By Miriam R. Nemetz and Robert L. Bronston
Today the Supreme Court granted certiorari in one case of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, July 31, 2003, and amicus briefs in support of the respondent are due on Thursday, September 4, 2003.
Bankruptcy - Chapter 13 - Cram Down Interest Rates. The Supreme Court granted certiorari in Till v. SCS Credit Corp., No. 02-1016, to decide the methodology of calculating the interest rate payable to a secured subprime creditor objecting to a Chapter 13 plan of reorganization.
Assuming all other requirements are met, when a debtor with a secured creditor files a Chapter 13 bankruptcy petition and intends to retain the collateral, the bankruptcy court must confirm the debtor's reorganization plan if the secured creditor consents or the debtor invokes Chapter 13's "cram down" provision. 11 U.S.C. § 1325(a)(5). The cram down provision requires the plan's confirmation over the objection of a creditor with an allowed secured claim if the secured creditor retains its lien on the collateral and "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." Id. § 1325(a)(5)(B). Because the allowed amount of a secured creditor's claim is the collateral's value at the time the petition is filed, id. § 506(a), in order for the debtor to invoke the cram down provision the plan must give the objecting secured creditor at least the equivalent of the value of the collateral the debtor has chosen to keep. Id. § 1325(a)(5)(B)(ii). Typically, this equivalent is a stream of payments with a present discounted value equal to the present value of the collateral, plus interest to compensate the creditor for the time value of money and the increased risk.
Debtors Lee and Amy Till invoked Chapter 13's cram down provision to keep their automobile, which secured a subprime loan at 21 percent interest from SCS Credit Corporation. The bankruptcy court confirmed the Tills' plan to pay SCS at an interest rate of 9.5 percent, which was based on the prime rate plus a risk premium of 1.5 percent, and is the rate adjusted to account for SCS's risk of not receiving the Tills' scheduled payments at which SCS could borrow the amount equal to the car's present value. But the district court conceived the cram down provision as effectively forcing SCS to extend...