Opinion ID: 3010160
Heading Depth: 2
Heading Rank: 2

Heading: Postpetition Interest

Text: 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.