1996 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-30-1996

Rankin v. Desarno

Precedential or Non-Precedential:

Docket 95-3007,95-3011,95-3037

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Recommended Citation

"Rankin v. Desarno" (1996). 1996 Decisions. Paper 134.

http://digitalcommons.law.villanova.edu/thirdcircuit_1996/134
 IN THE UNITED STATES COURT OF APPEALS

 FOR THE THIRD CIRCUIT 

 ___________ 

 NO. 95-3007 

 ___________ 

 LAURA RANKIN; DAVID RANKIN; 

 STACY JOHNSON; ALICE BONACCI, 

 Appellants, 

 v. 

 SAMUEL M. DESARNO; ALICE DESARNO; 

 COUNTY OF ALLEGHENY; PENN 

 HILLS SCHOOL DISTRICT 

 GARY J. GAERTNER, 

 Trustee 

 COUNTY OF ALLEGHENY and 

 PENN HILLS SCHOOL DISTRICT, 

 Appellants. 

 ___________ 

 NO. 95-3037 

 ___________ 

 LAURA RANKIN; DAVID RANKIN; 

 STACY JOHNSON; ALICE BONACCI 

 v. 

 SAMUEL M. DESARNO; ALICE DESARNO; 

 COUNTY OF ALLEGHENY; PENN HILLS SCHOOL DISTRICT 

 GARY J. GAERTNER, 

 Trustee 

 STACY JOHNSON, 

 Appellant. 

 ___________ 

 NO. 95-3011 

 ___________ 
 COUNTY OF ALLEGHENY; 

 PENN HILLS SCHOOL DISTRICT, 

 Appellants, 

 v. 

 SAMUEL M. DESARNO; ALICE DESARNO 

 GARY J. GAERTNER, ESQUIRE, 

 Trustee. 

 ___________ 

 On appeal from the United States District Court 

 for the Western District of Pennsylvania 

 (Civil Action Nos. 94-982 and 94-1174) 

 __________ 

 Argued: November 20, 1995 

 BEFORE: BECKER, SAROKIN 

and WELLFORD, Circuit Judges 

 ___________ 

 (Opinion filed July 30, 1996) 

Michael G. McCabe, Esq. (ARGUED) 

David W. Ross, Esq. 

Goehring, Rutter & Boehm 

1424 Frick Building 

Pittsburgh, PA 15219 

 Attorneys for the County of Allegheny 

 and the Penn Hills School District, 

 Appellants in Nos. 95-3007 and 95-3011 

 

Catherine T. Martin, Esq. (ARGUED) 

Daniel L. Haller, Esq. 

Maria Pekich, Esq. 

Neighborhood Legal Services Association 

Firm No. 213 

928 Penn Avenue 

Pittsburgh, PA 15222 

 Attorneys for Stacy Johnson, 

 Appellant in No. 95-3037 

Daniel J. Gates, Esq. 

Edgardo D. Santillan, Esq. 

Law Offices of Daniel J. Gates, P.C. 

828 Frick Building 
Pittsburgh, PA 15219 

 Attorneys for the Debtors 

 Samuel M. DeSarno and Alice DeSarno 

 

 __________ 

 OPINION OF THE COURT 

 __________ 

WELLFORD, Circuit Judge: 

 I. OVERVIEW 

 The primary dispute in this appeal concerns the rate of 

postpetition interest to which 

plaintiffs, the Penn Hills School District and Allegheny County, 

Pennsylvania, are entitled in 

connection with their oversecured prepetition tax claims against the 

defendants, numerous Chapter 

Thirteen bankruptcy debtors. Plaintiffs contend that interest should 

accrue at the applicable rates 

set forth in the Pennsylvania Municipal Code, and thus, that the 

bankruptcy and district courts 

erred in approving defendants' bankruptcy plans, which proposed to pay 

postpetition interest at 

a substantially lesser rate. Having carefully considered this issue and 

the others presented in this 

appeal, we AFFIRM in part and REVERSE in part. 

 II. STATEMENT OF THE CASE 

 Samuel and Alice DeSarno, Laura and David Rankin, Stacy Johnson, 

and Alice 

Bonacci defaulted on real estate taxes owed to Allegheny County and the 

Penn Hills School 

District. Because the salient facts are identical as to each defendant, 

we limit our background 

discussion to the DeSarnos. After the Desarnos defaulted on their tax 

obligations, plaintiffs filed 

secured claims against their principal residence in the approximate amount 

of $4,500. Under 

Pennsylvania law, these claims constitute first liens on the property and 

plaintiffs are entitled to 

receive interest on the underlying debts at certain statutorily prescribed 

rates. The DeSarnos' 

residence is worth many times the amount of the principal debt plus 

interest; thus, plaintiffs' 

claims are substantially oversecured. 

 In June 1993, to avoid a foreclosure on their house, the DeSarnos 

filed a voluntary 

petition for bankruptcy under Chapter Thirteen of the United States 

Bankruptcy Code. The 

DeSarnos subsequently filed a plan proposing to pay in full plaintiffs' 

prepetition claims (100 
percent of the principal debt plus interest at the statutory rates), but 

proposing to pay postpetitioninterest at a rate much lower than those 

prescribed by the relevant Pennsylvania statutes. 

 In November 1993, the bankruptcy court confirmed the DeSarnos' 

plan subject to 

a determination of the appropriate postpetition interest rate. The 

bankruptcy court directed the 

parties to file briefs supporting their respective positions, but did not 

schedule oral argument or 

conduct an evidentiary hearing on the matter. Allegheny County and Penn 

Hills argued at the 

confirmation hearing that they were entitled to interest at twelve and ten 

percent per annum, 

respectively, pursuant to Pennsylvania statutes. The DeSarnos, on the 

other hand, argued that 

plaintiffs' postpetition claims were modifiable under 11 U.S.C. 

1322(b)(2) and that postpetition 

interest should be set to accrue at a "reasonable" rate, as opposed to the 

statutory rates. 

 In May 1994, the bankruptcy court confirmed the DeSarnos' plan in 

its entirety, 

holding that plaintiffs' claims were modifiable and that the proposed rate 

of postpetition interest 

met and exceeded the rate that the court determined to be reasonable. 

Thereafter, plaintiffs sought 

review of the plan in the district court. Notwithstanding initial concern 

over the bankruptcy 

court's failure to hold an evidentiary hearing to aid in its determination 

of an appropriate interest 

rate, the district court affirmed the bankruptcy court's decision. This 

timely appeal ensued. 

Defendant Stacy Johnson subsequently filed a cross-appeal challenging the 

applicable rate of 

prepetition interest for Allegheny County. 

 III. ISSUES ON APPEAL 

 The following issues are before us in this appeal and crossappeal: (1) whether it 

was error to determine that Allegheny County is entitled under 

Pennsylvania statutory law to 

prepetition interest at a rate of twelve percent per annum; (2) whether 

the lower courts erred in 

holding that a tax claim secured by a statutory lien on a Chapter Thirteen 

debtor's principal 

residence is modifiable pursuant to 11 U.S.C.  1322(b)(2); and (3) if so, 

whether the reduced 

rate of postpetition interest approved by the lower courts provides 

plaintiffs with the "present 

value" of their claims pursuant to 11 U.S.C.  1325(a)(5)(B)(ii). 

 IV. STANDARD OF REVIEW 

 We review the bankruptcy court's findings of fact for clear 

error. Sharon Steel 
Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 38 (3d Cir. 1989). 

We exercise plenary 

review, however, in regard to the bankruptcy court's "choice, application 

and interpretation of 

legal precepts." Id. at 38-39. 

 V. DISCUSSION 

 A. Prepetition Interest 

 We first address whether the bankruptcy court correctly 

determined that Allegheny 

County is entitled to prepetition interest on its tax claims at a rate of 

twelve percent under 

Pennsylvania law. Although most of the defendants have conceded this 

point, defendant Johnson 

argues that the county is entitled to a maximum interest rate of only ten 

percent. We disagree. 

 Pursuant to 72 Pa. Cons. Stat. Ann.  5648, "second class" 

Pennsylvania 

counties are entitled to interest on all county tax delinquencies and may 

adopt a maximum interest 

rate of twelve percent per annum on these debts. It is undisputed that 

Allegheny County is the 

only "second class" county for purposes of  5648 and that its County 

Commissioners have chosen 

to charge tax debtors the maximum amount allowed under that statute. 

Nevertheless, Johnson 

argues that  5648 conflicts with and is governed by 53 Pa. Cons. Stat. 

Ann.  7143, which 

provides that interest claims made by municipalities for unpaid taxes 

cannot exceed ten percent 

per annum. 

 We agree that  7143 conflicts with  5648, but we do not find 

7143 to be 

controlling. Notwithstanding Johnson's assertions to the contrary,  5648 

is the more specific of 

the two statutes because it deals with tax delinquencies in second class 

counties. Further, the ten 

percent interest rate of  7143, established by an amendment dated October 

29, 1981, predatesthe twelve percent interest rate of  5648, which was 

established on May 5, 1982. See Pa. Laws 

319, No. 113,  1; Pa. Laws 372, No. 106,  1. Section 1933 of the 

Pennsylvania Statutory 

Construction Act of 1972 provides: 

 Whenever a general provision in a statute shall be in 

 conflict with a special provision in the same or 

 another statute, the two shall be construed, if 

 possible, so that effect may be given to both. If the 

 conflict between the two provisions is irreconcilable, 

 the special provisions shall prevail and shall be 

 construed as an exception to the general provision, 

 unless the general provision shall be enacted later 

 and it shall be the manifest intention of the General 

 Assembly that such general provisions shall prevail. 
1 Pa. Cons. Stat. Ann.  1933 (emphasis added). Based on  1993, the 

special provision 

allowing twelve percent interest to second class counties embodied in 

5648 prevails over the 

general provision of  7143 and must be construed as an exception to it. 

 To summarize,  5648 is inconsistent with  7143 because it 

specifically empowers 

the Allegheny County commissioners to establish an interest rate of up to 

twelve percent on 

delinquent taxes. Section 7143, on the other hand, provides for a maximum 

rate of only ten 

percent. Thus, the two statutes are in conflict because they authorize 

different rates. The 

commissioners, taking advantage of the full authorization of  5648, 

established the applicable rate 

at twelve percent. We believe that  5648--the later, more specific 

statute--controls here. 

Accordingly, we hold that Allegheny County is entitled to prepetition 

interest at a rate of twelve 

percent per annum under  5648 and thus AFFIRM the ruling of the lower 

courts on that issue. 

 B. Postpetition Interest 

 Turning to the next issue, we note that the parties agree that 

plaintiffs are entitled 

to some amount of postpetition interest on their claims, but they disagree 

as to the rate at which 

such interest should accrue. In this regard, plaintiffs first argue that 

the lower courts erred in 

holding that their claims to postpetition interest at the statutory rates 

are modifiable under 11 

U.S.C.  1322(b)(2). Alternatively, plaintiffs assert that the confirmed 

interest rates are 

insufficient to provide them with the present value of their allowed 

secured claims under 11 

U.S.C.  1325(a)(5)(B)(ii). We address each of these contentions in turn. 

 (1) 11 U.S.C.  1322(b)(2) 

 Section 1322(b)(2) of the Bankruptcy Code provides that Chapter 

Thirteen plans 

may "modify the rights of holders of secured claims, other than a claim 

secured only by a security 

interest in real property that is the debtor's principal residence." 11 

U.S.C.  1322(b)(2) 

(emphasis added). Defendants concede that plaintiffs' claims are secured 

by liens on their 

principal residences. Therefore, the key issue is whether those liens 

constitute "security interests" 

for purposes of the antimodification provision of  1322(b)(2). 

 The Bankruptcy Code defines "security interest" as "a lien 

created by an 

agreement." 11 U.S.C.  101(51) (emphasis added). In contrast, the Code 

provides that the term 
"statutory lien" means a "lien arising solely by force of a statute on 

specified circumstances or 

conditions . . . but does not include security interest or judicial lien." 

11 U.S.C.  101(53) 

(emphases added). Because plaintiffs' tax liens arose under state 

statute, and not from a 

consensual or voluntary agreement with the taxpayer defendants, we concur 

in the bankruptcy 

court's ruling that those liens are not "security interests" for purposes 

of  1322(b)(2). 

 The foregoing interpretation of  1322(b)(2) is supported by 

substantial authority 

from other jurisdictions. See, e.g., In re DeMaggio, 175 B.R. 144, 146-47 

(Bankr. D.N.H. 

1994) (holding that plain language and statutory history of  1322(b)(2) 

establish that 

nonconsensual tax liens do not fall within antimodification provision of 

that statute); In re Sabec, 

137 B.R. 659, 667-68 (Bankr. W.D. Mich. 1992) (finding antimodification 

provision of 

1322(b)(2) inapplicable because creditor's interest in the principal 

residence of the debtor was a 

"lien," rather than a "security interest," based on the fact that it arose 

nonconsensually under state 

tax act); In re Venable, 48 B.R. 853, 856 (Bankr. S.D.N.Y. 1985) (holding 

that city's tax lien 

on debtor's principal residence was modifiable despite  1322(b)(2) 

because not consensual, and 

thus, not a "security interest"); In re Mitchell, 39 B.R. 696, 700 (Bankr. 

D. Or. 1984) (finding 

IRS lien on debtor's principal residence modifiable because statutory, not 

created by agreement 

as required by  1322(b)(2)); In re Seel, 22 B.R. 692, 695-96 (Bankr. D. 

Kan. 1982) (holding 

modifiable a mechanic's lien on debtor's principle residence because it 

was a "statutory lien"). 

Nevertheless, plaintiffs urge us to hold that statutory tax liens on 

principal residences are not 

modifiable under  1322(b)(2) because Congress has historically made 

explicit reference to tax 

liens in provisions of the Bankruptcy Code intended to affect such liens. 

Plaintiffs further assert 

that the existence of public policy concerns analogous to those invoked by 

Congress in exempting 

liens for unpaid postpetition property taxes from the automatic stay 

indicates that Congress did 

not mean for tax liens to be modifiable under  1322(b)(2). In light of 

the plain language of 

1322(b)(2), however, we must decline plaintiffs' invitation to speculate 

as to the intent of 

Congress in this context. "Where the statutory language is clear, our 

"'sole function . . . is to 

enforce it according to its terms.'" Rake v. Wade, 508 U.S. 464, 471 

(1993) (quoting United 
States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)). 

 

 (2) 11 U.S.C.  1325(a)(5)(B)(ii) 

 Our conclusion that plaintiffs' claims are modifiable under 

1322(b)(2) does not 

dispose of this appeal. We must also determine whether the postpetition 

interest rate confirmed 

by the lower courts passes muster under 11 U.S.C.  1325(a)(5)(B)(ii). In 

a Chapter 13 

bankruptcy, the debtor is given the opportunity to retain property which 

would otherwise be 

subject to foreclosure by secured creditors. "In exchange for giving the 

debtor a right to continue 

possession of the property,  1325(a)(5)(B) directs two things: (i) the 

secured creditor shall retain 

a continuing lien on the property; and (ii) the secured creditor shall 

receive from the debtor 'the 

value, as of the effective date of the plan, of such property to be 

distributed under the plan on 

account of such claim [which shall be] not less than the allowed amount of 

such claim.'" GMAC 

v. Jones, 999 F.2d 63, 66 (3d Cir. 1993) (quoting 11 U.S.C. 

1325(a)(5)(B)(ii)). The latter 

provision requires that the payments to the secured creditor have a 

"present value" equal to the 

creditor's allowed secured claim. 5 Collier on Bankruptcy 

1325.06[4][b][iii][B] (15th ed. 

1982). Present value is a market rate concept, determined by the use of 

an interest rate which 

fairly compensates the creditor for not receiving the full amount of its 

secured claim upon 

confirmation of the debtor's plan. There is wide disagreement, however, 

as to what constitutes 

an appropriate rate of interest in this context. See In re Mitchell, 39 

B.R. at 700. Although this 

court has posited a framework for determining an appropriate interest rate 

under 

1325(a)(5)(B)(ii) in the context of commercial creditors, neither this 

court nor the Supreme Court 

has addressed that issue in the context of nonconsensual tax lien 

creditors such as plaintiffs. 

 

 In the case at bar, the bankruptcy court began its  1325(a) 

analysis with the 

statutory interest rates, but dismissed them as being in the nature of a 

penalty. According to the 

court, the statutory rates were raised by the Pennsylvania Legislature 

from six percent to their 

present levels in response to the extremely high commercial interest rates 

of the late 1970's and 

early 1980's. In the court's view, the state's purpose in raising the 

statutory rates was to "coerce 

and encourage prompt payment of taxes in competition with other higher 

commercial rates." 
 Having rejected the statutory rates, the bankruptcy court 

attempted to determine 

a more reasonable interest rate, ultimately concluding that the 

appropriate rate under 

1325(a)(5)(B)(ii) was "the reasonable cost of interest to the 

[plaintiffs], as of the effective date of 

the plan, over a 60 month period." Consulting published historical 

interest rates for municipal 

bonds, the court determined that, at a minimum, postpetition interest 

should accrue at 4.05 percent 

for Allegheny County and 4.30 percent for Penn Hills. Since defendants' 

plans proposed to pay 

postpetition interest at seven percent per annum, they were confirmed. 

 Plaintiffs contend that the bankruptcy court's rejection of the 

statutory rates was 

erroneous. In support of their position, plaintiffs rely principally upon 

our previously cited 

decision in Jones, wherein we addressed the issue of interest rates under 

 1325(a) in the context 

of a commercial creditor. In Jones, General Motors Acceptance Corporation 

("GMAC") filed 

secured claims against a number of Chapter 13 debtors who, prior to taking 

bankruptcy, had 

purchased GMC trucks and defaulted on their financing obligations. Jones, 

999 F.2d at 65. 

GMAC subsequently objected to the debtors' bankruptcy plans on grounds 

that the proposed 

interest rates were too low to provide it with the present value of its 

claims under 

1325(a)(5)(B)(ii). Id. at 66. 

 Reversing the bankruptcy and district courts, this court held 

that the interest rate 

should be determined with reference to the purpose behind 

1325(a)(5)(B)(ii): "to put the secured 

creditor in an economic position equivalent to the one it would have 

occupied had it received the 

allowed secured amount immediately, thus terminating the relationship 

between the creditor and 

the debtor." Id. at 66-67. The Jones court then rejected the bankruptcy 

court's "cost of funds" 

approach, which looks to the rate at which the creditor can borrow funds, 

as falling short of this 

statutory objective by failing to account for: (1) the cost to the 

creditor of sustaining its lending 

relationship with the debtor past the point contemplated in the original 

agreement; and (2) the 

expectation of commercial creditors to make a profit when extending 

credit. Id. at 67, 69. 

 

 Ultimately, the Jones court concluded that a "coerced loan" 

theory should provide 

the starting point for determining interest rates under 

1325(a)(5)(B)(ii). Id. at 67. Thus, the 
court held that the appropriate rate of interest is "that which the 

secured creditor would charge, 

at the effective date of the plan, for a loan similar in character, amount 

and duration to the credit 

which the creditor will be required to extend under the plan." Id. at 65 

(footnote added). 

According to the court, this approach, unlike the cost of funds method, 

closely approximates the 

creditor's immediate liquidation position because it recognizes that 

creditors incur costs associated 

with the coerced extension of credit and because it incorporates a 

consideration of profit into the 

determination of the  1325(a) interest rate. Id. at 67-69. The court 

further found the coerced 

loan approach appealing because it would reduce the litigation and 

transaction costs of Chapter 

13 cases due to the fact that "regularly maintained documents of the 

creditor should make it 

possible for the debtor and creditor to stipulate on the interest rate the 

creditor would charge for 

a new loan of similar character, amount and duration." Id. at 70. 

 Plaintiffs in the case at bar make two arguments based on Jones. 

First, they 

contend that the plain language of that decision requires that interest in 

the present case be set to 

accrue at the rates that they charge nonbankrupt, delinquent taxpayers 

(i.e., the statutory rates). 

Second, plaintiffs assert that the bankruptcy court erred in applying a 

cost of funds approach 

because that approach was specifically rejected in Jones. We agree with 

plaintiffs that the 

bankruptcy court's analysis was flawed. 

 In our view, the district court plainly erred by looking solely 

to plaintiffs' cost of 

funds in assessing the appropriateness of the proposed postpetition 

interest rates in this case. As 

the Ninth Circuit has noted, such an approach forces a governmental 

creditor to 

 incur an unconditional obligation to repay the money 

 it was required to borrow . . . in exchange [for] only 

 an inherently risky promise by the debtor to repay 

 the same amount over the applicable time period at 

 essentially the same rate paid by the government on 

 its obligation. 

In re Camino Real Landscape Maint. Contractors, Inc., 818 F.2d 1503, 1506 

(9th Cir. 1987) 

(citation omitted). Thus, the governmental creditor is "worse off as a 

result of the exchange." 

Id. Moreover, "there is no indication that Congress meant to subsidize 

debtors by making 

available to them the government's own favorable rate of interest." Id. 

Thus, we hold that for 
plaintiffs to be properly compensated, consistent with Jones, postpetition 

interest rates must be 

set in accordance with the municipalities' costs of maintaining their 

creditor relationship. 

 Since municipalities are not for-profit lending institutions and 

do not regularly 

extend loans that can be used to determine the appropriate rate of 

interest, the case at bar is not 

on all-fours with Jones. Nevertheless, we do not believe that Jones is 

totally inapplicable in this 

situation, despite GMAC's status as a for-profit entity, or that the "cost 

of funds" approach would 

be proper if applied to the debtor instead of the creditor. Therefore, 

the principles of Jones must 

be given effect, even if it is not factually identical. 

 We believe that the closest analog to the market loan in Jones is 

the statutory 

interest rate here. While the analogy is not perfect, it is sufficient: 

an entity forced to delay 

payment that it is entitled to receive is, in effect, extending a loan. 

And the rate that the 

municipality charges for those that coerce loans by not paying their 

property tax bills is twelve 

percent. In fact, as the difficulties in arriving at another rate have 

shown, the statutory rate is 

really the only practical and reasonable rate to apply. The statutory 

rate also serves the 

administrative efficiency goal of establishing a readily ascertainable 

"market" rate that will not 

require the time and expense of case-by-case litigation and potentially 

inconsistent results. 

 Political and financial market forces will generally operate to 

keep the statutory rate 

reasonable. The rate is set by elected officials accountable to citizens 

who, after all, must balance 

their desire to make their neighbors pay their property taxes with the 

consideration that they 

themselves may be in default some day. In addition, the financial market 

might provide the best 

check against oppressive rates. If a debtor can, in fact, do better than 

the statutory rate, he or she 

will rationally do what consumers normally do when rates (for instance, 

mortgage notes) become 

higher than the market. The debtor will "refinance" by obtaining the new 

loan at the lower 

available rate, using the funds to pay off the old loan. Indeed, the 

statutory rate at issue in this 

case--twelve percent--is not unreasonable. Credit card companies 

regularly charge their 

customers, who are not even high credit risks, interest at rates as high 

as eighteen percent. The 

debtors in this case, of course, are in bankruptcy and, although the 

municipality currently holds 

liens that are oversecured, property values can decline. 
 In support of our holding, we note that numerous courts have held 

that 

nonconsensual oversecured creditors are entitled to receive the rates of 

interest dictated by the 

statutes under which their liens arose, unless those rates constitute a 

penalty. See, e.g., Galveston 

Ind. Sch. Dist. v. Heartland Fed. Sav. & Loan Ass'n, 159 B.R. 198, 204 

(Bankr. S.D. Tex. 

1993); see also In re Parr Meadows Racing Ass'n, 880 F.2d 1540, 1549 (2d 

Cir. 1989), cert. 

denied sub nom., Suffolk County Treasurer v. Barr, 493 U.S. 1058 (1990). 

Although the 

bankruptcy court initially determined that the statutory rates at issue in 

this appeal are in the 

nature of a penalty, we find this decision to be in error. See Meilink v. 

Unemployment Reserves 

Commission, 314 U.S. 564 (1942). In Meilink, a unanimous Supreme Court 

held that a 

statutorily imposed interest rate of twelve percent on debts owed to a 

state's unemployment fund 

did not constitute a penalty within the meaning of the Bankruptcy Code. 

In that regard, the Court 

stated: 

 It is common knowledge that interest rates vary 

 not only according to the general use value of money 

 but also according to the hazard of particular classes 

 of loans. Delinquent taxpayers as a class are a poor 

 credit risk; tax default, unless an incident of 

 legitimate tax litigation, is, to the eye sensitive to 

 credit indications, a signal of distress. A rate of 

 interest on tax delinquencies which is low in 

 comparison to the taxpayer's borrowing rate--if he 

 can borrow at all--is a temptation to use the state as 

 a convenient, if involuntary, banker by the simple 

 practice of deferring the payment of taxes. 

 Another variable is the amount necessary to 

 compensate for the trouble of handling the item. 

 The legislature may include compensation to the 

 state for the increased costs of administration in the 

 exaction for delay in paying taxes without thereby 

 changing it from interest to penalty.

Id. at 567. 

 We believe that Judge Sarokin's arguments for using the prime 

rate prove too 

much. If the prime rate represents the appropriate rate in the commercial 

marketplace, why did 

not the Jones court use the prime rate in that case, which, after all, 

involved a commercial lender? 

 Moreover, that the Pennsylvania legislature has not seen fit to 

change the statutory 

rate on delinquent tax loans for some years, in our view, does not render 

the twelve percent rate 
penal or unreasonable. If the statutory rate, as suggested by the 

dissent, "far exceed[s] what the 

Plaintiffs could obtain under current market conditions," then the debtors 

(or the bankruptcy 

trustee) can proceed to obtain the more favorable rate in the market. 

 VI. CONCLUSION 

 Based on the foregoing, we AFFIRM the district court's award of 

prepetition 

interest to Penn Hills and Allegheny County at the statutory rates of ten 

and twelve percent per 

annum, respectively. We REVERSE, however, the decisions of the bankruptcy 

court and district 

court on the issue of postpetition interest rates and hold that Penn Hills 

and Allegheny County are 

also entitled to postpetition interest at the respective statutory rates. 

Rankin v. DeSarno, Nos. 95-3007/3011/3037 

_________________________________________________________________ 

SAROKIN, Circuit Judge, concurring in part and dissenting in part: 

 I join Parts I, II, III, IV, V.A, and V.B.(1) of the Majority's 

opinion. However, 

because I do not believe that the statutory rate should apply to 

postpetition interest, I dissent from 

the Majority's analysis and conclusion in Part V.B.(2). 

 I agree with the Majority that the "cost of funds" approach 

adopted by the 

bankruptcy court is flawed because it under-compensates the municipality 

and it offers the debtors 

a windfall by enabling them, in effect, to borrow funds from the 

municipality at rates that are 

generally available only to state entities. 

 But because I do not agree with the Majority's reliance on 

General Motors 

Acceptance Corp. v. Jones, 999 F.2d 63, 67 (3d Cir. 1993), I would reject 

as well the Plaintiffs' 

suggestion that we apply the statutory rate to post-petition interest 

payments. 

 The situation here differs from that in Jones in one important 

way: in Jones, the 

creditor was a commercial lender, in the business of lending money to earn 

a profit. Unlike the 

Majority, see Majority Op., typescript at 12, I believe that this 

difference is significant. 

 I. The statutory rate 

 In a market that is subject to the rigors and constraints of 

competition, the interest 

rate charged by a commercial lender (Lender A) should reflect the 

approximate cost of capital 

plus transaction costs, and a small profit component. If interest is set 

at a rate that substantially 

exceeds Lender A's costs in order to yield greater profits, competitors 

should be able to lure 

borrowers away from Lender A by setting their rates below that charged by 

Lender A while still 
earning a profit. Ultimately, the more competitive the market, the more 

closely the rate will 

reflect the costs incurred by the lender. Therefore, setting postpetition interest at a rate equal to 

the rate charged by a creditor-lender in the commercial market should come 

closest to 

compensating that creditor both for the non-availability of its capital 

and for the costs of 

maintaining the relationship, and should therefore "put the secured 

creditor in an economic 

position equivalent to the one it would have occupied had it received the 

allowed secured amount 

immediately, thus terminating the relationship between the creditor and 

the donor." Jones, 999 

F.2d at 66-67. 

 Here, the creditors are governmental entities. The interest 

rates that they can 

charge "debtors" -- i.e., those who have defaulted on their tax payments -

- are not constrained by 

competitive considerations, but imposed by statute. These rates were set 

at their current level in 

the early 1980s, and have not been modified since. "Courts are generally 

in agreement that an 

interest rate to compute present value must be responsive to current 

economic conditions" and 

"that an unchanging fixed rate established at some prior time is not 

appropriate in a present value 

analysis." In re DeMaggio, 175 B.R. 144, 150-51 (Bankr. N.H. 1994). It 

is easy to understand 

why: market rates have dropped significantly since the early 1980s. The 

statutory rates have not 

followed the commercial market's downward path and as a result "ha[ve] no 

relation to current 

economic conditions." Id. at 151. In fact, they far exceed what the 

Plaintiffs could obtain under 

current market conditions. Because they are so high, the statutory rates 

now "include a punitive 

element that is contrary to the purposes of the Bankruptcy Code" and 

"inimical to financial 

rehabilitation of the debtor." In re Camino Real Landscape Maintenance 

Contractors, Inc., 818 

F.2d 1503, 1507 n.2 (9th Cir. 1987). See also In re DeMaggio, 175 B.R. at 

151 (noting that 

"[i]nterest rates on delinquent taxes frequently incorporate a punitive 

aspect to discourage 

nonpayment."). 

 Because statutory rates are not subject to the discipline of the 

market, and because 

considerations of deterrence may in fact warrant a rate of interest for 

tax evasion that far exceeds 

costs, there is no reason to expect that the statutory rates are 

calculated to compensate the 

Plaintiffs for the present value of their claims, and to serve the 

objective of section 
1325(a)(5)(B)(ii), which is "to put the creditor in the same position it 

would have been in if it had 

been allowed to end the lending relationship at the point of the 

bankruptcy filing by repossessing 

the collateral." Jones, 999 F.2d at 69. Therefore, I reject the 

approach recommended by 

the Plaintiffs and espoused by the Majority, and would not set the 

postpetition interest rate at the 

statutory rate. 

 II. The prime rate 

 I would hold, instead, that the appropriate rate to compute the 

present value of a 

claim by an oversecured government creditor pursuant to section 

1325(a)(5)(B)(ii) is the rate 

charged by commercial banks to prime commercial loan customers -- that is, 

the prime rate -- for 

a loan of equivalent amount and duration. This method has been adopted by 

other courts, see, 

e.g., In re Jordan, 130 B.R. 185, 191 (D.N.J. 1991); In re Hudock, 124 

B.R. 532, 534 (N.D. 

Ill. 1991), and it addresses most of the concerns raised by alternative 

methods. 

 First, because it imposes a rate higher than the municipal bond 

rate, it offers the 

Plaintiffs a measure of compensation for the various costs, beyond the 

costs of capital, incurred 

in the delayed collection of tax payments. 

 Second, because it is based on a market rate, it is sensitive to 

changes in the costs 

of borrowing in the larger economy, and derivatively to the costs of 

borrowing for municipal 

governments as well. "Market rates are the best indicators of the present 

value of deferred 

payments because they are products of supply and demand, reflecting the 

interactions of economic 

variables that affect the cost of lending money." In re Ivey, 131 B.R. 

43, 49 (Bankr. N.C. 1991). 

 Third, because it is divorced from the statutory rate, it does 

not include a punitive 

element that is inimical to the purposes of bankruptcy reorganization. 

 Fourth, it is a readily available figure, and therefore 

relatively easy to compute. 

 Fifth, it does not create any incentives for debtors to delay 

payment of their real 

property taxes, since they would incur little benefit from such a delay. 

 I note that the Plaintiffs had urged that we consider a variation 

of this approach if 

we rejected the statutory rate. Specifically, they had urged that we 

adopt the prevailing 

commercial market rate, but taking into account factors such as the term 

of the payout period, the 

value of security and the risk of default, the statutory rate of interest, 

and the characteristics of 
the debtor in each case. Clm. Brf. at 34. Several circuits have adopted 

this measure of present 

value for debt owed to government, albeit in the context of a Chapter 11 

bankruptcy. See, e.g., 

In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d at 

1504 (holding that "the 

debtor must pay the government interest at the rate the debtor would pay a 

commercial lender for 

a loan of equivalent amount and duration, considering the risk of default 

and any security); United 

States v. Neal Pharmacal Co., 789 F.2d 1283, 1289 (8th Cir. 1986); In re 

Southern States Motor 

Inns, Inc., 709 F.2d 647, 652-53 (11th Cir. 1983) (same). Under this more 

refined approach, 

"the bankruptcy court must make a case-by-case determination of what 

interest the reorganizing 

debtor would have to pay a creditor in order to obtain a loan on 

equivalent terms in the open 

market." In re Camino Real Landscape Maintenance Contractors, Inc., 818 

F.2d at 1508. 

 The approach urged upon us by the Plaintiffs is unnecessarily 

unwieldy, and 

therefore I would reject it. All three cases cited by the Plaintiffs 

dealt with the proper method for 

determining the rate of interest to be applied in calculating deferred 

payments of delinquent federal 

taxes pursuant to 11 U.S.C.  1129(a)(9)(C). However, section 

1129(a)(9)(C) applies only to 

unsecured claims. Therefore, the risk of default on such debt is 

substantial. The risk present in 

the instant case is much less significant. As the DeSarnos note, the 

County and School District 

"are at very low risk of not receiving payment while enjoying a 

correspondingly high quality of 

security in the event of default under the Plan. The taxing bodies both 

enjoy priority status as 

creditors of the Debtors and are first in line to receive the amounts owed 

due to their position of 

possessing a statutory lien upon the Debtors' residence." DeSarno Brief 

at 24. Therefore, it is 

not necessary to refine our approach to account for the particular 

characteristics of each debtor. 

 I recognize that the prime rate approach, which reflects 

transactions between 

commercial lenders and borrowers, is not a perfect fit for government 

creditors. As noted supra, 

the costs of borrowing for a municipal government and for a commercial 

lender are not identical, 

both with regard to their "replacement costs" -- i.e., the rate at which 

they can borrow funds -- 

and "transaction costs." In addition, the market rate reflects the profit 

margin that motivates 

commercial lenders in the first place, but that is not a consideration for 

municipalities. 
 While the commercial market rate of interest for a low-risk, 

secured loan is not a 

perfectly accurate measure, exactitude is not the only consideration -- 

judicial economy and 

efficiency are also important factors, especially in matters involving 

high volume and relatively 

low amounts. Numerous courts, including this one, have recognized "the 

importance of 

minimizing the expense of getting a chapter 13 plan formulated and 

approved," Jones, 999 F.2d 

at 70, and therefore devising a formula that is relatively easy to 

compute. I believe that the 

approach I suggest here strikes the best balance between these two 

priorities and satisfactorily 

addresses our various other concerns as well.