In re Pryor, 05-87079.

• Decision Date: 12 May 2006
• Docket Number: No. 05-87079.,05-87079.
• Parties: In re Steven D. PRYOR, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Central District of Illinois

341 B.R. 648

In re Steven D. PRYOR, Debtor.

No. 05-87079.

United States Bankruptcy Court, C.D. Illinois.

May 12, 2006.

Dick B. Williams, East Peoria, IL, for Debtor.

Steven L. Nelson, for Ford Motor Credit Co.

OPINION

Before the Court is the objection of FORD MOTOR CREDIT COMPANY (FMCC) to confirmation of the Amended Chapter 13 plan filed by STEVEN PRYOR, the Debtor (DEBTOR). A hearing was held on February 13, 2006, and the matter was taken under advisement. The narrow question before the Court is whether the interest rate payable on a secured claim is capped at the contract rate. Both the DEBTOR and FMCC submitted briefs on the issue.

On September 10, 2002, the DEBTOR purchased a new 2002 Ford F150 from Velde Ford for $21,850. The amount financed under the motor vehicle retail installment contract was $20,145.56, payable over a period of 60 months with interest at the rate of 4.9% per annum. The contract was assigned to FMCC.

The DEBTOR filed a Chapter 13 petition on October 14, 2005, and placed a value of $8,000 on the F150 in Schedules B and D. The original plan filed by the DEBTOR provided for payments of $350 per month for 36 months and proposed to have the Trustee pay FMCC the principal sum of $8,000, plus interest at the rate of 8%. The estimated distribution to unsecured creditors was 1%. On November 2, 2005, FMCC filed a proof of claim in the amount of $11,156.51, plus interest at 8.75%, attaching a copy of the contract and title to the vehicle. FMCC also objected to confirmation of the plan based upon both the value of the vehicle and the proposed interest rate, contending that it was entitled to be paid $11,156.51, plus interest of 9%.

Three days prior to the confirmation hearing scheduled for February 13, 2006, the DEBTOR filed an amended plan, increasing FMCC'S secured claim to $11,123.94, the amount owed on the date of the filing of the bankruptcy, but reducing the rate of interest to 4.9%, as provided for by the contract. The payments to be made by the DEBTOR under the amended plan remained the same but the term of the plan was increased to 52 months. At the confirmation hearing, FMCC objected to the amended plan based on the contract rate of interest, contending that it is entitled to a rate of interest that compensates it for the present value of its claim. The Court took the matter under advisement. After the hearing, the amended plan was noticed to all creditors with an objection date of March 1, 2006. No other objections were filed.

The requirements for confirmation of a Chapter 13 plan are set forth in Section 1325 of the Bankruptcy Code. Pursuant to Section 1325(a)(5)(B)(ii), the Chapter 13 "cram down" provision, applicable where the debtor does not surrender the collateral and the secured creditor does not consent to the plan, the present value of the deferred payments provided for in the debtor's plan must not be less than the allowed amount of the secured creditor's claim.¹ Prior to the Supreme Court's ruling in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004), courts had taken divergent approaches in determining the appropriate "cram down" interest rate. The four main approaches were the "cost of funds method," the "presumptive contract rate" method, the "coerced loan" method, and the "formula" method.² In addition, a number of courts had treated oversecured and undersecured creditors differently as to the rate of interest to be applied. Reasoning that an oversecured creditor would receive the benefit of its initial bargain if its claim is paid at the rate of interest provided in the original contract, some courts had capped the interest payable on such a claim under a Chapter 13 plan at the contract rate. In re Carpenter, 223 B.R. 114 (Bankr.S.D.Ohio 1998); In re Segura, 218 B.R. 166 (Bankr.N.D.Okla.1998).

In Till, decided by the Supreme Court in 2004, the Court addressed the proper rate of interest to be applied under Section 1325(a)(5)(B)(ii). Endorsing the formula or "risk plus" approach as best effectuating the purposes of the Bankruptcy Code, the Court explained:

[U]nlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting "prime-plus" rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor's circumstances or its prior interactions with the debtor.

In so ruling, the Court rejected the presumptive contract rate, determining that its application could result in disparate treatment of similarly situated creditors. In illustration, the Court posed the following hypothetical set of facts:

[S]uppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher down interest rate, even though the two secured debts are objectively indistinguishable.

541 U.S. at 478, 124 S.Ct. at 1960. The Court characterized the terms of the parties original contract as "now irrelevant." 541 U.S. at 478, 124 S.Ct. at 1961.

The DEBTOR contends that Till's application is limited to cases involving a cram down. Noting that his plan proposes to pay FMCC the full amount of its claim at the contract interest rate, the DEBTOR suggests that application of a higher interest rate would result in a windfall to FMCC.³ FMCC argues that the "prime plus" formula for determining the interest rate set forth in Till applies to all cases, without regard to the interest rate set forth in the original contract.

In this Court's view, the Supreme Court's ruling in Till is clear that the prime rate as adjusted for risk applies in all cases involving cram down in a Chapter 13 plan, including those cases involving a below market contract rate of interest, whether the creditor's claim is oversecured or undersecured. The flip-side of the argument made here by the DEBTOR was recently rejected by the court in In re Wright, 338 B.R. 917 (Bankr.M.D.Ala. 2006), a case addressing Till's application to a post-BAPCPA Chapter 13 case. Rejecting the creditor's contention that Till's interest rate formula, applicable only in cram down cases, did not apply because its claim was fully secured, the court pointed out that the creditor was confusing the term "cram down" with the term "strip down," explaining:

"Cram...