Monnier Bros., In re
| Citation | 755 F.2d 1336 |
| Decision Date | 01 March 1985 |
| Docket Number | 84-1518,Nos. 84-1478,s. 84-1478 |
| Parties | 12 Collier Bankr.Cas.2d 323, Bankr. L. Rep. P 70,286 In re MONNIER BROTHERS, a Partnership, Alan Dale Monnier and Janice Irene Monnier; Thomas Richard Monnier and Bonnie LaVonne Monnier, Debtors. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellee, v. Alan Dale MONNIER, Janice Irene Monnier, Thomas Richard Monnier and Bonnie LaVonne Monnier, Appellants. In re MONNIER BROTHERS, a Partnership, Alan Dale Monnier and Janice Irene Monnier; Thomas Richard Monnier and Bonnie LaVonne Monnier, Debtors. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant, v. Alan Dale MONNIER, Janice Irene Monnier, Thomas Richard Monnier and Bonnie LaVonne Monnier, Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Claier R. Gerry, Sioux Falls, S.D., for appellant.
Robert E. Hayes, Sioux Falls, S.D., for appellee.
Before HEANEY, Circuit Judge, HENLEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.
These appeals are from a decision of the District Court for the District of South Dakota 1 modifying and affirming the bankruptcy court's confirmation of a chapter 11 reorganization plan. Debtors (Monnier Brothers, a partnership consisting of Alan Dale Monnier and Thomas Richard Monnier; and Alan Dale Monnier and Thomas Richard Monnier and their wives, as individuals) appeal from the district court's decision to increase the rate at which interest on debtors' secured indebtedness to Prudential Insurance Company would accrue during operation of the plan. Prudential contends in a cross appeal that the plan ought not to have been confirmed, urging that (1) the plan does not give "adequate protection" to Prudential's secured interest; (2) the plan is not feasible; and (3) the plan is unfair and inequitable, and discriminates against Prudential. For reasons to be stated, we affirm.
Debtors are farmers. Prudential loaned debtors $800,000 on May 16, 1981. The loan was evidenced by a note, and secured by a mortgage upon farmland debtors own in Deuel County, South Dakota. By the terms of the note and mortgage, interest on the Prudential loan would accrue at a rate of thirteen percent per annum, and at a rate of fifteen percent per annum on overdue installments. The term of the loan was fifteen years, although Prudential could shorten this term after giving notice to the borrowers. The first installment of principal was due on June 1, 1983. Debtors failed to make this principal payment, having filed their original chapter 11 petitions in the United States Bankruptcy Court for the District of South Dakota on January 3, 1983.
Prudential then requested the bankruptcy court to modify the automatic stay of 11 U.S.C. Sec. 362, so that Prudential might begin state foreclosure proceedings. After a hearing, the bankruptcy court denied Prudential's request for modification of the stay. The bankruptcy court determined that the fair market value of the Deuel County property was $1,356,000; that as of March 1, 1983, debtors' total indebtedness to Prudential, including accrued interest, had been $1,012,209.63; that continued use of the property by debtors was essential to successful reorganization; and that the "equity cushion of approximately $300,000.00" would provide adequate protection for Prudential during the preconfirmation period.
Subsequently, the bankruptcy court confirmed the plan over Prudential's objections. (Ten other classes of creditors, most of them holding fully secured claims, had accepted the plan.) The confirmed plan described how and when each claim would be repaid, and made predictions as to 1983 crop yields, crop prices, and expenses. The plan provided for an initial payment by debtors of $75,000 toward accrued interest then owing on the Prudential debt. The plan also called for the remaining indebtedness to Prudential to be repaid in level amortized installments over a fifteen year period. Under the confirmed plan, interest was to accrue on the Prudential claim for periods prior to the confirmation date at the default rate set by the note and mortgage, and thereafter at a 10.5 percent rate (the December, 1983 United States treasury bill annual investment yield discount factor). Because the plan did not provide for immediate payment in cash of Prudential's claim, and because Prudential opposed the plan, the district court, at debtors' request, invoked the "cram down" provisions of chapter 11 to confirm the plan. 11 U.S.C. Sec. 1129(b).
Prudential then sought review in the district court. The district court affirmed confirmation of the plan, but reversed the bankruptcy court's order of confirmation "insofar as the order fixes the interest rate that is paid The Prudential Insurance Company of America to be 10.5% rather than the 13% rate set out in the mortgage." The present appeals followed.
Debtors contend (and the bankruptcy court agreed) that under chapter 11 "cram down" provisions, the bankruptcy court could take evidence regarding various prevailing interest rates, and could then make applicable to the scheduled deferred payments due Prudential under the plan whatever rate of interest would insure that Prudential eventually would receive the value of the amount that had been owed on the date the plan was confirmed. U.S.C. Sec. 1129(b)(2)(A)(i)(II). 2 Prudential, however, suggests that when a creditor is oversecured, and prevailing interest rates at confirmation time are lower than the rate set by the loan agreement between the debtor and the creditor, a reorganization plan calling for deferred repayment of the secured debt under 11 U.S.C. Sec. 1129(b)(2)(A)(i)(II) must always provide for accrual of interest at the contract rate, so as to adequately compensate for impairment to the creditor's foreclosure rights, and otherwise give the creditor the full benefit of his bargain.
Under Sec. 1129(b)(2)(A)(i)(II), deferred cash payments due Prudential must total "a value, as of the effective date of the plan, of at least the value of [Prudential's] interest in the estate's interest in" the collateral. Since the Prudential loan was accelerated and oversecured, Prudential had a right at the date the plan became effective to the unpaid principal plus any contract rate interest that had accrued up until that time. The task of the bankruptcy court was to determine what rate of interest would insure Prudential ultimately receive the full value of that amount, given that the plan provided for level amortized payments over a fifteen year period.
One of the Code's few clues about what factors to take into account in selecting an appropriate interest rate appears in Sec. 1129(b)(2)(A)(iii); that section states that a plan may be confirmed over the objections of a secured creditor if the plan affords the creditor the "indubitable equivalent" of his claim. 11 U.S.C. Sec. 1129(b)(2)(A)(iii). Legislative history indicates Congress intended for this phrase to take on the meaning given it by Judge Learned Hand in In re Murel Holding Co., 75 F.2d 941, 942 (2d Cir.1935). See In re American Mariner Industries, 734 F.2d 426, 433 (9th Cir.1984). As the Ninth Circuit has noted, Murel emphasized two factors in determining whether a reorganization plan provided a secured creditor adequate protection for the full value of his claim:
Judge Hand concluded that the creditor's right to "get his money or at least the property" may be denied under a plan for reorganization only if the debtor provides a "substitute of the most indubitable equivalence." Such a substitute clearly must both compensate for present value and insure the safety of the principal.
In re American Mariner Industries, 734 F.2d at 433 (emphasis added). Although Sec. 1129(b)(2)(A)(iii), with its "indubitable equivalent" standard, is stated as an alternative to deferred repayment of the secured debt under Sec. 1129(b)(2)(A)(i)(II), we are satisfied from a reading of Murel that the congressional reference to the case expresses threshold requirements applicable to selection of an appropriate interest rate. Cf. In re American Mariner Industries, 734 F.2d at 432 ().
In the present case, neither Prudential nor debtors provided the bankruptcy court with much assistance in determining what interest rate would compensate Prudential for the time value of its money and the risks to its principal. Prudential provided no evidence on the issue, other than the rate set by the contract. Debtors, relying on 5 Collier on Bankruptcy p 1129.03, at 1129-63 n. 45, provided the bankruptcy court with the prime rate, federal fund rate, discount rate, call money rate, commercial paper rate, certificates of deposit rate, and treasury bill rate, that had been reported in the December 9, 1983 Wall Street Journal. The debtors ignored, however, a subsequent passage from the Collier discussion:
The appropriate discount rate must be determined on the basis of the rate of interest which is reasonable in light of the risks involved. Thus, in determining the discount rate, the court must consider the prevailing market rate for a loan of a term equal to the payout period, with due consideration for the quality of the security and the risk of subsequent default.
5 Collier on Bankruptcy p 1129, at 1129-65. We note that the treasury bill rate, which the bankruptcy court ultimately applied, reflected one rate of return available on a short term, low risk investment. See In re Loveridge Machine & Tool Co., 36 B.R. 159 (Bankr.D.Utah 1983).
According to the "market value" appraisal of the Deuel County property, Prudential was, at the time the plan became effective, oversecured, both with respect to principal and with respect to interest that had accrued under the contract. In these circumstances, we cannot say the district court erred in requiring interest to be paid under the plan at the...
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