8^(th) Circuit: Plan Interest Rate Formula May Use Treasury Rate Instead of Prime Rate Non-consensual plans under chapters 11, 12, and 13, that
8^(th) Circuit: Plan Interest Rate Formula May Use Treasury Rate Instead of Prime Rate Non-consensual plans under chapters 11, 12, and 13, that
provide for future payments to creditors must include an interest rate which
compensates for opportunity costs, inflation, and risk of default. Following Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (plurality opinion), most bankruptcy courts follow a two-step approach to determine such interest rate, commonly referred to as the “cramdown rate”.
First, courts determine whether there is an efficient market from which to take the appropriate interest rate. If not (as is often the case), they follow the formula approach described in Till. This approach usually starts with the national prime rate, “which reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” Till, 541 U.S. at 479.
The prime rate is then adjusted upward by a risk premium to account for the debtor's risk of nonpayment, looking at factors including the circumstances of the estate, the nature of the security, and the duration and feasibility of the chapter 11 plan. In re Charles St. Afr.
Methodist Episcopal Church of Bos., 578 B.R. 56, 105 (Bankr. D. Mass.
- (citing Till, 541 U.S. at 479–80).
In a recent case, the U.S. Court of Appeals for the Eighth Circuit was asked to decide whether it was permissible for a court to begin with the twenty-year treasury bond rate (the plan called for payments over a twenty-year term) instead of the prime rate. The court held that it was.
According to the Eighth Circuit, the main difference between the treasury and prime rates is that the prime rate considers a (small) risk of default, while the treasury rate is considered a risk-free rate. As a result, the court saw “no legal significance to whether a court starts with a risk-free rate and adds full risk or starts with a some-risk rate and adds some more.” The resulting interest rate is what ultimately matters, not what rate is used as the starting point, the court said.
For the court of appeals, the real controversy between the parties was whether the interest rate approved by the bankruptcy court was appropriate, which it saw as a factual determination, not a legal one.
This meant that, instead of the de novo review advocated for by the creditor, the determination would be reviewed for clear error. Under such deferential standard, the Eighth Circuit saw no reason to disturb the bankruptcy court’s decision and affirmed.