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Sunday, January 19, 2014

The Face of Modern Poverty in England

The New York Times ran a front page Saturday profile last week (oddly dated Tuesday January 14) on Jack Monroe, a 25-year old single mother in England who has apparently become what the headline calls "Britain's Austerity Celebrity".  Ms. Monroe, the reporter tells us, kept a "plucky online diary" about coping with the challenges of living in poverty with a toddler that became very popular and she has now been rewarded with a book contract and is now "courted by politicians, charities and even supermarket chains".   The article contains several vivid anecdotes of her hardships and sacrifices, including selling all her possessions and going to bed hungry often. And of course there are several "awww"-- inducing snippets from her young son.

But the article is beyond clueless when it tries to draw a larger lesson from Ms. Monroe's odyssey.  The article tells us, directly or indirectly, that Ms. Monroe (1) left school at 16, (2) is a single mother, (3) quit a full time job because she had to work at night but could not find child care at those hours and (4) has chosen to live alone and not with her middle-class parents.  With all these facts staring the reporter in his face, he writes "There is no simple tale here about a broken home, bad schools, drugs or racial prejudice, no familiarity in her path into poverty."

Seriously?  Drop-out, single mother, poor -- no familiarity to that story?  I mean, yes, there was no broken home, no bad schools, no racial prejudice, and as far as the press knows, no drugs.  But there are two of the biggest contributors to poverty and income inequality right there in his own narrative and the reporter appears oblivious to them.

The article tells us that the organized left in Britain uses Ms. Monroe as "proof that in post-financial crisis Britain neither the job market, which is sluggish, nor the benefit system, which is shrinking, can be relied upon to maintain a basic living standard."  The Times article doesn't go into detail about the job she quit, but I followed the links in the online version to an article about her in the British press, which says that she was earning 27,000 pounds (about $43,000) in the job she quit.  With all due respect, if a person who left school at 16 can get a job paying $43,000 -- keep in mind that she gets her health coverage through Britain's national health service on top of that  -- there is nothing wrong with Britain's job market.  In fact, it has the ninth-lowest unemployment rate of 31 European nations tracked by Eurostat, lower than Sweden's, Finland's, Turkey's, France's, Spain's, Belgium's, Italy's and Greece's.  Reuters reported last week that "British unemployment is falling faster than previously thought ... The poll of 50 economists, taken this week, suggests it will fall steadily in the coming quarters and reach 7 percent early next year."  And in terms of Ms. Monroe's demographic, the data are even rosier:  the female unemployment rate is already less than 7%, and the unemployment rate for persons 25 and older is an amazing 5.1%. ( UK site visited January 19).  And as far as the salary she gave up, it is almost exactly equal to the average annual full time salary in the UK.

I see Ms. Monroe as someone who consciously made bad decisions about several crucial aspects of her life -- to drop out of school early; to allow herself to become pregnant without a partner to share the burden of keeping a household, which left her with a no-win choice between job and child care; and to live on her own when she had a housing alternative with her parents.  Then, having painted herself into a desperate corner, she admirably escaped by creating an editorial product the market liked, which put her back on her feet.  If anything, the market rescues her, not fails her.   If she is the face of modern poverty in the UK, then the lessons to be learned are more about the benefit of making responsible life choices and creating value in the market than anything else.

Friday, January 3, 2014

A Deep Dive into Till v. SCS Credit Corp. – Part I: An Overview of the Topic and the Facts of the Case.

At the end of my post six months ago on the Texas Grand Prairie opinion from the Fifth Circuit, I indicated that I would follow up with a post about why I think a challenge to the application of Till v. SCS Credit Corp., in chapter 11 cases would have merit.  Many things intervened, including long stretches of great weather when I chose not to sit down at a PC, but this is it.  While I initially thought my post would be a brief review of the Till plurality opinion followed by a slightly longer explanation of the errors of economic analysis that bankruptcy courts have been making in their interpretation and application of the footnote from the plurality opinion that refers to “an efficient market”, as I delved into the background of the Till opinion, I found several interesting facts that, as far as I can tell, have never received the attention they deserve and so the initial idea has expanded to a much longer review that I have broken into several more digestible  segments.  Following this post, which summarizes the facts of the case, its lower court history and the state of the law as the issue came before the Court, there are:

1)  a couple of posts that take a “deep dive” into the briefs and the extremely revealing oral argument presented to the Court;

2)  an analysis of the plurality opinion, with particular attention to the way it reflects the facts and arguments that are covered below, and how, since Till is a chapter 13 case, those differ from the standard chapter 11 context; and

3)  an analysis of Justice Thomas’ concurrence, which supplied the fifth vote to overturn the 7th Circuit’s ruling in favor of the secured creditor.

Then, I focus on each of the passages in the plurality opinion that reference chapter 11 practice, and, in particular, look more closely than any prior commentator at the meaning of the term “efficient market” in footnote 14 to the plurality opinion.  

I identify a substantial amount of evidence that the loan market is sufficiently “efficient”  to satisfy even a strict reading of the plurality opinion,

Then, I show how lower courts have recurrently misunderstood the meaning of the term “efficient market” in applying Till and have also lost sight of the pre-Code precedent concerning secured creditor cram-down.  

I finish with a list of practical and strategic considerations for fashioning a case to overturn the use of Till in chapter 11 and a closing thought about the fairness of respecting market dynamics to resolve cramdown battles.

For those who don't have time to read all the posts, the first five posts focus on the Till decision itself, so readers who feel they are already familiar with it may want to skip those, although I encourage you to at least read the third post on the oral argument, which I think will bring to your attention things you do not know. The next five focus on the extension of Till to chapter 11; if you already understand the "efficient market hypothesis" in finance, you may not need to read the 8th post and if you are not in the mood for statistics about the credit markets, you may want to skip the 9th post.  The 10th post is the one where I address directly the lower court errors.

The aim of these posts is to convince the reader of two things: first, even if you think that Till was correctly decided in a chapter 13 context (and I am not going to question its result as a chapter 13 policy, although I will occasionally drop a footnote here or there containing my thoughts on that subject),  the “prime plus” method for pricing cramdown paper in chapter 13 was endorsed by the plurality solely as a pragmatic response to certain factors specific to chapter 13 that are not present in chapter 11 cram-downs.  Second, subsequent lower court decisions applying Till in chapter 11 are (a) generally misunderstanding what “an efficient market” is and (b) disregarding pre-Code Supreme Court decisions which were intended to carry over into chapter 11.

Factual Background 

Except as otherwise acknowledged,  all factual recitations in this post come from the Supreme Court opinion, the parties’ briefs in the Supreme Court, the transcript of argument before the Court, and the 7th Circuit opinion.

I’ll start with a short narrative of the Tills’ bankruptcy.  In 1998, Instant Auto Finance, a subprime auto lender, financed Indiana residents Lee and Amy Till’s purchase of a used 1991 Chevrolet S-10 pickup truck at a 21% annual interest rate, which, I learned in the course of my research, was the maximum rate chargeable under Indiana’s usury law.  The loan was for  $6,426 and their bimonthly payments were to be $122.  In 1999, by which time the Tills had reduced principal by about 25% but were in default, the Tills filed for chapter 13 relief in bankruptcy court for the Southern District of Indiana.  The parties stipulated to a $4,000 secured claim for the lender.[1]

The Tills’ plan proposed to repay the secured claim in full over 17 months  at a 9.5% interest rate, at a time when the “prime” rate was around 8%.  In the course of reading the transcript of argument before the Supreme Court, I came across counsel for the Tills informing the Court that the 1.5% premium was set by local rule, a fact not disclosed in the Supreme Court opinions; that was quite a surprise, given that the plurality would go on to declare that the “prime plus” approach provided room for individualized risk assessment.

The lender voted to reject the proposed treatment, objected to confirmation and, at the confirmation hearing, showed through two fact witnesses that it “uniformly” charged 21% on loans of similar credit quality and purpose, and further that such a rate was the prevailing industry rate for car loans to credits like the Tills (none of which was surprising, given 21% was the usury ceiling).

The Tills responded with expert testimony from an IUPUI  economics professor (who -- quoting from the Supreme Court opinion  -- “acknowledged that he had only limited familiarity with the subprime auto lending market”) to the effect that a fair market price of capital and the time value of money was captured by a market "prime rate" of 8% interest, and that a 1.5% risk premium should be added to cover the risk that petitioners would not make payments as required by the plan.  By a remarkable coincidence, his testimony just happened to dovetail with the rate established by local rule.  The professor further asserted that the 9.5% formula rate was “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible”. Moreover, the professor noted, respondent’s exposure was fairly limited because chapter 13 plans are performed “under the supervision of the court”. The chapter 13 trustee filed comments supporting the formula rate as, among other things, “easily ascertainable, closely tied to the condition of the financial market, and independent of the financial circumstances of any particular lender.”

The bankruptcy judge chose to allow the IUPUI professor’s testimony as expert testimony, adopted its reasoning (I imagine the judge had some involvement in crafting the local rule that the professor’s testimony said was reasonable) and confirmed the plan in an unreported opinion in June 2000. 

A brief aside: paying an academic expert to deliver expert testimony is pretty unusual in chapter 13, especially where the amount in controversy was less than $1,000.[2]  So I looked further into the case to see if I could figure out how that came to be, and saw that the UAW was representing the Tills.  The UAW apparently had a legal services plan for members, and one of the Tills was a member.  In an earlier version of this post, I speculated  that the UAW had invested in the expert because of the precedential nature of the issue, but Annette Rush, one of the Tills' counsel, informed me after reading the blog that hiring the expert was done just as a matter of trial strategy in the Tills' case specifically, and I thank her for enabling me to correct the recitation of facts.

The district court reversed, in November 2000, saying the lender’s unrebutted evidence established that a subprime market existed and that the established rate for the subprime lending market was 21%, which the District Court considered the controlling inquiry under Koopmans v. Farm Credit Services Of Mid-America, 102 F.3d 874 (7th Cir. 1996)(chapter 12)(“the creditor must get the market rate of interest, at the time of the hypothetical foreclosure, for loans of equivalent duration and risk”). The District Court stayed its order pending the debtors’ appeal to the 7th Circuit.

The 7th Circuit affirmed the reversal in August 2002 on different reasoning, 2-1.  It echoed the district court in stating that a secured creditor is due the same rate it would “obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy” and “is entitled to the rate of interest it could have obtained had it foreclosed and reinvested the proceeds in loans of equivalent duration and risk”, since nothing less would give the creditor the “indubitable equivalent” of its nonbankruptcy entitlement.”  But it went further than the district court and announced that the pre-petition, non-default contract rate was presumptive evidence of what  that rate was, adopting GMAC v. Jones, 999 F.2d 63 (3d Cir. 1993).  The “old contract rate will yield a rate sufficiently reflective of the value of the collateral at the time of the effectiveness of the plan to serve as a presumptive rate.”

The dissenter thought that the debtors’ interest rate should be whatever it would cost the lender to obtain an equal amount of money, i.e., the lender’s cost of funds, and no more.  Further, the dissenter contended that the lender had already been fully compensated for the risk of nonpayment in the interest rate initially specified (even though 75% of that loan remained unpaid and the creditor was being prohibited from exercising its contractual remedy for default).[3]

The Seventh Circuit’s decision reinforced a conflict that already existed among the circuits.  In addition to GMAC v. Jones, five other Circuits had adopted variations on the “coerced loan” approach: Matter of Southern States Motor Inns, Inc., 709 F.2d 647 (11th Cir. 1983), cert. den., 465 U.S. 1022 (1984); In re Hardzog, 901 F.2d 858 (10th Cir. 1990); United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir. 1993); In re Smithwick, 121 F.3d 211 (5th Cir. 1997), cert. den., 523 U.S. 1074 (1998); United States v. Arnold, 878 F.2d 925 (6th Cir. 1989).

In contrast, the Second, Eighth and Ninth Circuit Courts of Appeals had adopted alternative “formula” methods for discounting payments to present value, generally beginning with a relatively riskless rate, like US Treasuries, and adding a risk premium but also generally affording the trial judge discretion in computing the specific rate. See, e.g., In re Valenti, 105 F.3d 55 (2d Cir 1997) (which, much like the Till plurality, endorsed lower court decisions using a prime plus formula).

So, after several previous denials of cert, the Supreme Court chose Till as the vehicle to resolve the circuit conflict. 

[1]           The lender also received a $895 deficiency claim which was not satisfied in full, and is not relevant to my chapter 11 focus, but is worth keeping in mind to the extent one wants to think about whether the Tills’ plan was “fair and equitable” in a broader sense, especially when advocates of greater debtor relief emphasize the 21% pre-petition interest rate and the supposed profit reaped by the lender.  The lender here was not paid in full on its total claim.  I further doubt they were allowed any amount for their legal fees defending their claim.

[2]           On a $4,000 amortizing note over 17 months, the 11.5% difference in interest rates amounted to about $500 in additional payments.

[3]           In my opinion, that analysis reflected neither a sound legal analysis of a secured loan nor a basic grasp of finance in a market economy. The fact that a risk has materialized has nothing to do with whether the government can coercively re-expose the lender to a renewal of that risk or a different one, or at what price it can take away the lender's remedy for the risk materializing.

A Deep Dive into Till v. SCS Credit Corp.– Part II: Briefs

The Supreme Court briefs of the parties are remarkably different.  The Tills’ brief, prepared by the UAW Legal Defense Fund, made the following points: (1) the Seventh Circuit opinion “defeats a fundamental purpose of Chapter 13 to enable all individuals who qualify for Chapter 13 relief under 11 U.S.C. § 109(e) to retain basic necessities” and is “inexplicably hostile to Chapter 13 and its rehabilitative intent” (citing Lundin, 2 Chapter 13 Bankruptcy, § 112.1 at 112-16)(3d ed. 2000); (2) “Congress frequently rewards certain individuals and groups with favorable interest rates. Debtors under Chapter 13 are among those singled out for special treatment under 11 U.S.C. § 1325(a)(5)(B)(ii). Consumer bankruptcy reform was considered a fundamental objective of the Bankruptcy Reform Act of 1978….”; (3) “The ‘coerced loan’ or ‘presumptive contract’ cases are based on fictional premises. There are no loans in the Chapter 13 cramdown statute — only ‘claims.’ … There is no ‘market rate’ for a bankruptcy ‘loan,’ because pre-petition loans become ‘claims’ upon filing of bankruptcy”[1]; and (4) “The decisions of numerous Circuits, including the Seventh Circuit below, have transformed this mechanical process of calculating the “present value” of the ‘allowed secured claim’ into a fact-specific inquiry into a particular creditor’s use of interest as a vehicle for profit in the nonbankruptcy marketplace.  Once the myriad of inappropriate fact-specific characteristics are removed from the ‘present value’ equation, discounting of payments to present value under § 1325(a)(5)(B)(ii) becomes a straightforward process that lends itself to predictable results.”[2].  Therefore, “the most direct method to arrive at an appropriate discount factor is use of a formula method with a readily accessible national rate base. If the chosen national rate is truly risk-free, a risk premium may be added at the discretion of the bankruptcy court upon the creditor’s demonstration of uncompensated risk. On the other hand, an additional risk premium may be unnecessary — for instance, because the chosen national rate already includes a risk allowance, or because the higher Rash replacement value has eliminated the necessity for inclusion of an additional risk premium.”

I will take a minute to explain the reference to Assoc. Comm. Corp. v. Rash, 520 U.S. 953 (1997), which may be unfamiliar to some readers who do not have any reason to follow consumer bankruptcy law.  As the Tills’ brief explains, the Court in Rash held that “[a]djustments in the interest rate do not fully offset the risks of debtor default and property deteriorat(ion), incurred by the creditor when the debtor retains the collateral, whereas the replacement-value standard accurately gauges the creditor’s exposure to these ‘double risks’ occasioned by the debtor’s continued use of the property.” Thus, certain lower courts and the dissent below had concluded that, by requiring the debtor to pay the creditor the (higher) replacement value of the vehicle, the Court had “shifted compensation for the risk of default and property deterioration from the ‘interest’ component to the ‘valuation’ component of the present value equation.” [3]

A couple of additional points in the brief deserve to be drawn out, in hindsight. First, the Tills opened with two wholly non-legal points, an uncontroversial definition of “present value” and, of more consequence, a description of subprime auto lending, to the effect of  “the higher interest rates charged by subprime lenders cannot be fully explained solely as a function of the ‘additional risks’ presented by these loans.”

Second, the brief also made a telling point (in hindsight) when it pointed out that “under the majority panel’s ruling, every unsecured claimant would be entitled to a different interest rate based on its contract or lending market….”.  They also observed that “another goal of Chapter 13 is efficiency of administration. The emergence of fact-specific inquiries (and the need for evidentiary hearings to resolve otherwise routine present value calculations) can overwhelm the bankruptcy courts’ limited judicial resources and substantially increase the costs of administration of the typical Chapter 13 case.”  The topic, covered in just a single paragraph in the brief, proved to be the predominant focus of both the oral argument and the plurality opinion, as we shall see in subsequent posts

Lender’s Brief

The lender’s brief was fairly straightforward.  It opens with several pages explaining what it means to calculate present value by using a risk-adjusted discount rate.  There is not a lot of legal discussion in that section, but what there is includes as many references to non-bankruptcy precedents as to bankruptcy decisions.  As its sole bankruptcy precedents in the opening section, lender cited BFP v. Resol. Trust Corp., 511 U.S. 531 (1994) to show that the Court had instructed bankruptcy courts, in valuing assets, to recognize “price-affecting characteristics” in determining fair market value and reject “artificially constructed” formulations.  Next, lender argued section 1325(a)(5)(B) was not intended for the protection of debtors, but rather that of creditors; the  lender is entitled to present value of its claim, citing Johnson v. Home State Bank, 501 U.S. 78 (1991).  The only rational way to discount a claim to present value is with a risk-adjusted interest rate.   That means a market rate, but the contract rate is “in most chapter 13 cases” a good approximation of the market rate. Because the contact rate is just an approximation of market, it should serve as a presumption, allowing for evidence to move it up or down, to the extent permitted by law.
The brief next devotes 5 pages to an exposition of data supporting the propositions that Chapter 13s have a high risk of default, that a lender’s enforcement of rights imposes on it additional costs, that used car loans are several times more risky than new car loans, and subprime auto finance is not “predatory” – if anything, it is less profitable than other lending channels because of the higher default rate.

The third section of the lender’s argument devotes 10 pages to expounding a “holistic” vision of the Bankruptcy Code in which section 1325(a)(5)(B) joins with sections 361, 362 and 506 in a harmonious fashion to collectively preserve the value of a secured claim.
In the only section of the brief to reference chapter 11 law, the lender next argued that Section 1325(a)(5)(B) traces its history to early reorganization practice, specifically the principle of “indubitable equivalence”, which requires that the secured creditor is entitled to keep  its lien on the collateral and receive full value of its claim.  Under old Chapter XIII, a secured lender’s claim could not be modified without its consent, period.  In enacting section 1325(a)(5)(B), the lender argued, Congress explicitly incorporated the law that had developed under chapter X and section 77B, that a secured claim could be modified non-consensually as long as the creditor receives the indubitable equivalence of that claim, citing In re Murel Holding Co., 75 F. 2d 941 (2d Cir. 1935).  (Unfortunately, the lender did not serve up a citation showing that Congress intended that principle to apply in chapter 13; the brief only cites legislative history referring to section 1129(b)(2)(A)).  The lender asserted that only a market rate of interest results in the indubitable equivalence principle being satisfied. 

The following section of the brief argues that the market rate approach / contract rate presumption is consistent with other policies of the Bankruptcy Code, in particular, that of equality of distribution.  The argument that “similarly situated creditors” must receive similar treatment is portrayed as a red herring because it’s unlikely creditors with different liens are really “similarly situated”; their collateral cushion is unlikely to be similar. Judge Friendly’s epigram that “equality among creditors who have lawfully bargained for different treatment is not equity but its opposite…” is invoked.  See Chemical Bank N.Y. Trust Co. v. Kheel, 369 F.2d 845, 848 (2d Cir. 1966) (Friendly, J., concurring).

The final two sections argue that a “market-based” approach is “economically efficient” and “the most practical”.  As in the debtors-petitioners’ brief, non-legal, practical arguments dominate the lender’s brief.  Only four pages in the lender’s brief have any connection to chapter 11 matters and arguably the lender was simply wrong in contending they were even relevant to the Court’s task since it failed to prove a link between corporate reorganization case law and chapter 13.

Solicitor General's Brief

The Solicitor General weighed in, endorsing the “prime plus” formula over the presumptive contract rate.  The OSG argued:

One appropriate method to calculate such a discount rate is to adjust low-risk interest rates, such as the prime rate, to account for plan-specific risks of nonpayment. That “prime-plus” formula approach determines the present value of a debtor’s future payments based on the price of such payments in general financial markets, where the prime rate measures the value of low-risk capital. By including an adjustment for plan-specific default risks, a “prime-plus” formula provides a direct, fair market appraisal of the risk-adjusted present value of future payments. Such a formula approach is readily administrable; treats all creditors equally—thereby avoiding unfair disparities in cases where, as here, multiple secured creditors are parties to a single bankruptcy proceeding; and avoids the need for expert testimony regarding individual creditors’ lending practices or credit status. 

In contrast, the OSG continued:

the “contract-rate” approach used by the court of appeals would require courts presumptively to value identical plan payments differently if those payments are made to creditors with different pre-bankruptcy contract rates. Such presumptions could be rebutted only by evidence of a specific creditor’s current investment opportunities, but such opportunities are often difficult for courts to evaluate and are not directly relevant to the debtor’s financial status. Furthermore, burdening debtors with often “eyepopping” contract rates, would undermine debtors’ ability to pursue bankruptcy under Chapter 13, and would force many cases into liquidation under Chapter 7, to the general detriment of debtors and creditors alike.

We can see several of the points ultimately made in the plurality opinion in the SG’s brief: ease of administration; equal treatment of creditors; avoiding the need for expert testimony; and at the end a disdain for “eye-popping” interest rates.  We also see the SG characterizing the “prime plus” approach as a self-adjusting “market” approach while the “contract rate presumption” is characterized as more rigid and unchanging, which also appears to me to be how the plurality thought of the formula.[4]   In the succeeding posts, I will focus on how these themes dominate the plurality’s opinion. The SG’s brief definitely seems to have had a significant persuasive effect on the plurality. 

All the more relevant, then, to note that little of the SG’s argument involves an argument that might apply in chapter 11.  Expert testimony is common in chapter 11; eye-popping interest rates are not an issue, and so on.  In fact, in a footnote 9, the SG’s brief expressly disclaims any connection between the law governing chapter 11 cramdowns and the question before the Court:

The statutory term “indubitable equivalent,” however, appears only in two provisions of the Bankruptcy Code, neither of which applies here. See 11 U.S.C. 361(3) (dealing with automatic stay and trustees’ authority to sell estate property or obtain credit); 11 U.S.C. 1129(b)(2)(A)(iii) (prescribing an “indubitable equivalent” standard as an alternative to cram down in Chapter 11 proceedings). Moreover, even if secured creditors did deserve an “indubitable equivalence” under Chapter 13, it would be only an equivalence between the plan’s proposed payments and the creditor’s allowed secured claim. Disputes over present value and discount rates concern how courts should calculate that equivalence. Language quoted from Sections 361(3) and 1129(b)(2)(A)(i) does not in any way answer that question.

(Emphasis added)

[1]           This argument gained no traction with any justice and, in general, “argument-by-labels” (“it’s not an ____, it’s an ____”) has been disfavored as a basis for decision ever since the advent of legal realism, which has focused on the functional and policy justifications for legal results rather than forms and labels.  The point is that the statute calls for the "value" of a debt to be calculated and the debt market is the best reference to do that.  Calling it a loan or a claim or a debt does not change that fact.

[2]           This was a rather odd argument which says, more or less, “once we ignore facts, it’s much easier to get predictable results”.  I think Stalin found that doctrine worked quite well for his purposes, if I'm not mistaken.  Ultimately, the plurality embraced a hybrid approach that contains elements of predictability, in the baseline of the prime rate, and some amount of fact-specific adjustment in the “plus X”, or so they claimed.

[3]           I think that argument is myopic when applied to an undersecured claim, as was the case here.  Whatever overstatement of value allegedly takes place per Rash is likely to be systematically offset by the elimination of the lender’s deficiency claim. In any event, Rash does not come up that often in chapter 11 cases where what is being valued is usually producing income and the valuation is usually one form or another of discounting the cash flow being thrown off.

[4]           This is not to say that the SG or plurality were correct in an objective, absolute sense, just that, as between the contract rate and the prime plus alternative, one adjusts and one doesn’t, and the one that adjusts looks more like how a market rate would move. The “prime plus” formula is not at all a “direct, fair market appraisal of the risk-adjusted value of future payments” as the SG contended.  It is not “direct” and it is not “fair market” at all. It is an administratively simpler, but otherwise crude and imperfect proxy for that value. 

A Deep Dive into Till v. SCS Credit Corp.– Part III: Oral Argument

A review of the oral argument provides many interesting insights about the underlying reasons for the plurality opinion in Till and its applicability to chapter 11 cases.  As it was the Tills’ petition, their attorney, Rebecca Harpaer of the UAW Legal Defense Fund,  was first up.  The first question, which evidently came from Justice Scalia, noted “the interest rate that is given to different lenders is not always the same.”  Another judge chimed in with “I think the same thing that's bothering Justice Scalia, or that prompted his question in any event, is troubling me. When I read the briefs, I thought that the coerced loan approach, which you object to, did have certain deficiencies, because you had to have testimony what the interest rate is, you have to conform it to the particular transaction, it's hard to administer.” (Emphasis added).  Tills’ counsel replied with an argument that largely mirrored the dissent below, and Valenti, that the lender was fully compensated for the risk of a bankruptcy in its original interest rate, and that profit has no place in post-emergence interest rates.

Whether that was responsive or not, next, a justice debated with her how successful chapter 13s were; she asserted that 63% of confirmed plans avoided further default.[1]   

A colloquy took place in which a justice, evidently Justice Scalia again, opined that “bankruptcy judges aren’t very good risk calculators” and thus disfavored an approach that vests them with much discretion.  Another justice rejoined that “prime plus 1” vs. “prime plus 3” is not really a big range for such judges to be working within.  There was a lengthy discussion over whether it made more sense to start at a risk-free rate and build up, or to start at a presumptive contract rate and work down.
The Solicitor General’s office was next up, opening with a lawyerly observation that the lender’s position was slightly different than the approach proclaimed in the opinion of the Seventh Circuit, an observation that one justice echoed.  Next, the SG took up the theme of inconsistency among similarly situated creditors,[2] noting that “under the court of appeals’ approach, two creditors could make car loans to the same debtor that resulted in allowed secured claims of equal value, and yet one would receive thousands more in plan payments”.  The SG also reinforced the Rash decision as a reason “why the discount rate need not go too far in taking risks of nonpayment into account” although at least one justice snorted at the argument.  A colloquy ensued for the second time whether it made more sense to work up from the risk-free rate or down from a contract rate. The SG began emphasizing that the bankruptcy court’s finding of feasibility necessarily implied a lower rate than market, and was even arguing at the end that no risk premium might be required at all, when his time ran out.

When the lender’s attorney began, the first question he received turned back to the degree of chapter 13 failure. The second sought to reconcile the feasibility finding with the need for a risk premium. Which, of course, set the lawyer up very nicely to point out that, if as many as 37% of confirmed chapter 13’s were defaulting, then the feasibility finding wasn’t much comfort. Then the questioning turned again to the issue of whether anything more could be done than to give the bankruptcy courts discretion, and whether it made any difference if they started at the prime rate and worked up, or contract rate and worked down. 

Then the following important colloquy occurred between lender’s counsel and Justice Breyer -- who eventually, of course, joins the plurality opinion:

MR. BRUNSTAD: Your Honor, the contract rate is the best evidence,
the single best evidence of the market rate.

QUESTION: Contract rate -- if there has to be a number that's wrong,
it has to be that one. … The contract rate by definition was entered into
at some significant period of time prior to the present, and the present,
by chance in this instance, is 2 years later, and we know that interest rates
fell at least 1 or 2 percent during that time.

MR. BRUNSTAD: But not for subprime –

QUESTION: So -- what?

MR. BRUNSTAD: But not for subprime loans.

QUESTION: That's impossible. The prime rate --

MR. BRUNSTAD: No, Your Honor. This is why.

QUESTION: If that's so, then the risk went up.

MR. BRUNSTAD: No, that's not correct, Your Honor, and this is why.

QUESTION: No. It isn't?

MR. BRUNSTAD: Because State law caps the maximum rate that can be paid.

QUESTION: Oh, okay. … All right, because it's a usury problem.

MR. BRUNSTAD: Correct.

One sees in this colloquy that Justice Breyer enters it thinking that a prime-rate formula is superior to the contract rate presumption because it would have adjusted downward to the Tills’ benefit, and learns to his surprise that subprime rates wouldn’t have adjusted, because they are already capped by the usury rate -- at which the contract rate was set.  Rather critically, it seems to me, set against the backdrop of the usury law, and exactly as framed by the SG’s brief, the “prime plus” formula comes off  looking more like a “market” rate because it changes with circumstances, while the contract rate looks inflexible and not responsive to market fluctuations.  I tend to think that this realization, that an affirmance would have amounted to establishing the precedent that chapter 13 debtors could be locked into the highest rate allowed by their state’s usury law for the duration of their debt, regardless of changes in circumstances, was probably a significant factor in influencing the plurality’s preference for the “prime plus” formula.  Recognizing that the usury context lingers in the background of this opinion can also inform one’s understanding of the chapter 11 footnote, as I will discuss in a later post. 
The justices then pondered – for the third time -- whether there was any meaningful difference in administering a “prime rate plus” formula versus a “contract rate minus” approach. One justice asked:

Would it satisfy you if we said this? Suppose we said we see what we're after here. The objective is to equate the stream of payments plus repossession with $4,000. Now, on the one hand, we know it can't be lower than the prime. On the other hand, if the creditor wants to come in and give a -- present his evidence, the contract, of how risky this person is, then in fact it is evidence absolutely. And the bankruptcy judge will look at it, and he'll try to figure out the pluses and the minuses, what's happened to the interest rate, whether this particular person is a good or bad risk, and he'll choose a number. like that all the time?

And shortly thereafter the same or another justice suggested what s/he labeled as 

a scary thought. (Laughter.)  Is it possible that the statute does not provide an answer to this question? (Laughter.)  That since both of these schemes, your proposal and the other side's proposal, are theoretically perfect, if they are done correctly, the bankruptcy court is free to use either one so long as he comes up with the right answer.

Counsel responded, in brief, “The secured party must be fully compensated for  the risk that it must assume. The concept of indubitable equivalence must be completely compensatory. The secured party is not supposed to take uncompensated risk.”  (This as I will show in my sixth post on the case law as it stood when the Bankruptcy Code was adopted,” is a correct statement of pre-Code case law defining the contours of “fair and equitable”.)

And that justice responded, with what I think is the critical takeaway from the entire argument: “Nobody is disagreeing with you about that. That -- what we're -- I think what we're trying to get to -- it's a practical question.” (Emphasis added)

In hindsight, it seems to me, and I hope I have brought out to the reader, that the entire focus of the Court in deciding Till was not in the slightest about how to construe the statute or about haircutting secured claims by, for example, taking out their presumed profit margin: “Nobody is disagreeing with you about [fully compensating the secured creditor].”  The focus was all about what was the most “practical” approach for bankruptcy courts to employ to determine present value in chapter 13.

Interestingly, for purposes of my focus on Till in chapter 11, the lenders’ lawyer then turned to an argument based on chapter 11:

The correct standard is I think to recognize, which I think Your Honor does, that this concept of present value is an economic concept, not an equitable one[[3]], and that essentially what we're doing is we're saying there is a stream of payments to be made here and we have to figure out what it's worth. The best test for what it's worth would be what the market says. Now, the problem is, is that in chapter 11 there is a market. People do lend to chapter 11 debtors, and the standard is the same in chapter 11 as 13: value as of the effective date of the plan under 1129. So what we have to be very careful about is in chapter 11, the markets do value debtors' promises to pay and they lend money and they charge very high interest rates. Exit lenders or finance lenders charge very high interest rates, 18, 19, 20 percent. It can't be true that in bankruptcy, in chapter 13, who are the riskiest chapter -- riskiest debtors with the highest default rate, that we systematically give them a rate which approaches prime.  So I think what you need to do, recognizing it's an economic concept, is say what's the best evidence of a market rate(emphasis added)

To this argument a justice responded: “I understand. Tell me a question I don't know the answer to.”

We can see very clearly in this passage the germination of footnote 14 in the plurality opinion, the one that reflects awareness of DIP and exit lending in chapter 11: “in chapter 11 there is a market”. This is where footnote 14 comes from. We can also see in the Court’s response to it that the Court was not focusing on chapter 11 implications at all.  They were focusing, I hope the reader now sees, on devising a workable chapter 13 approach, nothing more.  In this light, I suggest, the plurality opinion should not be receiving the weight in chapter 11 practice that some judges have been affording it.

After a brief review of the various other issues raised by opposing counsel, a justice turned back to the mechanism design problem, referring to the scant evidence of the propensity for defaults in chapter 13’s:

But what about then taking this idea?  I'm trying to figure out how -- we say, okay, we really mean it. … I think, you know, prime plus or whatever, maybe the other. But then put the burden back on you to produce some real evidence and statistics about what happens to people we don't know about…. So then you have the burden of trying to bear it out with statistics and so forth that these people really are risky. And the bankruptcy judge can't just sit there and say, oh, I feel sorry for them. All right? What about something like that?

After counsel responded, the justice said: “you know, at least we'd have somewhat better information than just knowing about the default rate in bankruptcy cases in general. And we get a little finer than that. You see, that's what I'm trying to work with. I don't have an answer.”

That justice or another again emphasized the specifics of chapter 13’s:

Most of these debtors are very small debtors. You say take the contract rate as the presumptive rate and then we're going to knock down for all these other things. The high replacement cost that -- is one thing. The interest that they got before bankruptcy is another. The transaction cost that they're saved, another. And so let the debtor come in and show that. But the debtor has no money at all and certainly you don't want the debtor's money eaten up hiring an attorney and further depleting the money that could go to the creditors.  So it seems to me wildly unrealistic to expect that if you say the presumptive price is the contract price, you're going to get a debtor who will be able to -- I mean, I was surprised, looking at this record, that this debtor got an expert. Who paid the expert? Maybe because the union was involved … isn't it typical that these chapter 13 debtors don't have lawyers and don't have experts?

Again, note the focus on data and information about chapter 13’s and about the costs and other administrative aspects of chapter 13’s; the justices were looking for a practical solution for chapter 13s, not engaging in statutory construction meant to apply across the Code’s chapters.

Another justice changed the topic back to Rash, and then the argument concluded with an indisputable observation: “we're going in circles, and I mean, in some respects it's good, in some respects it's bad.”


What jumps out from the oral argument is that none of it dealt with the typical topics judges focus on when interpreting statutory text.  There was no discussion of the words of the statute,  its legislative history, or, save the one exception of Rash, how to reconcile the case before them with prior case law.  One justice even worried the statute did not answer the question before the Court.  Everything was a practical or administrative concern. We might have been reading minutes from a rule-making conference[4]:  which is more practical – to start low and add a risk premium, or vice versa? Do they both get to the same place, so we should allow either?  What about the cost of experts?  Should we give the lower courts discretion or keep them tightly reined in?

How much of that would be a concern in a chapter 11 case?  Sure, the text of the statute is the same in both chapters.  But we just saw the justices were not focusing on the text at all. The one case they discuss, Rash, is not very meaningful in chapter 11 valuations, where typically what is being valued is a going concern.  When one counsel brought up chapter 11 as an analogy, he was brushed off immediately.  And the practical issues the justices were focused on, such as the impracticality of expert testimony, researching the market, etc., make sense only in the context of chapter 13’s; those steps are taken all the time in chapter 11, even in summary proceedings, like lift-stay hearings, where the debtor/estate relationship is completely different than in a consumer case.

Finally, we should not lose sight of the fact that the lender in Till was defending a fairly extreme position, because the contact rate happened to be the maximum rate allowed by the state’s usury law, which is a type of law not generally relevant in chapter 11’s as usury laws do not apply to business loans in most states. Would a creditor defending a market approach in a business bankruptcy that resulted in a non-usurious rate have encountered a different result?

[1]           The fact that she did not mention (and I saw nothing in the briefs that mentioned) whether the Tills themselves had fully performed under their confirmed plan piqued my curiosity, so I contacted her per the contact information in the signature block on the brief.  Graciously, Ms. Rush answered my email and informed me that the Tills had in fact performed under the plan and received a discharge.  Since the plan had a 17-month term, that must have happened while the case was pending in the 7th Circuit.  I wondered further if  it mooted the case in any way, but realized that the relief sought by the lender was to get them to pay more, so that there was still a live controversy and relief that could have been ordered, so not moot.

[2]           I must say, although the SG carefully frames the point in terms of loans to the same debtor,  I don’t think all of the participants in the case understood what the concept of “equality of treatment among similarly situated creditors” means in bankruptcy.  It means that creditors of the same rank in the same case should get equal distributions. It does not mean that creditors in different cases are supposed to get the same payout.  Creditors of different debtors are not usually “similarly situated”.  Even if the creditors’ collateral, by accident, has the same value in the different cases, the debtors’ salaries, family situation and other circumstances relevant to risk of non-payment are not likely to be identical.

[3]           I show in my sixth post that this is not correct, that in truth the Court has explicitly founded the principle of full compensation of the secured creditor on equitable grounds.

[4]           Which actually might have been a better mechanism to resolve the question.  I explore that further in my concluding post.

A Deep Dive into Till v. SCS Credit Corp – Part IV: Plurality Opinion

In this post, I aim to convince the reader that the justices signing the plurality opinion selected what they thought was a practical, pragmatic resolution for chapter 13 cases that was not meant to be exported to chapter 11’s at all, but rather reflected the specific circumstances that dominate chapter 13’s.  That approach may not even have appeared to them to be the ideal approach to implementing the statute; it may in fact have been only the second-best approach in their minds (to looking at comps in a well-functioning market), but the plurality, at least, convinced itself that it was the best practical approach available to them.

In rendering a decision, the Court split into three camps: a plurality voting to overturn the 7th Circuit, in an opinion authored by Justice Stevens and joined by Justices Breyer, Ginsberg and Souter; a 5th vote to do so from Justice Thomas who authored a separate concurrence which I analyze in the next post; and the other four justices (Kennedy, O’Connor, Rehnquist and Scalia dissenting (I will not discuss the dissent as it is not relevant to my thesis). 

In the prior recap of oral argument, I showed that the justices devoted little time to a discussion of the statute and one even wondered if the statute specified a particular method of valuing the cram-down paper at all.   True to that theme, the first six words of  the plurality opinion, following its recitation of the facts and the proceedings below, are: “The Bankruptcy Code provides little guidance ….” 

The plurality goes on to make some fairly general points that address positions taken in the Till litigation that are not particularly insightful or relevant to chapter 11: that the Bankruptcy Code authorizes modification of pre-petition debt over a creditor’s objection (which generally speaking begs the question of what kind and degree of modification) and that the cramdown rate should be set “objectively” and not “subjectively” (by which they mean the creditor’s own cost of funds  and investment practices are not relevant).  They offer four reasons why payments under a chapter 13 plan bear reduced risk of default compared to the prepetition debtor:  the bankruptcy judge has found the plan feasible; the debtor’s financial affairs have been disclosed; the “public nature of the proceedings” reduce the debtor’s ability to take on more debt and, under chapter 13, the trustee remains in place to receive all post-confirmation income and distribute it.[1] 

They offer their opinion that Congress “likely” intended courts to use “essentially the same approach when choosing an interest rate” to discounting payment streams to present value throughout the Bankruptcy Code.  That might afford some fodder for the application of the “prime plus” formula to chapter 11, although it is hedged twice by “likely” and “essentially the same”.  But then, on the very next page, they reverse field and drop footnote 14 to suggest that chapter 11 cramdowns should in fact be handled differently, by reference to “the rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first principles and ask only what rate will fairly compensate a creditor for its exposure.”  (emphasis added). These two statements are where the impetus to apply the “prime plus” formula in chapter 11s comes from so I will analyze them in more detail in a following post.  At this point, I am just summarizing the opinion. 

Ultimately, the plurality states, a bankruptcy court “should aim to treat similarly situated creditors similarly, and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.”  Which is fairly broad and vague and open-ended conclusion but certainly does not imply they thought they were breaking new ground.
In Section III of the plurality opinion, the alternatives to the “prime plus” formula are eliminated for various reasons.  Few of these reasons arise in chapter 11.  The analysis begins by saying:

For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors, an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans. 

The first of those criticisms is obviously chapter 13-specific with its reference to “debt-adjustment plans”: the four justices are saying that chapter 13 proceedings don’t involve evidence about market rates; whether that is true or not of chapter 13, it’s obviously not true of chapter 11 cases, where bankruptcy judges hear evidence of market comps all the time, in contexts from lift – stay appraisals to solvency determination in avoidance actions to cram-downs at confirmation.[2]  The second is vaguely worded, but in my judgment, its reference to “court-supervised cram-down loans” is a reference to the role of the chapter 13 trustee in collecting and disbursing payments from debtors under confirmed chapter 13 plans, and thus likewise inapplicable to chapter 11s; performance under chapter 11 plans, post-emergence, is generally free of court supervision. A chapter 11 debtor is considered reorganized, and gets a discharge, the day it comes out of 11; the chapter 13 debtor is discharged and rehabilitated only when s/he completes the payments under the plan. That is a vital difference in understanding Till.

The plurality rejects the “presumptive contract rate approach” and “cost of funds” approaches because, by focusing on something other than the debtor’s proposed payment stream, they are less “objective”; also they might produce different interest rates for creditors of the same debtor, based on the creditors’ own financial condition, and finally they  impose evidentiary burdens on the chapter 13 debtor who, it goes without saying, could not generally afford to bear them and thus would be unfairly disadvantaged at trial.  Certainly the last factor is inapplicable to chapter 11’s, where debtors have squadrons of expensive professionals paid for by the estate.

Conversely, the plurality asserts in Section IV, the “prime-plus” formula “has none of these defects”. Again, note that the entire focus here is on what is practical, what is the best mechanism to approve, nothing about statutory interpretation.  The formula, they assert, takes “its cue from ordinary lending practices” because it starts with the “prime rate” which is in the newspaper every day.[3]  Once a risk adjustment factor is added, “the resulting ‘prime plus’ rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code.”  Although this statement is so generalized it could be argued to apply to chapters 11 & 12,  the opinion cites an amicus brief filed by an organization of chapter 13 trustees, further indicating it was thought to be targeted to chapter 13 cases.

This section of the opinion closes by explicitly noting that the opinion does not approve any specific scale to be used for risk adjustment factors.  In explaining their perspective (keep in mind this is dictum in a plurality opinion), they say something which in my experience bears no relation to chapter 11 practice and thus could not have been thoughtfully intended to apply to chapter 11: that the rate on chapter 13 cramdown paper is supposed to be (a) selected by the court and (b) “high enough to compensate the creditor for its risk but not so high as to doom the plan.”   Essentially, having started at “present value” as being required by the statute, they wind up at something I would call “highest feasible present value“, i.e., “you can have as much value as we can give you and still confirm the plan”.  Whether this is right as a chapter 13 matter, I will leave to one side, but neither in practice nor in precedent does it resemble the chapter 11 context. 
As far as the judge actually selecting the cramdown rate in chapter 11, although on occasion a judge might more or less give fairly clear guidance about what s/he might approve, to move things along, I cannot recall seeing a court ever confirm a plan with language like that and specify the rate.  If a judge saw it, he or she would likely tell the debtor that it’s the debtor’s job to propose a plan and the judge’s job to review it, and then the parties would go out and cut their deal.[4]

As far as turning cramdown valuation in chapter 11 into the “highest feasible present value” approach endorsed by the plurality, that would fly in the face of the Court’s prior precedents on the subject as I will discuss in the sixth post.  In addition, the process of formulating a chapter 11 plan in the real world generally operates in a very different manner: typically, (1) financial professionals try to figure out the debtor’s projected EBITDA;  (2) then, they look at the debt levels of comparable companies and recent deals in the credit markets to determine (a) how much debt, as a multiple of the projected EBITDA, the reorganized debtor should reasonably take on; and (b) what other salient terms comparable financings are presently carrying; and then (3) they approach potential exit lenders to test their hypothesis and fine-tune the specific terms for the debtor in the dual track process of negotiating with creditors and soliciting exit financing.  In other words, the chapter 11 plan process does not start with a desired debt amount and then solve for feasibility by lowering the interest rate, as the plurality thinks chapter 13 does.  It starts with the amount available to pay debt service, then derives a feasible debt amount from that number by looking at comps that – this is important -- are solvent.  Because the comps are solvent companies by definition, there is no need for the professionals to do a big, separate feasibility analysis of the debtor’s risk of default, although one will be prepared anyway to make a record that complies with confirmation formalities.  It’s just embedded in the use of solvent comps that, if you use the same debt/EBITDA ratios and the same interest rate solvent companies have, the debt burden will invariably meet the feasibility test.  Applying the plurality’s approach in chapter 11 runs the risk, I think, not only of systematically under-compensating recipients of cramdown paper contrary to the Court’s prior precedents, but, equally important for bankruptcy policy, of systematically over-leveraging reorganized debtors’ balance sheets and thereby increasing the risk of “chapter 22s.”

Section V of the plurality opinion is  devoted to addressing issues raised by the other five justices’ views.  First, they respond to the four dissenters’[5] recommendation of the “presumptive contract rate” with an argument about the subprime lending market, which they opine, is not “perfectly competitive” in part because it is highly regulated to protect borrowers from their own “ignorance”. This section, whatever you think of its intrinsic merit[6], is further  evidence of my two main themes: (1) reference to the market is the first inquiry, even for these justices, although they have been persuaded, as footnote 14 indicates, that the market does not work for chapter 13 debtors, and (2) that the plurality opinion is driven by factors peculiar to 13s that don’t carry over to 11s. 

Next, the plurality simply reiterates its point that chapter 13 rates are supposed to be set at a rate that enhances feasibility: “In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success.”  Although I think this begs the very question as to what rate is necessary to ”qualify for confirmation” in the first place, it seems clear the plurality is reiterating its “highest feasible present value” interpretation here and there is nothing new here to discuss vis a vis chapter 11 relevance. Further, the plurality justices immediately make a muddle of their guidance by stating that “Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.”  Which is quite a “straw man” argument, as no one was suggesting courts were or should be setting “cram down rates at absurdly high levels” – the opponent of cramdown, is just saying, don’t confirm!  What’s “absurdly high” is the loan to value ratio!  Third, the plurality explains that the “presumptive contract rate’ approach may lead to stale and outdated results because circumstances may have changed since that loan was established.  This likewise has nothing to do with my thesis and so I will not discuss it further.

Last, but most definitely not least (because the plurality describes this as the area where they “principally differ with the dissent”, so future interpretation should focus on this point more than any other), the plurality again frames the issue as one of allocating the evidentiary burden:  “In our view, any information debtors have about [risk adjustment] factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who  must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the cases.”   That point also illustrates my thesis that the plurality was thinking of “prime plus” as a practical chapter 13 solution and not as a trans-chapter interpretation of the Bankruptcy Code.  In chapter 11 cases, debtors always have access to professional advisors and experts whose fees are charged to the estate, and thus can determine prevailing rates and other terms in the lending market as easily as creditors can. There is an ample supply of published confirmation opinions out there that show this to be true.

[1]           However, they provide no citations, beyond the statute, for the proposition that these reduce risk and offer no estimate of how much of a reduction they effectuate; frankly, these unsubstantiated assertions are nothing more than makeweights.  This is one reason I think it would have made more sense for the Court to take on the issue of chapter 13 cramdown rates via a rule-making procedure, where factual assertions like these could have been tested and additional real-world input could have been gathered and studied properly.

[2]           Even in the chapter 13 context, the assertion that “evidence about the market for loans” is “far removed from [bankruptcy] courts’ usual task” is ridiculous.  Judges hear evidence about financial conditions, including lending rates, all the time in chapter 11 cases and they’re the same judges who adjudicate chapter 13 cases.  As well, when these judges adjudicate preference cases and other “usual tasks”, they have to find facts about the “ordinary course of business” of whatever businesses the debtor and the creditor happen to be in, which is a task at least as “far removed” from what these justices perceive their “usual task” to be as hearing “evidence about the market for loans”.

[3]           It is not the point of this post to criticize the Till plurality opinion as a chapter 13 matter, but I have to say, this part of the opinion shows such an incredible lack of awareness of lending practices that it warrants at least a footnote.  First, the opinion itself identifies the “prime rate” as one available to a “creditworthy commercial borrower” but then completely fails to explain why consumer credit should be priced like a commercial loan; in reality, bank loans to consumers and commercial enterprises are evaluated and priced totally differently, reported differently, etc.  I fail to understand why the plurality could not have chosen something more relevant like the “average rate for a used car loan in the local market” as the starting point. One can go to a website like to find out current “average auto loan rates” which are then broken down into new and used car rates, and add a debtor-specific adjustment from there.  That was what the Sixth Circuit had endorsed in a case virtually identical to the Tills, In re Kidd, 315 F.3d 671 (6th Cir. 2003) and appears to have all the advantages of the “prime plus” formula while also being more focused on the particular type of loan, a used car loan.
Second, as a matter of economic substance, it should be kept in mind the commercial banks which offer “prime rate” or “base rate” loans are funded primarily by federally insured deposits, which have lower rates than other lenders’ funding sources, enabling them to offer lower rates on their loans. So using banking concepts like “prime rate” or “base rate” to set cramdown rates in chapter 13 probably favors debtors vs. an average or median rate drawn by looking at the full consumer credit market.

[4]           On a couple of rare occasions, I recall seeing a debtor file a chapter 11 plans with a “placeholder” provision for a cramdown interest rate; that is, the section prescribing the proposed treatment for the claim would describe the interest rate on the take-back paper to be something like “the rate determined by the Bankruptcy Court at the Confirmation Hearing to be the rate necessary to cause the treatment herein provided to comply with the requirements of Section 1129(b)(2) of the Bankruptcy Code”.  But those were typically filed just to comply formally with an exclusivity deadline or otherwise to keep a case moving forward for some reason.  Such terms were then amended to reflect later negotiations. 

[5]           This section also discusses Justice Thomas’s concurrence which I handle in the next post.

[6]           It is intellectually maddening that the private market rate-setting mechanism is required to be “perfect,” while government intervention to set those rates is held to a standard no higher than that of being “administratively easier”.