In Re Harko
Two appeals are before us. In neither are the relevant facts in dispute. Both concern the same issue of law, namely whether an oversecured creditor in a case under Chapter 13 of the Bankruptcy Code (the “Code“),
In the Milham appeal, we have had the benefit of the briefs of Key Bank, of an amicus curiae, the New York State Credit Union League, Inc., of the Milhams and of the Chapter 13 Trustee, Andrea E. Celli. In the Harko appeal, we have the briefs of Key Bank and of Ms. Celli.
Standard of Review
The facts are undisputed and the issue is one purely of law. The standard of review, accordingly, is de novo. Bellamy v. Federal Home Loan Mortgage Corp. (In re Bellamy), 962 F.2d 176, 178 (2d Cir.1992).
Discussion
The starting point of our inquiry is a review of the statutory provisions in question and, in the first place,
(a) . . . the court shall confirm a plan if-
. . .
(5) with respect to each allowed secured claim provided for by the plan-
(A) the holder of such claim has accepted the plan; (B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder; . . .
See
With regard to the determination of the “allowed amount of [the] claim,” we look first to
With regard to secured claims, however,
(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection
(c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
Subsection (b) codifies current law by entitling a creditor with an oversecured claim to any reasonable fees, costs, or charges provided under the agreement under which the claim arose. These fees, costs, and charges are secured claims to the extent that the value of the collateral exceeds the amount of the underlying claim.
H. Rep. No. 95-595 at 356, 357 (1977); S.Rep. No. 95-989 at 68 (1978) U.S.Cоde Cong. & Admin.News 1978, pp. 6312-13 (emphasis added). There is nothing in the language of
In addition, it is now well settled that full payment under
While Key Bank does not espouse such result, if, as Key Bank argues,
The substitution of a contract rate of interest for present value interest, on the other hand, would be inconsistent with the objective of
Of crucial importance, too, are the provisions of
Thus, the Ninth Circuit in Shearson Lehman Mortgage Corp. v. Laguna (In re Laguna), 944 F.2d 542 (9th Cir.1991), cert. denied, 503 U.S. 966, 112 S.Ct. 1577, 118 L.Ed.2d 219 (1992), considered that the oversecured creditor‘s right to postpetition interest is qualified by, and must be understood in the context of, the interplay that exists between §§ 1322(b) and 1325(a) with respect to modification and cure and stated that “[t]he cramdown route necessarily involves a modification of the creditor‘s rights with regard to such factors as number of payments and the rate of interest.” Id. at 544-45. Similarly, in In re Smith, 178 B.R. 946 (Bankr.D.Vt.1995), addressing the rights of an oversecured creditor in Chapter 12, the court recognized the overriding nature of
Use of the contract rate is claimed by its proponents to be the best way to determine the market rate because it is usually at arm‘s length and presumably reflects current interest rates, the current cost of money, and accounts for risk and costs. These arguments sink in the Bankruptcy Code waters because Courts do not award profit, administration costs, risk, industry transactional costs, costs of collection, and all those other myriad elements that go into a contract rate. Moreover, the Code authorizes a debtor to change its creditors’ contract rights. §§ 1123(b)(1), 1222(b)(2), 1322(b)(2).
The dissent herein takes issue with In re Smith‘s conclusion that bankruptcy courts “do not award profit, administration costs, risk, industry transactional costs, costs of collection, and all those other myriad elements that go into a contract rate.” However, the concept that profit is not an element of present value interest is not, as the dissent claims, without its authority. The Second Circuit in In re Valenti, 105 F.3d at 63, expressly rejected the Third Circuit‘s argument in General Motors Acceptance Corp. v. Jones, 999 F.2d 63 (3d Cir.1993) that “it would be inappropriate to attempt to exclude consideration of `profit’ from a determination of the § 1325 interest rate,” id at 69, instead approving In re Dingley and In re Hudock, as noted above.
In addition, the dissent, relying on Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), argues that it is only contract rights, not statutory rights such as the oversecured creditor‘s right to postpetition interest under
Finally, contrary to the dissent‘s view, we do not believe that our analysis of the relationship between §§ 1325(a)(5)(B)(ii) and 506(b) is in any way inconsistent with the provisions of
For all these reasons, we would hold that an oversecured creditor is entitled to receive interest pursuant to
For example, in In re Klein, the court explained the relationship between
For purposes of fixing the value of a creditor‘s secured claim, [s]ection 506(b) permits the secured claim to include reasonable interest together with any reasonable fees, costs or charges provided for in the security agreement when the value of the collateral exceeds the amount of the allowed secured claim.
The discount rate, on the other hand, does not become part of the secured claim, but is instead incremental adjustments to the secured claim to compensate the creditor for depreciation of the collаteral over the term of the plan.
In re Klein, 10 B.R. at 661 (citations omitted). In re Webb held that:
[S]ection 1325(a)(5) requires that the secured creditor receive not less than the present value of his allowed claim. Section 506, on the other hand, fixes that allowed secured claim. Therefore, as of the confirmation date, section 506(b) incorporates contractual provisions to fix the total secured claim. Thereafter, the Court, independently of the contract, must fix an interest factor such that the total of such deferred payments is equivalent to the receipt of the total claim today. By this method the secured party‘s rights are not modified but protected.
In re Webb, 29 B.R. at 286 (citations omitted). In In re Corliss, the court analyzed the relationship between
As the value of the payments to be distributed under [§ 1325(a)(5)(B)(ii)] must at least equal the allowed amount of the creditor‘s claim one must first ask of what the “allowed amount of the claim” consists within the context of that subsection. The language of § 506(b) suggests the inclusion of post-petition interest as part of the allowed secured claim to the extent of the value of the collateral. This interest will accrue from the date the petition is filed
until the effective date of the plan. The secured creditor cannot, of course, receive any contract interest which is unmatured as of the effective date of the plan. To determine otherwise would obligate the debtor to pay the discount rate on unmatured interest and lead to payment of two forms of interest simultaneously.
In re Corliss, 43 B.R. at 178. The court in In re Hugee held that:
The creditor is entitled to receive the contract rate of interest until the effective date of the plan — at which time the accumulated interest becomes a part of the allowed secured claim. From that time forward the oversecured creditor is entitled to receive the discount rate.
In re Hugee, 54 B.R. 676. The court in In re Busone found
Section 506(b) permits a secured claim to include postpetition interest when the value of the collateral exceeds the amount of the allowed secured claim. This section allows an oversecured creditor to add interest that accumulates prior to confirmation to the secured claim awaiting distribution under the debtor‘s plan. This postpetition interest actually becomes part of the secured claim and may accrue until the effective date of the plan. Section 506(b) interest accrues from the date the petition is filed until the effective date of the plan. . . . Simply stated, section 506(b) interest becomes part of the allowed secured claim. It is the present value of this claim that must be paid under section 1325(a)(5)(B)(ii).
In re Gladdin, 107 B.R. at 806 (citations omitted). Accordingly, the court rejected the argument that an oversecured creditor could receive
Although § 506(b) and § 1325(a)(5)(B)(ii) both mandate a calculation of interest, there are different objectives underlying the actual selection of the interest rate under each section. As a result, the interest rate that will return the present value under the plan under § 1325(a)(5)(B)(ii) is not necessarily the same interest rate used to determine the allowed amount of the claim under § 506(b). While § 506(b) determinеs the exact amount of the claim as of the “effective date of the plan” § 1325(a)(5)(B)(ii) requires the payments made under the plan return the present value of that amount to the creditor. The two sections complement each other and together ensure the full payment of the value of the secured creditor‘s claim.
In re DeMaggio, 175 B.R. at 150 (citations omitted.)
Finally, no review of this topic would be complete without a mention of the Supreme Court‘s decision in Rake v. Wade. Courts have frequently cited Rake as authority for the proposition that under
The Second Circuit in In re Valenti concluded that the market rate of interest under
MICHAEL J. KAPLAN, Bankruptcy Judge, concurring in part and dissenting in part.
The majority is transfixed by facially glossy jurisprudence that evolved principally in Chapter 11 cases and that truly applies only to undersecured claims. The notion of “present value” as it arises under Bankruptcy Code sections such as §§ 1325(a)(5) and 1129(b)(2)(A)(i)(II) derives exclusively from consequences of deferral of payments, i.e., a dollar tomorrow is worth less than a dollar today.1 “Present value” is not implicated if I bargained for a dollar to be paid tomorrow, and if a plan promises precisely that — to pay a full dollar tomorrow. This is one of the differences between the notion of “present value” and the notion of “interest.” Interest may be applicable even when “present value” is irrelevant. If a payment is not being deferred to a time beyond when it was due, there is no reason to consider “present value” in any sense, let alone the
It is well-settled that oversecured claims and undersecured claims are treated differently under the Code. Indeed,
Further,
DISCUSSION
Rarely is a lien on personalty oversecured in a Chapter 13 case.7 Consequently, nearly all of the gloss on
The analysis offered by the majority is brilliant (as are somе of the authorities upon which it is based) as applied to a completely different case. It would speak ably to: (1) undersecured claims; (2) oversecured claims that are being significantly stretched out to a point at which application of the contract rate would provide the lender with a windfall at the expense of unsecured creditors, relative to the possible yield to the creditor if the loan were fully repaid by the end of the note duration; or (3) a significant reduction in risk to the lender. But where, as here (perhaps8), the only effect of the plan is to
The majority claims to find its authority in
By what authority did the court in the case of In re Smith, 178 B.R. 946 (Bankr.D.Vt. 1995), cited by the majority, conclude that bankruptcy courts “do not award profit, administration costs, risk, industry transactional costs, costs of collection, and all those other myriad elements that go into a contract rate?” No authority was cited for writing
Courts addressing this issue have largely addressed policy reasons, as if the statute admitted of such an approach. In any event, let us address those on the merits. Firstly, there is the argument that the reasoning of this dissenting opinion would disrupt Chapters 11. Lawyers are used to negotiating a “fair and equitable” interest rate for payment of secured claims in that chapter. See
Next, it is often argued that to grant postpetition interest at the contract rate to an oversecured creditor would be “unfair” to unsecured creditors. So long as an unconscionable rate of interest is avoided (see discussion below) then I believe that the “fairness” issue was settled against unsecured creditors a very long time ago. Surely in a Chapter 7 case, contract interest will be paid from the proceeds of sale of underencumbered collateral, no matter how much time lapsed between the petition date and the sale. If there is some reason to assess a
Moreover, the “fairness” issue was specifically addressed in the Timbers of Inwood case, wherein the United States Supreme Court recognized the pre-Code rule that “[i]t was considered unfair to allow an undersecured creditor to recover interest from the estate‘s unencumbered assets before unsecured creditors had recovered any principal.” Timbers of Inwood, 484 U.S. at 373, 108 S.Ct. at 631 (emphasis added). The Court held that
Recently, the High Court observed, in the case of Associates Commercial Corp. v. Rash, ___ U.S. ___, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997), that “from the creditor‘s perspective as well as the debtor‘s, surrender and retention are not equivalent acts.” Rash, ___ U.S. at ___, 117 S.Ct. at 1885. It seems to the present writer that when a debtor seeks relief under a rehabilitative chapter of the Code, and elects to retain collateral, the result is not unlike a nonbankruptcy context in which the debtor hides the vehicle from the lienor and thereby thwarts repossession and sale. Can we doubt, in such context, that the unpaid balance continues to accrue interest at the contract rate until the creditor ultimately locates and obtains possession of the vehicle, and sells it?
As to grossly unfair rates of interest, this writer submits that Ron Pair (wherein it was held that interest is allowed even to noncontractual liens because the placement of punctuation marks in
In sum, then, in light of history, the Chapter 7 result, the
Finally, many commentators have focused on the ways in which the state law rights of oversecured creditors are similar to the state law rights of undersecured creditors, in determining that they should be treated alike after confirmation. For example, it is true that each is compelled to sell the vehicle in a commercially reasonable manner after repossession. The present writer believes that the key regard in which the state law rights of the two are dissimilar has been ignored. Denying overseсured creditors the bargained-for rate not only “sticks” them with the equivalent of a money judgment (rather than cash) on the day of confirmation, but it treats the added value in the collateral as if it no longer exists. We all understand why it suffices to give an undersecured creditor only the present value of the car; the most that that creditor would get if it got the car back would be cash today equaling the value of the car. So the substitute of cash over time at present value under
What has happened to that excess value in a Chapter 13 case? What happened to the value that the creditor bargained for as security for her profit on the loan? Under the majority‘s decision, that excess value has been converted to the debtor‘s benefit in the form of a $2400 state law exemption that the debtor would not enjoy outside Chapter 13 if the car only fetched the liened amount at a “commercially reasonable sale.” Furthermore, under the majority‘s decision, any value over that liened amount plus the exemption has been converted to the benefit of unsecured creditors by virtue of the Chapter 7 test.
In this writer‘s view the Code is not susceptible of such a larcenous result. Particularly not when all the authority for that result is in derogation of
Perhaps most importantly, we must not forget what Congress said when it overturned the ruling of Rake v. Wade in 1994, by enacting
The specific language of
CAVEAT
All of this being said, this minority decision dissents only In part because the Panel has not been told whether the interest rate is the only term that the Debtors seek to modify. It is important to know whether award of the contract rate will simply assure the oversecured creditor of the bargained-for profit, or whether it will provide to the creditor a true windfall at unsecured creditors expense.
Consider an illustration. I loaned you $10,000 to buy a $30,000 vehicle at 15% for three years. In the third year, when the vehicle is worth, say, $ 15,000 and you owe me perhaps $7,000,13 you file Chapter 13 and propose to stretch the last year‘s payments out over five more years. If such were the case, an award of 15% might be a windfall to me, over and above the bargained-for profit. It would be a windfall if, as of the date of confirmation, markets had dropped to the point at which there were no way that I could obtain anything approaching a 15% yield on a five year investment of monies equal to what I would receive on the remaining payments on the car loan according to the original terms, if I were to invest each of those payments.
Were this a two-party dispute only, this writer would have no difficulty imposing the 15% rate on the debtor who elects to stretch out the remainder of the payments over the lender‘s objection. Indeed a failure to do so probably would invite abuse of Chapter 13. I would not, however, impose a windfall rate at the expense of the debtor‘s other creditors.14 If, in fact, market rates of interest had dropped substantially, it is at the point that applying the contract rate to a stretch-out would yield a windfall, that I would pay heed to the majority‘s decision and the authorities upon which it claims to be based.
I am not suggesting that under those circumstances the cоntract rate should apply until a specified date during the life of the plan, and then a different rate thereafter. Rather, a stretch-out, by definition, involves a deferral of payments, and reference to
Where there is, in fact, deferment the simplest way to address the complex functions invoked by this writer‘s analysis is to negotiate and settle them. Indeed that is the way that nearly all cases that involve the present fact pattern are resolved in all three of the rehabilitative chapters — Chapters 11, 12 and 13. (Perhaps in Chapter 9 as well. This writer has no experience with that Chapter.)
The rules of administrаtive convenience adopted by many courts for dealing with the present value issue as to undersecured claims are wholly appropriate, as affirmed by the Valenti decision, since the value of the undersecured claim is easy to measure; it is the value of the vehicle. As to oversecured claims, the value of the vehicle is not relevant. We must measure the value of what the creditor was to receive under the original contract. So rules of administrative convenience fail us. The difficulty in reaching the correct result as to oversecured claims where a substantial modification is sought other than merely as to interest rate, is precisely the reason that any dispute should be negotiated to settlement. The complexity, expenses, and uncertainty of litigating the “present value” of what a particular stretched-out oversecured creditor will receive under a plan, as compared to the present value of what that creditor was to receive over the balance of the original term of that contract, should cause one to shy away from the effort, and cause one to seek a settlement instead. (Over a mere three to five year period, the “swing” in possible rates would likely be offset by the cost of the proof.)
CONCLUSION
As stated at the outset of this minority opinion, if the principal balance of an oversecured car loan will be paid off over more or less the same duration as the remaining contract duration, and if it will be paid off by monthly payments that keep the interest current and retire the debt over the life of the remaining duration of the original contract, and if it will be paid at about the same risk, then no reference to
For all of the above reasons, I would remand for further proceedings. If the plan provisions for payment of the oversecured creditor in these two cases are not very different from the original loan terms, I would direct an award of the contract rate. If there are other significant differences (stretch out, changed use, etc.) and if contract rate would result in a windfall at the expense of someone other than the Debtors, I would direct that the rate be tempered by the bankruptcy court‘s discretion, and only a “fair” profit be reflected in the awarded
Notes
An allowed claim of a creditor secured by a lien . . . is a secured claim to the extent of the value of such creditor‘s interest in the estate‘s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor‘s interest . . . is less than the amount of such allowed claim.
The second sentence of § 506(a) provides guidelines for the valuation contemplated by the first sentence. It provides:
Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor‘s interest. Section 1325(a)(1) provides that, “the court shall confirm a plan if . . . the plan complies with the provisions of this chapter and with the other applicable provisions of this title . . .”
[I]nterest accruing on a loan prepetition is part of the claim in bankruptcy. The Code, however, does not provide for postpetition interest as part of the claim; rather, in some circumstances, it provides for interest on the claim. See, e.g., H.R.Rep. No. 95-595, at 180-81 (1977) U.S.Code Cong. & Admin.News 1977, at 5787, 6140-41, reprinted in Appendix 2 Collier on Bankruptcy, pt. II (Lawrence P. King, ed., 15th ed.1996).
[F]rom a policy viewpoint, it would make sense to treat pendency interest as part of the secured claim for purposes of plan interest, because pendency interest is a substantive right granted under the Code which would be subject to dilution if payable on a preferred basis without a present value requirement. Dean Pawlowic, Entitlement to Interest under the Bankruptcy Code, 12 Bankr.Dev. J. 149, 171-2. Any effort to define contract interest as anything оther than profit might be technically accurate, but pragmatically wasted. That profit is the key element of interest seems too obvious to belabor.
(b) . . . the plan may —
. . .
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor‘s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; . . .
Quite obviously the final version of § 1322(b)(2) represented a compromise. The legislative history therefore indicates only that § 1322(b)(2) was designed to provide greater protection to home mortgage lenders than other secured creditors in the Chapter 13 context. In 1995, the Smith case noted thirty-five articles on the subject. See Smith, 178 B.R. at 949 n. 6.