Opinion
Case No. 11-10664.
July 20, 2011
ORDER OVERRULING CONFIRMATION OBJECTION OF RIPLEY FEDERAL SAVINGS BANK
Roger Bolender (the "Debtor") is a family farmer who seeks relief under Chapter 12 of the Bankruptcy Code. Before the Court is a confirmation objection ("Objection") (Doc. 22) filed by Ripley Federal Savings Bank ("Ripley") which holds mortgages to certain farmland the Debtor owns. The Court held a March 23, 2011 confirmation hearing.
The Debtor's Chapter 12 plan proposes a cramdown of five Ripley claims secured by real property. The plan proposes to pay the claims over thirty years at 5.25% interest. Originally, the Objection opposed the thirty-year repayment schedule and the 5.25% interest rate. Prior to the hearing, however, the parties reached a compromise to amortize the claims over thirty years with a balloon payment after twenty years.
ISSUE
The only remaining dispute for the Court to decide in this case is the appropriate interest rate under 11 U.S.C. § 1225(a)(5)(B)(ii). That section provides, in relevant part:
[T]he court shall confirm a plan if —
. . .
(5) with respect to each allowed secured claim provided for by 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 by the trustee or the debtor under the plan on account of such claim is not less than the allowed amount of such claim[.]
11 U.S.C. § 1225(a)(5)(B)(ii).
DEBTOR'S POSITION
The Debtor derived the 5.25% interest rate from the formula approach set forth in the chapter 13 decision of Till v. SCS Credit Corporation, 541 U.S. 465 (2004) (concluding that the formula approach is the best method for determining the applicable interest rate in a chapter 13 case under 11 U.S.C. § 1325(a)(5)(B)(ii)). Sections 1225(a)(5)(B)(ii) and 1325(a)(5)(B)(ii) are effectively identical. Till's formula rate is the prime rate plus a risk adjustment based upon "such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan." Till, 541 U.S. at 478-79. The Debtor's 5.25% rate is the sum of the prime rate on the date of confirmation, 3.25%, plus a 2% risk adjustment.
The only difference being that § 1325(a)(5)(B)(ii) does not contain the underlined language of § 1225(a)(5)(B)(ii), quoted below:
(ii) the value, as of the effective date of the plan, of property to be distributed by the Trustee or the Debtor under the plan on account of such claim is not less than the allowed amount of such claim[.]
RIPLEY'S POSITION
Ripley acknowledges that the 5.25% interest rate is consistent with Till. Ripley does not object to a 5.25% interest rate over the first five years of the twenty-year term. However, Ripley argues that Till's formula rate is not designed to ensure present value beyond the five-year maximum life of a chapter 13 plan. After five years, Ripley believes the interest rate should revert to the contract rate stated in the loan documents.
FORMULA APPROACH — BEYOND CHAPTER 13
There is no certain way of knowing if, when or how interest rates will change. Aware of this uncertainty, the Supreme Court identified the formula approach or prime rate plus as the best measurement of present value and stated: "[w]e think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of [the present value] provisions [of the Bankruptcy Code]." Till, 541 U.S. at 474.
PRIME RATE INCLUDES RISK OF INFLATION
Importantly, the Supreme Court noted that prime rate is all that is necessary to ensure present value if the debtor completes the plan. Id. at 479 n. 18. The risk adjustment compensates for the risk of loss resulting from the potential that a debtor might default on the plan. Id.; see also In re Henry, 328 B.R. 529, 537 n. 10 (Bankr. S.D. Ohio 2004). It does not compensate for the risk of rising interest rates over the life of a completed plan. That risk is included in the prime rate. Till, 541 U.S. at 479 (prime rate compensates for the risk of inflation).
RISK ADJUSTMENT IN THIS CASE
After adopting the formula or prime rate plus approach, the Plurality in Till acknowledged that debtors in bankruptcy pose a greater risk of default. However, as earlier noted, those same Justices went on to hold that "the approach then requires a bankruptcy court to adjust the prime rate," taking into account "such factors as the circumstances of the estate, the nature of the security, and duration and feasibility of the reorganization plan." Till, 541 U.S. at 478-79.
In this case, there is little risk of loss in the event of plan default. Ripley concedes it is oversecured and its collateral, real property, is not going anywhere. Nor is real property subject to the same depreciation risks as personal property. These factors weigh heavily against any risk adjustment. See Till, 541 U.S. at 478-79.
Moreover, Till places the burden squarely on creditors to prove the need for adding a risk adjustment. Id. at 479. In this case, Ripley did not sustain its burden. Ripley wants the plan to revert back to the contract rate after five years, yet the original notes are not a part of the record. There is no record of the interest rates or terms of the original notes. Given the lack of support for any risk adjustment, the 2% risk adjustment proposed by the Debtor in the plan more than compensates Ripley for the risk of inflation, which is already subsumed into the prime rate.
At the hearing, counsel for Ripley merely mentioned that the interest rates on the notes ranged from 6% to 8%. Counsel for Ripley said nothing about the term of the notes, nor did Ripley seek to introduce copies of the notes into evidence. It is well established that, "to prove the content of a writing . . . the original writing . . . is required." Fed.R.Evid. 1002; see also In re Sol Bergman Estate Jewelers, Inc., 225 B.R. 896, 902 (B.A.P. 6th Cir. 1998), aff'd, 2000 WL 263338 (6th Cir. Feb. 29, 2000). The best evidence rule protects against "dangers of fraud" and "faulty memory." Kodadek v. MTV Networks, Inc., No. CV 96-1429 DT, 1996 WL 807435 at 3 (C.D. Calif. Dec. 9, 1996), aff'd, 152 F.3d 1209 (9th Cir. 1998).
COST OF FUNDS APPROACH REJECTED BY TILL
The evidence that Ripley introduced supports a present value approach that Till rejected, being the cost-of-funds approach. Aaron Wood, the executive vice president and loan officer for Ripley, testified quite credibly concerning Ripley's cost of lending and risks as a smaller bank with fewer deposits. He testified that Ripley correlates its commercial loan rates to its five-year CD rates, maintaining a spread that enables it to meet its CD liabilities. The Court is sympathetic of these concerns. However, in rejecting this contention, the Supreme Court decided that this approach "mistakenly focuses on the creditworthiness of the creditor rather than the debtor." Id. at 478. The present-value analysis is not meant to make the creditor whole. Id. at 477. Rather, it is designed "to ensure the debtor's payments have the required present value." Id.
CHAPTER 12 PRECEDENT APPLYING TILL
Ripley's argument is similar to that raised by Rabo AgServices, Inc. ("Rabo") in the chapter 12 case of In re Schreiner, No. BK08-41014, 2009 WL 924418 (Bankr. D. Neb. Mar. 30, 2009). While objecting to the interest rate on a twenty-year repayment schedule pursuant to § 1225(a)(5)(B)(ii), Rabo made the following argument:
Rabo . . . argues that the current economic climate requires a risk adjustment to the prime rate of more than two percentage points. Rabo points out that the prime lending rate in late January 2009 was half of what it was one year prior, due in part to efforts by the Federal Reserve to encourage lending and prevent further deterioration of the financial markets. Rabo objects to what it describes as the debtors' attempt "to parlay the deflated prime rate of interest in the near term to a long term lending relationship with Rabo."
Id. at *1. Schreiner applied Till's formula approach and rejected Rabo's argument. "The present `suffocating economic uncertainty' described by Rabo is not under the debtors' control and they should not be made to alleviate any more of Rabo's risk than Till requires." Id. at *2.
TILL EXCEPTION LIMITED TO CHAPTER 11
Finally, Ripley notes that the Sixth Circuit does not automatically apply Till's formula approach in chapter 11 cases. See In re American Homepatient, Inc., 420 F.3d 559, 568 (6th Cir. 2005). We surmise that the Sixth Circuit does not always apply the Till rate in chapter 11 cases because of Till's footnote 14. See American Homepatient, 420 F.3d at 568. Footnote 14 distinguishes chapter 13 from chapter 11 to the extent that "there is no free market of willing cramdown lenders" for chapter 13 cases; whereas "the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession." See Till, 541 U.S. at 476 n. 14. Footnote 14 does not draw the same distinction between chapter 13 and chapter 12. Therefore, American Homepatient does not provide a clear basis to distinguish Till from chapter 12 cases.
Even in chapter 11 cases, Till's formula approach governs unless there is an efficient market of financing available. See American Homepatient, 420 F.3d at 568.
In our view, the Till approach adopted by the Supreme Court for chapter 13 cases is the more appropriate one to apply here, given the nature of the proceedings, the similarities that exist between chapter 13 and chapter 12, and the legislative history of chapter 12. See In re Chambers, 2008 WL 564960 at 4 (E.D. Tenn.).
CONCLUSION
The prime rate contemplates the risk of inflation. The 5.25% interest rate proposed by the Debtor includes a 2% risk adjustment where little or no risk adjustment is supported by the record. Given the combination of these factors, the Court is satisfied that the 5.25% interest rate proposed by the Debtor ensures Ripley's receipt of present value over the life of the plan. Therefore, the Objection is OVERRULED. Debtor's counsel shall tender a confirmation order.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.