In re SJT Ventures, LLC, 2010 WL 3342206 (Bankr. N.D. Texas 2010)

CASE SNAPSHOT

A chapter 11 debtor sought confirmation of its reorganization plan, over the objections of its oversecured commercial mortgage lender. The lender objected to the rate of interest proposed in the debtor’s plan, arguing that it should receive the contractual rate of interest. The debtor argued that the market rate of interest was appropriate. The court agreed with the debtor, holding that, with regard to oversecured commercial loans, a “market formula” was the appropriate method for calculating the post-confirmation interest rate.

FACTUAL BACKGROUND

SJT Ventures, LLC purchased a commercial office building in Dallas. When the economy turned downward in 2008, SJT fell behind in its payments. Unable to work out an arrangement with its lender, SJT filed a chapter 11 petition. In the six months between the petition date and the filing of its proposed plan of reorganization, the debtor experienced positive tenant growth and a somewhat better financial situation. The debtor’s original plan proposed that the lender’s secured claim would be paid in full over 60 months, ending with a balloon payment. The claims would be amortized over 30 years with a 5 percent interest rate per annum. At the confirmation hearing, the debtor orally amended its plan, providing for repayment of the lender’s claim within five years, together with interest at 6.35 percent per annum. Except for the secured lender, all classes of creditors voted to accept the amended plan.  

The secured lender objected to the feasibility of the plan, as well as to the cramdown interest rate. Specifically, the secured lender argued that since it was oversecured, it should be paid the contract interest rate of 8.69 percent.  

COURT ANALYSIS

In considering the facts before it, the Bankruptcy Court examined the applicability of In re Good, 413 B.R. 552 (Bankr. E.D. Tex. 2009, aff’d 428 B.R. 249 (E.D. Tex. 2010) (holding that an oversecured creditor is entitled to the contractual rate when debtor is solvent and could afford the contract rate). The Bankruptcy Court, however, distinguished Good on the basis that the debtor in that case had sufficient assets to pay its creditors in full, while still paying its oversecured creditor at the default rate of interest specified in the contract – a circumstance not present here.

In addition, the Bankruptcy Court distinguished authority that examined preconfirmation rates of interests, focusing instead on cases that evaluated the appropriate post-confirmation rate. In doing so, the Bankruptcy Court noted that, while the pre-confirmation contractual interest rate was the settled law in the Fifth Circuit, post-confirmation interest was still “an issue of developing bankruptcy law.”

The Bankruptcy Court further explained the distinction by focusing on the unique policy concerns that distinguish pre-confirmation and post-confirmation interest rates. Prior to confirmation, a secured creditor is entitled to receive the contract rate of interest from a solvent debtor because a lesser rate “would result in a windfall to those holding the equity position.” After confirmation, however, there is a new “bargain” under the cramdown provision of the Bankruptcy Code. A secured creditor need only receive the “present value” of its secured claim, and nothing in the Bankruptcy Code suggests that this value should change with the debtor’s level of financial solvency.

After examining the U.S. Supreme Court decision of Till v. SCS Credit Corp., 541 U.S. 465 (2005), the Bankruptcy Court rejected the notion that the contract rate is the presumptive rate of interest, and opted instead for a “formula approach.” The formula approach calculation starts with the prime lending rate (appropriate for very low-risk borrowers), and builds in additional interest to compensate for the bankrupt debtor’s higher degree of risk. Specifically, the Bankruptcy Court relied upon expert testimony, provided at the plan confirmation hearing, in holding that the formula usually applied by the appropriate market constituted the appropriate rate of interest.

COURT HOLDING

The Bankruptcy Court held that, with regard to oversecured commercial loans, the court will look to the formula ordinarily used by the market to derive the appropriate interest rate. This method, the court reasoned, will ensure that “secured creditors are compensated for the ‘time value of their money and the risk of default’ by way of an objective assessment, while at the same time employing the on-the-ground insight of an effective market, where it exists.”

PRACTICAL CONSIDERATIONS

This court takes the analysis set forth in the Good case a step further, clearly distinguishing between pre-confirmation and post-confirmation realities. Thus, an oversecured creditor must be willing to look beyond its contractual interest rate, analyze the local market, and methodically calculate a “market” rate of interest in staking out its position before the bankruptcy court.