Restructuring

“…to be my student, you must develop a taste for victory.”

 Pai Mei, Kill Bill

The votes are in, Weil Bankruptcy Blog readers have decided. The ABI Commission to Study the Reform of Chapter 11’s proposed market rate on secured creditor cramdown in its Final Report and Recommendations has prevailed over all other competing proposals in our epic March Madness matchup. 
As the law currently stands, cramdowns in chapter 11 cases are decided using the Supreme Court’s decision in Till v. SCS Credit Corporation, 541 U.S. 465 (2004) as precedent.  Till is a case in the chapter 13 context that decided the cramdown interest rate for a used pickup truck.
A cramdown, by the way, is the involuntary imposition by a bankruptcy court of a plan of reorganization on a class of creditors following a vote to reject a proposed plan or reorganization by that class.
Under section 1129(b)(2)(A) of the Bankruptcy Code, bankruptcy courts apply a discount rate to determine the present value of any deferred cash payments being made to a secured creditor under the chapter 11 plan on account of the creditor’s allowed secured claim.  The Bankruptcy Code requires the present value of such deferred cash payments to equal at least the amount of the secured creditor’s allowed secured claim as of the effective date of the chapter 11 plan. This often leads to disputes in the cramdown context over whether the appropriate discount rate to be used is a “market” rate, or whether a different approach should be used.
In the Till case, Lee and Amy Till had bought an ill-fated 1990 Chevy pickup truck which was financed by SCS Credit with a 21 percent interest rate.  They filed a chapter 13 bankruptcy a year later, and proposed a repayment plan for this august vehicle with a cramdown interest rate of 9.5% on the remaining $4,000 balance on the pickup truck. This case wound its way through the court system, and the Supreme Court ultimately determined that the appropriate rate of interest on a cramdown note in chapter 13 should be determined by the “formula approach,” which starts with the prime rate – the interest rate a commercial bank would charge a creditworthy commercial borrower – and then adjusts that rate upward to account for the additional risk of non-payment posed by lending to a bankrupt debtor.
The applicable provision of chapter 13 that permits cramdown of a secured creditor’s secured claim (11 U.S.C. § 1325(a)(5)(B)) is substantially the same as the one in chapter 11 (11 U.S.C. § 1129(b)(2)(A)(i)), hence the relevance of Till to chapter 11 cramdowns (well that, and some footnotes to the decision that we won’t get into here).
So what did the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 have to say in its Final Report and Recommendations? Pretty simple really:
“In selecting the appropriate discount rate, the court should consider the evidence presented by the parties at the confirmation hearing and, if practicable, use the cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity, taking into account the size and creditworthiness of the debtor and the nature and condition of the collateral, among other factors.  If such a market rate is not available or the court determines that an efficient market does not exist, the court should use an appropriate risk-adjusted rate that reflects the actual risk posed in the case of the reorganized debtor, considering factors such as the debtor’s industry, projections, leverage, revised capital structure, and obligations under the plan.  The court should not apply the “prime plus” formula adopted by the Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465 (2004) in the chapter 11 context.”
OK, so let’s ask that question again: In two words, what did the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 have to say in its Final Report and Recommendations?
“Kill Till.”
Our Weil Bankruptcy Blog readers have wielded their samurai swords accordingly.
If you want to read more about Till and its impact in Momentive, check out our four-part series here. And make sure to look out for our Weil Bankruptcy Blog Q1 Review which will have a compilation of all of the blog pieces we’ve published on the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11’s Final Report and Recommendations.