Cramdown Interest Rates And Secured Creditors In Chapter 11: The Waters Are Still Muddy

Recently, the Fifth Circuit decided a case regarding the appropriate interest rate to be charged when a secured creditor's claim is "crammed down," pursuant to section 1129(b)(2)(A) of the United States Bankruptcy Code (Code), 11 U.S.C. §§ 101-1532. Unfortunately, the decision does little to clarify the confusion precipitated by the Supreme Court's 2004 decision of Till v. SCS Credit Corp., 541 U.S. 465 (2004), and perhaps even adds to it.

In Wells Fargo Bank N.A. v. Texas Grand Prairie Hotel Realty, L.L.C., (In re Texas Grand Prairie Hotel Realty, L.L.C., No. 11-11109, 2013 WL 776317 (5th Cir. Mar. 1, 2013)), the debtor borrowed $49 million from Wells Fargo's predecessor in interest in 2007, secured by various hotel properties and related assets. In 2009, the debtor was unable to pay Wells Fargo's note when it became due and filed a petition under Chapter 11. The debtor subsequently filed a plan of reorganization, which Wells Fargo rejected, valuing Wells Fargo's secured claim at just over $39 million. The debtor sought to cram down Wells Fargo's secured under section 1129(b), proposing to pay the secured loan over ten years with interest accruing at 5% per annum (1.75% above the prime rate). Wells Fargo argued that the loan should bear interest at 8.8% per annum. Both parties agreed that the "primeplus" formula endorsed by Till should apply, but hotly disputed what that formula required. The bankruptcy court adopted the debtor's expert's analysis and confirmed the plan. Wells Fargo appealed to the district court, which affirmed, and Wells Fargo appealed to the Fifth Circuit.

On appeal, the Fifth Circuit began by denying the debtor's motion for dismissal of the appeal on the grounds that it was equitably moot. Although the plan had been consummated and the debtor had made nearly $8 million of post-plan distributions, the Court was not persuaded that the issue before it—paying the secured creditor additional interest—would jeopardize the reorganization, especially given the undisputed improvement in the debtor's revenues and cash position since the filing of the petition, which improvement had continued post-confirmation.

The court then turned to the issue of what section 1129(b) of the Code required. Among other things, section 1129(b) provides that for a plan to be confirmed over the objection of a secured creditor, the creditor must receive deferred payments of a value at least equal to the allowed amount of the secured claim as of the...