Till We Meet Again: Eighth Circuit Weighs in on Appropriate Interest Rate in a Cramdown

Much has been written about how to calculate the appropriate interest rate for the deferred cash payments a debtor may propose to pay to a rejecting secured creditor under a “cramdown” Chapter 11 plan to meet the “fair and equitable” requirement for confirmation under section 1129 of the U.S. Bankruptcy Code.¹ The Bankruptcy Code does not specify how to calculate such a rate. The Supreme Court’s decision in Till v. SCS Credit Corporation, 541 U.S. 465 (2004), provided guidance on how to do so in the Chapter 13 context but left open the question of how to do so in Chapter 11 and Chapter 12 cases. The Eighth Circuit’s recent decision in Farm Credit Services of America v. Topp (In re Topp)² joins Second, Fifth, and Sixth Circuit decisions³ in providing guidance on this issue. The Eighth Circuit held that, when applying the “formula” approach adopted in Till, the prime rate need not be the starting point for determining the cramdown interest rate — the debtor can instead use the Treasury bill rate as the base rate, so long as the risk adjustment is appropriate under the circumstances.⁴

Cramdown Basics

When a debtor seeks to “cram down” its plan over the dissent of an impaired secured creditor and pay the secured creditor over time, the Supreme Court determined in Till that the debtor must discount the stream of deferred payments back to their present value to ensure that the creditor receives at least the value of their allowed secured claim as of the effective date of the plan. In a plurality opinion, the Supreme Court in Till adopted the “formula” approach for calculating net present value, which requires the debtor to start with a risk-free base rate (e.g., the national prime rate)⁵ and adjust upward to reflect the particular debtor’s default risk based on such factors as “the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”⁶ The Supreme Court also noted that Congress likely intended for courts to apply the same approach to choosing an interest rate under any cramdown provision and that “in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce” in selecting a cramdown interest rate for a secured creditor.⁷ The majority of courts apply Till’s rationale to cramdown interest rates via a two-step process as laid out in American Home Patient, Inc.⁸: first, if an efficient market exists, apply the market rate; and second, if there is no efficient market, apply Till’s formula approach.⁹

The Topp Decision

In Topp, the Eighth Circuit, applying the formula approach, held that Till does not require a Chapter 12 debtor to use the prime rate as the starting point for fixing the interest rate imposed in a cramdown situation, so long as the risk adjustment is appropriate under the circumstances. Topp was an appeal that arose from a dispute between a debtor farmer and a creditor over the debtor’s proposed repayment plan. Although the parties both agreed to a 20-year repayment period, they disagreed on the appropriate interest rate for determining if the future repayments were equal to the present value of the creditor’s allowed claim.

The Eighth Circuit sided with the debtor and held that the prime rate did not need to be the starting point for determining a cramdown interest rate and, instead, the debtor could use the Treasury bill rate as the risk-free base rate. In Topp, The Eighth Circuit explained: “[t]o the extent that [the creditor] relies on Till for the proposition that the prime rate is the rate with which to start and that starting with the [T]reasury rate is legal error, we disagree. Doud and Till are not cases about particular starting rates. They are about the proper approach to satisfying the plan-confirmation requirement that secured creditors receive at least ‘the value, as of the effective date of the plan,’ of their claims.”¹⁰ The Eighth Circuit focused on the length of the proposed maturity period, the fact that the relevant creditor’s claim was substantially over-secured, and the overall risk of nonpayment. The creditor’s claim was secured by real estate, which gave the Eighth Circuit further justification to rely on the Treasury bill rate because claims secured by real estate are generally financed over a longer period of time. In the end, the Eighth Circuit approved a 4% rate — the Treasury bill rate plus a 2% risk adjustment.

Takeaway

The Eighth Circuit’s recent decision adds to the growing body of case law on cramdown interest rates. Although the Supreme Court in Till presumed the prime rate as the starting point (even though it acknowledged the prime rate is not entirely risk-free), the Eighth Circuit found that was not the dispositive starting point, and the real question is how to account for the risk that the secured creditor might not get paid. This is a more fact-intensive analysis, with an ever-expanding list of factors that courts will consider to determine the risk of nonpayment to a secured creditor after the debtor’s emergence, and every case will be different. Topp serves as a reminder that care should be taken to properly evaluate the debtor’s circumstances and consider the evidence that will be needed to defend or oppose a cramdown interest rate in a plan of reorganization.

^[1] See Bankruptcy Code Section 1129(b)(2)(A) (providing several ways for a Chapter 11 plan to afford “fair and equitable” treatment to a class of secured creditors, including by the debtor retaining the collateral securing the allowed claim and proposing “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property”). A Chapter 11 plan must also not “discriminate unfairly” against the rejecting class of claims, which requires that another class of equal or junior rank in priority not receive greater value under the plan than the rejecting class, unless there is adequate justification for the discrimination.
^[2] Case No. 22-2257, 2023 WL 4921241 (8th Cir. Aug. 2, 2023).
^[3] See In re American HomePatient, Inc., 420 F.3d 559 (6th Cir. 2005) (departing from Till and setting forth a two-step process: first, if an efficient market exists, apply the market rate; and second, if there is no efficient market, then apply Till’s formula approach); Apollo Global Management, LLC v. Bokf, NA (In re MPM Silicones, LLC), 874 F.3d 787 (2d Cir. 2017) (following the approach established in In re American HomePatient, Inc.); In re Texas Grand Prairie Hotel Realty, LLC, 710 F.3d 324, 328 (5th Cir. 2013) (holding that the formula approach established in Till is not the exclusive mechanism to determine the appropriate interest rate but applying Till’s formula approach, where parties had agreed such approach governed). In its analysis, the Eighth Circuit also relied on United States v. Doud, 869 F.2d 1144 (8th Cir. 1989), a pre-Till Eighth Circuit decision concerning the appropriate cramdown interest rate in a Chapter 12 case. In Doud, the Eighth Circuit upheld the lower court’s decision to start with the prevailing market interest rate and then adjust for the quality of security and risk of default. Id. at 1146. Prior to Till, there were a number of competing methodologies, in addition to the formula approach, for determining the appropriate interest rate, including the: (i) coerced loan approach (what rate the creditor could have obtained if it foreclosed on the loan, sold the collateral, and obtained equivalent loans); (ii) presumptive contract rate approach (what the rate under the contract of the existing loan would be, which could be challenged as too low or too high); and (iii) cost of funds approach (what it would cost the creditor to obtain cash equivalent to the collateral from someone else). See Till v. SCS Credit Corp., 541 U.S. at 473.
^[4] In Topp, the debtor and secured creditor agreed that a formula approach should be applied to determine the appropriate interest rate under the plan, so the Eighth Circuit did not engage in the two-step analysis set forth in American HomePatient and instead, as in Texas Grand Prairie Hotel Realty, started with the formula approach set forth in Till.
^[5] The Eighth Circuit in Topp noted the Till plurality “did not explicitly analyze the merits of starting with the prime rate versus the treasury rate. The Court discussed the prime rate simply because that was what the formula-approach proponents used.” In re Topp, No. 22-2577, 2023 WL 4921241, at *6.
^[6] Till v. SCS Credit Corp., 541 U.S. at 479.
^[7] Till v. SCS Credit Corp., 541 U.S. at 477 n. 14.
^[8] See In re Am. HomePatient, Inc., 420 F.3d 559 (6th Cir. 2005).^[9] See also In re Premiere Hosp. Grp., Inc., 2013 WL 6633428 (Bankr. E.D.N.C. Dec. 16, 2013); In re LMR, LLC, 496 B.R. 410, 423 (Bankr. W.D. Tex. 2013).
^[9] See also In re Premiere Hosp. Grp., Inc., 2013 WL 6633428 (Bankr. E.D.N.C. Dec. 16, 2013); In re LMR, LLC, 496 B.R. 410, 423 (Bankr. W.D. Tex. 2013).
^[10] In re Topp, No. 22-2577, 2023 WL 4921241, at *3.