Commercial Law World - Issue 1, 2018 - 17
and large expenditures in time and money that might be
incurred using the other approaches, which the Court
deemed inconsistent with the condensed time frames
inherent in the Chapter 13 process. While the Supreme
Court in Till addressed a Chapter 13 case, the Court's
decision prefigured the application of the Till analysis in
Chapter 11 cases. The Till Court observed that "Congress
[likely] intended bankruptcy judges and trustees to follow
essentially the same [formula] approach when choosing an
appropriate interest rate under [Chapter 11]," reasoning that
the applicable statutory language was functionally identical
in both contexts. Id. at 1958-59.
The Supreme Court in Till explained that the cramdown
rate of interest, i.e., the present value analysis, requires a
necessarily objective rather than subjective analysis. The
Supreme Court determined that the present value analysis
does not require the creditor's individual circumstances to
be considered, "such as its prebankruptcy dealings with the
debtor or the alternative loans it could make if permitted
to foreclose. Rather, the court should aim to treat similarly
situated creditors similarly, and to ensure that an objective
economic analysis would suggest the debtor's interest
payments will adequately compensate all such creditors for
the time value of their money and the risk of default." 124 S.
Ct. at 1960.
The foregoing consideration led to the Supreme Court
to reject the coerced loan, contract rate, and the cost of
funds approach (which the Supreme Court stated that while
"improperly aimed", it "rightly disregards the now-irrelevant
terms of the parties' original contract"). Id. at 1960-61. The
Supreme Court instead adopted the "prime plus" formula
approach. Id. at 1961. The Supreme Court stated that the
approach takes "its cue from ordinary lending practices,"
begins by looking to the national prime rate, reported
daily in the press, which reflects the financial market's
estimate of the amount a commercial bank should
charge a creditworthy commercial borrower to
compensate for the opportunity costs of the loan, the
risk of inflation, and the relatively slight risk of default.
Because bankrupt debtors typically pose a greater risk
of nonpayment than solvent commercial borrowers,
the approach then requires a bankruptcy court to
adjust the prime rate accordingly. The appropriate size
of that risk adjustment depends, of course, on such
factors as the circumstances of the estate, the nature
of the security, and the duration and feasibility of the
The Till Court held that it did not need to define a scope
for the risk adjustment, but found that an adjustment in
the range of 1% to 3% provided a guideline that could be
raised or lowered depending on the facts of each case. Id.
at 1962. Courts have also applied significantly higher risk
adjustments to reflect the particular circumstances of a case.
See, e.g., In re Griswold Bldg. LLC, 420 B.R. 666, 696 (Bankr.
E.D. Mich. 2009) (applying a five percent risk adjustment).
For example, the Northern Ohio bankruptcy judges selected
the middle of the Supreme Court's 1% to 3% guideline, or
2%, as the presumptive cramdown rate for secured claims in
Chapter 11 cases.
It is not debatable that the majority of case authority
since Till has endorsed a cramdown interest rate using a
Till formula rate. See, e.g., Gary W. Marsh & Matthew M.
Weiss, Chapter 11 Interest Rates After Till, 84 Am. Bankr.
L.J. 209, 221 (2010) ("Till 's formula approach, which adds
the prime rate to a debtor-specific risk adjustment, should
now be considered the default interest rate for a Chapter 11
cramdown."); see also In re Pamplico Highway Dev., LLC, 468
B.R. 783, 795 (Bankr. D.S.C. 2012) (collecting cases); In re
SW Boston Hotel Venture, 460 B.R. 38, 55 (Bankr. D. Mass.
2011) (collecting cases).
Nevertheless, the Supreme Court in Till appeared
to qualify its application of the prime-plus formula in
Chapter 11 cases, observing that since "efficient markets"
for exit financing often exist in business bankruptcies,
"it might make sense to ask what rate an efficient market
would produce." Till, 124 S. Ct. at 1959 n.14. The two-step
approach directs bankruptcy courts to determine whether
an efficient market exists, and if so, the efficient market
interest rate should be applied; where no efficient market
exists, the formula approach endorsed by the Supreme
Court in Till should be applied. In fact, a majority of courts
over the past several years have joined the Sixth and now
the Second Circuit in advocating a two-step approach to
determining the appropriate present value, or cramdown,
rate. See American Homepatient, Inc v. Official Committee of
Unsecured Creditors (In re American Homepatient), 420 F.3d
559, 568 (6th Cir. 2006); In re 20 Bayard Views, 445 B.R. 83,
107-09 (Bankr. E.D.N.Y. 2011) (stating majority of courts
follow two-step approach); See In re Brice Rd. Developments,
LLC, 392 B.R. 274, 280 (6th Cir. B.A.P. 2008); Momentive
Performance Materials, Inc. v. BOKF (In the Matter of MPM
Silicones, LLC), 874 F.3d 787, 800-801 (2d Cir. Oct. 20,
2017); In re 20 Bayard Views, LLC, 445 B.R. 83, 107-09
(Bankr. E.D.N.Y. 2011) (stating that a majority of courts
both within the Second Circuit and outside of it employ the
two-step analysis); KBC Bank and Santander Bank v. Capitol
Lakes, Inc. (In re Capitol Lakes, Inc.), 2016 Westlaw 5394767,
at * 3-4 (W.D. Wis. Sept. 27, 2016) (adopting Till rate after
determining that no efficient market existed); In re Settlers'
Housing Service, Inc., 505 B.R. 483, 490-91 (Bankr. N.D. Ill.