Smithwick, Matter of
| Decision Date | 08 September 1997 |
| Docket Number | No. 96-41089,96-41089 |
| Parties | In the Matter of Ruben R. SMITHWICK, Jr.; In the Matter of Debbie Smithwick, Debtors. GREEN TREE FINANCIAL SERVICING CORPORATION, Appellant, v. Ruben R. SMITHWICK, Jr.; Debbie Smithwick, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Frederick J. McCutchon, Deborah J. Greer, Wood, Boykin and Wolter P.C., Corpus Christi, TX, for Appellant.
Jan L. Shephard, Corpus Christi, TX, for Appellees.
James Thomas McMillen, Corpus Christi, TX, for National Association of Consumer Bankruptcy Attorneys, Inc., Amicus Curiae.
Appeal from the United States District Court for the Southern District of Texas.
Before JONES, EMILIO M. GARZA and PARKER, Circuit Judges.
Green Tree Financial Servicing Corporation appeals the district court's affirmance of the bankruptcy court's decision that its Local Rule 3020(d) provides the appropriate post-confirmation interest rate on Green Tree's oversecured claim. We reverse and remand.
The Debtors, Ruben Smithwick, Jr. and Debbie Smithwick, entered into a Retail Installment Contract with Green Tree in May 1994 for the purchase of a mobile home. The Contract provided for an interest rate of 12.75 percent. The Smithwicks filed for bankruptcy protection on February 15, 1995 and submitted a proposed Chapter 13 plan, listing Green Tree's debt in the amount of $10,000.00. Green Tree filed its secured proof of claim in the amount of $12,774.24. Green Tree also filed objections to the Smithwicks' plan on the grounds that it did not provide for the full payment of its claim including payment at the rate of interest specified in the Contract. Thereafter, the Smithwicks proposed an amended plan to provide for payment of Green Tree's claim in the amount of $12,774.24 at an interest rate of 11.00 percent.
Green Tree continued to object to the amended plan, arguing that the appropriate post-confirmation interest rate was the 12.75 percent as specified in the Contract. The bankruptcy court decided that the appropriate post-confirmation interest rate was 11.00 percent as provided for under the bankruptcy court's Local Rule 3020(d). 1 Green Tree appealed and the district court affirmed.
Section 1325(a)(5)(B)(ii) specifies that:
(a) [T]he court shall confirm a plan if--
* * * * * *
(5) with respect to each allowed secured claim provided for by the plan--
(B)(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.
This provision requires that the debtor provide the secured creditor "with payments, over the life of the plan, that will total the present value of the allowed secured claim... ." Associates Commercial Corp. v. Rash, --- U.S. ----, ---- - ----, 117 S.Ct. 1879, 1882-83, 138 L.Ed.2d 148 (1997). We must decide whether the bankruptcy court erred in its selection of the appropriate post-confirmation interest rate to use in calculating whether Green Tree would receive payments "as of the effective date of the plan" of a value "not less than the allowed amount of such claim."
Although this court has not addressed this question in a Chapter 13 case, it has opined on the choice of cramdown interest rate in the analogous provision in Chapter 11. Applying the requirements of § 1129(b)(2)(A)(i)(II), the bankruptcy court is to make a factual determination of the interest rate appropriate under all the circumstances and to evaluate whether the payments under the plan will provide the creditor with the present value of his allowed secured claim. See In re Briscoe Enter., Ltd., II, 994 F.2d 1160, 1169 (5th Cir.1993); In re T-H New Orleans Ltd. Partnership, 116 F.3d 790, 800 (5th Cir.1997). This court has declined to "establish a particular formula" for the cramdown interest rate in Chapter 11 cases. T-H New Orleans, 116 F.3d at 800. However, we have noted that "[o]ften the contract rate will be an appropriate rate ..." and that "[n]umerous courts have chosen the contract rate if it seemed to be a good estimate as to the appropriate discount rate." Briscoe Enter., 994 F.2d at 1169 (). See also T-H New Orleans, 116 F.3d at 801 ().
Guidance is also available from other circuits' approach to Chapter 13. In General Motors Acceptance Corp. v. Jones, 999 F.2d 63, 65 (3d Cir.1993), the Third Circuit decided that the Chapter 13 cramdown interest rate "is that which the secured creditor would charge, at the effective date of the plan, for a loan similar in character, amount and duration to the credit which the creditor will be required to extend under the plan." In reaching this conclusion, the court rejected an approach that would merely compensate the creditor for his estimated "cost of funds" to be extended in the loan. Id. at 67. The "cost of funds" analysis fails to take into account that the Chapter 13 plan "effectively coerces a new extension of credit in which the creditor is required to assume not only the cost of capital over the deferral period but also the cost of sustaining the lending relationship over that period." Id. Thus, the court adopted a "coerced loan" model, which theorizes that "[i]n effect the law requires the creditor to make a new loan in the amount of the value of the collateral rather than repossess it, and the creditor is entitled to interest on his loan." Id. (quoting Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427, 429 (6th Cir.1982)). Since the creditor is forced not only to cover the cost of providing the funds to be extended to the debtor, but also of extending the loan, the court decided that if the creditor received the rate it charged "in the regular course of its business in the region for loans of similar character, amount and duration, that creditor will be placed in approximately the same position it would have occupied had it been able simply to repossess the collateral at the time of the bankruptcy." Id. at 68.
The Third Circuit also urged minimization of administrative and litigation costs in Chapter 13 cases, which are "high in volume and low in absolute value." General Motors Acceptance Corp., 999 F.2d at 70. Thus, to "reduce litigation expense," the court adopted an additional rule:
In the absence of a stipulation regarding the creditor's current rate for a loan of similar character, amount and duration, we believe it would be appropriate for bankruptcy courts to accept a plan utilizing the contract rate if the creditor fails to come forward with persuasive evidence that its current rate is in excess of the contract rate. Conversely, utilizing the same rebuttable presumption approach, if a debtor proposes a plan with a rate less than the contract rate, it would be appropriate, in the absence of stipulation, for a bankruptcy court to require the debtor to come forward with some evidence that the creditor's current rate is less than the contract rate.
We are persuaded by the Third Circuit approach. Accord United Carolina Bank v. Hall, 993 F.2d 1126, 1130-31 (4th Cir.1993)(match "rate of return to the secured creditor with that which the creditor would otherwise be able to obtain in its lending market"); In re Hardzog, 901 F.2d 858, 860 (10th Cir.1990) (); Memphis Bank and Trust Co., v. Whitman, 692 F.2d 427, 431 (6th Cir.1982) (same). It is consistent with the approach we have taken in Chapter 11 cases in attempting to find the rate which best calculates the present value of the payments offered under the plan. Essentially, "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." Koopmans v. Farm Credit Services of Mid-America, 102 F.3d 874, 875 (7th...
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