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Till v. SCS Credit Corporation

Supreme Court of United States
541 U.S. 465 (2004)
ELI5:

Rule of Law:

In a Chapter 13 bankruptcy cramdown plan, the appropriate interest rate to ensure a secured creditor receives the present value of its claim is the national prime rate adjusted upward by a risk premium to account for the debtor's specific circumstances of nonpayment.


Facts:

  • On October 2, 1998, Lee and Amy Till purchased a used truck from Instant Auto Finance.
  • The Tills financed the purchase through a retail installment contract, which was assigned to SCS Credit Corporation, at an interest rate of 21% per year.
  • The Tills subsequently defaulted on their payments to SCS Credit Corporation.
  • At the time the Tills filed for Chapter 13 bankruptcy, their outstanding loan balance was $4,894.89, while the truck itself was valued at only $4,000.
  • In their proposed bankruptcy plan, the Tills offered to pay interest on the $4,000 secured portion of SCS's claim at a rate of 9.5%, calculated by taking the national prime rate and adding a 1.5% risk adjustment.
  • SCS Credit Corporation objected, demanding it receive the original contract interest rate of 21%.

Procedural Posture:

  • Lee and Amy Till filed a Chapter 13 bankruptcy petition and proposed a debt adjustment plan in the U.S. Bankruptcy Court.
  • SCS Credit Corporation, a secured creditor, objected to the plan's proposed 9.5% interest rate on its claim.
  • The Bankruptcy Court overruled the objection and confirmed the plan with the 9.5% rate.
  • SCS appealed to the U.S. District Court, which reversed the Bankruptcy Court, holding that the creditor was entitled to its contract rate of 21%.
  • The Tills, as appellants, appealed to the U.S. Court of Appeals for the Seventh Circuit.
  • A divided Seventh Circuit panel vacated the District Court's judgment, holding that the contract rate should serve as a presumptive cramdown rate that either party could rebut, and it remanded the case.
  • The U.S. Supreme Court granted certiorari to resolve a split among the circuits.

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Issue:

Does the 'formula approach,' which starts with the national prime rate and adds a premium for the debtor's nonpayment risk, satisfy the requirement under 11 U.S.C. § 1325(a)(5)(B)(ii) that a Chapter 13 cramdown plan provide a secured creditor with payments equal to the present value of their claim?


Opinions:

Majority - Justice Stevens

Yes. The 'formula approach' is the proper method for determining the cramdown interest rate under § 1325(a)(5)(B)(ii). This approach starts with the national prime rate, which accounts for the time value of money, inflation, and minimal risk, and then requires a court to add a further premium to compensate for the specific risk of nonpayment posed by the debtor. This method is favored because it is objective, straightforward, and minimizes costly evidentiary proceedings, unlike the coerced loan, presumptive contract rate, or cost of funds approaches. Those alternative methods improperly focus on the creditor's subjective circumstances or the original contract, which are irrelevant in a court-supervised bankruptcy, and would lead to disparate treatment among similarly situated creditors. The formula approach appropriately places the evidentiary burden on the creditor to show that the risk of the debtor's plan warrants a higher premium than the court proposes.


Concurring - Justice Thomas

The judgment should be reversed, but the plurality's reasoning is incorrect. The plain text of § 1325(a)(5)(B)(ii) does not require any compensation for the risk of nonpayment; it only requires that the present value of the property distributed account for the time value of money. The statute requires valuing the 'property to be distributed' (the stream of cash payments), not the debtor's 'promise to pay.' Therefore, a risk-free interest rate is all that the statute mandates. Since the 9.5% rate proposed by the Tills was higher than the risk-free rate, it was more than sufficient to satisfy the statute, and the Court of Appeals' judgment must be reversed.


Dissenting - Justice Scalia

No. The formula approach is flawed because it begins with the prime rate, a number that is indisputably too low for a subprime borrower, and then relies on a bankruptcy judge's subjective and difficult-to-calculate risk premium. The proper method is the 'presumptive contract rate' approach, which assumes that subprime lending markets are competitive and that the original contract rate is therefore a good proxy for the actual risk of default. This rate provides a more accurate and efficient starting point, which either party can then rebut with evidence. The plurality's approach will systematically undercompensate secured creditors and relies on the fiction that bankruptcy judges can accurately predict plan success, a notion disproven by high failure rates of confirmed Chapter 13 plans.



Analysis:

This decision resolved a significant circuit split regarding the calculation of interest rates in Chapter 13 cramdown plans, establishing a uniform, debtor-friendly standard. By adopting the 'formula approach,' the Court prioritized objectivity and administrative efficiency over a market-based or creditor-specific analysis. This holding generally results in lower interest rates than the original contract rate, making Chapter 13 plans more feasible for debtors to propose and complete. However, it also shifts a significant analytical burden to bankruptcy courts to determine an appropriate risk premium, potentially leading to litigation over the size of the risk adjustment in individual cases.

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