also In re Russell, 567 B.R. 833, 839 (Bankr. D. Mont. 2017).

(66) See, e.g., In re Cafeteria Operators, L.P, 299 B.R. 400, 410 (Bankr. N.D. Tex. 2003) (granting a replacement lien); In re Coker, 216 B.R. 843, 855 (Bankr. N.D. Ala. 1997) (stating that "[p]eriodic cash payments are the most common ways debtors provide secured creditors with adequate protection"); In re O'Quinn, 98 B.R. 86, 89 (Bankr. M.D. Fla. 1989) (stating that "[t]ypically, adequate protection takes the form of monthly or quarterly cash payments").

(67) One court described the economic risks of prepayment:
   Beyond the loss of the bargained-for rate of return, prepayment can
   cause serious economic consequences, such as an increased tax
   burden and unexpected reinvestment costs; for those investors whose
   purpose in lending money was to ensure a stable annual income for a
   period of years, it can also cause a frustration of that purpose.


Warrington 611 Assoc. v. Aetna Life Ins. Co, 705 F. Supp. 229, 233-34 (D.N.J. 1989).

(68) Professor Dale Whitman wrote one of the seminal works on the topic. Dale A. Whitman, Mortgage Prepayment Clauses: An Economic and Legal Analysis, 40 UCLA L. Rev. 851 (1993).

(69) Grant S. Nelson, et al., Real Estate Finance Law [section] 6.1 (6th. ed. 2014) (compiling cases).

(70) See Kent H. Roberts, Prepayment Penalties in Texas, 45 Baylor L. Rev. 585, 595 (1993).

(71) See River E. Plaza, L.L.C. v. Variable Annuity Life Ins. Co, 498 F.3d 718, 721 (7th Cir. 2007) (citing Whitman, supra note 68, at 871).

(72) See generally Whitman, supra note 68. Make-whole provisions may be designed to relieve the lender of unexpected transaction costs, increased tax liability, and reinvestment loss resulting from the borrower's prepayment. Whitman, supra note 68, at 860-62.

(73) Whitman, supra note 68, at 870-71.

(74) Scott Talkov, Exposing the Myth of Mortgage Prepayment Penalties in the Aftermath of River East, 44 Real Prop. Tr. & Est. L.J. 585, 600 (2009) ("In the commercial sector, the 'yield-maintenance' clause has become the industry standard.").

(75) Whitman, supra note 68, at 871; see also Joel Rosenberg, Prepayment and Maintaining Yield on Commercial Loans, Precision Lender (last visited Dec. 13, 2018).

(76) See also Nelson, et al, supra note 69, at [section] 6.1 (describing these types of calculations).

(77) River E. Plaza, L.L.C. v. Variable Annuity Life Ins. Co., 498 F.3d 718, 719 (7th Cir. 2007); cf. Richard F. Casher, Prepayment Premiums: Hidden Lake Is a Hidden Gem, Am. Bankr. Inst. J., Nov. 2000, at 33 ("Treasuries are used as the reinvestment norm because there exists no standard commercial mortgage loan rate, given the uniqueness of each commercial loan and the inherent difficulty (if not impossibility) of identifying an identical or similar loan; in contrast, the market for treasuries is deep and highly liquid").

(78) See, e.g., River E. Plaza, 498 F.3d at 721; UIP Ltd, L.L.C. v. Lincoln Nat'l Life Ins. Co, No. CV090006-PX-NVW, 2009 WL 4497233, at *10 (D. Ariz. Nov. 30, 2009); Clean Harbors, Inc. v. John Hancock Life Ins. Co, 833 N.E.2d 611, 618-19 (Mass. Ct. App. 2005).

(79) Whitman, supra note 68, at 859-60 ("The general reaction of state courts has been to enforce [prepayment fees] routinely, notwithstanding arguments that they ... amount to invalid liquidated damages clauses."); Nelson, et al., supra note 69, at [section] 6.2 ("Attacks on prepayment fee clauses on the basis that they are unreasonable forms of liquidated damages, and hence constitute unlawful penalties, have been largely unsuccessful in state courts").

(80) See, e.g., Planned Pethood Plus, Inc. v. KeyCorp, Inc., 228 P.3d 262, 264-65 (Colo. App. 2010); Clean Harbors, 833 N.E.2d at 617-18.

(81) Megan W. Murray, Prepayment Premiums: Contracting for Future Financial Stability in the Commercial Lending Market, 96 Iowa L. Rev. 1037, 1052 (2011) (describing how some courts essentially find "that prepayment premiums are the result of a borrower's and lender's conscious agreement to modify the perfect-tender-in-time rule to allow for an alternative method of contract performance").

(82) See, e.g., Great Plains Real Estate Dev., L.L.C. v. Union Cent. Life Ins. Co, 536 F.3d 939, 945 (8th Cir. 2008) (declining to apply a liquidated-damages analysis after concluding that a prepayment-premium provision gave the borrower control over the method of performance); Atlantic Ltd. P'ship-XI v. John Hancock Mut. Life Ins. Co, 95 F. Supp. 2d 678, 684 (E.D. Mich. 2000) (refusing to follow a liquidated-damages approach when the borrower's voluntary prepayment did not result in a breach of the loan documents); Carlyle Apartments Joint Venture v. AIG Life Ins. Co, 635 A.2d 366, 368-73 (Md. 1994) (declining to undertake a liquidated-damages analysis when the borrower elected the "more desirable," voluntary, prepayment alternative).

(83) 498 F.3d 718, 721 (7th Cir. 2007) C[T]he parties are unable to agree on the legal standard that Illinois courts would apply to this question. [Borrower] maintains that Illinois would analyze the prepayment fee under a liquidated damages analysis. [Lender] argues that Illinois would consider the clause to be a bargained-for form of alternative performance").

(84) See id. at 719.

(85) See id. at 722.

(86) See River E. Plaza, L.L.C. v. Variable Annuity Life Ins. Co, No. 03 C 4354, 2006 WL 2787483, at * 13 (N.D. Ill. Sept. 22, 2006). The trial court's ruling has been criticized on grounds that it lacked consistency with Illinois law, improperly relied on decisions from bankruptcy courts, and failed to consider the practical realities of the commercial mortgage industry. See Gregory A. Thorpe, River East Plaza: Liquidated Damages Analysis Applies to Prepayment Premium, 42 Real Prop. Prob. & Tr. J. 41 (2007).

(87) River E. Plaza, 498 F.3d at 721.

(88) Id. at 724; cf. Planned Pethood Plus, Inc. v. KeyCorp, Inc., 228 P.3d 262, 264-65 (Colo. App. 2010) ("Where a borrower exercises an alternative form of performance by invoking a prepayment privilege, the law of liquidated damages is inapplicable").

(89) See, e.g., Santa Rosa KM Assocs., Ltd. v. Principal Life Ins. Co, 206 P.3d 40 (Kan. Ct. App. 2009) ("The 'make-whole premium' provision has the effect of offsetting the downside risk when the borrower, after enjoying a favorable interest rate on the loan during periods of rising interest rates, unilaterally elects to prepay the loan when interest rates fall").

(90) Butner v. United States, 440 U.S. 48, 54-55 & n.9 (1979).

(91) In re Hidden Lake L.P, 247 B.R. 722, 730 (Bankr. S.D. Ohio 2000).

(92) Cf. id. ("Had [the creditor's note contained an acceleration right exercisable upon the filing of a bankruptcy petition and had there been no prepetition acceleration, the result might be different").

(93) 11 U.S.C. [section] 502(b)(2) (2012).

(94) 11 U.S.C. [section] 506(b) (2012).

(95) See, e.g., CSC Tr. Co. of Del. V. Energy Future Intermediate Holdings Co. LLC, Inc. (In re Energy Future Holdings Corp.), 513 B.R. 651, 659 (Bankr. D. Del. 2014) (stating that "[t]he District of Delaware, as well as other courts, have tended to agree" that when a debtor is "solvent, the pre-bargained contractual prepayment penalty would be enforced, regardless of its reasonableness as decided under Section 506(b) of the Code").

(96) In re Schwegmann Giant Supermarkets P'ship, 264 B.R. 823 (Bankr. E.D. La. 2001).

(97) Id. at 832.

(98) See, e.g., In re Duralite Truck Body Container Corp, 153 B.R. 708, 714 (Bankr. D. Md. 1993) ("A prepayment change formula must effectively estimate actual damages, otherwise, the charges may operate as either a penalty on the debtor or a windfall to a lender, at the expense of other creditors of the bankruptcy estate").

(99) See Tobey M. Daluz, Delaware: A Venue of Choice for Major Chapter 11 Cases, Corp. Couns. Bus. J, June 2008, at 62, http://ccbjournal.com/articles/9996/delaware-venue-choice-major-chapter-11-cases.

(100) See, e.g., Anchor Resolution Corp. v. State St. Bank & Tr. Co. (In re Anchor Resolution Corp.), 221 B.R. 330, 340-41 (Bankr. D. Del. 1998) (distinguishing In re Duralite Truck Body Container Corp.).

(101) Arguments of this sort were made in General Electric Mortgage Corp. v. South Village, Inc. (In re South Village, Inc.), 25 B.R. 987, 988 n.1 (Bankr. D. Utah 1982).

(102) See, e.g., Patrick Halligan, Cramdown Interest, Contract Damages, and Classical Economic Theory, 11 Am. Bankr. Inst. L. Rev. 131 (2003); In re Galvao, 183 B.R. 23, 26 (Bankr. D. Mass. 1995); In re W. Preferred Corp, 58 B.R. 201, 211 (Bankr. N.D.Tex. 1985).

(103) Cf., e.g., Grundy Nat'l Bank v. Tandem Mining Corp, 754 F.2d 1436 (4th Cir. 1985) C[T]he secured creditor is entitled to be compensated for the use of its money when it is precluded from liquidating its debt."); Crocker Nat'l Bank v. Am. Mariner Indus, Inc. (In re Am. Mariner Indus, Inc.), 734 F.2d 426 (9th Cir. 1984) (noting the secured creditor's bargained-for right to take possession of and sell collateral entitles the creditor to compensation for delay in enforcing its right during the time between the filing of a bankruptcy petition and confirmation of a plan).

(104) Halligan, supra note 102, at 135.

(105) 11 U.S.C. [section] 361(3) (2012).

(106) United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs, Ltd. 484 U.S. 365, 371 (1988).

(107) Id. at 381-82.

(108) 11 U.S.C. [section] 1129 (2012).

(109) 11 U.S.C. [section] 1129(b).

(110) Id.

(111) 11 U.S.C. [section] 1129(b)(2)(A)(i)(i).

(112) 11 U.S.C. [section] 1129(b)(2)(A)(i)(ii).

(113) See id. Compare 11 U.S.C. [section] 1129(b)(2)(A)(i)(ii) (requiring payment of "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property"), with 11 U.S.C. [section] 1325(a)(5)(B)(ii) (requiring the chapter 13 plan to provide that "the value, as of the effective date of the plan, of property to be distributed under the plan on account of [an allowed secured] claim is not less than the allowed amount of such claim").

(114) In re Sanders Coal & Trucking, Inc., 129 B.R. 516, 520 (Bankr. E.D. Tenn. 1991).

(115) Id.

(116) In re Snowden's Landscaping Co, 110 B.R. 56, 60 n.7 (Bankr. S.D. Ala. 1990).

(117) Id.

(118) Id.

(119) In re Mason & Dixon Lines, Inc., 71 B.R. 300, 303 (Bankr. M.D.N.C. 1987).

(120) Id.

(121) In re Mahoney, 80 B.R. 197, 200 (Bankr. S.D. Cal. 1987).

(122) In re Inventive Packaging, Corp, 81 B.R. 74, 79 (Bankr. D. Colo. 1987).

(123) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012). Present-value analysis is explored richly in the chapter 13 consumer bankruptcy context by Rafael I. Pardo in Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, 68 Wash. & Lee L. Rev. 113 (2011).

(124) H.R. Rep. No. 95-595, at 414 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6370 (stating that "a valuation of the consideration 'as of the effective date of the plan' ... contemplates a present value analysis that will discount value to be received in the future").

(125) Till v. SCS Credit Corp, 541 U.S. 465, 469 (2004).

(126) Id. at 473-74.

(127) H.R. Rep. No. 95-595, at 414-16 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6370-72.

(128) See discussion infra Section III.D.2.a.

(129) For a detailed analysis of the various approaches, see 7 Collier on Bankruptcy [paragraph] 1129.05[2][c] (Richard Levin & Henry J. Sommer eds. 16th ed. 2018).

(130) See discussion infra notes 157-160 and accompanying text; see also Till, 541 U.S. at 472-73.

(131) Till, 541 U.S. at 473.

(132) Id. at 478.

(133) Secured creditors argued that the debtor should use this approach in Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, L.L.C.), 874 F.3d 787, 793 (2d Cir. 2017).

(134) See discussion infra Section III.C.

(135) See, e.g., Anthony J. Casey, Bankruptcy's Endowment Effect, 33 Emory Bankr. Dev. J. 141, 161 (2016) (arguing in favor of a market rate of interest because anything less may incentivize debtors to exploit the bankruptcy process); Emma J. Guido, Till v. SCS Credit Corporation: A "Prime-Plus-Plus" Method Tilling Courts to Consider Efficient Market Evidence, 38 Cardozo L. Rev. 269 (2016) (urging courts to adopt a so-called "prime-plus-plus" method, which begins with the Till formula and then makes additional adjustments based on evidence of an efficient market); Bruce A. Markell, Fair Equivalents and Market Prices: Bankruptcy Cramdown Interest Rates, 33 Emory Bankr. Dev. J. 91 (2016) (situating cramdown interest rate determinations against the broader challenge of valuing promises and property in bankruptcy and arguing that the formula approach best reflects core valuation principles laid down by Congress and the courts); Matthew Henschen O'Brien, Tilling the Cram Doum Landscape: Using Securitization Data to Expose the Fundamental Fallacies of Till, 59 Vand. L. Rev. 257 (2006) (criticizing all of the prevailing approaches and recommending that Congress or the courts commission comprehensive studies on the success rates of chapter 13 plans and use this and existing market data to develop objective formulas for calculating cramdown rates); Todd J. Zywicki, Cramdown and the Code: Calculating Cramdown Interest Rates Under the Bankruptcy Code, 19 T. Marshall L. Rev. 241 (1994) (urging courts to adopt the new-loan approach); Aaron J. Bell, Comment, Maying Cramdown Palatable: Post-Confirmation Interest on Secured Claims in a Chapter 11 Cramdown, 23 Willamette L. Rev. 405, 40506 (1987) (recommending a formula approach that begins with the relevant Treasury rate and makes upward adjustments to account for risk); Monica Hartman, Comment, Selecting the Correct Cramdown Interest Rate in Chapter 11 and Chapter 13 Bankruptcies, 47 UCLA L. Rev. 521, 532-44 (1999) (advancing a formula approach, with the recommendation that courts use the prime rate as the starting point).

(136) 7 Collier on Bankruptcy [paragraph] 1129.05[2][c] n.36 (Richard Levin & Henry J. Sommer eds. 16th ed. 2018) ("Courts have consistently required a fixed interest rate to be used under the 'cramdown' provisions of 11 U.S.C. [section] 1129(b)....").

(137) United States v. Neal Pharmacal Co, 789 F.2d 1283, 1286 (8th Cir. 1986) (quoting 11 U.S.C. [section] 1129(a)(9)(C)).

(138) Id.

(139) See 11 U.S.C. [section] 1129(a)(11) (2012); In re Cheerview Enters, Inc., 586 B.R. 881, 902 (Bankr. E.D. Mich. 2018).

(140) 11 U.S.C. [section] 1129(a)(11).

(141) In re Snowden's Landscaping Co, 110 B.R. 56, 61 (Bankr. S.D. Ala. 1990).

(142) 11 U.S.C. [section] 1129(b)(1). Whether a plan is fair and equitable is a factual determination reviewable for clear error. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1358 (9th Cir. 1986).

(143) Bankruptcy Act of 1898, ch. 541, 30 Stat. 544, as subsequently amended (repealed 1978).

(144) 308 U.S. 106 (1939).

(145) Id. at 117.

(146) Id. (quoting N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 508 (1913)).

(147) Id. (quoting Boyd, 228 U.S. at 508).

(148) 312 U.S. 510 (1941).

(149) Id. at 526.

(150) Id at 529-30 (citing Boyd, 228 U.S. at 508).

(151) Grp. of Institutional Inv'rs v. Chicago, Milwaukee, St. Paul & Pac. R.R. Co, 318 U.S. 523 (1943).

(152) Id. at 540 (citing Mo. ex rel. Sw. Bell Tel. Co. v. Pub. Serv. Comm'n of Mo, 262 U.S. 276, 310 (1923) (Brandeis, J, concurring).

(153) Id. at 565 (quoting Los Angeles Lumber Prods., 308 U.S. at 130; Consol. Rock Prods., 312 U.S. at 526, 529).

(154) Id.

(155) See also Markell, supra note 135, at 95-99.

(156) Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997); Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P'ship (In re T-H New Orleans Ltd. P'ship), 116 F.3d 790 (5th Cir. 1997); GMAC. v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997); Koopmans v. Farm Credit Servs. of Mid-America, ACA, 102 F.3d 874 (7th Cir. 1996), GMAC v. Jones, 999 F.2d 63 (3d Cir. 1993); United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993); Farm Credit Bank of Spokane v. Fowler (In re Fowler), 903 F.2d 694 (9th Cir. 1990); Hardzog v. Fed. Land Bank of Wichita (In re Hardzog), 901 F.2d 858 (10th Cir. 1990); United States v. Doud, 869 F.2d 1144 (8th Cir. 1989); Prudential Ins. Co. of Am. v. Monnier (In re Monnier Bros.), 755 F.2d 1336 (8th Cir. 1985); United States v. S. States Motor Inns, Inc. (In re S. States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983); Memphis Bank & Tr. Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982).

(157) Memphis Bank, 692 F.2d at 427.

(158) Americredit Fin. Servs, Inc. v. Nichols (In re Nichols), 440 F.3d 850, 859 n.8 (6th Cir. 2006).

(159) Memphis Bank, 692 F.2d at 431.

(160) Id

(161) Bank of Am. Nat'l Tr. and Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 457 (1999).

(162) Memphis Bank, 692 F.2d at 431.

(163) In re Benford, 14 B.R. 157, 160 (Bankr. W.D. Ky. 1981) (citing 5 Collier on Bankruptcy H 1129.03, at 1129-62 to 1129-65 (15th ed. 1979)).

(164) See, e.g., In re Kauffunger, 16 B.R. 666, 669 (Bankr. D.N.J. 1981); In re Landmark at Plaza Park, Ltd, 7 B.R. 653, 657-58 (Bankr. D.N.J. 1980).

(165) United States v. S. States Motor Inns, Inc. (In re S. States Motor Inns, Inc.), 709 F.2d 647 (11th Cir. 1983).

(166) See 26 U.S.C. [section] 6621 (1982) (establishing, at the time, a rate on tax claims that was calculated based on the prime rate).

(167) S. States Motor Inns, 709 F.2d at 651.

(168) Id. at 651-52; accord United States v. Camino Real Landscape Maint. Contractors, Inc. (In re Camino Real Landscape Maint. Contractors, Inc.), 818 F.2d 1503, 1505 (9th Cir. 1987); United States v. Neal Pharmacal Co, 789 F.2d 1283, 1285 (8th Cir. 1986).

(169) S. States Motor Inns, 709 F.2d at 652-53.

(170) Prudential Ins. Co. of Am. v. Monmer (In re Monnier Bros.), 755 F.2d 1336 (8th Cir. 1985).

(171) Id. at 1337.

(172) Id. at 1339.

(173) Id.

(174) Id. (citing S. States Motor Inns, 709 F.2d at 651-53).

(175) 869 F.2d 1144 (8th Cir. 1989).

(176) Id. at 1145.

(177) Id. at 1146.

(178) Id. at 1145.

(179) Id. at 1146 (citing United States v. Neal, 789 F.2d 1283, 1286 n.8 (8th Cir. 1986)).

(180) Id. at 1145-46.

(181) Hardzog v. Fed. Land Bank of Wichita (In re Hardzog), 901 F.2d 858, 860 (10th Cir. 1990).

(182) Id. at 859.

(183) Id.

(184) Id.

(185) Id.

(186) Id. at 860; accord Wade v. Bradford, 39 F.3d 1126, 1130 (10th Cir. 1994) (considering a chapter 11 case converted from chapter 13).

(187) See In re Hardzog, 901 F.2d at 859.

(188) 903 F.2d 694 (9th Cir. 1990).

(189) Id. at 695.

(190) Id.

(191) Id.

(192) Id.

(193) Id.

(194) Id.

(195) Id. at 697

(196) Id. at 698.

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

(198) Id. at 1128.

(199) Id.

(200) Id.

(201) Id. at 1131. The court did not make clear how it would determine what portion of the interest rate represented expenses in obtaining the loans; in any case, we submit that a quest by a court to do so would have been fruitless.

(202) 999 p.2d 63 (3d Cir. 1993).

(203) Id. at 66.

(204) Id.

(205) Glenn G. Munn, et al. Encyclopedia of Banking & Finance 830 (Charles J. Woelfel ed, 9th ed. 1993) (explaining that the prime rate is a short-term rate); see also In re MPM Silicones, LLC, No. 14-22503-rdd, 2014 WL 4436335, at *31 (Bankr. S.D.N.Y. Sept. 9, 2014) ("The Treasury note rate actually is ... often used as a base rate for longer-term corporate debt...."), aff'd sub nam., U.S. Bank Nat'l Ass'n v. Wilmington Savs. Fund Soc'y, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015), rev'd sub nom, Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, L.L.C.), 874 F.3d 787 (2d Cir. 2017); In re Walkabout Creek Ltd. Dividend Hous. Ass'n. Ltd. P'ship, 460 B.R. 567, 577 (Bankr. D.D.C. 2011) (acknowledging that the prime rate is used to set short-term interest rates and includes a profit component); In re SJT Ventures, LLC, 441 B.R 248, 255-56 (Bankr. N.D. Tex. 2010) (observing that Treasury rates, not the prime rate, are used for setting long-term fixed rates in the credit markets).

(206) See, e.g., In re Walkabout Creek, 460 B.R. at 577.

(207) Jones, 999 F.2d at 67.

(208) Id. at 71.

(209) Id. at 69.

(210) Id. at 71 n.12.

(211) 102 F.3d 874 (7th Cir. 1996).

(212) Id. at 874-75.

(213) Id. at 875.

(214) See supra note 106 and accompanying text. The Trustee apparently raised this argument, but the Seventh Circuit distinguished the Supreme Court's earlier ruling as holding only "that an undersecured lender is not entitled to interest." Koopmans, 102 F.3d at 876.

(215) Id. at 875.

(216) Id. at 876.

(217) Gen. Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 63-64 (2d Cir. 1997).

(218) Id. at 59.

(219) Id.

(220) Id. at 63-64.

(221) Id. at 64.

(222) Id.

(223) Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P'ship (In re T-H New Orleans Ltd. P'ship), 116 F.3d 790 (5th Cir. 1997).

(224) Id. at 800.

(225) Id. at 800 n.12.

(226) Id. at 800 (quoting Heartland Fed. Sav. & Loan Ass'n v. Briscoe Enters, Ltd, II (In re Briscoe Enters, Ltd. II), 994 F.2d 1160, 1169 (5th Cir. 1993)). In re Briscoe was a chapter 11 case involving an undersecured mortgage loan secured by an apartment complex. 994 F.2d at 1167. The Fifth Circuit agreed with the bankruptcy court's confirmation of a plan with an interest rate on the secured claim equal to the prepetition contract rate. Id. at 1169. The court noted that the contract rate of 10.25% was 3.85 percentage points higher than the equivalent term Treasury rate at the time and held that it was "not clearly erroneous for the bankruptcy court to find that this risk premium adequately compensates" the creditor, but the court did not expressly adopt a coerced-loan theory. Id.

(227) In re T-H Hew Orleans Ltd. P'ship, 116 F.3d at 801.

(228) Green Tree Fin. Servicing Corp. v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997).

(229) Id. at 214.

(230) Id.

(231) Id. at 213, 215.

(232) Till v. SCS Credit Corp, 541 U.S. 465 (2004).

(233) Id.

(234) Id. at 480.

(235) Id. at 477-78.

(236) Id. at 468-69.

(237) Id. at 470.

(238) Id.

(239) Pursuant to 11 U.S.C. [section] 506(a), the amount of an allowed secured claim cannot exceed the value of the collateral.

(240) Till, 541 U.S. at 471.

(241) Id.

(242) Id. (alteration in original).

(243) 11 U.S.C. [section] 1325(a)(5)(B)(ii).

(244) See supra note 112 and accompanying text.

(245) 11 U.S.C. [section] 1325(a)(5)(B)(ii).

(246) Till, 541 U.S. at 472.

(247) Id.

(248) Id. at 472-73.

(249) See supra note 211 and accompanying text.

(250) In re Till, 301 F.3d 583, 590-93 (7th Cir. 2002), rev'd sub nom. Till v. SCS Credit Corp, 541 U.S. 465 (2004).

(251) Id.

(252) Till, 541 U.S. at 467, 485, 491.

(253) For a detailed analysis of the various approaches, see 7 Collier on Bankruptcy f 1129.05 (Richard Levin & Henry J. Sommer eds. 16th ed. 2018).

(254) Till, 541 U.S. at 477 (Stevens, J.) (plurality opinion).

(255) Id. at 478-80.

(256) Id. at 477.

(257) Id.

(258) Id.

(259) Id. at 478.

(260) Id.

(261) Id.

(262) Id. at 478-79.

(263) Id. at 479.

(264) Id.

(265) Id. at 478-79.

(266) Id. at 479.

(267) Id. at 480.

(268) Id.

(269) Id. at 480-81 (citing In re Till, 301 F.3d at 593 (Rovner, J, dissenting). Some courts have held that a risk adjustment greater than three percentage points may be appropriate. See, e.g., In re Griswold Bldg, LLC, 420 B.R. 666, 696 (Bankr. E.D. Mich. 2009) (providing for an adjustment of five percentage points); In re Nw. Timberline Enters, Inc., 348 B.R. 412, 434 (Bankr. N.D. Tex. 2006) (providing for an adjustment of 5.75 percentage points).

(270) See infra Sections II.A. and B.

(271) See id.

(272) Till, 541 U.S. at 485-91 (Thomas, J, concurring).

(273) Id. at 486.

(274) Id. at 487.

(275) Id.

(276) 520 U.S. 953 (1997).

(277) Till, 541 U.S. at 489.

(278) Rash, 520 U.S. at 962. Of course, this distinction is relevant only if the claim is undersecured and, therefore, secured only to the extent of the value of the collateral. See 11 U.S.C. [section] 506(a)(1) (2012); see also supra notes 58-62 and accompanying text.

(279) Till, 541 U.S. at 488 (Thomas, J, concurring). Obviously, however, this does not help a creditor that is oversecured even based on liquidation value so that its claim is fully secured whichever valuation method is used.

(280) Id. at 491-508 (Scalia, J, dissenting).

(281) Id. at 492.

(282) Id.

(283) Id.

(284) Id. at 498-99 ("When the risk premium is the greater part of the overall rate, the formula approach no longer depends on objective and easily ascertainable numbers. The prime rate becomes the objective tail wagging a dog of unknown size").

(285) Id. at 500-01. Other courts have expressed similar concerns about courts' inability to set such a risk premium in any plausible fashion. See, e.g., In re Walkabout Creek Ltd. Dividend Hous. Ass'n Ltd. P'ship, 460 B.R. 567, 577 (Bankr. D.D.C. 2011) ("When a bankruptcy judge picks a risk premium number, unless expert testimony regarding the components of market interest rates is presented, it may be guesswork that would not pass muster under the standards applicable to expert witnesses"). The Walkabout Creek court went on to say:
   Necessarily, under the Till formula approach, a bankruptcy judge
   might look to the real world of market rates and attempt to divine
   what part of market rates represents a risk premium component, but
   market rates of interest are not nicely broken down in the Wall
   Street Journal as to their various components for such things as
   risk, transaction costs, costs of administration, and profit. In
   many cases, bankruptcy judges probably mouth the words of Till
   regarding risk factors and after addressing those factors act as
   though they have the expertise to quantify a risk premium based on
   those factors just because Till suggests that they do, and because
   they are obedient soldiers in the field struggling to obey the
   Court's precedent. At some point, a case will arise in which, after
   reviewing the various risk factors a plan presents, and without any
   expert testimony as to the components (including the risk
   component) of market rates of interest or other expert testimony
   regarding quantifying a risk component, a judge will arrive at a
   risk premium adjustment that is necessarily guesswork. In such a
   case, a litigant might well remark that the bankruptcy judge is
   engaged in a naked exercise, unsupported by any evidence, of
   pulling a number out of thin air, and state the equivalent of "The
   emperor has no clothes."


Id. at 578.

(286) Till, 541 U.S. at 508 (Scalia, J, dissenting).

(287) Drive Fin. Servs, L.P. v. Jordan, 521 F.3d 343, 350 (5th Cir. 2008); see also In re SJT Ventures, LLC, 441 B.R. 248, 253 n.3 (Bankr. N.D. Tex. 2010) ("[W]hen a case is decided by a fragmented Supreme Court, the controlling 'holding' of the Court may be viewed as that position taken by Justices who concurred on the narrowest common grounds." (citing Marks v. United States, 430 U.S. 188 (1977)).

(288) In re Cook, 322 B.R. 336, 344 (Bankr. N.D. Ohio 2005).

(289) Such questions are addressed by Phillip J. Giese in Till v. SCS Credit Corp.: Can You "Till" Me How to Cram This Down? The Supreme Court Addresses the Proper Approach to Calculating Cram Down Interest Rates, 33 Pepp. L. Rev. 133, 175-76 (2005), and by April E. Kight in Balancing the Till: Finding the Appropriate Cram Down Rate in Bankruptcy Reorganizations After Till v. SCS Credit Corporation, 83 N.C. L. Rev. 1015 (2005).

(290) For a thoughtful exploration, see Mark J. Thompson & Katie M. McDonough, Lost in Translation: Till v. SCS Credit Corp. and the Mistaken Transfer of a Consumer Bankruptcy Repayment Formula to Chapter 11 Reorganizations, 20 Fordham J. Corp. & Fin. L. 893 (2015).

(291) Till v. SCS Credit Corp, 541 U.S. 465, 474 (2004) (Stevens, J.) (plurality opinion) (alterations in original) (quoting Rake v. Wade, 508 U.S. 464, 472 n.8 (1993)).

(292) Id. at 474-75.

(293) Id. at 476, n.14 (citation omitted).

(294) Wells Fargo Bank Nat'l Ass'n v. Tex. Grand Prairie Hotel Realty, L.L.C. (In re Tex. Grand Prairie Hotel Realty, L.L.C.), 710 F.3d 324, 331 (5th Cir. 2013) (alteration in original).

(295) Some of the post-Till case law is examined in Gary W. Marsh & Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 Am. Bankr. L.J. 209 (2010).

(296) Bank of Montreal v. Official Comm. of Unsecured Creditors (In re American HomePatient, Inc.), 420 F.3d 559, 567 (6th Cir. 2006).

(297) Id. at 568.

(298) Id.

(299) Id.

(300) Id. at 569.

(301) Id. at 568.

(302) Tills famous footnote 14 did not say that the market rate should be used when there is an efficient market; rather, in dictum, it only said that "when picking a cramdown rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce." Till v. SCS Credit Corp, 541 U.S. 465, 476 n.14 (2004) (emphasis added); see also In re SJT Ventures, LLC, 441 B.R. 248, 255 (Bankr. N.D. Tex. 2010) (noting that Till does not mandate application of an efficient market rate but merely suggests that courts look at the market rate for reference).

(303) See, e.g., In re 20 Bayard Views, LLC, 445 B.R. 83, 108 (Bankr. E.D.N.Y. 2011) ("The majority of courts outside this Circuit to consider the issue have similarly applied the two-step analysis described by the Sixth Circuit in American HomePatient to determine the appropriate cramdown interest rate in a Chapter 11 plan."); see also, e.g., 2010-1 CRE Venture, LLC v. VDG Chicken, LLC (In re VDG Chicken, LLC), BAP No. NV-10-1278-HKiD, 2011 WL 3299089, at *8 (B.A.P. 9th Cir. Apr. 11, 2011); Gen. Elec. Credit Equities, Inc. v. Brice Rd. Devs, L.L.C. (In re Brice Rd. Devs, L.L.C.), 392 B.R. 274, 280 (B.A.P. 6th Cir. 2008); In re Walkabout Creek Ltd. Dividend Hous. Ass'n Ltd. P'ship, 460 B.R. 567, 572 (Bankr. D.D.C. 2011).

(304) See, e.g., In re LMR, LLC, 496 B.R. 410, 429 (Bankr. W.D. Tex. 2013) (searching for an efficient market and finding none). A rare example of a court finding an efficient market is In re Winn-Dixie Stores, Inc., 356 B.R. 239, 255-56 (Bankr. M.D. Fla. 2006). The court stated that it agreed with the Sixth Circuit's ruling in American HomePatient and found that the debtor had demonstrated the existence of an efficient market for $720 million in financing for the debtor's exit from chapter 11 at an interest rate equal to the London Interbank Offered Rate ("LIBOR") plus 150 basis points (for a total rate of 7% per year as of the relevant date). Id. at 255. Oddly, the court then used that 7% rate as the appropriate rate to be applied (apparently as a fixed rate) to a class of secured tax claims. Id. at 256. Moreover, it did so without recognizing that LIBOR rates are short-term floating rates that typically adjust based on the current LIBOR index rate periodically at intervals of one to six months. See Richard Wight, et al. The LSTA's Complete Credit Agreement Guide 64-66 (2009). The Winn-Dixie court seemed to regard any efficient market for a loan of any type to the debtor as the appropriate benchmark for the interest rate to be paid to any class of secured creditors regardless of how different that class's claims were from the loans for which an efficient market existed.

(305) See e.g., In re Brice Rd. Devs., 392 B.R. at 280-81.

(306) Wells Fargo Bank Nat'l Ass'n v. Tex. Grand Prairie Hotel Realty, L.L.C. (In re Tex. Grand Prairie Hotel Realty, L.L.C.), 710 F.3d 324, 327 (5th Cir. 2013).

(307) Id. at 334. This approach is sometimes referred to as the "tiered-financing" approach. See, e.g., In re Brice Rd. Devs., 392 B.R. at 281.

(308) In re Tex. Grand Prairie Hotel, 710 F.3d at 334.

(309) Id. at 337. Other post-Till courts that have rejected the blended-rate approach include In re 20 Bayard Views, LLC, 445 B.R. 83, 110-11 (Bankr. E.D.N.Y. 2011) (rejecting argument that expert testimony about blended-rate approach demonstrated efficient market for various tranches of debt and equity).

(310) In re Tex. Grand Prairie Hotel, 710 F.2d at 336.

(311) Id. at 333.

(312) Id. at 331.

(313) Id. at 337.

(314) 874 F.3d 787, 793 (2d Cir. 2017).

(315) Id. at 798.

(316) U.S. Bank Nat'l Ass'n v. Wilmington Savs. Fund Soc'y, FSB (In re MPM Silicones, LLC), 531 B.R. 321, 334 (S.D.N.Y. 2015) (alteration in original) (citations omitted), rev'd sub nom., In re MPM Silicones, 874 F.3d 787.

(317) See, e.g., In re Walkabout Creek Ltd. Dividend Hous. Ass'n Ltd. P'ship, 460 B.R. 567, 574 (Bankr. D.D.C. 2011). But see Mercury Capital Corp. v. Milford Conn. Assocs, L.P, 354 B.R. 1, 12 (D. Conn. 2006) (finding that the bankruptcy court did not correctly apply Till because it used a Treasury rate without first considering the prime-plus rate). Although this discussion is focused on chapter 11, we note that bankruptcy courts presiding over chapter 13 cases have also used the Treasury rate in recent years. See, e.g., In re Vasquez, No. 12-30834, 2012 WL 3762981, at *2 (Bankr. S.D. Tex. Aug. 29, 2012).

(318) 28 U.S.C. [section] 1961 (2012) (directing courts to use one-year Treasury security yields for calculating post-judgment interest in civil cases).

(319) In re MPM Silicones, LLC, No. 14-22503-rdd, 2014 WL 4436335, at *31 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd sub nom., In re MPM Silicones, LLC, 531 B.R. 321, rev'd sub nom., In re MPM Silicones, 874 F.3d 787.

(320) At issue were two categories of debt--"first lien replacement notes" and "1.5 lien replacement notes." Id. at *32.

(321) Id. at *32.

(322) In re MPM Silicones, LLC, 531 B.R. at 332.

(323) W. at 334-35.

(324) See In re MPM Silicones, 874 F.3d at 798.

(325) Id. at 801.

(326) Id.

(327) Id. at 800 ("adopting] the Sixth Circuit's two-step approach").

(328) Am. Bankr. Institute Comm'n to Study the Reform of Chapter 11, 2012-2014 Final Report and Recommendations (2014), available at http://commission.abi.org/full-report.

(329) Id. at 237.

(330) Id.

(331) Id.

(332) A comment made in a 1985 article rings as true today: "Few bankruptcy issues have met with as much confusion as the determination of a proper discount rate." Chaim J. Fortgang & Thomas Moers Mayer, Valuation in Bankruptcy, 32 UCLA L. Rev. 1061, 1119 (1985).

(333) For instance, the Till dissent explained, "the most relevant factors bearing on risk premium are (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement." Till v. SCS Credit Corp, 541 U.S. 465, 499 (2004) (Scalia, J, dissenting). This statement, however, seems wrong because only item (2) in the list appears to be relevant. That is, the probability of plan failure should be irrelevant so long as the creditor is appropriately protected against a decrease in the value of its collateral. Also, items (3) and (4) are irrelevant because both are risks and costs that the creditor faces whether it forecloses immediately or only later, after a plan failure.

(334) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012).

(335) Inflation risk can easily be compensated for by using a base rate that accounts for the market's perception of the inflation risk over the relevant term of the plan. The TCM yield rate for an equivalent term does that. The prime rate does not because it is a short-term rate, which can change from day to day. The difference between the TCM yield for a given maturity and the TIPS yield for the same maturity is the market's estimate of the likely inflation over that term. See discussion supra Section II.B.

(336) Professor Robert K. Rasmussen is also critical of courts' reliance on interest rates to address all risks faced by secured creditors. See Robert K. Rasmussen, Creating a Calamity, 68 Ohio St. L.J. 319, 319 (2007) (stating that the reasoning that a "modest increase in the prime rate represents the true risk to creditors ... cannot be squared with what we know about Chapter 13 practice").

(337) 0f course, this consideration is more relevant when the creditor is a professional lender that makes many similar loans.

(338) See supra text accompanying notes 38-40. Judge Rovner of the Seventh Circuit made this point in her dissent from the court of appeals' decision in Till:
   But courts should consider the extent to which the creditor has
   already been compensated for this risk in the rate of interest that
   it charged to the debtor in return for the original loan. Sub-prime
   lenders charge exorbitant rates of interest precisely because there
   is a high risk that their borrowers will default on their loan
   obligations. These lenders understand that a significant number of
   their borrowers will not make good on their obligations--may, in
   fact, end up in bankruptcy. Yet, they continue to make high-risk
   loans because the money they receive from non-defaulting borrowers
   is enough to offset that risk; they would not remain in business
   otherwise. In short, the high interest rate on the Tills' used car
   loan already accounted for the very possibility of bankruptcy (and
   with it, the Tills' ability to keep their truck rather than
   surrender it) that has come to pass. Awarding SCS a second risk
   premium ... may well be unnecessary and inappropriate.


In re Till, 301 F.3d 583, 596-97 (7th Cir. 2002) (Rovner, J, dissenting) (citations omitted).

(339) Such a situation could exist, to use a hypothetical example, when the collateral for a secured claim of $80,000 is a federally-insured bank account with a balance of $100,000 when the account is under the control of the creditor and the debtor has no right to withdraw funds.

(340) Till v. SCS Credit Corp. 541 U.S. 465, 501 (2004) (Scalia, J, dissenting); see also supra note 285.

(341) In re Couture Hotel Corp, 536 B.R. 712, 744-47 (Bankr. N.D. Tex. 2015).

(342) Id. at 745.

(343) Id. at 745-46.

(344) Id. at 744-45.

(345) Id. at 746.

(346) The prime rate is a poor base on which to build a risk-free rate because it includes some element of risk protection in that it is offered to borrowers with some risk of nonpayment, it arguably includes a profit component, and it is not used in the market to price long-term fixed rate loans. See supra text accompanying notes 49-57

(347) See, e.g., In re Cachu, 321 B.R. 716, 720 (Bankr. E.D. Cal. 2005) (taking judicial notice in a post-Till case of the prime rate as reported in Publication H.15).

(348) Whether the Treasury rate includes a component of profit may be subject to debate; however, the extraordinarily low, near-zero rates on TIPS (approximately .25% per year as of the date of this writing) suggests that any profit component in the Treasury rate is negligible.

(349) In contrast, the prime rate is typically used to price short-term, floating rate loans.

(350) See supra Section II.C.

(351) 11 U.S.C. [section] 361 (2012).

(352) 11 U.S.C. [section] 1129(b)(2)(A)(iii) (2012).

(353) 7 Collier on Bankruptcy [paragraph] 1129.04[2][c][i] (Richard Levin & Henry J. Sommer eds. 16th ed. 2018) (citing Sandy Ridge Dev. Corp. v. La. Natl Bank, 881 F.2d 1346, 1350 (5th Cir. 1989) and In re Pennave Props. Assocs, 165 B.R. 793 (E.D. Pa. 1994)).

(354) When deciding the proper rate of interest for a chapter 13 secured creditor cramdown, the bankruptcy court emphasized the creditor's oversecured position, suggesting that this factor leans in favor of a lower interest rate. In re Vasquez, No. 12-30834, 2012 WL 3762981, at *2 (Bankr. S.D. Tex. Aug. 29, 2012).

(355) Although some courts have found negative amortization not to be fair and equitable, it is not per se impermissible in a plan. See Great W. Bank v. Sierra Woods Grp., 953 F.2d 1174, 1177-78 (9th Cir. 1992) (discussing the case law).

(356) 11 U.S.C. [section] 506(a) (2012).

(357) Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997).

(358) In First Southern Rational Bank v. Sunnyslope Housing LP. (In re Sunnyslope Housing L.P.), 859 F.3d 637, 640 (9th Cir. 2016) (en banc) (Hurwitz, J.) (majority opinion), the foreclosure value atypically was higher than the retention value because of certain rent restrictions that would have been eliminated in a foreclosure. The court, sitting en banc, reversed the Ninth Circuit panel's earlier decision and held that Rash required that the secured claim should still be valued based on the retention value rather than the higher foreclosure value. Id. at 645.

(359) A leading treatise includes an extensive discussion of valuation standards under 11 U.S.C. [section] 506(a). See 4 Collier on Bankruptcy [paragraph] 506.03 (Richard Levin & Henry J. Sommer eds. 16th ed. 2018). Among other things, Collier notes that Rash left open the questions of how collateral should be valued for purposes of adequate protection requests and "the determination of whether, in the event of plan failure, a plan provides sufficient safeguards to the holder of a secured claim under the fair and equitable test of section 1129(b)." Id. [paragraph] 506.03[6][a]. It further states that "in the context of determining whether the creditor's collateral position is properly maintained under the plan (as distinct from determining the amount of the creditor's secured claim), the court should conduct the valuation from the perspective of the creditor's position if the plan does not succeed and the creditor must foreclose* Id. [paragraph] 506.03[6][c].

(360) See, e.g., In re CP Holdings, Inc., 332 B.R. 380, 385-88 (W.D. Mo. 2005) (in which a mortgage lender was allowed a prepayment premium of over $2.6 million, even though there had been no actual prepayment, because a provision in the note required payment of the premium based solely upon acceleration of the debt after default regardless of whether an actual prepayment was made); accord In re Hidden Lake Ltd. P'ship, 247 B.R. 722, 728-29 (Bankr. S.D. Ohio 2000) (in which a prepayment premium was allowed based on prepetition acceleration even though no actual prepayment occurred and the debtor's plan did not provide for early payment). The majority of cases considering the issue have concluded that such prepayment premiums do not constitute "unmatured interest," which is to be excluded from allowed claims pursuant to 11 U.S.C. [section] 502(b)(2). In re Trico Marine Servs, Inc., 450 B.R. 474, 480-81 (Bankr. D. Del. 2011). But see Paloian v. LaSalle Nat'l Bank (In re Doctors Hosp. of Hyde Park, Inc.), 508 B.R. 697, 706 (Bankr. N.D. 111. 2014) (distinguishing Trico on the basis that, in Trico, acceleration occurred before the filing of the bankruptcy case and in Doctors Hospital, it did not); see also Hidden Lake, 247 B.R. at 730 (discussing the issue of prepetition vs. postpetition acceleration); supra Section II.D. Such prepayment fees can be very large. See, e.g., Santa Rosa KM Assocs, Ltd. v. Principal Life Ins. Co, 206 P.3d 40, 49 (Kan. Ct. App. 2009) (approving yield-maintenance prepayment premium equal to more than one-third of the outstanding principal amount of the loan).

Some commentators have argued that such prepayment premiums, which are usually calculated based on the return the lender could achieve if it were to reinvest the prepaid funds in Treasury securities of a maturity equivalent to the remaining term of the loan, systematically overcompensate lenders for the loss of yield they suffer because of prepayment. See, e.g., Talkov, supra note 74, at 590-91, 614-17. This argument is based on the idea that the premium is calculated to determine the loss of yield the lender would suffer if it reinvested the prepaid principal in a risk-free Treasury security even though it might be more likely to reinvest the payment in another loan similar to the one that was prepaid, which would carry an interest rate higher than that of Treasury securities. Id.

(361) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012).

(362) 11 U.S.C. [section] 1129(b)(2)(A)(iii).

(363) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II).

(364) 11 U.S.C. [section] 1129(a)(11).

(365) See 11 U.S.C. [section] 1142(b) (2012).

(366) See, e.g., Casey, supra note 135, at 161.

(367) 0f course, one wonders how often a debtor would subject itself to the rigors and uncertainties of chapter 11 in order to lower its interest rate.

(368) Further, how would this approach be used with respect to different types of creditors with similar collateral? Would the holder of a mechanic's lien on a debtor's real property be entitled to the same rate as the holder of a mortgage loan on the same, or a different, property? What relevant market would the court look to in order to determine a market rate for mechanic's lien claims?

(369) 11 U.S.C. [section] 1129(b)(2)(A)(i)(II) (2012).

(370) 11 U.S.C. [section] 1129(b)(2)(B).

(371) 11 U.S.C. [section] 1129(b)(2)(C).

(372) 11 U.S.C. [section] 1129(b).

(373) 11 U.S.C. [section] 102(3) (2012).

(374) Fed. Savs. & Loan Ins. Corp. v. D & F Constr, Inc. (In re D & F Constr. Inc.), 865 F.2d 673 (5th Cir. 1989). For other cases addressing a court's ability to deny plan confirmation on general fair-and-equitable grounds, see Aetna Realty Inv'rs, Inc. v. Monarch Beach Venture, Ltd. (In re Monarch Beach Venture, Ltd.), 166 B.R. 428, 436-37 (C.D. Cal. 1993) (holding that a plan "cannot unfairly shift the risk of a plan's failure to the creditor" or unfairly discriminate against an objecting impaired class); In re Consul Rest. Corp, 146 B.R. 979, 989 (Bankr. D. Minn. 1992) ("When the proposed distribution would substantially shift the risk of failure of the plan from a junior class to a senior dissenting class for no legitimate purpose, the plan is not fair and equitable to the dissenting class."); In re Miami Ctr. Assocs, Ltd, 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (plan term was too long to be fair and equitable; ten-year loan in its ninth year could not be stretched out for another ten years under plan).

Diane Lourdes Dick, Professor of Law, Seattle University School of Law

Brian D. Hulse, Partner, Davis Wright Tremaine LLP

Kevin D. Badgley, Associate, Davis Wright Tremaine LLP
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Publication:American Bankruptcy Law Journal
Date:Mar 22, 2019
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