BANKRUPTCY BULLETIN
Contributing Author: David M. Tanabe, Winthrop & Weinstine, P.A.
In Topp v. Farm Credit Services of America (In re Topp), 2023 WL 4921241 (8th Cir. Aug. 2, 2023), the United States Circuit Court for the Eighth Circuit (“Eighth Circuit”) affirmed the factual finding for the discount rate for cramdown pursuant to 11 U.S.C. § 1225(a)(5)(B)(ii) with a starting point of the treasury rate, not the prime rate.
The farmer filed a petition for Chapter 12 bankruptcy relief. The lender filed a $595,000 secured claim arising from five loans of various durations from ten to twenty years, with interest rates ranging from 3.5% to 7.6%. Together, the loans were secured by $1.45 million of the farmer’s real estate. As such, the lender’s claim was over-secured.
The lender objected to the farmer’s Chapter 12 plan of reorganization pursuant to § 1225(a)(5)(B)(ii). For such a cramdown, the plan must promise future property distributions whose total value “as of the effective date of the plan” are not less than the allowed amount of the secured claim.
While both parties agreed to a twenty-year repayment period, the parties disagreed on the appropriate discount interest rate for determining the present value of future payments for § 1225(a)(5)(B)(ii). The farmer proposed starting with the twenty-year treasury bond rate (1.87% at the relevant time) and adding a 2% risk adjustment. The lender argued for the national prime rate (3.25% at the time) but otherwise agreed with a 2% risk adjustment. Thus, the parties disagreed on the proper risk-free or some-risk base rate: the treasury rate or the prime rate.
The bankruptcy court sided with the farmer that the proper starting point in the case was the treasury rate and, after rounding up, found that a total discount rate of 4% was appropriate and confirmed the plan. The district court affirmed, and the lender appealed to the Eighth Circuit.
On appeal, the Eighth Circuit rejected that the following cases explicitly analyzed the merits of whether the proper base rate for cramdown was the prime rate or treasury rate: United States v. Doud, 869 F.2d 1144 (8th Cir. 1989) and Till v. SCS Credit Corp., 541 U.S. 465 (2004).
Further, the Eighth Circuit stated that it saw no legal significance to whether a court started with a risk-free rate and added full risk or started with a some-risk rate and added some more. “If the court properly follows the formula approach, the ultimate discount rate, not the starting point, is what matters,” explained the Eighth Circuit.
The Eighth Circuit held that the proper base rate and total discount rate for § 1225(a)(5)(B)(ii) are factual findings based on the particular case.
The Eighth Circuit affirmed the bankruptcy court’s factual findings of a 2% base rate and a 2% risk adjustment for a total discount rate of 4%. In its review, the Eighth Circuit discussed that the bankruptcy court considered (1) the length of the proposed maturity period, (2) the fact that the lender’s claim was substantially over-secured, and (3) the overall risk of nonpayment. Further, the bankruptcy court specifically noted that the lender’s claim was secured by real estate and that those “types of transactions are generally financed over a longer period of time which justifies use of the treasury bond as the base rate.”
To read the Eighth Circuit’s decision, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.