I’ve stayed away from expressing directly my view of Till as a chapter 13 decision throughout
these posts, mainly because I believe, as stated at the outset, that its
applicability to chapter 11 is independent of its merit in chapter 13, but,
before concluding, I do want to make clear my bottom line on Till as a chapter 13 matter. I think a formula approach to setting
cram-down interest rates was a defensible result in chapter 13 because of the
administrative issues posed by most of the alternatives, and the conceded lack
of conceptual difference between the “prime plus something” and the “contract
minus something” approaches the parties presented. That said, I think the reasoning used by the
5 justices who voted to overturn the 7th Circuit’s decision to get
to that result was awfully specious and should not influence future
decision-makers.
However, that the result was defensible does not mean it
could not be improved upon.. I think a
far more open and sophisticated approach to figuring out how to instruct lower
courts on chapter 13 interest rate decisions would be to tackle the question
through a rule-making process. The Court
has been empowered by the Rules Enabling Act (28 U.S.C. § 2072) to establish
rules for administering the Bankruptcy Code and it seems to me that, if the
Court wants judges administering chapter 13 to do the best job possible setting
interest rates while remaining highly pragmatic, the rule making process would
be a far superior way to do that rather than the ad hoc approach that led up to
Till. The Court could express its
concerns and objectives more overtly, solicit proposals and input from persons
with real, in-depth knowledge about the subject, and request the Administrative
Office of the U.S. Courts to research the topics the justices find relevant,
like how many chapter 13 plans default. Then, the advisory committee on
bankruptcy rules and its reporter could sift through them and hold hearings and
receive presentations and come up with a proposal that could be sent out for
notice and comment.
The same approach could be applied to chapter 11
practice. Right now, the question muddles along in the lower courts
year after year with judges working off a lightly thought out dictum in a
footnote in a plurality opinion, and misapprehending basic propositions of
microeconomics as they do so. As a
practical matter, those courts have also used the plurality's passing remark to
rationalize fairly blatant favoritism toward local elites. To clean up this mess, the Court could simply
propose that the rule making process be used to develop a uniform approach to
evaluating cram-up paper in chapter 11 cases and get a real analysis of the
empirical questions that it deems relevant, from academics who have analyzed
the lending market and more importantly from people with decades of experience
in the commercial loan market who could testify about its degree of efficiency,
and what databases to look at, and provide other straightforward, pragmatic
insights about the value of the absolute priority rule that would guide the
formulation of a uniform approach.
Unless and until that happens, the appellate process will
be the only route to correct the mistakes being made in applying Till in chapter 11 cases. I read the Fifth Circuit’s Texas Grand Prairie opinion to display a
certain amount of frustration that the panel was not presented with a better argument
for rejecting the Till approach in
chapter 11 cases. With proper planning,
a creditor’s lawyer could fashion a strong case for appellate review. Some of the tactical considerations in
framing a case for a successful appeal seem to me to include:
1) Picking the
right case to the extent possible.
Regardless of the legal analysis, appellate judges are reluctant to
tamper with lower court practices if they don’t have any sense that someone is
being wronged by the practice. Has the
secured claim already been haircut under 506(a), imposing one loss on the
creditor and now the debtor's below-market takeback paper on the secured
portion amounts to a second bite out of the creditor's apple? How close is the feasibility issue – how much
risk is the creditor being asked to take on for the proposed below market paper? How much of a maturity extension is being
proposed? Is the secured creditor the
original lender or a buyer who is going to make a healthy profit even if it
loses the cramdown fight - not that it should matter, but it seems to. How do the three interest rates - contract,
debtor's proposed cram-up, and lender's proposal - match up? In some of the
cases I have read, the creditor is complaining the rate on the cramdown paper
is too low, even though it is higher than the contract rate. Economically that can be quite logical, if
the credit risk has deteriorated, but courts aren't paragons of economic logic;
you need to be realistic as to how much traction the argument "I'm not being
made better off enough" will have with an appellate court. Overall, does it look like the creditor is
taking advantage of the predicament, or does it look like the creditor is the
one being taken advantage of? Ideally,
one goes to an appellate level with a record in which everything points to the
creditor being screwed, like Castleton Plaza, not one where the creditor will
make out like a bandit. In the real world, I know, you go with the best you
can.
2) Secured creditors also need to think harder about
making the § 1111B election if they are
undersecured and a debtor is attempting to strip their lien down; there does
not seem to be any room in Till to
impose an interest rate below “prime plus 1” so making the § 1111B election
seems to raise the debt service hurdle and may strengthen the creditor’s
chances of winning on feasibility. If
the court imposes a below-prime rate, the creditor gets a second Till-centric argument -- non-compliance
with Till in addition to trying to
overturn Till. In the worst case, the election will give the
client a bigger claim in a future default.
3) As a practical
matter, the creditor should make an effort to contest the feasibility of the
plan, or at a minimum, point out that it is not feasible at proper rates. Emphasize the theme that feasibility is just
a "preponderance of the evidence" meaning there is a risk of error,
and the court needs to compensate creditor for that risk via the terms of the
cram-down paper. Remind the court of the plurality’s statement -- entitled, one
must assume, to equal dignity with footnote 14 -- 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.”
4) Counsel for the
secured creditor needs to use the right expert to make the right record. It would be a mistake to just have someone
testify about rates and comps.
Additionally, the case should include expert testimony about what
efficiency means in the context of financial markets and the efficiency of the
credit market. A professor of financial
economics may be the right kind of expert on that subject. Prepare the expert to explain why it's
efficient even when there is no loan like the cram-down paper trading at par. Be sure the expert calculates, clearly
delivers and can defend an opinion on the value of the paper the debtor
proposes under the plan, showing that it is below par, not just the rate that would yield par. Also get some testimony on the decline in
creditworthiness or loss of other contracts rights or value in the
restructuring. Hopefully as well, the
creditor's expert won't provide any opinions helpful to the debtor's case, as
the bankruptcy judges in Texas Grand
Prairie and Castleton Plaza both
seemed to record.
5) The creditor
must not allow the trial court to lose sight of the burden of proof on the
"efficient market". The debtor
has the burden of proof on cramdown. That is clear. If a court follows the plurality in Till, and American Homepatient, and says the first question is whether the
credit markets are efficient, it is the debtor's burden of proof to show that
they are inefficient. It is not the
creditor's burden to convince the judge that they are efficient, just to
explain, with expert assistance, what "efficient market" means. Also make sure the court uses the same
standard to evaluate both theses, the market should not be required to be
“perfectly efficient” while the Till
formula is merely required to be “good enough for government work”.
6) Emphasize the practical differences between 11 & 13
that were identified in the plurality opinion:
no court-supervision post emergence; the debtors’ routine use of
experts, etc.
7) Be clear that (presumably) you are not trying to
overturn Till in chapter 13, but
merely correct its application in chapter 11.
Neither should you get trapped in arguing labels like whether this is or
isn't the "coerced loan" approach, or "indubitable
equivalence" under 1129(b)(2)(A)(iii), because labels are poor substitutes
for thought. All that anyone is trying
to do is interpret the word "value" in 1129(b)(2)(A)(i). The market is the best evidence available on
value, just like any other valuation that takes place in chapter 11. Instead of "indubitable
equivalence" use the phrase "full compensation" from controlling
pre-Code precedent such as Consolidated
Rock Products v. Dubois.
Courts at the trial level that want to follow the Till / American Homepatient approach
should develop a better understanding of the criteria for financial market
efficiency and the ways in which the loan market generally satisfies those criteria. They should reflect more on the arbitrariness
of deviating from the absolute priority rule and the systematic harm that
recurrent deviations can inflict on financing practices. No mechanism has ever been discovered that is
better at allocating capital than the market.
Even more importantly, they should recognize that the test
of an efficient market is not that a particular individual or constituency gets
the terms it wants at another’s expense.
Finally, they need to realize that the entire package of terms of the
proposed cramdown paper, not just the interest rate, is subject to the fair and
equitable standard.
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