1

United States Court of Appeals,

Fifth Circuit.

No. 96-41089.

In the Matter of Ruben R. SMITHWICK, Jr.; In the Matter of

Debbie Smithwick, Debtors.

GREEN TREE FINANCIAL SERVICING CORPORATION, Appellant,

v.

Ruben R. SMITHWICK, Jr.; Debbie Smithwick, Appellees.

Sept. 8, 1997.

Appeal from the United States District Court for the Southern

District of Texas.

Before JONES, EMILIO M. GARZA and PARKER, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Green Tree Financial Servicing Corporation appeals the

district court's affirmance of the bankruptcy court's decision that

its Local Rule 3020(d) provides the appropriate post-confirmation

interest rate on Green Tree's oversecured claim. We reverse and

remand.

The Debtors, Ruben Smithwick, Jr. and Debbie Smithwick,

entered into a Retail Installment Contract with Green Tree in May

1994 for the purchase of a mobile home. The Contract provided for

an interest rate of 12.75 percent. The Smithwicks filed for

bankruptcy protection on February 15, 1995 and submitted a proposed

Chapter 13 plan, listing Green Tree's debt in the amount of

$10,000.00. Green Tree filed its secured proof of claim in the

amount of $12,774.24. Green Tree also filed objections to the

Smithwicks' plan on the grounds that it did not provide for the
 

1Local Rule 3020(d) of the United States Bankruptcy Court for

the Southern District of Texas states:

The interest or discount rate on deferred payments made

through a confirmed Chapter 13 plan must equal two

percent (2%) plus the prime rate set in the Money Rates

Section of the Wall Street Journal on the date the

petition initiating the Chapter 13 case was filed. 

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full payment of its claim including payment at the rate of interest

specified in the Contract. Thereafter, the Smithwicks proposed an

amended plan to provide for payment of Green Tree's claim in the

amount of $12,774.24 at an interest rate of 11.00 percent.

Green Tree continued to object to the amended plan, arguing

that the appropriate post-confirmation interest rate was the 12.75

percent as specified in the Contract. The bankruptcy court decided

that the appropriate post-confirmation interest rate was 11.00

percent as provided for under the bankruptcy court's Local Rule

3020(d).1 Green Tree appealed and the district court affirmed.

 Section 1325(a)(5)(B)(ii) specifies that:

(a) [T]he court shall confirm a plan if—

 * * * * * *

(5) with respect to each allowed secured claim provided

for by the plan—

(B)(ii) the value, as of the effective date of the

plan, of property to be distributed under the plan

on account of such claim is not less than the

allowed amount of such claim.

This provision requires that the debtor provide the secured

creditor "with payments, over the life of the plan, that will total

the present value of the allowed secured claim... ." Associates

Commercial Corp. v. Rash, --- U.S. ----, ---- - ----, 117 S.Ct.
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1879, 1882-83, 138 L.Ed.2d 148 (1997). We must decide whether the

bankruptcy court erred in its selection of the appropriate

post-confirmation interest rate to use in calculating whether Green

Tree would receive payments "as of the effective date of the plan"

of a value "not less than the allowed amount of such claim."

Although this court has not addressed this question in a

Chapter 13 case, it has opined on the choice of cramdown interest

rate in the analogous provision in Chapter 11. Applying the

requirements of § 1129(b)(2)(A)(i)(II), the bankruptcy court is to

make a factual determination of the interest rate appropriate under

all the circumstances and to evaluate whether the payments under

the plan will provide the creditor with the present value of his

allowed secured claim. See In re Briscoe Enter., Ltd., II, 994

F.2d 1160, 1169 (5th Cir.1993); In re T-H New Orleans Ltd.

Partnership, 116 F.3d 790, 800 (5th Cir.1997). This court has

declined to "establish a particular formula" for the cramdown

interest rate in Chapter 11 cases. T-H New Orleans, 116 F.3d at

800. However, we have noted that "[o]ften the contract rate will

be an appropriate rate ..." and that "[n]umerous courts have chosen

the contract rate if it seemed to be a good estimate as to the

appropriate discount rate." Briscoe Enter., 994 F.2d at 1169

(citing In re Monnier Bros., 755 F.2d 1336, 1339 (8th Cir.1985) and

In re Guilford Telecasters, Inc., 128 B.R. 622

(Bkrtcy.M.D.N.C.1991)). See also T-H New Orleans, 116 F.3d at 801

(affirming lower court's adoption of contract rate as appropriate

cramdown interest rate).
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Guidance is also available from other circuits' approach to

Chapter 13. In General Motors Acceptance Corp. v. Jones, 999 F.2d

63, 65 (3d Cir.1993), the Third Circuit decided that the Chapter 13

cramdown interest rate "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." In reaching this

conclusion, the court rejected an approach that would merely

compensate the creditor for his estimated "cost of funds" to be

extended in the loan. Id. at 67. The "cost of funds" analysis

fails to take into account that the Chapter 13 plan "effectively

coerces a new extension of credit in which the creditor is required

to assume not only the cost of capital over the deferral period but

also the cost of sustaining the lending relationship over that

period." Id. Thus, the court adopted a "coerced loan" model, which

theorizes that "[i]n effect the law requires the creditor to make

a new loan in the amount of the value of the collateral rather than

repossess it, and the creditor is entitled to interest on his

loan." Id. (quoting Memphis Bank & Trust Co. v. Whitman, 692 F.2d

427, 429 (6th Cir.1982)). Since the creditor is forced not only to

cover the cost of providing the funds to be extended to the debtor,

but also of extending the loan, the court decided that if the

creditor received the rate it charged "in the regular course of its

business in the region for loans of similar character, amount and

duration, that creditor will be placed in approximately the same

position it would have occupied had it been able simply to
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repossess the collateral at the time of the bankruptcy." Id. at

68.

 The Third Circuit also urged minimization of administrative

and litigation costs in Chapter 13 cases, which are "high in volume

and low in absolute value." General Motors Acceptance Corp., 999

F.2d at 70. Thus, to "reduce litigation expense," the court

adopted an additional rule:

In the absence of a stipulation regarding the creditor's

current rate for a loan of similar character, amount and

duration, we believe it would be appropriate for bankruptcy

courts to accept a plan utilizing the contract rate if the

creditor fails to come forward with persuasive evidence that

its current rate is in excess of the contract rate.

Conversely, utilizing the same rebuttable presumption

approach, if a debtor proposes a plan with a rate less than

the contract rate, it would be appropriate, in the absence of

stipulation, for a bankruptcy court to require the debtor to

come forward with some evidence that the creditor's current

rate is less than the contract rate.

Id. at 70-71.

We are persuaded by the Third Circuit approach. Accord

United Carolina Bank v. Hall, 993 F.2d 1126, 1130-31 (4th

Cir.1993)(match "rate of return to the secured creditor with that

which the creditor would otherwise be able to obtain in its lending

market"); In re Hardzog, 901 F.2d 858, 860 (10th Cir.1990)

(Chapter 12 case; look to market of similar loans in the area);

Memphis Bank and Trust Co., v. Whitman, 692 F.2d 427, 431 (6th

Cir.1982) (same). It is consistent with the approach we have taken

in Chapter 11 cases in attempting to find the rate which best

calculates the present value of the payments offered under the

plan. Essentially, "the creditor is entitled to the rate of

interest it could have obtained had it foreclosed and reinvested
 

2Judge Easterbrook explained why the reference to "profits"

can be misleading:

[I]n competition, a financial intermediary does not make

a "profit." True, there may be accounting profits, but

there are no economic profits in vigorous competition,

one of Adam Smith's principal points in The Wealth of

Nations (1776).... Normal returns to entrepreneurial and

managerial skill may keep the wolf from the door, but

they are not economic "profit." What appears on the

books as accounting profit is just the opportunity cost

of keeping the firm's assets in this business rather than

the next-best alternative. Financial intermediation is

today highly competitive.... To say that the lender is

limited to its "cost of capital" ... is therefore to say

that the lender is entitled to the market rate of

interest, for that is what its cost of capital is: the

price it must pay to its own lenders, plus the costs of

making and administering loans, plus reserves for bad

debts (that is, the anticipated rate of non-repayment.)

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the proceeds in loans of equivalent duration and risk." Koopmans

v. Farm Credit Services of Mid-America, 102 F.3d 874, 875 (7th

Cir.1996) (interpreting § 1225(a)(5)(B)(ii)).

Critics of the "coerced loan" approach fault it for awarding

the lender "profit" as an element of the market rate. See, e.g.,

In re Valenti, 105 F.3d 55, 63-64 (2d Cir.1997); Collier on

Bankruptcy ¶ 1325.06[3][b][iii][B] (15th ed. rev.). However, we

agree with the Third Circuit that to exclude profit would violate

the statutory requirement that the creditor be placed "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." General Motors Acceptance Corp., 999

F.2d at 69. As Judge Easterbrook reasoned, "[a] supplier of

capital, no less than a supplier of seeds or combines, is entitled

to the market price." Koopmans, 102 F.3d at 876.2
102 F.3d at 876. 

 

3See, e.g., T-H New Orleans, 116 F.3d at 800-01 (describing

competing expert testimony and methodologies presented at Chapter

11 confirmation hearing). 

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 In the Chapter 11 cases this court has acknowledged that it

is necessary, through whatever valuation methodology proposed by

the parties, to consider the risk associated with a particular

loan. See, e.g., T-H New Orleans, 116 F.3d at 801. Chapter 13

cases, because of the greater need to reduce litigation expenses

associated with an individualized discount rate determination, call

for particular guidance in the selection of the appropriate

post-confirmation interest rate. The type of expert testimony on

valuation that is presented in complex Chapter 11 cases3 is not

practical for the typical Chapter 13 case. Finding the correct

rate is still a factual determination which will be reviewed for

clear error, but the contract rate, together with the rebuttable

presumption approach we add here, provides the best formula for a

correct choice. As articulated by the Third Circuit in General

Motors Acceptance Corp., this approach balances the competing

considerations of maximizing judicial economy and ensuring an

accurate reflection of the costs and risks associated with the

secured lender's "forced" extension of credit in the Chapter 13

plan.

In this case the court erred in not making a factual

determination, based on the presumption described here, as to the

appropriate discount rate for the forced extension of credit by

Green Tree. While we appreciate the bankruptcy court's effort to
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promote judicial economy by resorting to the Southern District's

local rule, that approach fails to ensure that the risk factors

associated with compulsory lending to Chapter 13 debtors are

properly considered. Accordingly, we REVERSE and REMAND for

further proceedings consistent with this opinion.

REVERSED AND REMANDED.