In Re Kuljis Seafood Co., Inc.
MEMORANDUM OPINION
This issuе came on before the Court on the Objection to Confirmation of the Debt- or’s Second Amended Plan of Reorganization filed by the United States of America on behalf of its agency, the Small Business Administration (SBA). No other objections were filed, and the issues were submitted to the Court on briefs. Upon consideration thereof, the Court enters the following Conclusions of Law. The Facts, stipulated by the parties аnd filed on November 18, 1985, are incorporated herein by reference.
Section 1129(a) of Title 11 of the United States Code provides the requirements which must be met in order to confirm a plan of reorganization. Where a class of creditors has not accepted the plan, as in this case where the class was composed only of the SBA, or where the class is impaired, as is also the сase here, under which events Section 1129(a)(8) would not be met, the proponent of the plan may request confirmation under § 1129(b) notwithstanding the requirements of § 1129(a)(8), “cram down”, if all other applicable requirements of § 1129(a) and (b) are met. Of these requirements, the SBA contends that § 1129(a)(7)(A)(ii) and § 1129(b)(2)(A) have not been complied with by the debtor.
Subsection (a)(7)(A)(ii) provides that each holder of a claim of such class
(ii) will rеceive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date
[[Image here]]
Id. The debtor’s plan provides that the SBA’s claim will be treated as follows:
The allowed claims of the Unitеd States Small Business Administration shall be paid as follows: (i) The debtor shall, upon confirmation, resume regular periodic payments as called for in the promissory notes held by SBA and secured by the debtor’s property; (ii) the debtor shall, promptly following confirmation, execute and deliver to SBA a new promissory note in a principal amount equal to that portion of SBA’s claim that constitutes delinquent interest and collection costs, said note to bear interest at twelve percent (12%) per annun, and to be payable in two (2) equal installments on November 1, 1986 and November 1, 1987: (iii) the payment of all delinquent principal as of the date of confirmation shall be deferred until maturity; and (iv) SBA’s liens on the debtor’s property shall be retained, and its claims against the debt- or and its property shall remain otherwisе unimpaired and unaffected by this plan.
Debtor’s Second Amended Plan and Disclosure Statement, at p. 3. As pointed out by the SBA, the property upon which its loans are collateralized are listed on the debtor’s schedules as having an estimated market value of $2,000,000.00, while the principal amount of the SBA’s claim is $457,053.05. The allowed distribution of a claim to a secured creditor where the value of the security is greater than the amount of the claim includes charges provided for in the agreement' under which the claim arose. 11 U.S.C. § 506(b). Therefore, the SBA would, in the event of liquidation, be entitled to its total claim of $457,053.05 plus contract rates of interest on the appropriate portions of the debt at 3% and at 8í4% per annum, as in the original notes.
The key issue here is in determining whether the amount to be received by the SBA under the plan is property of a value, as оf the effective date of the plan,
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interest that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides
(i)(I) that the holder of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that eаch holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (1) or (iii) of the subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims.
11 U.S.C. § 1129(b) 1
The issue here revolves around § 1129 (b)(2)(A)(i)(II) language tying in the value of deferred cash payments to the effective date of the plan.
“Value as of the effective date of the plan,” as used in paragraph ... 1129(b), ... indicates that the promised payment under the plan must be discounted to present value as of the effective date of the plan. The discounting should be based only on the unpaid balance of the amount due under the plan, until that amount, including interest, is paid in full. [House Report No. 95-595, 95th Cong., 1st Sеss. 408 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6364.]
§ 1124 Legis.Hist., Bankruptcy code, Collier’s Pamphlet Edition (1986). Whether the present value of deferred cash is based
In the case of
In re Nolen,
Southern States Motor Inns, Inc.,709 F.2d 647 (11th Cir.1983); In re Roxbury Residential Associates, Inc.,35 B.R. 348 (Bkrtcy.D.Conn.1983) In re Snedaker,32 B.R. 29 (Bkrtcy.S.D.Fla.1983) In re Connecticut Aerosols, Inc.,31 B.R. 883 (Bkrtcy.D.Conn.1983); In re Sullivan,26 B.R. 677 (Bkrtcy.W.D.N.Y.1982); Matter of Landmark at Plaza Park Limited,7 B.R. 653 (Bkrtcy.D.N.J.1980). Klee, “All You Ever Want to Know About Cramdown Under the New Bankruptcy code,” 53 American Bankruptcy Law Journal pp. 133, 156.
Id.
at 489
2
See also In re N.S. Garrott & Sons,
Other cases have taken a contract ratе of interest into consideration in determining the correct rate to be applied under a confirmation analysis. In the case of
In re Victory Construction Company, Inc.,
The consequence of such a payment, without explicit authorization in the Code, would be to allow the secured creditors to take more than 100 percent of their claims. It is clear that the drafters intended the court to dеny confirmation where the plan proposes to pay more than 100 percent to a senior class without the consent of a junior. See generally Senate Report No. 989, 95th Cong., 2d Sess. 127-128 (1978).
Id.
at 155. Along the same vein, it was noted in
In re Barrington Oaks General Partnership,
Additional cases holding that the contract rate is propеr include
In re Naugle’s Nursery,
A determination of a proper discount rate could become a very complex matter. In re Miller, supra [4 B.R. 392 (Bkrtcy.S.D.Cal.1980) ]. In order to simplify this Congress has suggested that there should be a presumption that a proper discount rate would be the same as the rate set out in the parties’ interest bearing Agreement. H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 352-53 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787; S.Rep. No. 95-989, 95th Cong., 1st Sess. 62-63 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787.
Id.
at 475. In
In re Patel,
Bkrtcy.
Much has been made in the case law of the necessity of determining the exact market discount rate to determine present values in cram down litigation. Many cаses dealing with this issue have arisen in the Chapter 13 setting. However, “Chapter 11 cram down presents problems identical to those posed in Chapter 13. Deferred payments are required to have a value as of the effective date of the plan equal to the allowed claim.” In re Benford, 14 B.R. 157 , 160 (Bkrtcy.W.D.Ky.1891). From examination of numerous Chapter 13 opinions, it has become apparent to this Court that the Courts hаve been confronting this issue in a case-by-case method. See, e.g., In re Rogers,6 B.R. 472 (Bkrtcy.S.D.Ia.1980), where the annual contract interest rate was determined to be a proper discount rate; In re Bedford, supra, where the Court decided that the prevailing market rate was the proper rate since it was the only rate which could be reasonably responsive to current economic conditions; In re Klein,10 B.R. 657 (Bkrtcy.1981), where the court determined the most equitable rate by averaging the legal rate and the contract rate. This Court believes that where a seller negotiates a fixed rate with a buyer for a purchase money mortgage on a particular piece of property, that rate is far more persuasive than the money market or other sources of financial data.
Id.
at 104-05. Courts have also been mindful оf windfall effects to the debtor or creditor where the market rate post-petition is different from the original contract rate.
See In re Maimone,
Courts have also distinguished the present value rate of interest in § 1129(b) from the contract rate in § 506(b). Noting that there is much dispute as to what discount rate should be applied to determine the present value of deferred payments, the Court in
In re Hildreth,
To determine the proper rate of interest, courts must instead rely on the policy considerations underlying the Bankruptcy Code and commerciаl law in general.
Admittedly, these principles do not forcefully compel either the contract rate of interest, a market rate, the legal rate, or any other particular interest rate. In general, however, it is appropriate for oversecured creditors to be allowed the contract rate of interest partly for the reasons stated in In re Loveridge, supra: “(R)ejecting the contract rаte where there is a contract might mean either a windfall to the creditor when the contract rate is less than the rate selected or a windfall to the debtor when the contract rate exceeds the rate selected ... The parties in this ease have shown no good reason for producing a windfall under Section 506(b).”36 B.R. 159 , 11 B.C..D. at 487.
In a reorganization, however, a windfall is inevitable whenever the mаrket discount rate, which becomes effective upon confirmation of a plan of reorganization, differs from the contract rate. See In re Loveridge, supra (chapter 11); In re Busman,6 B.C.D. 683 ,5 B.R. 332 (Bankr.E.D.N.Y.1980) (chapter 13); Blum. Treatment of Interest on Debtor Obligations Under the BankruptcyCode, 50 U.Chi.L.R. 430, 441 (1983); but see In re Kauffunger, 16 B..R. 666, 668-69 (Bankr.D.N.J.1981) (DeVito, J.) (chapter 13; contract rate).
Id.
at 979. The Court pointed out that the contract rate would generally apply absent equitable considerations. Moreover, “the creditor is nоt entitled to the benefit of its bargain, that is not the purpose of these interest payments.”
In re Benford, supra,
at 161.
See also In re Briggs Transportation,
In determining how the legal authorities and policy considerations should be applied under the facts of this case, an initial issue is whether the plan payments proposed by the debtor constitute “deferred cash payments”. “Deferred” is dеfined in Webster’s Third New International Dictionary as, “put off”, “postponed”, or “withheld for or until a stated time.”
In re Parker,
However, it is illogical to treat payments, with the exception of delinquencies, as deferred under a plan of reorganization under § 1129(b)(2), thus subjecting them to additional requirements concerning present value of interest, where the section’s intent is merely to protect creditor’s interests in terms of a potential loss and where the terms of payment are not changed from what they were prior to the Bankruptcy, but arе reinstated. Therefore, the portion of the SBA debt that is resumed in regular periodic payments should not be treated as deferred under 1129(b), thus invoking additional standards on a reinstated debt. The payments are not any more “deferred” or “postponed” under the plan than they would have been absent the bankruptcy. This is consistent with cases that have recognized the notion that deferred payments under § 1129 are in the nature of “coerced” loans.
In re Southern States Motor Inn, supra,
n. 7;
In re Benford, supra,
at 160. Furthermore, “payment of interest at the market rate seems inconsistent with § 1124(2)’s recognition of debtor’s right to cure a default and reinstate the contract on its original terms”.
In re Shriver,
Evеn if the entire debt were treated as a deferred debt for purposes of section 1129(b) increase in payment on the SBA claim from the contract rates of interest to the market rate would act as a windfall to the SBA. They would be receiving more than 100% of their allowed claim under § 506 and more than they ever would have receive, but for the bankruptcy. These effects are pointed out in American Mariner, Maimone, and Loveridge, supra. For thеse reasons, the Court finds that the first section of the debtor’s plan concerning the SBA calling for a resumption of regular payments under the note meets the standards of § 1129 and that the contract rate of interest, rather than the market rate, is appropriate.
Regarding the portion of the debt that is currently past due, the debtor’s plan proposes to pay 12% interest upon the delinquent
interest
payments in two annual installments, and further provides that the delinquent principal payments be deferred until maturity. These payments, representing
past due
debt, rather than payment not yet due, would be “deferred” or postponed under the reorganization plan and should be treated as such for purposes of § 1129(b)(2). The SBA, as an overse-eured creditor, is entitled to the present value, as of the effective datе of the plan, of these “deferred” payments under the
Counsel for the debtor is instructed to prepare an order in conformation with this opinion.
Notes
. Section 1124 provides the circumstances under which a claim is not impaired which includes the curing of a default, as the debtor proposes in its plan here. However, the cure and compensation must be completed by the effective date of the plan to avoid impairment.
In re Jones,
. Note that Roxbury, Connecticut Aerosol, and Snedeker deal with deferred tax payments under § 1129(a)(9), however.
. This case involved a Chapter 13 confirmation under § 1325(a)(5)(B)(ii) which incorporates language concerning present value.
. Although the entire debt is not technically cured in the plan since the delinquency payments will not be paid by the effective date of the plan, the fact remains that the remainder of the contract would be resumed under its original terms.
. The concept of value should be flexible under the Bankruptcy Code in order to fashion a remedy appropriate under circumstances set forth in each individual case.
In re Miller,
. The plan provides that the past due principal will be paid at "maturity”. However, to the extent that past due payment have already matured, it is unclear exactly when the debtors plan provides that these payments will be made.