Koopmans v. Farm Credit Services of Mid-America, ACA

• Decision Date: 10 December 1996
• Docket Number: MID-AMERIC,AC,D,No. 96-2088,96-2088
• Parties: , 30 Bankr.Ct.Dec. 21, Bankr. L. Rep. P 77,190 Melvin and Bonnie KOOPMANS, Plaintiffs-Appellants, v. FARM CREDIT SERVICES OFefendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 874

102 F.3d 874

65 USLW 2403, 30 Bankr.Ct.Dec. 21, Bankr.

L. Rep. P 77,190

Melvin and Bonnie KOOPMANS, Plaintiffs-Appellants, v. FARM CREDIT SERVICES OF MID-AMERICA, ACA, Defendant-Appellee.

No. 96-2088.

United States Court of Appeals,

Seventh Circuit.

Argued Nov. 8, 1996.

Decided Dec. 10, 1996.

Jere Humphrey (argued), Kizer & Neu, Plymouth, IN, and Mark B. Wagner, Kizer & Neu, Bremen, IN, for Defendant-Appellee.

Paul E. Chael, Crown Point, IN, for Intervenor-Appellant.

R. William Jonas, Jr. (argued) and Greg A. Hixenbaugh, Hammerschmidt, Amaral & Jonas, South Bend, IN, for Dobtors-Appellants.

Before EASTERBROOK, MANION and ROVNER, Circuit Judges.

EASTERBROOK, Circuit Judge.

Farm Credit Services holds a first mortgage on the Koopmans' farm, securing a loan whose balance hovers near $110,000. The land is worth more, perhaps as much as $215,000, so, although junior liens on the farm exceed $500,000, Farm Credit Services is oversecured and entitled to interest in the Koopmans' bankruptcy. 11 U.S.C. § 506(b); United Savings Ass'n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 372, 108 S.Ct. 626, 631, 98 L.Ed.2d 740 (1988). "At what rate?" is the question we must answer. The question arises at all only because the bankruptcy court has blocked Farm Credit Services from foreclosing and has approved a Chapter 12 reorganization over its objection. In such a cramdown the secured creditor is entitled to the "indubitable equivalence" (In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir.1935) (L. Hand, J.)) of its property interest, 11 U.S.C. § 1225(a)(5)(B)(ii), which means a stream of payments including interest that adds up to the present value of its claim. Cf. In re Fortney, 36 F.3d 701 (7th Cir.1994). At what rate of interest will Farm Credit Services be as well off in the reorganization as if it had been allowed to foreclose on and sell the farm?

To put the question in this way is to supply the answer: the creditor must get the market rate of interest, at the time of the hypothetical foreclosure, for loans of equivalent duration and risk. The bankruptcy judge approximated this by starting with the prime rate of interest, which it found prevalent for new 20-year well-secured agricultural loans at the time, and adding 1.5 percent because it deemed this extension of credit more risky than the norm in light of the Koopmans' sorry repayment record. This produced a floating rate, 10.5 percent (9 percent k 1.5 percent) at the time the bankruptcy judge approved the plan. The district court affirmed, 196 B.R. 425 (N.D.Ind.1996), surveying the cases and concluding that the bankruptcy judge's approach--often called the "coerced loan" method--represents the dominant though not exclusive view among the courts of appeals. E.g., General Motors Acceptance Corp. v. Jones, 999 F.2d 63 (3d Cir.1993); United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir.1993). See also John K. Pearson, Ending the Judicial Snipe Hunt: The Search for the Cramdown Interest Rate, 4 Am.Bankr.Inst.L.Rev. 35 (1996) (discussing possible approaches to the subject). Without implying that "prime-plus" is the only way to approximate the market rate of interest--for participants in the market may use other methods--we now hold that the creditor is entitled to the rate of interest it could have obtained had it foreclosed and reinvested the proceeds in loans of equivalent duration and risk. Nothing else gives the creditor the indubitable equivalent of its non-bankruptcy entitlement.

Consider a few of the potential alternatives. One, which some bankruptcy courts have used, is the rate of interest provided by the original loan--in this case, 8.75 percent for credit extended in 1976. This is a market rate of interest, but it does not exhaust the creditor's legal entitlements under state law. If a debtor does not pay, a creditor is entitled to declare a default, accelerate repayment of the principal, and cash out by foreclosure. In other words, the original contract provided for an 8.75 percent rate with an option for the lender to mark the rate to market if the debtor defaults. That is what happened. Note, too, that the original contract required repayment no later than March 2012, while the Koopmans' plan of reorganization extends the loan through December 2014. A debtor who wants to change the duration of a loan must refinance, which occurs at the current market rate. This may be lower than the one provided by contract. Just as the debtor cannot insist on the lower of the contract or current market rates, neither may the creditor obtain the higher of contract or current market. The market rate must be used consistently. Accord, General Motors Acceptance Corp., 999 F.2d at 71 n. 11.

What the standing Chapter 12 Trustee, representing the interests of unsecured creditors, favors is the rate the federal government pays to borrow money (the "T-Bill rate" for short). At times the Trustee appears to concede that this rate may be adjusted for risk; if so, that comes to the same thing as prime-plus, although the adjustment may be larger. The prime rate of interest is the benchmark rate for the banks' most credit-worthy customers, but even blue-chip debtors are more likely to default than is the United States government, so the prime rate exceeds the T-Bill rate. Because the prime rate includes some compensation for the risk of non-repayment, the add-on for less creditworthy customers is less than it would be if the court started with the risk-free T-Bill rate. See generally In re Oil Spill by the Amoco Cadiz, 954 F.2d 1279, 1331-33 (...