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Supreme Court Disappoints Secured Lenders

By Michael L. Cook and Leslie W. Chervokas
June 25, 2004

The U.S. Supreme Court's recent Till decision on the proper cramdown interest rate will disappoint secured lenders. Till v. SCC Credit Corp., 124 S. Ct. 1951 (2004). As we show below, Till should be limited to its narrow fact pattern, but is still bad news for lenders. They now will be forced to fight an uphill battle to prove that a higher risk premium should be added to the prime rate applicable to their crammed down secured claim. In Till, the plurality accepted a risk adjustment premium in the range of 1% to 3% (Justice Thomas, concurring, could accept no premium at all). Commercial lenders will thus have to overcome Till by showing that they are entitled to a truly “market” interest rate.

Holding

A plurality (Justice Stevens, joined by Justices Breyer, Ginsburg and Souter) held on May 17, 2004, that the prime-plus, or formula, approach, requiring adjustment of the prime national interest rate for the risk of the borrower's nonpayment, was the best method for fixing the cramdown interest rate on a secured loan. Id. at 1968. (“Cramdown” refers to the alternative plan confirmation standard “by which a plan may be confirmed notwithstanding the failure of an impaired class to accept the plan.” See 124 Cong. Rec. H 11,103 (Sept. 28,1978); S 17,420 (Oct. 6, 1978) discussing Code section 1129(b).) Previously, only the Second Circuit had endorsed the formula approach. See, e.g., GMAC v. Valenti (In re Valenti), 105 F.3d 55, 64 (2d Cir. 1997) (imposing formula approach at treasury security rate, because “it is easy to apply, it is objective, and it will lead to uniform results”); abrogated on other grounds by Assoc. Commercial Corp. v. Rash, 520 U.S. 953 (1997), 117 S. Ct. 1879, 138 L. Ed. 2d 148; Key Bank Nat'l Assoc. v. Milham (In re Milham), 141 F.3d 420, 424 (2d Cir. 1998) (formula rate applied in cramdown for oversecured creditor). Justice Thomas concurred in Till, reasoning that the 9.5% cramdown interest rate adequately compensated the lender for the present value of its claim, and that the Bankruptcy Code did not require secured creditors to be compensated for the risk of nonpayment. Id. at 1965.

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