Restructuring

Contributed by Conray C. Tseng
One of the Weil Bankruptcy Blog’s ongoing projects is to monitor various court dockets around the country and gather the latest and greatest decisions on cramdown interest rates for secured claims under section 1129(b) of the Bankruptcy Code.   Today, we review the Fifth Circuit’s recent decision in In re Texas Grand Prairie Hotel Realty, L.L.C..  In Grand Prairie, the Fifth Circuit reaffirmed its previous holding that Till’s prime plus formula was not binding authority in the Fifth Circuit.  Nonetheless, the Fifth Circuit affirmed the bankruptcy court’s decision to apply the prime plus formula and calculate a 5.0% cramdown interest rate, while leaving the door open for other methods, including a potential “efficient market approach.” 
In 2007, Texas Grand Prairie Hotel Realty obtained a $49 million loan from Morgan Stanley to purchase and renovate four hotels in Texas.  The four hotels and substantially all of Grand Prairie’s assets secured the loan.  Morgan Stanley would later sell the loan to Wells Fargo.
In 2009, Grand Prairie’s hotel business faltered and it filed a chapter 11 case.  Grand Prairie proposed a plan of reorganization that valued Wells Fargo’s secured claim at $39 million.  The plan adopted the Till prime plus approach and proposed to pay Wells Fargo’s secured claim over 7 years with an interest of 5.0% (1.75% above the prime rate of 3.25% as of the confirmation hearing).
As discussed in our previous post, in Till v. SCS Credit Corp., a plurality of the U.S. Supreme Court opined that, for purposes of calculating cramdown interest rates in a chapter 13 case, bankruptcy courts should apply a prime plus formula whereby the court takes the current federal prime lending rate and adjusts upwards based upon the expected credit worthiness of the debtor after reorganization.  Although the Supreme Court did not decide the appropriate rate, it observed that other courts generally approve 1% to 3% adjustments.  Certain courts have since applied Till in the chapter 11 context.
Notably, the Till plurality also explicitly rejected the coerced loan (i.e., the market interest rate for a similar loan), presumptive contract rate, and cost of funds approaches.  The plurality was particularly suspect of the coerced loans approach, which requires a court to consider evidence about the market for comparable loans – a task “far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans.”
The Till plurality, however, may have left the door open for a market approach in footnote 14 of its decision, which provides “when picking a cram down rate in a [c]hapter 11 case, it might make sense to ask what rate an efficient market would produce.”
In Grand Prairie, the Fifth Circuit reaffirmed its previous decision in T-H New Orleans that there is no specific methodology to calculate a chapter 11 cramdown interest rate in the Fifth Circuit.  While recognizing bankruptcy courts may view Till as persuasive authority, the Fifth Circuit held firm and reiterated that Till is not controlling in the chapter 11 context in the circuit.  Accordingly, the Fifth Circuit reviewed the lower courts’ decision in Grand Prairie only for clear error in the lower courts’ exercise of discretion.
Despite the Fifth Circuit’s previous precedent permitting methods to calculate cramdown interest other than the Till prime plus approach, both Grand Prairie and Wells Fargo adopted the Till prime plus method with differing results.  Grand Prairie calculated a prime rate of 3.25% and adjusted the rate by 1.75% to reflect the circumstances of Grand Prairie’s estates, the nature of the security, and duration and feasibility of the plan.  Grand Prairie’s final proposed interest rate was 5.0%.  In contrast, Wells Fargo adopted the same 3.25% prime rate and adjusted the interest rate based upon what the market would charge to finance a similar loan.  Because no market existed for such a loan, Wells Fargo based its analysis on a “blended rate” from exit financing comprised of senior debt, mezzanine debt, and equity, which, with certain downward adjustments, resulted in a total interest rate of 8.8% (3.25% prime rate plus 5.55% in adjustments).
In its analysis, the bankruptcy court adopted Grand Prairie’s methodology.  In reviewing the bankruptcy court’s decision, the Fifth Circuit agreed that Grand Prairie’s approach was appropriate.  In rejecting Wells Fargo’s appeal, the Fifth Circuit stated Wells Fargo’s comparable loan analysis was effectively the same as the coerced loan approach explicitly rejected by Till.  In particular, the Fifth Circuit reasoned that the Wells Fargo proposed methodology required bankruptcy courts to depart from an analysis of the debtor’s financial circumstances and consider evidence of the current market conditions; accordingly, the proposed methodology was inappropriate.  The Fifth Circuit acknowledged that, while no free market lender would extend credit to Grand Prairie on the terms as proposed under the plan, the sanctioned Till prime plus approach produced a non-market result. 
In dicta, the Fifth Circuit suggested that footnote 14 of Till may permit an “efficient market approach.”  The Fifth Circuit, however, highlighted that Wells Fargo failed to raise the footnote 14 argument, and, even if Wells Fargo had raised the point, Wells Fargo’s blended rate approach did not constitute an “efficient market” for purpose of calculating cramdown interest.  For future cases in the Fifth Circuit, secured lenders may want to explore the “efficient market” approach as an alternative to the Till prime plus approach.
In conclusion, we have another data point for cramdown interest:

Jurisdiction – Fifth Circuit

Cramdown Interest Rate – 5.0% (3.25% prime rate + 1.75% adjustments)

Method – Till prime plus approach; Till remains persuasive but not binding authority

As the year progresses, we’ll continue to monitor dockets for more decisions on cramdown interest rates and hope to bring them to your attention here on the Weil Bankruptcy Blog.