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.
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. …