Court Opinion

ID: 9495669
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:08:11.848811+00
Date Added: 2024-06-11T17:57:08.911091
License: Public Domain

SIMPSON, District Judge,
concurring in part, and dissenting in part.
CONCURRING IN PART, DISSENTING IN PART
I respectfully dissent from the majority opinion to the extent that it interprets Memphis Bank & Trust Co. v. Whitman1 to require reference to “more generally applicable”2 or “conventional”3 rates of interest which are unrelated to the particular debtor, when determining the appropriate rate of interest for coerced loans in cram-down situations.
Section 1325(a)(5)(B)(ii) states that a plan shall be confirmed if “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.” If the secured claim is to be paid over time, the bankruptcy court must assess interest so that the value of the claim is not diluted through delay in payment. The secured creditor is forced to extend a new collater-alized loan to the debtor, hence the “coerced” loan concept.4 Memphis Bank mandates that the bankruptcy court determine and apply the current market Ínter-*679est rate for similar loans in the region, not some other unrelated arbitrary rate.5
I believe that the application of a generalized rate of interest, in this instance that of the pool of all prime automobile loans, is both arbitrary and a departure from the clear directive of Memphis Bank.
The coerced loan is not made in a vacuum, but rather to an actual debt- or/borrower, with a discernable degree of predictable risk both as to default and collection/transaction costs. Because such coerced loans are generally without an “equity cushion,” the potential for loss to the creditor/lender is even greater. Since Memphis Bank requires that what happens in a cram down be viewed as a coerced loan, the bankruptcy court ought to analyze the kind of loan being made so that interest rates on similar loans can be determined. This, in turn, requires consideration of the amount and duration of the loan, as well as the nature of the collateral and the characteristics of the debtor/borrower.
Such an inquiry is, faithful to Memphis Bank and likely to put the secured creditor in a position very close to what it would have been in had it been allowed to repossess its collateral. The result is that the coerced loan is not made on unrealistic terms either from the creditor’s or the debtor’s viewpoint. More importantly, the valuation requirements of 11 U.S.C. § 1325(a)(5)(B) are respected because neither party has the possibility of an advantage due to the arbitrary imposition of some generalized interest rate.
Because the loan marketplace will take into account prevailing interest rates and risk factors, the bankruptcy court need only determine what market interest rate would be charged, at the time, on such a loan to such a borrower. The contract, if not too old, may provide evidence of how the market would price such a loan.
Memphis Bank does not require a loan rate available from the particular creditor to the debtor. Rather, the bankruptcy court ought to determine a market rate bearing some real-world relationship to the coerced loan in issue. Here, the “conventional” rate of interest, of 9.3% as determined by the bankruptcy court was based upon an average of all prime automobile loans ‘in the region, for new' and used vehicles. 'But this average did not include the sub-prime loan market in which the original loan had been obtained.6 There was no showing that the debtors had transformed into prime borrowers. Thus the rate applied was, in fact, an unrelated arbitrary rate. The bankruptcy court’s addition of 1% to the 9.3% to account for “special circumstances” described as “recent increases in the prime rate of interest” 7 is' arbitrariness on top of arbitrariness.
The majority finds refuge for this result in' Memphis Bank’s observation that “[bjankruptcy courts are generally familiar with the current conventional rates on various types of consumer loans.”8 The majority converts this dictum into a mandate that only current conventional interest rates can be used for coerced cram-down loans in bankruptcy.
While such uniformity is a bit more convenient, it is at odds with reality. The time value of money is not in all cases the same. The fact that the lending market reflects a multitude of interest rates at any one moment is a clear demonstration that the market factors the element of risk into the time value of money. Were it not so, *680rates for all borrowers would be the same for a given time period, and the availability of credit would be commensurately constrained.
Risk entails many factors. Among them are the likelihood of repayment as revealed by the financial profile of the borrowers, the nature of the collateral, the size of the equity cushion, and the transaction costs attendant to collection of principal and interest.
The generally higher rates of interest charged to sub-prime borrowers account for factors which reduce the odds that the creditor will recover the value of the collateral over time.9 Memphis Bank recognizes that the purpose in assessing interest on the secured portion of the claim is to protect the value of the claim from dilution. To achieve this goal, the element of risk must be factored in more precisely than by simplistically utilizing average interest rates only available to prime borrowers.10
Because the majority approves the imposition of cram-down loan interest rates based on prevailing generalized conventional loan rates, rather than loans similar in quality to the coerced loan itself, I must respectfully dissent.

. 692 F.2d 427 (6th Cir.1982).

. Majority Opinion (Maj.Op.), pg. 677.

. Maj. Op., pg. 677.

. See, Memphis Bank, 692 F.2d at 429 ("In 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.”)

. 692 F.2d at 431.

. Joint Appendix, pp. 258, 262-63, 266.

. August 14, 2000 Findings of Fact and Conclusions of Law, pg. 3.

. 692 F.2d at 431.

. See, In re Glueck, 223 B.R. 514, 522 (Bankr.S.D.Ohio 1998) ("[A] 'forced loan' of 100% of the value of an automobile is not customary in the industry, and produces additional risks to lenders.”) See also, In re Hardzog, 901 F.2d 858, 860 (10th Cir.1990) (listing numerous factors which are utilized by lenders in establishing interest rates).

. Other courts considering the issue raised here have also employed a particularized approach which incorporates markeAased factors including, inter alia, risk, in determining the appropriate cram-down interest rate. In re Till, 301 F.3d 583 (7th Cir.2002); In re Smithwick, 121 F.3d211 (5th Cir.1997); General Motors Acceptance Corp. v. Jones, 999 F.2d 63 (3d Cir.1993); United Carolina Bank v. Hall, 993 F.2d 1126 (4th Cir.1993); In re Hardzog, 901 F.2d 858 (10th Cir.1990); United States v. Arnold, 878 F.2d 925 (6th Cir.1989); In re Glueck, 223 B.R. 514 (Bankr.S.D.Ohio 1998); In re Cassell, 119 B.R. 89 (Bankr.W.D.Va.1990).