Since this author’s last column on post-confirmation interest rates in chapter 13 cases, several court decisions have been added to the mix. Not the least of these is Associates Commercial Corporation v. Rash, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997) in which the court discussed the value and treatment of an allowed secured claim. Other cases have specifically revisited the interest rate, and the result is a continued disparity in treatment of oversecured creditors by the various courts. The National Bankruptcy Review Commission weighed in with its recommendations, which vary to some degree with those of the courts. This article summarizes the current state of the law and lack of uniformity on this issue.

No particular interest rate is specified in 11 U.S.C. §1325(a)(5)(B)(ii). A plan must provide a secured creditor with the "present value" of its claim. The Supreme Court decision in Rash requires a fact- intensive analysis to determine "present value" involving the use of the collateral, warranties, inventory cost, storage, etc. In a footnote, the court states that using replacement value could require retail, wholesale or some other value. The interest rate to be paid on the secured claim is a closely related question to valuation. Section 1325 does not discuss what interest rate will result in a secured creditor receiving present value.

The courts still apply different legal rules to arrive at different interest rates in finding when the present value require-ment is met. What a debtor pays to secured creditors or, conversely, what unsecured creditors receive, varies according to the venue.

The "coerced loan" approach continues to be applied in the Fifth Circuit. The most recent case is Greentree Financial Services v. Smithwick (In re Smithwick), 121 F.3d 211 (5th Cir. 1997). The debtor had purchased a mobile home on a retail installment sales contract at an interest rate of 12.75 percent. Within one year, the chapter 13 ensued. The debtor proposed to pay Greentree’s claim in full at 11 percent interest, applying a local rule. The bankruptcy court agreed and applied the local rule (2 percent plus prime on petition date), and the district court affirmed.

On appeal, the Fifth Circuit reversed and remanded. The court cited Rash as requiring payments over the life of the plan that will total the present value of the allowed secured claim. In supporting the conclusion that a creditor is going to make a profit if paid the present value of its claim, the court supported the "coerced loan" approach. Pointing out that litigation expenses should be reduced in chapter 13 cases, the court cited GMAC v. Jones, 999 F.2d 63, 70 (3rd Cir., 1993), which applied the contract interest rate post-confirmation unless the creditor established it was too low or the debtor established it was too high. This application of a market price for capital was supported by decisions in United Carolina Bank v. Hall, 993 F.2d 1126, 1130-31 (4th Cir., 1993); In re Hardzog, 901 F.2d 858, 860 (10th Cir., 1990) and Memphis Bank & Trust v. Whitman, 692 F.2d 427, 431 (6th Cir., 1982), all of which apply the contract rate. The court noted that GMAC v. Jones and Valenti violated the statutory requirement that the creditor be in the same position in cramdown as if the collateral had been repossessed and liquidated. GMAC v. Valenti, 105 F.3d 55 (2nd Cir., 1997).

On April 10, 1998, the Second Circuit again addressed the issue of post-confirmation interest to an oversecured creditor. The result is a complete analysis and methodology in support of modifying the contract rate. Key Bank National Association v. Milham, 211 B.R. 116 (2nd Cir. BAP, July, 1997) aff'd, per curium 2nd Cir. No. 97-5056, 4-10-98. The court set forth the general rule under 11 U.S.C. §502(b)(2) that interest on pre-petition claims stops accruing at filing. The exception is 11 U.S.C. §506(b), which states that an oversecured creditor is entitled to post-petition interest. Citing Rake v. Wake, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed. 2d 424 (1993), the court held post-petition interest was part of the oversecured claim. That "pendency" interest did not have to accrue at the contract rate according to U.S. v. Ron Pair Enterprises, 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed. 2d 290 (1989), although most courts allow it. The BAP and the Second Circuit went on to say that an oversecured creditor’s profit was not protected in a chapter 13. Ignoring the fact that creditors make loans for a profit and not some higher moral purpose, the Second Circuit ignored the BAP dissent and outlined the following approach for cramdown on an oversecured chapter 13 creditor:

• Determine the principal amount of the secured claim including §506(b) interest (the total due if paid in full at confirmation).
• Determine the schedule of payments to be made under the plan.
• Impose an interest rate equal to that necessary to recoup the value of secured claim (interest rate = treasury rate plus risk factor).

The Second Circuit had no trouble finding that cramdown allowed modification of the creditor’s interest rate even when oversecured, citing In re Laguna, 944 F.2d 542 (CA 9, 1991) cert. denied, 503 U.S. 966 (1992), which applied a cost of funds approach to setting post-confirmation interest.

It would seem that this decision allows 11 U.S.C. 1322(b)(2) to trump §506(b) and ignores §1322(e). The latter states that defaults must be cured in accordance with the contract and applicable non-bankruptcy law. A Second Circuit debtor can modify his interest rate in the first year of an oversecured contract in a chapter 13 and pay his unsecured creditors more. A Fifth Circuit debtor cannot.

The proper post-confirmation interest rate was recently discussed by the court in In re Segura, 1998 WL 97812 (Bankr. N.D. Okla, March 5, 1998). In this case, the creditor, a sub-prime car lender, and the debtor stipulated that the claim was oversecured. The contract interest rate was 21 percent. The debtor proposed cramdown over 48 months at 10 percent. After discussing In re Hardzog, the court commented that not only was Rash creditor-friendly but that the creditor gained when extending credit in a chapter 13 due to a decrease in default risk, regular payments and a reduction in servicing costs. The court concluded that the current rate for this type of loan was 20.09 percent, that deduction of overrides to dealers reduced the rate to 19.2 percent and that a further 2 percent reduction for reduced risk was in order. The post-confirmation rate was set at 17.2 percent. The court apologized for not being able to fashion a more simple standard. In so doing, it criticized "replacement value" as requiring expensive litigation and suggested NADA wholesale value citing Judge Frank H. Easterbrook’s testimony to the Commission at Vol. 1, page 248, note 271. The suggestion is that uniform value will lead to uniform interest.

The National Bankruptcy Review Commission acknowledged the lack of uniformity and cited negative factors:

• Lower rates on some property before a different court.
• Diverse distribution to similarly situated unsecured creditors.
• Uncertainty causing litigation, reducing assets.

The Commission recommended a nationally uniform rate such as the six-month treasury rate, plus risk factors. Of course, "factors" cause a variety of results. The Commission did not discuss "pendency interest" in its report. The conflicting results in the circuits and the lack of a proposal embracing uniformity will fuel continuing litigation.