Friday, January 3, 2014
A Deep Dive into Till v. SCS Credit Corp.– Part II: Briefs
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.” 
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.
 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.
 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.
 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.
 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.