United States Court of Appeals,
Fifth Circuit.
No. 96-41089.
In the Matter of Ruben R. SMITHWICK, Jr.; In the Matter of
Debbie Smithwick, Debtors.
GREEN TREE FINANCIAL SERVICING CORPORATION, Appellant,
v.
Ruben R. SMITHWICK, Jr.; Debbie Smithwick, Appellees.
Sept. 8, 1997.
Appeal from the United States District Court for the Southern
District of Texas.
Before JONES, EMILIO M. GARZA and PARKER, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Green Tree Financial Servicing Corporation appeals the
district court's affirmance of the bankruptcy court's decision that
its Local Rule 3020(d) provides the appropriate post-confirmation
interest rate on Green Tree's oversecured claim. We reverse and
remand.
The Debtors, Ruben Smithwick, Jr. and Debbie Smithwick,
entered into a Retail Installment Contract with Green Tree in May
1994 for the purchase of a mobile home. The Contract provided for
an interest rate of 12.75 percent. The Smithwicks filed for
bankruptcy protection on February 15, 1995 and submitted a proposed
Chapter 13 plan, listing Green Tree's debt in the amount of
$10,000.00. Green Tree filed its secured proof of claim in the
amount of $12,774.24. Green Tree also filed objections to the
Smithwicks' plan on the grounds that it did not provide for the
1
full payment of its claim including payment at the rate of interest
specified in the Contract. Thereafter, the Smithwicks proposed an
amended plan to provide for payment of Green Tree's claim in the
amount of $12,774.24 at an interest rate of 11.00 percent.
Green Tree continued to object to the amended plan, arguing
that the appropriate post-confirmation interest rate was the 12.75
percent as specified in the Contract. The bankruptcy court decided
that the appropriate post-confirmation interest rate was 11.00
percent as provided for under the bankruptcy court's Local Rule
3020(d).1 Green Tree appealed and the district court affirmed.
Section 1325(a)(5)(B)(ii) specifies that:
(a) [T]he court shall confirm a plan if—
* * * * * *
(5) with respect to each allowed secured claim provided
for by the plan—
(B)(ii) 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.
This provision requires that the debtor provide the secured
creditor "with payments, over the life of the plan, that will total
the present value of the allowed secured claim... ." Associates
Commercial Corp. v. Rash, --- U.S. ----, ---- - ----, 117 S.Ct.
1
Local Rule 3020(d) of the United States Bankruptcy Court for
the Southern District of Texas states:
The interest or discount rate on deferred payments made
through a confirmed Chapter 13 plan must equal two
percent (2%) plus the prime rate set in the Money Rates
Section of the Wall Street Journal on the date the
petition initiating the Chapter 13 case was filed.
2
1879, 1882-83, 138 L.Ed.2d 148 (1997). We must decide whether the
bankruptcy court erred in its selection of the appropriate
post-confirmation interest rate to use in calculating whether Green
Tree would receive payments "as of the effective date of the plan"
of a value "not less than the allowed amount of such claim."
Although this court has not addressed this question in a
Chapter 13 case, it has opined on the choice of cramdown interest
rate in the analogous provision in Chapter 11. Applying the
requirements of § 1129(b)(2)(A)(i)(II), the bankruptcy court is to
make a factual determination of the interest rate appropriate under
all the circumstances and to evaluate whether the payments under
the plan will provide the creditor with the present value of his
allowed secured claim. See In re Briscoe Enter., Ltd., II, 994
F.2d 1160, 1169 (5th Cir.1993); In re T-H New Orleans Ltd.
Partnership, 116 F.3d 790, 800 (5th Cir.1997). This court has
declined to "establish a particular formula" for the cramdown
interest rate in Chapter 11 cases. T-H New Orleans, 116 F.3d at
800. However, we have noted that "[o]ften the contract rate will
be an appropriate rate ..." and that "[n]umerous courts have chosen
the contract rate if it seemed to be a good estimate as to the
appropriate discount rate." Briscoe Enter., 994 F.2d at 1169
(citing In re Monnier Bros., 755 F.2d 1336, 1339 (8th Cir.1985) and
In re Guilford Telecasters, Inc., 128 B.R. 622
(Bkrtcy.M.D.N.C.1991)). See also T-H New Orleans, 116 F.3d at 801
(affirming lower court's adoption of contract rate as appropriate
cramdown interest rate).
3
Guidance is also available from other circuits' approach to
Chapter 13. In General Motors Acceptance Corp. v. Jones, 999 F.2d
63, 65 (3d Cir.1993), the Third Circuit decided that the Chapter 13
cramdown interest rate "is that which the secured creditor would
charge, at the effective date of the plan, for a loan similar in
character, amount and duration to the credit which the creditor
will be required to extend under the plan." In reaching this
conclusion, the court rejected an approach that would merely
compensate the creditor for his estimated "cost of funds" to be
extended in the loan. Id. at 67. The "cost of funds" analysis
fails to take into account that the Chapter 13 plan "effectively
coerces a new extension of credit in which the creditor is required
to assume not only the cost of capital over the deferral period but
also the cost of sustaining the lending relationship over that
period." Id. Thus, the court adopted a "coerced loan" model, which
theorizes that "[i]n effect the law requires the creditor to make
a new loan in the amount of the value of the collateral rather than
repossess it, and the creditor is entitled to interest on his
loan." Id. (quoting Memphis Bank & Trust Co. v. Whitman, 692 F.2d
427, 429 (6th Cir.1982)). Since the creditor is forced not only to
cover the cost of providing the funds to be extended to the debtor,
but also of extending the loan, the court decided that if the
creditor received the rate it charged "in the regular course of its
business in the region for loans of similar character, amount and
duration, that creditor will be placed in approximately the same
position it would have occupied had it been able simply to
4
repossess the collateral at the time of the bankruptcy." Id. at
68.
The Third Circuit also urged minimization of administrative
and litigation costs in Chapter 13 cases, which are "high in volume
and low in absolute value." General Motors Acceptance Corp., 999
F.2d at 70. Thus, to "reduce litigation expense," the court
adopted an additional rule:
In the absence of a stipulation regarding the creditor's
current rate for a loan of similar character, amount and
duration, we believe it would be appropriate for bankruptcy
courts to accept a plan utilizing the contract rate if the
creditor fails to come forward with persuasive evidence that
its current rate is in excess of the contract rate.
Conversely, utilizing the same rebuttable presumption
approach, if a debtor proposes a plan with a rate less than
the contract rate, it would be appropriate, in the absence of
stipulation, for a bankruptcy court to require the debtor to
come forward with some evidence that the creditor's current
rate is less than the contract rate.
Id. at 70-71.
We are persuaded by the Third Circuit approach. Accord
United Carolina Bank v. Hall, 993 F.2d 1126, 1130-31 (4th
Cir.1993)(match "rate of return to the secured creditor with that
which the creditor would otherwise be able to obtain in its lending
market"); In re Hardzog, 901 F.2d 858, 860 (10th Cir.1990)
(Chapter 12 case; look to market of similar loans in the area);
Memphis Bank and Trust Co., v. Whitman, 692 F.2d 427, 431 (6th
Cir.1982) (same). It is consistent with the approach we have taken
in Chapter 11 cases in attempting to find the rate which best
calculates the present value of the payments offered under the
plan. Essentially, "the creditor is entitled to the rate of
interest it could have obtained had it foreclosed and reinvested
5
the proceeds in loans of equivalent duration and risk." Koopmans
v. Farm Credit Services of Mid-America, 102 F.3d 874, 875 (7th
Cir.1996) (interpreting § 1225(a)(5)(B)(ii)).
Critics of the "coerced loan" approach fault it for awarding
the lender "profit" as an element of the market rate. See, e.g.,
In re Valenti, 105 F.3d 55, 63-64 (2d Cir.1997); Collier on
Bankruptcy ¶ 1325.06[3][b][iii][B] (15th ed. rev.). However, we
agree with the Third Circuit that to exclude profit would violate
the statutory requirement that the creditor be placed "in the same
position it would have been in if it had been allowed to end the
lending relationship at the point of the bankruptcy filing by
repossessing the collateral." General Motors Acceptance Corp., 999
F.2d at 69. As Judge Easterbrook reasoned, "[a] supplier of
capital, no less than a supplier of seeds or combines, is entitled
to the market price." Koopmans, 102 F.3d at 876.2
2
Judge Easterbrook explained why the reference to "profits"
can be misleading:
[I]n competition, a financial intermediary does not make
a "profit." True, there may be accounting profits, but
there are no economic profits in vigorous competition,
one of Adam Smith's principal points in The Wealth of
Nations (1776).... Normal returns to entrepreneurial and
managerial skill may keep the wolf from the door, but
they are not economic "profit." What appears on the
books as accounting profit is just the opportunity cost
of keeping the firm's assets in this business rather than
the next-best alternative. Financial intermediation is
today highly competitive.... To say that the lender is
limited to its "cost of capital" ... is therefore to say
that the lender is entitled to the market rate of
interest, for that is what its cost of capital is: the
price it must pay to its own lenders, plus the costs of
making and administering loans, plus reserves for bad
debts (that is, the anticipated rate of non-repayment.)
6
In the Chapter 11 cases this court has acknowledged that it
is necessary, through whatever valuation methodology proposed by
the parties, to consider the risk associated with a particular
loan. See, e.g., T-H New Orleans, 116 F.3d at 801. Chapter 13
cases, because of the greater need to reduce litigation expenses
associated with an individualized discount rate determination, call
for particular guidance in the selection of the appropriate
post-confirmation interest rate. The type of expert testimony on
valuation that is presented in complex Chapter 11 cases3 is not
practical for the typical Chapter 13 case. Finding the correct
rate is still a factual determination which will be reviewed for
clear error, but the contract rate, together with the rebuttable
presumption approach we add here, provides the best formula for a
correct choice. As articulated by the Third Circuit in General
Motors Acceptance Corp., this approach balances the competing
considerations of maximizing judicial economy and ensuring an
accurate reflection of the costs and risks associated with the
secured lender's "forced" extension of credit in the Chapter 13
plan.
In this case the court erred in not making a factual
determination, based on the presumption described here, as to the
appropriate discount rate for the forced extension of credit by
Green Tree. While we appreciate the bankruptcy court's effort to
102 F.3d at 876.
3
See, e.g., T-H New Orleans, 116 F.3d at 800-01 (describing
competing expert testimony and methodologies presented at Chapter
11 confirmation hearing).
7
promote judicial economy by resorting to the Southern District's
local rule, that approach fails to ensure that the risk factors
associated with compulsory lending to Chapter 13 debtors are
properly considered. Accordingly, we REVERSE and REMAND for
further proceedings consistent with this opinion.
REVERSED AND REMANDED.
8