In re Yett

• Decision Date: 27 January 2004
• Docket Number: Bankruptcy No. 02-03054.,BAP No. ID-03-1250-BKMu.
• Citation: 306 B.R. 287
• Parties: In re Danny Ray YETT and Frances Ann Yett, Debtors. Wells Fargo Bank Northwest, N.A., Appellant, v. Danny Ray Yett; Frances Ann Yett, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

306 B.R. 287

In re Danny Ray YETT and Frances Ann Yett, Debtors.

Wells Fargo Bank Northwest, N.A., Appellant, v. Danny Ray Yett; Frances Ann Yett, Appellees.

BAP No. ID-03-1250-BKMu.

Bankruptcy No. 02-03054.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted November 20, 2003.

Filed January 27, 2004.

Trevor L. Hart, Perry Law, P.C., Boise, ID, for Wells Fargo Bank Northwest, N.A. Joseph M. Meier, Cosho, Humprey, Greener & Welsh, P.A., Boise, ID, for Danny and Frances Yett.

Before BRANDT, KLEIN and MUND,¹ Bankruptcy Judges.

OPINION

BRANDT, Bankruptcy Judge.

Can chapter 12² debtors confirm a "cramdown" plan over the objection of the holder of two secured promissory notes which had matured prepetition, although the plan neither cures the defaults nor pays interest at the default rate? The creditor objected but did not proffer evidence. The bankruptcy court confirmed the plan. This timely appeal followed.

I. FACTS

Debtors Danny and Frances Yett operate a family dairy farm in Idaho. They filed a chapter 12 petition on 18 September 2002. Wells Fargo Bank Northwest, N.A., is the holder of a $439,244.01 secured claim, evidenced by two promissory notes, in the amounts of $175,000 and $426,000. Both matured approximately four months prepetition.

The notes were fully secured by debtors' inventory, accounts receivable, farm equipment, and products, livestock, milk and milk proceeds, which the bank valued at $500,000. Both notes require interest at the same variable rate, initially 8.5%, calculated at the bank's "prime rate" plus 1.5% per annum. Debtors did not pay the debt to Wells Fargo by the maturity date.

Each note contains the following "Lender's Rights": "Upon default, including failure to pay upon final maturity, Lender, at its option, may also ... increase the variable interest rate on this Note to 5.500 percentage points over [the prime rate]." When the notes were not paid at maturity, the bank exercised those rights. Its proof of claim in the bankruptcy reflected an interest rate of 10.25% as of the petition date, which had decreased to 9.75% when the claim was filed.

Debtors filed a plan of reorganization, proposing to consolidate the bank's two loans and repay them over seven to eight years with income from milk production. As ultimately confirmed, the plan provided that the bank would retain its security and be repaid on an eight-year schedule, funded by the herd's milk production. At the confirmation hearing, the plan was modified to provide interest on the bank debt at the non-default contract rate of 1.5% over the bank's "prime rate."

While the plan does not explicitly set forth the amount of the bank's allowed secured claim, debtors' counsel represented at argument that the allowed claim amount includes interest at the default rate through confirmation, the plan's effective date. In any event, although the bank suggested otherwise at argument, it did not raise an issue regarding pre-confirmation interest in its brief, and has waived it. Law Offices of Neil Vincent Wake v. Sedona Inst. (In re Sedona Inst.), 220 B.R. 74, 76 (9th Cir. BAP 1998).

Wells Fargo objected to confirmation on the theory that § 1225 requires cure of the default by payment of either the claim in full as of the plan's effective date or post-confirmation interest at the contractual default rate of the original notes. It proffered no evidence.

The bankruptcy court overruled the objection and confirmed the plan following the confirmation hearing, explaining its reasoning in a written decision:

WFB also objects to the interest rate provided under Class 8 of the Plan. As noted above, Debtors propose to pay the obligation to WFB using the variable rate formula found in the underlying notes (which they characterize as the "contract rate"). Debtors believe this provides the "present value" required under § 1225(a)(5)(B)(ii). In order to provide present value, a plan must include a "market rate" of interest for loans of similar quality, nature and risk..... WFB did not contend that this rate was not an appropriate market rate nor did it introduce evidence on the point.

WFB instead argues that, because the notes had maturity dates of May 5, 2002, the obligations were in default prior to Debtors' September 18, 2002 bankruptcy filing.... in order to appropriately cure the defaults, Debtors must either pay the obligations in full on the effective date of the plan or provide the "default rate of interest" as the interest rate for purposes of § 1225(a)(5)(B)(ii).

WFB has provided no direct authority in support of this contention. Further, its position is contradicted by several other cases, none of which WFB addressed.

Memorandum of Decision, at 10-11 (emphasis added, citations omitted).

The confirmation order was entered 18 April 2003, and the bank timely appealed.

II. JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. § 1334, § 157(b)(1) and (2)(L), and we do under 28 U.S.C. § 158(c).

III. ISSUE

Is a Chapter 12 plan which neither provides for immediate repayment of matured notes owing to a secured claimant nor for interest at the default rate confirmable under § 1225(a)(5)(B)(ii)?

IV. STANDARD OF REVIEW

A. Confirmation of a chapter 12 plan requires analysis and interpretation of the Bankruptcy Code; we review issues of statutory construction and conclusions of law, including interpretation of the Bankruptcy Code and Rules, de novo. Predovich v. Staffer (In re Staffer), 262 B.R. 80, 82 (9th Cir. BAP 2001), aff'd, 306 F.3d 967 (9th Cir.2002).

B. The determination of factors to apply in a valuation calculation pursuant to § 1225 involves an interpretation of statute that we review de novo, while the application of those factors to a particular case is a question of fact reviewed for clear error, giving "substantial deference" to the bankruptcy court in making cramdown interest rate determinations. Farm Credit Bank v. Fowler (In re Fowler), 903 F.2d 694, 696 (9th Cir.1990), citing with approval, Patterson v. Federal Land Bank (In re Patterson), 86 B.R. 226, 227 (9th Cir. BAP 1988). We review factual findings for clear error. Rule 8013. A factual finding is clearly erroneous if the appellate court, after reviewing the record, has a firm and definite conviction that a mistake has been committed. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).

V. DISCUSSION

A. Cramdown:

"Cramdown" and "cram down" are bankruptcy terms of art which do not appear in the Bankruptcy Code: they refer to the modification of the rights of a secured creditor over its objection. As noted by a leading scholar:

In many cases filed under Chapter 13 of the Bankruptcy Code, the debtor wants to keep her car or truck and modify the terms of her car note in a manner that is not acceptable to the lender. And, in many Chapter 11 business cases, the debtor wants to keep its equipment or building and modify the terms of its secured loan in a manner that is not acceptable to the lender. A bankruptcy court can confirm a Chapter 11, 12, or 13 plan that modifies the rights of a secured creditor without the consent of that creditor. In other words, the plan can be "crammed down" over the objection of the secured creditor.

....

[T]here are two separate valuations involved in the cram down of a secured claim. First, the court must determine the value of the creditor's collateral. Second, the court must determine the value of the deferred payments proposed by the plan to determine whether the present value of such payments at least equals the value of the collateral.

....

The cram down of a secured claim involves not only section 506 [providing that creditor's secured claim is limited to the value of the collateral], but also section 1129(b)(1), section 1222(b)(2), or section 1322(b)(2), which permit a Chapter 11, 12, or 13 plan to "impair" or "modify" the rights of holders of secured claims. Any plan impairment or modification must be confirmed by the bankruptcy judge. In approving such a change over the objection of the affected secured creditor, the court must find that the requirements of sections 1129(b)(2)(A), 1225(a)(5)(B)(ii), or 1325(a)(5)(B)(ii), generally referred to as the cram down provisions, have been satisfied.

....

[T]he courts and commentators have generally treated the question of how the cram down interest rate should be determined as a question that is answered the same in Chapter 11, 12, and 13 cases. Note the italicized phrase, "value, as of the effective date of the plan," in each of these sections. Each of these provisions requires that a secured creditor who is not either paid in full or permitted to repossess must receive the present equivalent value of its secured claim.

David G. Epstein, Don't Go and Do Something Rash about Cram Down Interest Rates, 49 Ala. L.Rev. 435, 439-442 (1998)(footnotes omitted). See also In re Till, 301 F.3d 583 (7th Cir.2002), cert. granted, Till v. SCS Credit Corp., ___ U.S. ___, 123 S.Ct. 2572, 156 L.Ed.2d 601 (Mem) (2003) (No. 02-1016) (Chapter 11, 12, and 13 cramdown provisions analogous; collecting cases on determination of cramdown rates).

Along with many others, the Till court renders the term "cramdown" in its noun form, as do we.

B. Confirmation:

Section 1225 governs the confirmation of a chapter 12 plan. If the holder of an allowed secured claim does not accept the proposed plan, the debtor must either surrender the collateral or satisfy the requirements of § 1225(a)(5)(B), which provides:

(a) Except as provided in subsection (b), the court shall confirm a plan if —

(5) with respect to each allowed secured claim provided for by the plan — (B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of such claim is not less than the...