Till We Meet Again: Eighth Circuit Weighs In On Appropriate Interest Rate In A Cramdown

• Published date: 07 September 2023
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-Structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Goodwin Procter LLP
• Author: Mr Michael Goldstein, Debora Hoehne, Meredith Mitnick and Sari Rosenfeld

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...