Opinion ID: 780391
Heading Depth: 2
Heading Rank: 2

Heading: Cram Down under Chapter 13

Text: 20 Although the Bankruptcy Code nowhere uses the words cram down, the term has come to denote the confirmation of a plan over the objection of a secured creditor. Pursuant to the provisions of 11 U.S.C. § 1325(a)(5)(B), a bankruptcy court may approve a plan proposed by a Chapter 13 debtor without the consent of the affected creditor if: 21 (i) the plan provides that the holder of such claim retain the lien securing such claim; and 22 (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. 23 In Memphis Bank & Trust Co., 692 F.2d at 429, we recognized that the law, in effect, 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. (Footnote omitted.) Such interest payments are mandated simply [i]n order for the secured creditor to get payments over time under the plan having a present value equal to the allowed amount, as the above quoted statutory language directs. Gen. Motors Acceptance Corp., 999 F.2d at 66. 24 In reference to determination of the appropriate rate of interest to be added to Chapter 13 payments, we declined to t[ie] the interest rate to an arbitrary ... rate, and instead held that: 25 [I]n the absence of special circumstances bankruptcy courts should use the current market rate of interest used for similar loans in the region. Bankruptcy courts are generally familiar with the current conventional rates on various types of consumer loans. And where parties dispute the question, proof can easily be adduced. 26 Memphis Bank & Trust, 692 F.2d at 431. Even after such a seemingly clear explanation by this court of the proper method for calculating interest in cram down situations, Household now cites additional Sixth Circuit decisions in an attempt to justify its effort to maximize debtor payments to itself to the detriment of other creditors. 27 For example, the finance company discusses in its brief on appeal the holding in Cardinal Federal Savings & Loan Ass'n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir.1985). In Colegrove, a case arising in the context of home mortgage arrearages, keith m. lundin, chapter 13 bankruptcy § 112.1, at 112-2 (3d ed.2000), the court concluded: 28 [T]he most equitable rate to establish in this type of situation is the prevailing market rate of interest on similar types of secured loans at the time of allowance of the creditors['] claim and the confirmation of the plan in bankruptcy with a maximum limitation on such rate to be the underlying contract rate of interest. 29 Colegrove, 771 F.2d at 123 (emphasis in original). Household focuses upon that language to support its position that the appropriate interest rates for the automobile transaction in this case should also be determined by reference to the underlying contract rate of interest. We have, however, limited Colegrove to its particular facts — a home mortgage arrearage situation in which the creditor was completely secured and was not required to accept unsecured status as to any portion of its debt. United States v. Arnold, 878 F.2d 925 (6th Cir.1989). Because the factual situation in this appeal in no way resembles the facts of Colegrove, we conclude that the decision in that case is inapplicable here. 30 Household also cites the Arnold decision in support of its argument that Memphis Bank & Trust 's references to the current market rate of interest used for similar loans in the region and the current conventional rates on various types of consumer loans actually relate only to a lender's own interest rate and not an actual market or conventional rate. In Arnold, we resolved a dispute involving a Chapter 12, rather than a Chapter 13, bankruptcy, but we noted that Chapter 12's cram down provision is identical to that found in Chapter 13. Arnold, 878 F.2d at 927. Then, in determining which of competing interest rates to apply, we held that where a `cram down' occurs ... and a creditor is forced to write-down a portion of its note, a creditor is entitled to receive its current market rate on the `new loan.' Id. at 930 (footnote omitted) (emphasis added). Household contends that this court's use of the word its in describing the relevant market rate indicates that a more general rate need not be considered and that the interest rate at which the particular creditor would loan money to the particular debtor may be used for cram down purposes. 31 There is, however, absolutely no indication in Arnold or in other Sixth Circuit decisions that use of the phrase its market rate mandates assessment in this case of interest at the rate at which a loan would be made by Household to borrowers identical to the Kidds in all relevant respects. In fact, adoption of such a rate is tantamount to endorsement of the automatic application of a contract rate of interest, a principle clearly at odds with the clear language of Memphis Bank & Trust. Rather, it is more likely that use by the panel in Arnold of the modifier its to describe the appropriate market rate was intended solely to limit consideration to rates relevant to the particular types of loans at issue. For instance, the setting of the market rate for automobile loans should be limited to consideration of only the automobile loan universe and not rates that would apply to an average borrower seeking, for instance, financing for a new home. 32 Furthermore, as noted by the bankruptcy court in In re Richards, 243 B.R. 15, 22 (Bankr.N.D.Ohio 1999), the purpose of Chapter 13's cram down provisions is to ensure that a secured creditor ... receive[s] payment equal to the value of the collateral as of the effective date of the plan. To the extent that the debtor's payments are spread out over time, the creditor will actually receive less than what he is entitled to due to the simple fact that a sum of money received over [time] does not have the same value as a sum of money received today. Id. Hence, in Memphis Bank & Trust, we concluded that current market rates of interest would best approximate the present value of a secured claim. Id. Thus, payment of that amount and that amount alone satisfies the purposes of the cram down provisions. In fact, [t]o permit a secured creditor to receive interest on his claim in an amount greater than the conventional market rates would allow the creditor to actually receive more than the allowed amount of his secured claim. Id. 33 Finally, an analysis of the language used in Memphis Bank & Trust clearly negates application of an interest rate that can be determined only on a case-by-case basis through analysis of information provided and controlled by the creditor. Clearly, the opinion does not anticipate imposition of a rate of interest that would apply in the non-existent market that encompasses the factors prevalent in the bankruptcy setting. Rather, by stating that [b]ankruptcy courts are generally familiar with the current conventional rates on various types of consumer loans, Memphis Bank & Trust, 692 F.2d at 431 (emphasis added), we directed the use of more generally applicable rates. Moreover, had loan-specific rates been contemplated in formulating the proper interest calculus, there would have been no need to refer to conventional rates. Indeed, adoption of the position espoused by Household in this appeal would virtually ensure that bankruptcy courts would not be familiar with the rates charged by various lenders to different borrowers based upon varied elements of a personal credit history. Rather than conclude that the Memphis Bank & Trust court inserted wholly superfluous language into its opinion, we elect to give effect to the carefully chosen terms used in the decision. 1