Hardzog, In re, s. 89-6064

• Decision Date: 19 April 1990
• Docket Number: 89-6065,Nos. 89-6064,s. 89-6064
• Citation: 901 F.2d 858
• Parties: , 22 Collier Bankr.Cas.2d 1253, 20 Bankr.Ct.Dec. 640, Bankr. L. Rep. P 73,340 In re Clarence L. (I.O.) HARDZOG; Katy Lou Hardzog, Debtors. Clarence L. (I.O.) HARDZOG; Katy Lou Hardzog, Appellees, v. The FEDERAL LAND BANK OF WICHITA, Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 858

901 F.2d 858

58 USLW 2675, 22 Collier Bankr.Cas.2d 1253,

20 Bankr.Ct.Dec. 640, Bankr. L. Rep. P 73,340

In re Clarence L. (I.O.) HARDZOG; Katy Lou Hardzog, Debtors.

Clarence L. (I.O.) HARDZOG; Katy Lou Hardzog, Appellees, v. The FEDERAL LAND BANK OF WICHITA, Appellant.

Nos. 89-6064, 89-6065.

United States Court of Appeals, Tenth Circuit.

April 19, 1990.

B.J. Brockett, Anthony L. Jackson, and J. Mark Spaeth of B.J. Brockett, Inc., P.C., Oklahoma City, Okl., on the briefs, for appellees.

G. Blaine Schwabe, III, J. Eric Ivester, and Rob F. Robertson of Mock, Schwabe, Waldo, Elder, Reeves & Bryant, Oklahoma City, Okl., on the briefs, for appellant.

Before SEYMOUR, MOORE, and BRORBY, Circuit Judges.

BRORBY, Circuit Judge.

This appeal was set for oral argument during the March Term of this court. Counsel were unable to be present due to blizzard conditions. This court has therefore examined the briefs and appellate record and has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed.R.App.P. 34(a); 10th Cir.R. 34.1.9. The cause is therefore ordered submitted without oral argument.

This appeal concerns the validity of a Bankruptcy Chapter 12 debt adjustment plan.

The significant facts are neither complex nor disputed. Appellant (Bank) made a loan to Appellees (Debtors) and secured this debt with a mortgage upon Debtors' real property. After paying on this loan for approximately twelve years, Debtors commenced a Chapter 12 Bankruptcy proceeding. At that time, the mortgage called for approximately eighteen years of payments at 12.5 per cent per annum. The unpaid principal amounted to approximately $193,000. The total amount of the Bank's allowed claim was approximately $204,000. ¹ The fair market value of the real property was approximately $230,000. The debtors filed their debt adjustment plan and proposed to pay the amount of the allowed claim in fifteen years ² with interest at 7.5 per cent per annum. The Bank objected to the plan and asserted it was entitled to interest at 12.5 per cent per annum, which was the agreed upon rate contained in the contract.

The Bankruptcy Court ultimately approved a modified plan, which called for payment of the allowed claim in fifteen years at an annual interest rate of ten per cent. The Bankruptcy Court established the interest rate by computing what it determined to be the Bank's cost of funds. ³ It set the cost of Bank's funds at 9.3 per cent and the cost of Bank's risk factor at .7 per cent, thus yielding a total interest rate of 10 per cent.

Bank appeals, asserting: (1) the debt adjustment plan does not propose to pay the value of its claim; (2) if an interest rate other than the contract rate is applied, the Bank would then be deprived of its property without just compensation; and (3) numerous arguments contending that the Bankruptcy Court either should not have used the cost of funds approach or that the Bankruptcy Court miscomputed the cost of funds.

A broad, loose and generalized summary of Chapter 12 of the Bankruptcy Code will help place Bank's arguments into perspective. Generally speaking, an eligible family farmer may obtain relief from debts and continue to reside upon and operate the farm if the Bankruptcy Court approves a debt adjustment plan. The debt adjustment plan may affect the rights of the holders of the debt. After the debt adjustment plan has been approved, the debtor pays the trustee who in turn pays the holders of the debt. To be confirmed, a debt adjustment plan must meet certain requirements specified by the Bankruptcy Code. One of these requirements is that the holder of an allowed claim must receive property under the plan which has a value of no less than the amount of its allowed claim. ⁴

Bank contends it will not receive the allowed amount of its claim as it will not receive the agreed upon interest rate. Stated somewhat differently, Bank contends it cannot receive the value of its claim unless it receives its contract rate of interest. ⁵

What becomes immediately obvious is that the Bankruptcy Court must determine the present value of a series of future cash flows; otherwise it cannot determine whether Bank will receive less than the allowed amount of the claim. This necessarily dictates that the Bankruptcy Court must arrive at a discount factor or interest rate. Once the unpaid principal, due date, payment periods, and payment amounts are determined, the problem still cannot be solved until the interest rate or discount factor is determined. Only with all of these figures known does the solution then become one of mathematical computation. The precise question before us is how to determine the interest rate to be applied to the formula.

Congress, in enacting Chapter 12, gave us no guidance in how to determine the applicable interest rate.

The Bankruptcy Code contains other provisions setting forth a present value requirement. ⁶ Courts, in interpreting these similar statutes, have not been uniform in their results. As one authority on Bankruptcy has stated:

While the cases considering the issue are fairly uniform in agreeing that a market rate of interest is appropriate, the cases differ drastically in their interpretation of how a "market rate" is to be determined.

5 Collier on Bankruptcy Sec. 1225.03 at 1225-21 (1989).

A review of court decisions determining an appropriate interest rate under Chapter 12 likewise reveals diverse results which include using the interest rate charged by the secured creditor; ⁷ using the legal rate on judgments in the absence of evidence concerning market rates; ⁸ using the contract rate after determining it was below market; ⁹ and of course the case now before this court, which holds a cost of funds approach to be proper.

The Eighth Circuit has addressed the problem before us in the case of United States v. Doud, 869 F.2d 1144 (8th Cir.1989). This decision endorsed the "market rate" approach while approving a method of determination of the "market cost" by first determining the rate of a risk-free loan, such as the yield on treasury bonds, and adding thereto two per cent as a risk factor. In short, this approach determines an appropriate interest rate, which consists of a "risk-free rate" plus additional interest to compensate a creditor for risks posed by the...