Prudential Insurance v. MonnierPrudential Insurance v. Monnier
Lead Opinion
Thеse appeals are from a decision of the District Court for the District of South Dakota
Debtors are farmers. Prudential loaned debtors $800,000 оn May 16, 1981. The loan was evidenced by a note, and secured by a mortgage upon farmland debtors own in Deuel County, South Dakota. By the terms of the note and mortgage, interest on the Prudential loan would accrue at a rate of thirteen percent per annum, and at a rate of fifteen percent per annum on overdue installments. The term of the loan was fifteen years, although Prudential could shorten this term after giving notice to the borrowers. The first installment оf principal was due on June 1, 1983. Debtors failed to make this principal payment, having filed their original chapter 11 petitions in the United States Bankruptcy Court for the District of South Dakota on January 3, 1983.
Prudential then requested the bankruptcy court to modify the automatic stay of
Subsequently, the bankruptcy court confirmed the plan over Prudential’s objeсtions. (Ten other classes of creditors, most of them holding fully secured claims, had accepted the plan.) The confirmed plan described how and when each claim would be repaid, and made predictions as to 1983 crop yields, crop prices, and expenses. The plan provided for an initial payment by debtors of $75,000 toward accrued interest then owing on the Prudential debt. The plan also called for the remaining indebtedness to Prudential to be repaid in level amortized installments over a fifteen year period. Under the confirmed plan, interest was to accrue on the Prudential claim for periods prior to the confirmation date at
Prudential then sought review in the district court. The district court affirmed confirmation of the plan, but reversed the bankruptcy court’s order of confirmation “insofar as the order fixes the interest rate that is paid The Prudential Insurance Company of America to be 10.5% rather than the 13% rate set out in the mortgаge.” The present appeals followed.
1. Interest Rate
Debtors contend (and the bankruptcy court agreed) that under chapter 11 “cram down” provisions, the bankruptcy court could take evidence regarding various prevailing interest rates, and could then make applicable to the scheduled deferred payments due Prudential under the plan whatever rate of interest would insure that Prudential eventually would receive the value of the amount that had been owed on the date the plan was confirmed.
Under
One of the Code’s few clues about what factors to take into account in selecting an appropriate intеrest rate appears in
Judge Hand concluded that the creditor’s right to “get his money or at least the property” may be denied under a plan ■ for reorganization only if the debtor provides a “substitute of the most indubitable equivalence.” Such a substitute clearly must both compensate for present value and insure the safety of the principal.
In re American Mariner Industries,
In the present case, neither Prudential nor debtors provided the bankruptcy court with much assistance in determining what interest rate would compensate Prudential for the time value of its money and the risks to its principal. Prudential provided no evidence on the issue, other than the rate set by the contract. Debtors, relying on 5 Collier on Bankruptcy 111129.03, at 1129-63 n. 45, provided the bankruptcy court with the prime rate, federal fund rate, discount rate, call money rate, commercial paper rate, certificates of deposit rate, and treasury bill rate, that had been reported in the December 9, 1983 Wall Street Journal. The debtors ignored, however, a subsequent passage from the Collier discussion:
The appropriate discount rate must be determined on the basis of the rate of interest which is reasonable in light of the risks involved. Thus, in determining the discount rate, the court must considеr the prevailing market rate for a loan of a term equal to the payout period, with due consideration for the quality of the security and the risk of subsequent default.
5 Collier on Bankruptcy II1129, at 1129-65. We note that the treasury bill rate, which the bankruptcy court ultimately applied, reflected one rate of return available on a short term, low risk investment. See In re Loveridge Machine & Tool Co.,
According to the “market value” appraisal of the Deuel County property, Prudential was, at the time the plan became effective, oversecured, both with respect to principal and with respect to interest that had accrued under the contract. In these circumstances, we cannot say the district court erred in requiring interest to be paid under the plan at the contract rate. Only some twenty months had elapsed between the time the contract was made and the time the plan was confirmed; the contract, like the plan, contemplated a fifteen year payment term; and identical security was involved, since under the plan, Prudential retains a lien on the Deuel County property. In other words, the contract rate, which was a rate agreed upon in an arms length bargain between businessmen, presumably reflected the prevailing cost of money (at least as of May, 1981), the prospects for appreciation or depreciation of the value of the security, and the risks inherent in a long-term agricultural loan. Lacking any evidence correlating other rates with the “coerced loan” contemplated by the plan, the district court did not err in reinstating the contract rate of interest. Cf. In re Southern States Motor Inns, Inc.,
2. Adequate Protection
Prudential argues that its interests were not adequately protected during the pre-confirmation period, and will not be adequately protected during operation of the plan. In support of this argument, Prudential contends that the bankruptcy court erred in using the market value, rather than the liquidation value, of the Deuel County property in assessing the extent of the “equity cushion” available to protect Prudential. Prudential further argues that an equity cushion is not, in itself, sufficient protection for a secured creditor’s interest; and that in any event the equity cushion in this case is too small to assure protection of Prudential over the life of the plan.
We note that “adequate protection” is not a standard the Bankruptcy Code uses in connection with confirmation decisions. Instead, the adequаte protection requirements apply primarily in the context of preconfirmation proceedings. See, e.g.,
Even though the issue may be moot, the parties have not so treated it and we have considered Prudential’s arguments that it was not adequately protected during pendency of the stay. We find these arguments to be without merit. We need not decide whether in all cases a significant equity cushion would be enough to adequately protect a secured creditor, in part because, prior to the final order of confirmation, debtors have paid (or offered to pay) Prudential $75,000 toward unpaid interest. Also, it appears that with the equity cushion described by the bankruptcy court, the value of the Deuel County property as of the confirmation date would have been more than enough to satisfy debtors’ indebtedness to Prudential, including all contract-rate interest that had accrued up until that date. Prudential does not allege that the value of the Deuel County property was depreciating rapidly during the stay (indeed, the only evidence on this pоint was that land values in the area had remained fairly level); nor does Prudential allege that its contract rate of interest was insufficient to compensate it for the use of its money. Cf. In re American Mariner Industries,
3. Feasibility
Construing feasibility requirements in the context of a plan of arrangement proposed under the Bankruptcy Act, this court stated: “[i]n determining whether [a plan] is feasible, the bankruptcy court has an obligation to scrutinize the plan carefully to determine whether it offers a reasonable prospect of success and is workable.” United Properties, Inc. v. Emporium Department Stores, Inc.,
The bankruptcy court found that debtors’ plan was feasible; and the district court, after considering briefs and hearing oral argument on the feasibility issue, affirmed the finding. We have carefully reviewed the record, and cannot say that the feasibility finding, as affirmed by the district court, was clearly erroneous. Projecting future income of, and expenses of, an extensive farming operation such as debtors’ cannot be an exact science. The bankruptcy court heard evidence about the accuracy of debtors’ crop yield and earnings projections, and reasonably resolved the conflicts in that evidence in debtors’ favor. The plan states that “all taxes of any kind whatsoever will be paid at or before the same become due;” Prudential did not inquire into this matter during the many hearings on the plan, nor did Prudential present evidence of its own about the effect taxes might have. Similarly, aside from conclusory statements, Prudential has not attempted to show that the district court’s adjustment of the interest rate on the Prudential claim made the plan unworkable. Prudential’s predictions of a $100,000 shortfall in 1983 fail to take into account $225,000 from 1982 crop sales which the disclosure statement indicated would be applied toward 1983 expenses. It is true that during the first years the plan is in effect, the amount of such carry-over earnings will likely decrease, year by year; however, several debts will be discharged under the plan after five years, and payments due creditors under the plan will
Prudential also complains that thе bankruptcy court erroneously permitted debtors to present testimony which varied from the representations contained in the disclosure statement. This argument has no merit. The primary purpose of a disclosure statement is to give the creditors the information they need to decide whether to accept the plan.
Precisely what constitutes adequate information in any particular instance will develop on a case by case basis. Courts will take a practical approach as to what is necessary under the circumstances of each case, such as the costs of preparation of the statements, the need for relative speed in solicitation and confirmation, and, of course, the need for investor protection____ In reorganization cases, there is frequently great uncertainty. Therefore the need for flexibility is greatest.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 409, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6365. Prudential chose to reject the plan, and does not now indicate any dissatisfaction with that choice. The particular testimony in question fleshed out the details of a sideline cattle operation proposed in the plan, and showed how the results of debtors’ farming efforts in 1983 compared with the projections contained in the disclosure statement. The new evidence suggested thаt the prospects for successful reorganization were somewhat greater than the disclosure statement might indicate. The reorganization proceedings were protracted, and during those proceedings one creditor consented to debtors having free use of $104,000’s worth of grain to feed cattle. In these circumstances, we cannot say the bankruptcy court erred in admitting and considering this additional testimony.
4.
We are not persuaded by this argument. When the proposed treatment of Prudential’s claim is contrasted with treatment of other secured claims, no inequity or discrimination is apparent. The cram down provisions contemplatе deferred repayment of secured loans. Prudential, like all other secured creditors under the plan, will receive repayment in level amortized payments over a fixed term of years. Prudential retains its lien; its original loan to debtors had a fifteen year term; and its collateral is not subject to rapid depreciation, unlike the machinery securing certain other debts the plan encompasses. When the proposed treatment of Prudential’s сlaim is compared with treatment of unsecured claims, again no inequity or discrimination is apparent. The unsecured creditors will receive no interest, even though repayment of principal will be in level amortized payments over a ten year term; and the unsecured creditors retain no liens to protect them in the event of a default.
As indicated, the judgment of the district court is affirmed.
Notes
. The Honorable John B. Jones, United States District Judge, District of South Dakota.
. As pertinent to today’s decision,
(b)(1) ... the plan does not discriminate unfairly, and is fair and equitable, with respect to such [dissenting] class____
(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, thе plan provides—
(i)(I) that the holders of such claims retain the lien securing such claims, whether the property subject to such lien is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each 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 effectivе date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property; [or]
* * *
(iii) for the realization by such holders of the indubitable equivalent of such claims. We note that under the plan, Prudential's claim is assigned a class of its own.
. On brief, debtors contend that the district court erred in substituting its own findings on this issue for those of the bankruptcy court. We do not agree. Even if selection of an appropriate interest rate is in part a factuаl inquiry, the record in this case presented only one rate which would necessarily have had some correlation with the “cost" to Prudential of the deferred payment plan. See In re Southern States Motor Inns, Inc.,
. We note that in treating as fully secured Prudential’s claim for preconfirmation contract-rate interest, the bankruptcy court gave Prudential the benefit of the difference between fair market and liquidation values. See
Concurrence in Part
concurring ánd dissenting.
I concur in the majority opinion with one exception, that being the interеst rate allowed on the Prudential loan. In my view, the appropriate interest rate was a question of fact to be determined by the bankruptcy court, see In Re George Buggiere Chrysler-Plymouth,