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Cramdown Interest Rates in Chapter 11
In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the U.S. Supreme Court applied a formula to determine the appropriate cramdown interest rate with respect to the treatment of secured claims in a Chapter 13 case ' holding that the appropriate interest rate is determined by taking a risk-free base rate, such as the prime rate or the Treasury rate, and adding a risk premium of between 1% and 3% to reflect the repayment risks unique to the particular debtor. However, Till left an unanswered question about how to determine an applicable cramdown interest rate for allowed secured claims in Chapter 11 cases.
Since Till, courts have relied on language contained in footnote 14 in Till to provide guidance on how such a rate should be determined in Chapter 11 cases. Footnote 14, in substance, states that while there is no readily apparent Chapter 13 cramdown interest rate because there is no free market of Chapter 13 cramdown lenders, the same may not be true in Chapter 11 because lenders advertise financing for Chapter 11 debtors-in-possession. This has opened the door to arguments about the use of market rates to determine cramdown interest rates in Chapter 11 cases. However, questions still remain over how and when to apply either a market interest rate or formula-based rate in Chapter 11 cases.
Recently, in a bench ruling in In re MPM Silicones, LLC, issued on Aug. 26, 2014 (No. 14-22503-RDD (Bankr. S.D.N.Y. Aug. 26, 2014) and later corrected on Sept. 9, 2014 ( see In re MPM Silicones, LLC, No. 14-22503, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014)) (Momentive), the United States Bankruptcy Court for the Southern District of New York (USBJ Drain), held, among other things, that the debtors could cram down their plan of reorganization on their secured lenders under section 1129(b)(2)(A)(i) of the Bankruptcy Code by providing them with replacement notes paying a below-market interest rate using a formula approach to calculate the applicable interest rate.
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