In re Hugee, Bankruptcy No. 84-01941.
| Decision Date | 09 September 1985 |
| Docket Number | Bankruptcy No. 84-01941. |
| Citation | 54 BR 676 |
| Court | U.S. Bankruptcy Court — District of South Carolina |
| Parties | In re Willie HUGEE and Louise Hugee, Debtors. |
R. Michael Drose, Drose & Rhoades, Charleston, S.C., for debtors.
Charles S. Altman, Charleston, S.C., for creditor.
Before the court is the objection of Safeway Finance Corporation of South Carolina (Safeway) to the confirmation of the Chapter 13 debtors' amended plan, filed on March 20, 1985. Safeway maintains that because it is oversecured it is entitled, pursuant to 11 U.S.C. § 506(b)1, to the payment of interest at the contract rate over the life of the plan. The debtors contend that their Chapter 13 plan should be confirmed over the objection of Safeway because the plan satisfies the requirement of § 1325(a)(5)(B)(ii) by providing for the payment of a reasonable interest rate calculated to afford the value, as of the effective date of the plan, of the allowed amount of Safeway's claim.
The debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on December 12, 1984. On September 21, 1984, the debtors borrowed from Safeway $3,532.46 at an interest rate of 24.75% per annum. The loan is secured by a mortgage on the debtors' residence and by a lien on a 1976 Ford truck and on certain consumer goods owned by the debtors. The mortgage was recorded in the R.M.C. Office for Charleston County on September 25, 1984.
The schedules filed by the debtors — representing that debtors' residence has a value of $26,500., is encumbered by three mortgages aggregating $10,500., and has a net equity value of $16,000. — indicate that all three mortgagees, of which Safeway is in third position, are oversecured.
The Chapter 13 plan proposes to pay Safeway its payoff balance of $3,646.71, plus attorney's fees of $250., in monthly installments over a period of 42 months with interest at the rate of 14% per annum. The parties are in agreement as to the principal amount that is owed to Safeway, and the attorney's fees for which Safeway is entitled to reimbursement pursuant to the terms of the contract; they disagree as to the interest rate.
The issue is whether a Chapter 13 plan, in order to be confirmed, must provide an oversecured creditor with the rate of interest set forth in the loan contract, or whether it is sufficient for the plan to provide a reasonable rate of interest calculated to provide the oversecured creditor with the value, as of the effective date of the plan, of the allowed amount of its claim.
The debate concerning the appropriate interest rate revolves around the interplay of sections 506(b) and 1325(a)(5)(B)(i) and (ii).
Section 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
Section 1325(a) provides:
Section 1325(a)(5)(B)(ii) requires that secured creditors who have not accepted the plan receive the "present value equivalent of the allowed amount of their secured claims." In re Klein, 10 B.R. 657, 4 C.B.C.2d 412, 416, 7 B.C.D. 668 (Bankr.E. D.N.Y.1981). The debtor is, therefore, required to provide secured creditors with additional amounts which substitute for the time value of money.
The objecting creditor has asserted that because it is oversecured it is entitled to receive, by virtue of the operation of § 506(b), more (e.g., its contract rate of interest) than is required by § 1325(a)(5)(B). That creditor has confused the discount rate prescribed by § 1325(a)(5)(B)(ii) with the creditor's right to interest on its secured claim under § 506(b). See, In re Hyden, 10 B.R. 21, 6 B.C.D. 1392 (Bkrtcy.S. D.Ohio 1980).
In re Klein, supra, 10 B.R. at 661, 4 C.B.C.2d at 416.
In many cases courts have declined to fix the discount rate at the interest rate stated in the contract because the purpose of the discount rate is to protect the secured creditor from any loss caused to it due to the deferred payment of its claim. See, In re Klein, supra; In re Lum, 1 B.R. 186, 1 C.B.C.2d 95 (Bkrtcy.E.D.Tenn.1979); In re Weaver, 5 B.R. 522, 2 C.B.C.2d 315 (Bkrtcy. N.D.Ga.1980); In re Hyden, supra. It is not the purpose of the discount rate to produce a lender's profit. In re Lum, supra; In re Weaver, supra.
The creditor is entitled to receive the contract rate of interest until the effective date of the plan — at which time the accumulated interest becomes a part of the allowed secured claim. From...
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