Fifth Circuit Affirms Below-Market Interest Rate Used In Cramdown Of Secured Lender In Chapter 11 Plan Based On Prime-Plus Formula Established By Supreme Court In Chapter 13 Case
By THE FINANCE AND RESTRUCTURING PRACTICE
On March 1, 2013, the Court of Appeals for the Fifth Circuit held in In re Texas Grand Prairie Hotel Realty (“Texas Hotel”) that a bankruptcy court did not err when it confirmed a “cramdown” chapter 11 plan that proposed to pay a dissenting secured lender interest calculated at the national prime rate plus 1.75%, which resulted in an effective annual rate of 5%. Notably, the lender in Texas Hotel stipulated that the “prime plus” formula for cramdown interest established by a plurality of the Supreme Court in the chapter 13 case Till v. SCS Credit Corp. would apply. As a result, the lender did not argue that the right methodology to calculate its interest rate should be a “market rate” approach in chapter 11 cases where an “efficient market” for exit financing exists (as alluded to as proper in Footnote 14 of the Till decision). Based on the lender’s stated agreement to the “prime plus” methodology, the Fifth Circuit concluded that the bankruptcy court committed no reversible error even though, under the Till methodology, the risk adjustment to the prime rate established by Till is nothing more than a “smallish number picked out of a hat.” While the Fifth Circuit’s decision may be perceived as further endorsement of Till’s “prime plus” formula, that endorsement is qualified by the lender’s decision to stipulate to that formula in lieu of pursuing a “market rate” approach based on Footnote 14 of Till. Secured lenders may be relieved to know that nothing in the Texas Hotel decision precludes them from arguing for a “market rate” approach in future chapter 11 cases, if an efficient market for such loans exists. Indeed, the Fifth Circuit reaffirmed its prior rulings that bankruptcy courts enjoy “some latitude” in determining the appropriate method for calculating a cramdown interest rate in chapter 11 cases. Texas Hotel, therefore, cautions secured lenders that if they accede in a chapter 11 case to the “prime plus” formula established by the Supreme Court in Till, they may be forced to accept a below-market rate. However, the court was clear that in the absence of an efficient market, Till would govern in bankruptcy cases filed in the Fifth Circuit.