Chapter 11 Bankruptcy and Cramdowns: Adopting a Contract Rate Approach

By Wong, Daniel R. | Northwestern University Law Review, October 1, 2012 | Go to article overview

Chapter 11 Bankruptcy and Cramdowns: Adopting a Contract Rate Approach


Wong, Daniel R., Northwestern University Law Review


ABSTRACT-One of the key issues in many Chapter 11 bankruptcy proceedings is the determination of a proper interest rate that debtors must pay on secured claims existing at the time of a bankruptcy reorganization. For decades, the courts of appeals have debated the proper cramdown determination approach. In Till v. SCS Credit Corp., the Supreme Court addressed the issue in a Chapter 13 context and produced a plurality opinion endorsing a formula approach. However, there is not yet a consensus for Chapter 11 cases. This Comment argues for the adoption of a "contract rate" approach whereby courts will default to the prepetition contract rate of the secured claim. I believe this method adequately protects the creditor's lending expectations while also helping to limit the debtor-inpossession's evidentiary costs. Unlike the other approaches, the contract rate approach is more objective; courts will no longer have to consider evidential material to make a determination of the appropriate risk premiums or the existence of an "efficient market." More importantly, the contract rate approach will provide predictability and greater fairness by ensuring that similar cases are treated alike. Overall, the ease, simplicity, and fairness of the contract rate approach make it a better option.

INTRODUCTION

Bankruptcy law in the United States offers benefits to both debtors and creditors. Debtors are able to exit bankruptcy with a fresh start, while creditors generally get at least a portion of their money back.1 Ideally, bankruptcy provides a quick and orderly forum for debtors to pay creditors and resolve their debts. Yet, in reality, many bankruptcies are drawn into long and expensive litigation. One of the most frequently argued economic issues in bankruptcy court is the proper interest rate that debtors must pay on secured claims existing at the time of a bankruptcy reorganization.2 When the parties to the bankruptcy proceeding fail to settle upon an interest rate, the bankruptcy judge must determine and calculate an appropriate cramdown interest rate.

Due to the tremendous financial impact a cramdown can have on all parties, cramdown interest rates have become "one of the most litigated, contentious and costly squabbles in the bankruptcy arena."3 The existence of cramdown interest rates stems from the bankruptcy court's "cramdown" power, which is the court's ability to confirm the reorganization plan proposed by a debtor-in-possession4 despite the objections of creditors.5 The judicial determination of this cramdown interest rate is often a decision that has significant financial ramifications both for the debtor-in-possession and for creditors.6 The cramdown interest rate may determine whether a reorganization plan is feasible, and it is certainly a key factor that secured creditors consider when deciding whether or not to accept a proposed reorganization plan. Yet, oddly enough, despite the large number of Chapter 11 bankruptcies each year7 and the need for predictability and certainty, bankruptcy courts continue to struggle with the proper determination of the cramdown interest rate a debtor-in-possession must pay on secured claims.

For decades, the courts of appeals have debated the proper approach to determining cramdown rates.8 In Till v. SCS Credit Corp.,9 a 2004 case, the Supreme Court addressed the issue and produced a plurality opinion endorsing a formula approach.10 Yet because Till failed to produce a majority opinion and involved cramdown rates in the Chapter 13 context,11 the extent of its precedential value in Chapter 11 cases is limited. Ultimately, Till has leftpractitioners and courts with little guidance as to the proper method of determining Chapter 11 cramdown interest rates.12 Recent developments suggest several cramdown approaches are being applied to Chapter 11 cases, such as the efficient market and formula approaches; however, none yet commands a clear consensus.

After reviewing the various methods for determining cramdown rates, this Comment argues for the adoption of a contract rate approach.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Chapter 11 Bankruptcy and Cramdowns: Adopting a Contract Rate Approach
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.