Till, Lee, et ux. v. SCS Credit Corp. (05/17/2004)

Questions presented: (1) Is an undersecured creditor entitled to the "indubitable equivalent" of its nonbankruptcy entitlement for purposes of discounting deferred payments to present value under the Chapter 13 cramdown provision at 11 U.S.C. ?1325(a)(5)(B)(ii), resulting in fixing of a subprime lender's 21 percent contract rate as the presumptive discount rate? (2) What is the proper method for discounting of deferred payments to present value on property retained by the debtor under the Chapter 13 cramdown provision, and what is the creditor entitled to be compensated for in calculating the appropriate discount rate of interest?BY EMILY DUPUIS, MEDILL NEWS SERVICEIndiana residents Lee M. Till and Amy M. Till jointly filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code.

Chapter 13 applies to individuals with regular incomes and debts that fall below statutory levels. The plan allows the debtor to keep his or her property in the Tills case, their 1991 truck and repay the debt out of future income over three to five years.

SCS Credit Corporation, a sub-prime lender, offered its services to the Tills. Sub-prime lenders aid individuals with credit histories too poor to qualify for prime-rate auto loans. The Tills original loan was $6,425 with a total sale price of $8,385.24.

Chapter 13's "cramdown" provision allows the bankruptcy plan to be established over the objection of a secured creditor. This may happen only if the creditor retains the right to sell the property if the debtor defaults. The creditor also receives cash payments over the course of the plan equivalent to the value of the collateral. The agreement established the "cramdown" value of the Tills vehicle to be $4,000.

Under this provision, the debtor proposes a repayment plan based on how much money is available to pay debts after current living expenses have been covered. The Tills proposed to pay $740 a month for three years at an interest rate of 9.5 percent.

SCS Credit objected to the Tills plan. The corporation argued the interest rate would not provide it with the present value of the truck, as required by the "cramdown" provision.

The corporation claimed the interest rate should be 21 percent, the rate it would have earned had it foreclosed on the vehicle, sold it and then reinvested the money into another auto loan. The corporation contended other area lenders charge an interest rate of 21 percent.

The parties turned to the U.S. Bankruptcy Court for the Southern District of Indiana to settle the dispute.

Courts have traditionally used differing methods to calculate interest rates under Chapter 13's "cramdown" provision.

The "cost of funds" method sets the interest at the rate the creditor would have to pay to borrow the amount equal to the truck's value. The "formula method" uses a risk free market rate or the price one would pay in an open market and allows the court to add a premium based on how risky the court finds the reorganization plan. The "coerced loan method" calls for creditors to extend a new line of credit to the debtor and provide the interest rate the creditor would have obtained had it foreclosed and reinvested the money into similar loans.

After considering SCS Credit's objection, the bankruptcy court confirmed the Tills "formula method" plan, ruling the proper interest rate was the prime rate of 9.5 percent plus a risk adjustment of 1.5 percent.

SCS Credit appealed to the U.S. District Court for the Southern District of Indiana. The district court reversed, ruling that the "coerced loan" approach applied in this case. The court set the interest rate at 21 percent based on the amount SCS Credit would receive for a loan of similar length and risk.

On Aug. 21, 2002, a divided 7th Circuit Court of Appeals panel vacated the district court judgment and remanded the case to the bankruptcy court for further proceedings.

To resolve the question, the majority looked first to statutory construction to determine what Congress might have intended with the cramdown provision and related parts of the Bankruptcy Code.

The majority concluded that because the creditor is forced to accept the debtor's plan, the creditor should be compensated for the diminution of his present value in the collateral. "In short, from the debtor's perspective, it is necessary to pay for the continued use of the collateral at a rate that will preserve the value of the creditor's interest," wrote Judge Kenneth Ripple for the majority.

That said, the 7th Circuit still found three possible ways of arriving at the best formula and discussed ways to arrive at the most appropriate formula, noting that the "old contract rate will yield a rate sufficiently reflective of the value of the collateral at the time of the effectiveness of the plan to serve as a presumptive rate."

Though the majority concluded that the district court "properly determined that the correct approach in ascertaining the appropriate interest rate in a cramdown situation is the coerced loan approach," the court nonetheless sent the case back to the bankruptcy court to hold proceedings consistent with the methodology the 7th Circuit elaborated on.

In dissent, Judge Ilana Rovner noted that the majority opinion might allow for SCS Credit to charge whatever the market will bear, or "an eye-popping 21 percent." Calling that a burdensome rate, Rovner argued it would diminish the feasibility of the Chapter 13 plan.

"Overcompensating the creditor by demanding that the debtor pay interest as high as the market for high-risk loans will bear greatly increases the burden on the debtor, and far from the fresh start that Chapter 13 was intended to give him, puts him back in the very position that brought him into bankruptcy," Rovner wrote.

The 7th Circuit denied a motion to rehear the case en banc.

Seeking review by the U.S. Supreme Court, the Tills argue the need for a universal formula to calculate interest rates in "cramdown" situations.

"Under the same federal statute debtors in Indiana may be required to pay the contract rate of 21 percent or more, whereas debtors in a district applying a formula method may pay 7 percent contrary to the uniform application intended by Congress and perhaps the best evidence of misapplication of the present value concept, by which, if properly applied, could never produce such widely divergent results."

On June 16, 2003, the U.S. Supreme Court accepted the case for review, and on May 17, 2004, a divided Court held 5-4 for Till.

Justice John Paul Stevens wrote the Court's lead opinion. Justice Clarence Thomas joined in it, but penned a concurrence. Justices Antonin Scalia, Sandra Day O'Connor, Anthony Kennedy and Chief Justice William Rehnquist dissented.