General Motors Acceptance Corp. v. Jones

Decision Date20 July 1993
Docket NumberNo. 92-5351,92-5351
Citation999 F.2d 63
Parties, 29 Collier Bankr.Cas.2d 381, 24 Bankr.Ct.Dec. 800, Bankr. L. Rep. P 75,352 GENERAL MOTORS ACCEPTANCE CORPORATION, Appellant, v. Alphonso JONES, Debtor, Robert M. Wood, Trustee.
CourtU.S. Court of Appeals — Third Circuit

Robert Szwajkos (Argued), Lavin, Coleman, Finarelli & Gray, Philadelphia, PA, for appellant.

David Paul Daniels, Jeannette M. Amodeo (Argued), David Paul Daniels, A Professional Corp., Camden, NJ, for appellees.

Before: STAPLETON and COWEN, Circuit Judges, and DUBOIS, * District Judge.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

These chapter 13 bankruptcy cases require us to determine the rate of interest which will assure that a secured creditor receives payments under a chapter 13 plan having a present value equal to the value of its allowed secured claim, as required by 11 U.S.C. § 1325(a)(5)(B)(ii). This is a question of first impression in this Circuit. We hold that the rate of interest under § 1325(a)(5)(B)(ii) 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. We will reverse the district court's judgment upholding the order of the bankruptcy court and will remand these cases for proceedings consistent with this opinion.

I.

Appellee Jones possessed a Chevy pickup truck which he purchased pursuant to a financing agreement with appellant General Motors Acceptance Corporation (GMAC). Jones filed a voluntary petition and a plan under chapter 13 of the bankruptcy code, 11 U.S.C. §§ 1301 et seq. The value of the truck, as collateral, was less than the amount Jones owed to GMAC on the date of the filing, and Jones was able to reduce the amount of GMAC's secured claim down to the value of the collateral. 1 Jones's plan proposed to reduce the secured claim due to GMAC as of the filing date from $15,713.98 at 11.98% annual rate of interest, to $11,500.00 at 10% interest. Appellee Jordan also possessed a GMC pickup truck purchased pursuant to a financing agreement with GMAC. The value of the truck as collateral also was less than the amount Jordan owed to GMAC. Jordan filed a plan proposing to reduce the secured claim owed to GMAC from $15,115.79 at 13%, to $9,700.00 at 10%. In both cases, GMAC objected to the interest rate, contending that a 10% rate was too low to provide GMAC with the present value of its allowed secured claim over the time of the plan, as required by § 1325(a)(5)(B)(ii).

In confirmation hearings on the two plans, the bankruptcy court held that the presumptive market indicator of the appropriate interest rate is the prime rate. The district court affirmed without opinion, and GMAC filed this appeal.

II.

This Court has jurisdiction pursuant to 28 U.S.C. § 158(d). The issue presented in this case is a question of law, over which this Court has plenary review. Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir.1992).

III.

Chapter 13 of the Bankruptcy Code provides for the adjustment of debts for individual debtors with regular income. A chapter 13 case begins when the debtor files a voluntary petition of bankruptcy. This petition will stay most proceedings by creditors against the debtor and his property. Generally, the debtor must propose a plan for payment of his debts within fifteen days of the filing of the petition. 2 Creditors with an interest in the plan are given twenty-five days' notice 3 before the plan comes before the bankruptcy court for confirmation.

In situations known as "cramdowns", the plan may be confirmed over the objection of a secured creditor if certain conditions are met. Specifically, in a chapter 13 "cramdown", a debtor may retain property in which a secured creditor has a security interest, even if the secured creditor would prefer to repossess and liquidate the property as it would be entitled to do in the absence of a bankruptcy filing. In exchange for giving the debtor a right to continue possession of the property, § 1325(a)(5)(B) directs two things: (i) the secured creditor shall retain a continuing lien on the property; and (ii) the secured creditor shall receive from the debtor "the value, as of the effective date of the plan, of such property to be distributed under the plan on account of such claim [which shall be] not less than the allowed amount of such claim." 11 U.S.C. § 1325(a)(5)(B)(ii).

In order for the secured creditor to get payments over time under the plan having a present value equal to the allowed amount, as the above quoted statutory language directs, the debtor normally pays interest on the allowed amount. Unfortunately, the statute is silent about how to determine the interest rate.

IV.

The concept of present value recognizes that money received after a given period is worth less than the same amount received today. This is the case in part because money received today can be used to generate additional value in the interim. How much additional value can be generated depends on who is investing the money received today and in what market. It necessarily follows that determining the present value of money to be received in the future requires a selection of the relevant investor and the relevant market. That selection should be made on the basis of the purpose for which one is determining present value. In this context, we look to the purpose of § 1325(a)(5)(B)(ii) which, as we understand it, seeks to put the secured creditor in an economic position equivalent to the one it would have occupied had it received the allowed secured amount immediately, thus terminating the relationship between the creditor and the debtor. In determining present value, we therefore look to the additional value that the secured creditor could be expected to generate in the regular course of its business if the plan provided for an immediate, rather than a deferred, payment of the allowed secured amount.

A.

Some courts, including the bankruptcy court in the cases we are here reviewing, have suggested a "cost of funds" theory which would determine present value by looking to the creditor and the market in which the creditor borrows capital. See, e.g., Matter of Jordan, 130 B.R. 185 (Bkrtcy.D.N.J.1991); In re Shannon, 100 B.R. 913, 932 (S.D.Ohio, 1989). According to the "cost of funds" theory, a creditor in a cramdown is deprived of the right to immediately repossess and liquidate the collateral and thus realize an immediate inflow of cash. The creditor, under this view, can cover for this loss, however, by borrowing funds equivalent in value to the funds it would have realized had it been allowed to repossess and liquidate its secured interest. Accordingly, a secured creditor can be protected against any loss occasioned by delayed payment under the plan if it is paid interest on the allowed secured amount at the interest rate it would pay in the market in order to borrow the funds needed to replace those being temporarily withheld. See Matter of Jordan at 190 ("[w]e conclude that the market rate time value of money is most accurately measured for chapter 13 present value purposes by the cost of funds approach, which seeks to compensate the creditor's cost of borrowing to replace funds that would otherwise be available upon liquidation of its collateral.")

We view the "cost of funds" approach as falling short of the statutory objective. Paying the creditor the cost of the funds unavailable to it during the period of the plan will partially compensate the creditor for the loss of opportunity it would have had if it had been able to repossess the collateral. There is more involved, however, than the mere cost of funds. When a cramdown plan calling for payments to a secured creditor over time is confirmed, the creditor is forced both to absorb the costs of deferred payment and to continue a lending relationship with the debtor past the point contemplated in the original agreement. A plan under Chapter 13 thus 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. The "cost of funds" approach inappropriately compensates the creditor for only the former category of cost.

Any creditor extending credit anticipates that over the course of the loan it will recover, in interest, its cost of capital and its cost of service, as well as a profit. When we focus on the present value of chapter 13 deferred payments to a secured creditor who has been forced to extend this new credit, this fact should not be ignored. It is only by acknowledging the coerced loan aspects of a cramdown and by compensating the secured creditor at the rate it would voluntarily accept for a loan of similar character, 4 amount and duration that the creditor can be placed in the same position he would have been in but for the cramdown.

B.

We think that the model of a coerced loan presents a more complete picture of what happens in a cramdown, and should provide the starting point for determining the appropriate interest rate under § 1325(a)(5)(B)(ii). The Sixth Circuit has stated tersely and well the basic idea of the "coerced loan" theory: "In 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." Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427, 429 (6th Cir.1982). Courts have implemented the "coerced loan" approach by determining the appropriate interest rate to be equal to the interest rates of "similar loans" made in the region. 5 Some have made specific reference to the interest rates of similar loans made in the region by the actual creditor who is effectively being coerced into extending the loan by the chapter 13 proceeding....

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