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8th Cir. Affirms Use of Borrower’s Proposed Rate for Payments in Chapter 12 Bankruptcy

chapter 12 bankruptcyIn an appeal involving a Chapter 12 bankruptcy, the U.S. Court of Appeals for the Eighth Circuit recently affirmed that the borrower’s use of the 20-year treasury bond rate sufficiently ensured that the total present value of future payments to the lender over the plan period equaled or exceeded the allowed value of the claim.

A copy of the opinion in Farm Credit Services of America v. William Topp is available at: Link to Opinion.

A farmer (“debtor”) in Iowa filed for Chapter 12 bankruptcy. A Chapter 12 bankruptcy is specifically intended for family farmers. A lender financed a portion of the debtor’s farming operations and filed a $595,000 claim in the bankruptcy proceeding concerning the debtor’s default on various loans.

The loans were secured by the debtor’s real estate valued at over $1 million. The debtor’s loans included interest rates ranging from 3.5% to 7.6%.

In Chapter 12 proceedings, secured creditors are entitled to full payment based on the debtor’s future earnings proposed in a plan. However, the debtor’s plan must accommodate each secured creditor by either (1) obtaining the creditor’s acceptance of the plan; (2) surrendering the property securing the claim; or (3) providing the creditor both a lien securing the claim and a promise of future property distributions whose total value “as of the effective date of the plan” is not less than the allowed amount of the claim. § 11 U.S.C. 1225(a)(5).

The lender objected to the debtor’s plan and the debtor did not surrender his property. Ultimately, the parties agreed to a 20-year repayment period but disagreed as to the appropriate interest rate to determine the present value of future payments.

The debtor proposed starting with the 20-year treasury bond rate at the time (1.87%) and adding 2% for a rate of 3.87%. The lender proposed using the current national prime rate (3.25%) with a 2% risk adjustment for a rate of 5.25%. The bankruptcy court affirmed the debtor’s proposal and rounded up the rate to 4%.

The lender appealed to a trial court who affirmed the bankruptcy court’s plan. The lender appealed again to the U.S. Court of Appeals for the Eighth Circuit. 

The Court of Appeals noted how the issue on appeal concerned ensuring that the total present value of future payments to the lender over the plan period equaled or exceeded the allowed value of the claim. 11 U.S.C. § 1225(a)(5); see Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (plurality opinion). This essentially meant the discount rate used for the present value calculations “should consist of a risk-free rate, plus additional interest to compensate a creditor for risks posed by the plan.” See United States v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989).

In arguing for the higher discount rate that included the prime rate in the calculation, the lender relied on an opinion by the Supreme Court of the United States in which the court utilized the prime rate in a formula-based approach resolving a Chapter 13 bankruptcy matter. See Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004). The Appellate Court acknowledged that many courts used Till as guidance to utilize the prime rate in their calculations of the discount rate, but the Eighth Circuit held that Till was not applicable to this case because the question involved evidence that was not before it.

Specifically, the Court of Appeals held that the dispute over prime versus treasury rate was a factual finding about the appropriate discount rate and not a purely legal question. Because the bankruptcy court considered the length of the proposed maturity period, the fact that the lender’s claim was substantially over-secured, and the overall risk of nonpayment, the Court of Appeals held the lower courts did not commit clear error when they ruled in favor of debtor’s rate calculation.

Additionally, the Eighth Circuit noted that by focusing on the starting rate rather than the ultimate rate, the lender failed to show that the bankruptcy court clearly erred in its determination that a 4% rate was sufficient to ensure full payment on “the value, as of the effective date of the plan,” of the secured claim. See § 1225(a)(5)(B)(ii).

Accordingly, the Court of Appeals affirmed the judgment of the bankruptcy court.

Photo: alenamozhjer/stock.adobe.com

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Jake VanAusdall is Senior Counsel in the Nashville office of Maurice Wutscher LLP. He practices in the firm’s Consumer Credit Litigation and Commercial Litigation groups predominantly representing financial institutions. Jake also has substantial litigation experience representing clients involved in intellectual property, construction, contract, and business disputes. Jake has been recognized as a “Mid-South Super Lawyers – Rising Star” in the area of Business Litigation (2018-2022), and is a former member of the Tennessee John Marshall American Inn of Court. For more information, see https://mauricewutscher.com/attorneys/jacob-vanausdall/

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