Bankruptcy Litigation Committee

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Sixth Circuit Declines to “Blindly Adopt Till” - Announces Nuanced Approach to Cramdown Interest Rates

In Bank of Montreal v. Official Committee of Unsecured Creditors (In re American HomePatient, Inc.), 2005 WL 1949548 (6th Cir. Aug. 16, 2005), the Sixth Circuit, relying heavily on a footnote from Till v. SCS Credit Corp., 541 U.S. 465 (2004), introduced a “nuanced approach” in determining the correct cramdown interest rate in a chapter 11 case.  The Supreme Court in Till held that the formula approach is the appropriate method of calculating cramdown interest in chapter 13 cases. Id. at 479–80.  While the court in Bank of Montreal does not explicitly reject Till in the chapter 11 context, the court does not use Till’s formula approach. 

The bankruptcy court, considering the case pre-Till, imposed the debtorís plan on lenders pursuant to the Bankruptcy Codeís “cramdown” provisions of §1129(b) and relied on Sixth Circuit precedent adopting the coerced-loan theory in determining cramdown interest rates. “Under the coerced-loan theory, courts Ďtreat any deferred payment of an obligation under a plan as a coerced loan, and the rate of return with respect to such a loan must correspond to the rate that would be charged or obtained by the creditor making a loan to a third party with similar terms, duration, collateral and risk.í” Bank of Montreal, 2005 WL at *5 (citing 7 Collier on Bankruptcy 1129.06[1][c][ii][B]). The coerced-loan theory requires that courts use current market rates of interest based on similar loans in the region. Applying the coerced-loan theory, the bankruptcy court held that the appropriate level of interest for the lenders was equal to the six-year Treasury Bill interest rate plus 350 basis points (which equaled 6.785 percent). The lenders asserted that a blended interest rate of 12.16 percent was appropriate. Challenging, among other issues, the cramdown interest rate, the lenders appealed the confirmation order to the district court, which concluded that the bankruptcy court had properly determined the cramdown interest rate. The lenders then appealed to the circuit court and argued that both lower courts erred in applying the coerced-loan theory to determine the appropriate cramdown interest rate.

According to the lenders, Till rendered the coerced-loan theory improper. The Supreme Court, in the Till chapter 13 case, endorsed the use of the formula approach after evaluating four widely used methods of calculating the cramdown interest rate (including the coerced-loan approach). See Till, 541 U.S. at 473-80. The formula approach uses the national prime rate adjusted by the court for risks inherent in lending money to bankrupt debtors.

The court in Bank of Montreal pointed out that Till, while clear in application to chapter 13 cases, is not as clear when applied in the chapter 11 context. Bank of Montreal, 2005 WL at *6. Footnote 14 to the Till opinion notes that “there is no readily apparent chapter 13 cramdown market rate of interest,” Bank of Montreal, 2005 WL at *7 (citing Till, 541 U.S. at 476 n.14), but “when picking a cramdown rate in a chapter 11 case, it might make sense to ask what rate an efficient market would produce.” Id. The court interpreted this footnote as not requiring the formula approach in chapter 11 cases.

Declining “to blindly adopt Tillís endorsement of the formula approach for chapter 13 cases in the chapter 11 context,” the circuit court instead announced that it would use a “nuanced approach.” Bank of Montreal, 2005 WL at *7. Under Bank of Montrealís nuanced approach, “the market rate should be applied in chapter 11 cases where there exists an efficient market.” Id. According to the Bank of Montreal decision, in the absence of an efficient market, the nuanced approach would employ the formula approach from Till. Id.

The circuit court then reconciled its nuanced approach with the coerced-loan theory, which was applied by the bankruptcy court and affirmed by the district court. After reviewing expert testimony and the bankruptcy courtís methodology, the circuit court found that the bankruptcy court fully considered the efficient market in determining the cramdown interest rate. The court in Bank of Montreal noted that the lower courtís utilization of the coerced-loan theory provided no basis for reversal and concurred with the result reached by both the bankruptcy court and district court.