David G. Epstein, Don’t Go and Do Something Rash About Cram Down Interest Rates, 49 Ala.

L. Rev. 435, 443 (1998) (suggesting that the cram down interest rate should be based upon what
the secured creditor would have earned had it been paid a cash amount equal to the value of its
secured claim and reinvested that cash in a loan comparable to the terms and risks presented by
the debtor’s plan).

In this case, Judge Wedoff determined that the prime rate of interest is appropriate for the
cramdown of automobile loans and confirmed the plan over the objection of Onyx. The prime
rate is the benchmark rate banks use for their most creditworthy customers, but it still includes
some compensation for the risk of non-repayment. Koopmans, 102 F.3d at 875, Inre: Scott,

248 B.R. at 793. In Scott, Judge Wedoff thoroughly analyzed the competing methods for

determining the interest rate in a cramdown situation, which included: (1) cost of funds (what a
secured creditor would have to pay to borrow money); (2) new forced loan to the debtor (the
interest rate a secured creditor would obtain if it made a new loan to the debtor); and (3) the “tisk
plus” formula (adding a “risk factor” interest premium to some standard measure of “risk free”
lending such as a U.S. treasury bill). 248 B.R. at 790-92. Judge Wedoff then examined the
Koopmans decision, which requires that the cramdown interest rate to be set so as to give the
secured creditor “the indubitable equivalent of its nonbankruptcy entitlement.” Id. at 792. Judge
Wedoff explained that Koopmans is not entirely analogous to the situation at issue in Scott
because in Koopmans, unlike Scott, the secured creditor’s collateral was worth substantially
more than the amount of its outstanding indebtedness and thus was not subject to strip down
under § 506(a). Thus, according to Judge Wedoff, the court must account for the fact that in the

case of an undersecured creditor some compensation for the risk of non-repayment is already

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11 U.S.C. § 1325 permits a Chapter 13 debtor to “cram down” a proposed Chapter 13
plan over the objection of a creditor holding a secured claim only if “the value, as of the effective
date of the plan, of the property to be distributed under the plan on account of such claim is not
less than the allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii). Value of an allowed
secured claim is determined by bifurcation under § 506(a) of the Code. Section 506(a) limits a

Po &,

creditor’s “allowed secured claim” to the value of the collateral supporting the claim, and
provides the creditor with an unsecured claim to the extent of any deficiency in collateral value.
In Associates Commercial Corp. v. Rash, the Supreme Court held that the secured portion of the
claim should reflect the “replacement value” of the collateral. 520 U.S. 953, 117 S.Ct. 1879

(1997). Thus, collateral must be valued at “the cost the debtor would incur to obtain a like asset

for the same “proposed ... use.” Rash, 520 U.S. at 965, 177 S.Ct. at 1886..

At issue in the case is the cramdown interest rate required to provide the present value of
the allowed secured claim. In Rash, the Supreme Court alluded to the interrelationship between
value, interest rate and risk but did not provide any guidance as to how the interrelationship of
these factors should be resolved. 520 U.S. at 962-63, 117 S.Ct. at 1885. In Koopmans v. Farm

Credit Services of Mid-America, ACA, a pre-Rash decision, the Seventh Circuit held that: (1) in

a “cramdown” situation where a debtor’s plan of reorganization is approved over the objection of
a secured creditor, the secured creditor is entitled to the “indubitable equivalence” of its property
interest; and (2) in order to provide this “indubitable equivalence” the creditor must receive a
market rate of interest which it could have obtained, at the time of hypothetical foreclosure, if it
had foreclosed its property interest and reinvested the proceeds in loans of duration and risk

equivalent to that of a loan made to the debtor. 102 F.3d 874, 874-75 (7" Cir. 1996). See also

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compensated for due to the Rash decision’s requirement that value of a secured claim be
measured by the replacement value of the collateral. Id. at 792. After consideration of these and
other factors, Judge Wedoff determined that the prime rate of interest is presumptively
appropriate for the cramdown of automobile loans. Id. at 793 (explaining that applying a rate of
interest that fully reflects risk of nonpayment to a secured claim amount that already includes
substantial risk protection results in a windfall for the secured creditor to the detriment of
unsecured creditors).

This Court finds that the use of the prime rate for the cramdown of automobile loans is
presumptively appropriate. In the run of cases, the use of the prime rate will provide the secured
creditor the “indubitable equivalence.” However, the bankruptcy court must give the secured
creditor or the debtor, whichever the case may be, the opportunity to rebut the presumption. In
Scott, the stipulated evidence demonstrated that the debtor’s plan would pay the secured creditor
more than what Koopmans would require. Unlike in Scott, however, there was no stipulation in
this case regarding the amounts that Onyx would receive and earn in a liquidation. Onyx is
entitled to present evidence to overcome the presumption that the prime rate is appropriate in this

case,

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Minute*Deger Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Jud i itt
oe Magistrate Judge David H. Coar “Than hstgned Judge
CASE NUMBER 02 C 0733 DATE 4/29/2002
CASE Onyx Acceptance Corp. vs. Lee G. Hartzol and Alfreda G. Hartzol
TITLE

MOTION:

{in the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

of the motion being presented.]

Chapter 13 pian.

Onyx Acceptance Corp.’s Appeal from the Bankruptcy Court’s Confirmation of Alfreda and Lee Hartzol’s

Copy to judge/magistrate judge.

date mailed notice

courtroom
kb (le) deputy’s
initials

Date/time received in
central Clerk's Office rmoling depaty ints

DOCKET ENTRY:
(1) a Filed motion of [ use listing in “Motion” box above.]
(2) Qa Brief in support of motion due
(3) Oo Answer brief to motion due . Reply to answer brief due
(4) 0 Ruling/Hearing on set for at
(5) oO Status hearing[held/continued to] [set for/re-set for] on set for at
(6) oO Pretrial conference[held/continued to] (set for/re-set for] on set for at
(7) im Trial[set for/re-set for] on at
(8) oO [Bench/Jury trial] [Hearing] held/continued to at
(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) O General Rule21 OO) FRCP41(a)(1) OO FRCP41(a)(2).
qo ff [Other docket entry] For the reasons set forth in the attached Memorandum Opinion and Order, the
decision of the Bankruptcy Court is reversed and the case remanded to permit Onyx Acceptance Corp.
to present evidence to overcome the presumptive use of the pritne rate for the cramdown of its automobile
loan.
(11) @ [For further detail see order attached to the original mimute order.]
No notices required, advised in open court. Document
Number
No notices required. ursber of cotices
Notices mailed by judge’s staff. MAY 9 6 ame
Notified counsel by telephone. date dockeed
X_ | Docketing to mail notices.
Mail AO 450 form. fs frivals



Conclusion

For the foregoing reasons, the decision of the Bankruptcy Court is reversed and the case
remanded to permit Onyx to present evidence to overcome the presumptive use of the prime rate for
the cramdown of its automobile loan.

Enter:

audit lle
David H. Ll
United States District Judge

Dated: April 29, 2002

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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DOCKETED

ONYX ACCEPTANCE CORP., ) i fink
) AY =~ & opp.
Appellant, ) 6 2002
) No. 02 C0733
v. )
) HONORABLE DAVID H. COAR
LEE G. HARTZOL and ALFREDA G. )

HARTZOL,

)
Appellees. )

MEMORANDUM OPINION AND ORDER

Before this court is Onyx Acceptance Corp.’s (“Onyx”) appeal from the Bankruptcy
Court’s confirmation of Alfreda and Lee Hartzol’s Chapter 13 plan. At issue in this case is the
appropriate rate of interest to be paid on secured claims in a Chapter 13 proceeding under the
so-called "cram down" provision’ of 11 U.S.C. § 1325(a)(5)(B)(ii). Onyx appeals confirmation of
the debtor's plan, asserting that the interest rate of 6.75% to be paid on its secured claims under
the debtor's plan is insufficient to meet the "present value" requirement of § 1325(a)(5)(B)(ii).
Onyx maintains that, in order to pay the value of the Onyx's claim over time, the plan must pay
interest at the original contract rate. For the reasons set forth below, this Court reverses and
remands this case for an evidentiary hearing on the interest rate to be applied.
Factual and Procedural Background

On August 16, 2001, Debtors, Lee G. Hartzol and Alfreda G. Hartzol (“Hartzol”), filed a
Voluntary Petition for Relief under Chapter 13 of the United States Bankruptcy Code. At the

same time, Hartzol filed a Chapter 13 Plan which proposed to pay Appellant Onyx a secured

-J-

( i


claim at a rate of 6.75% over an initial term of 43 months. Onyx is a financier of “sub-prime”
retail installment contracts secured by motor vehicle collateral. On October 26, 2001, Onyx filed
an objection to Hartzol’s plan on the grounds that the valuation included in the plan and the
interest rate proposed were inadequate to provide Onyx with the indubitable equivalence of its
property interest in the collateral, a 1996 Chevrolet Blazer.

On October 29, 2001, Hartzol filed an Amended Chapter 13 Plan which increased the
valuation of Onyx’s collateral to $8,700.00 (the retail value of the vehicle), and increased the life
of the initial term of the plan to 44 months, but maintained the proposed present value interest
rate of 6.75%. The Bankruptcy Court confirmed the plan over the objection of Onyx.

On November 7, 2001, Onyx filed a Motion to Reconsider Order of Confirmation and for
Evidentiary Hearing. In that motion, Onyx reiterated its request for an evidentiary hearing to
establish that the amount which it would be able to realize if it were to repossess and liquidate
the collateral and reinvest the proceeds in the ordinary course of business exceeded that which
the debtor proposed to pay over the life of the Amended Chapter 13 Plan. On December 17,
2001, the Bankruptcy Court denied the motion to reconsider and for an evidentiary hearing
relying upon its decision in In re: Scott, 248 B.R. 786 (Bankr. N.D. Ili. 2000). In In re: Scott, the
Bankruptcy Court determined that the prime interest rate is presumptively appropriate for the
cramdown of automobile loans because it reflects the risk involved for the creditor when
replacement rather than liquidation value is used to determine the value of the security under 11
U.S.C. § 506(a). Id. at 793.

Discussion

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