U.S. v. Arnold, No. 88-1703

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: Before MILBURN and NELSON, Circuit Judges, and CELEBREZZE; MILBURN
• Citation: 878 F.2d 925
• Docket Number: No. 88-1703
• Decision Date: 18 August 1989
• Parties: , 19 Bankr.Ct.Dec. 978 UNITED STATES of America, Plaintiff-Appellee, v. Harlan ARNOLD and Dorene Arnold, Defendants-Appellants.

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878 F.2d 925 21 C.B.C. 266, 19 Bankr.Ct.Dec. 978 UNITED STATES of America, Plaintiff-Appellee,
v.
Harlan ARNOLD and Dorene Arnold, Defendants-Appellants. No. 88-1703. United States Court of Appeals,
Sixth Circuit. Argued May 18, 1989.
Decided July 3, 1989.
Rehearing and Rehearing En Banc Denied Aug. 18, 1989.

Paul B. Newman (argued), Newaygo, Mich., for Harlan Arnold and Dorene arnold.

Edith A. Landman (argued), Office of the U.S. Atty., Grand Rapids, Mich., for the U.S.

Before MILBURN and NELSON, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

MILBURN, Circuit Judge.

Defendants-appellants Harlan and Dorene Arnold ("debtors") appeal the judgment of the district court reversing the decision of the bankruptcy court regarding the proper interest rate payable to the United States as a creditor through the Farmers Home Administration ("FmHA"). For the reasons that follow, we affirm.

I.

A.

Debtors, who are farmers located in Mecosta County, Michigan, filed a voluntary joint petition for bankruptcy on February 2, 1987, under newly enacted Chapter 12 of the United States Bankruptcy Code. ¹ See 11 U.S.C. Secs. 1201-1231 (Supp.1989). On May 29, 1987, FmHA filed a proof of claim against debtors in the total sum of $273,947.28. On November 4, 1987, debtors filed a proposed Chapter 12 plan. FmHA objected to the plan, contending that the debtors' plan did not provide for payment of the present value of FmHA's collateral. See 11 U.S.C. Sec. 1225(a)(5)(B). However, on January 21, 1988, the bankruptcy court confirmed the debtors' plan over the objection of FmHA.

On January 29, 1988, FmHA filed a notice of appeal to the United States District

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Court of the bankruptcy court's order confirming the debtors' plan. See 28 U.S.C. Sec. 158(a) ("The district courts ... shall have jurisdiction to hear appeals from the final judgments ... of bankruptcy judges...."). Following a hearing, the district court reversed the order confirming the debtors' plan and remanded the case to the bankruptcy court for further proceedings. ² This timely appeal by the debtors followed.

B.

The central facts relevant to this appeal are not in dispute. Following the filing of debtors' Chapter 12 bankruptcy petition, the United States filed a proof of claim stating that the debtors owe FmHA a total of $273,947.28, consisting of $216,825.07 in principal and $57,122.21 in interest. FmHA claimed that at the time of filing, debtors' account was delinquent in the amount of $123,537.25.

The indebtedness to FmHA consists of five notes executed from December 23, 1975, through August 28, 1984. The notes are at varying rates of interest with the first note at 9 percent, the second and third notes at 5 percent, the fourth note at 3 percent, and the fifth note at 7 and 1/4 percent, per annum. The notes are secured by mortgages on real estate and security agreements on chattels.

In lieu of a contested hearing, the debtors and FmHA agreed to accept the values of the collateral determined by an independent appraiser. The agreed-upon value of the secured real estate is $94,520.00, and the value of the chattels is $80,920.00, which, after undisputed adjustments, allows a total secured claim by FmHA of approximately $157,000.00.

The plan submitted by the debtors proposed repayment of only a portion of the first two notes executed between the debtors and FmHA. The debtors proposed that the secured value be prorated between the first two notes according to the unpaid principal balance and accrued interest on each note. The payment on the allowed secured claim would approximate 83 percent of the total amount due on both these notes. After prorating the secured debt among the first two notes, the debtors proposed repayment at the contract rate of interest provided in the notes with full payment by the respective original due date of each note. With respect to the remaining indebtedness evidenced by the third, fourth, and fifth notes between debtors and FmHA, debtors proposed the same treatment for these amounts as for the general class of unsecured creditors.

Also, prior to the debtors' filing of their petition under Chapter 12, they had qualified for an "interest credit" under applicable FmHA regulations. Pursuant to this interest credit, received in 1986, the contract rate of interest upon the first note executed (9 percent) was waived, and the debtors were paying only 1 percent interest on this note at the time of filing. The debtors proposed in their plan that they would continue to pay the 1 percent interest rate on the amount prorated to the first note until such time that FmHA, pursuant to periodic review conducted in connection with the interest credit program, determined that the financial condition of the debtors had improved to the extent that they no longer qualified for the interest credit. Should this occur, debtors maintained that the interest rate should then revert to the 9 percent contract rate. The interest rate on the amount prorated to the second note would remain the contract rate throughout the plan. The 1 percent interest credit rate on the first note and the 5 percent rate on the second note are less than FmHA's current market rates.

FmHA objected to the proposed plan. Among other things, FmHA argued that the debtors should not be allowed to retain

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the interest credit for special hardship cases in effect at the time debtors filed their petition in bankruptcy. FmHA further asserted that it should receive its current interest rate applicable to new loans on its allowed secured claim. FmHA maintained that this was only fair given that the third, fourth, and fifth loans executed would receive unsecured creditor status as would 17 percent of the indebtedness on the first and second loans. Testimony before the bankruptcy court revealed that FmHA's current interest rates were then approximately 10 percent for real estate loans and 9 and 1/2 percent for chattel loans.

Before the bankruptcy court, the issue centered on whether the interest rate on the allowed secured claim should be the contract rate (less the temporary interest credit provided the debtors qualified for the credit as determined by the FmHA) or, as FmHA maintained, the current market rate being charged by it for new loans. The bankruptcy court held that the interest rate to be charged on FmHA's loans should be the lesser as between the contract rate or the current market rate and that the debtors should receive the benefit of the interest credit program until further review is conducted by FmHA. The bankruptcy court relied upon In re Colegrove, 771 F.2d 119 (6th Cir.1985), wherein we held that "a maximum limitation on [the interest rate to be awarded is] the underlying contract rate of interest." Id. at 123 (emphasis in original). The bankruptcy court also agreed with the debtors that the notes first in time would be first entitled to be secured.

As earlier stated, FmHA appealed the confirmation of the debtors' Chapter 12 plan to the district court pursuant to 28 U.S.C. Sec. 158(a). The district court rejected the bankruptcy court's interpretation of In re Colegrove, supra, and, instead, held that "where there is a new bargain struck, where there is a write-down, the creditor should be entitled to the current interest on that...