In re Tapang
In re Tapang, 540 B.R. 701 (Bankr. N.D. Cal. 2015): the U.S. Bankruptcy Court for the Northern District of California determined that a 5% interest rate on the secured creditor’s claim met the standards set forth in Till v. SCS Credit Corporation, 541 U.S. 465 (2004) ("Till") for confirmation of the debtor’s chapter 11 plan, by "cramdown" on the secured creditor who voted to reject the Chapter 11 plan.
Facts:
The Tapang case concerned the limited question of the rate of interest required for the debtor to cram down her proposed plan of reorganization on a dissenting secured creditor, 523 Burlingame LLC ("Creditor"). The case is a bit unusual in that it was originally assigned to the Honorable Arthur Weissbrodt, who determined (1) the value of the property in question, (2) that Till applied, and (3) that Creditor had the burden of proof on the appropriate risk factors to be applied under the Till formula. When Judge Weissbrodt announced his retirement, the case was reassigned to the Honorable Charles Novack, though the interest rate issue was reserved to Judge Weissbrodt. Judge Weissbrodt presided over a trial and took the matter under submission; however, the issue was later reassigned to Judge Novack, who reviewed the record and testimony and issued the court’s decision.
Creditor held a first deed of trust on the debtor’s real property, which was a commercial property used as an elder living facility. As of the bankruptcy filing, Creditor held a claim of $1,829,167.33. The court determined the property’s value to be $1,148,785, and there was a prepetition real property tax claim of $100,060.32 senior to Creditor’s claim. The debtor proposed to pay the secured portion of Creditor’s claim over 25 years with an annual interest rate of 5%. Creditor opposed confirmation, asserting that 5% interest did not provide for an adequate risk premium. Creditor did not, however, propose an alternate rate.
During the chapter 11 case, the debtor timely made adequate protection payments to Creditor and was current on postpetition real property taxes. In addition, the debtor (who owned a number of properties) had amassed cash of $200,000 in her checking account.
The debtor’s expert, whose qualification as an expert was unsuccessfully challenged by Creditor via a motion in limine, opined that a risk premium of 1.75% over and above the prime rate of 3.25% was appropriate. He based his opinion on the following factors: the treatment of similarly situated creditors in the debtor’s reorganization plan (all had agreed to a rate of 5% or less), the timeliness of the debtor’s postpetition monthly payments to Creditor and to the County for real property taxes, and the debtor’s cash on account.
Upon cross-examination by Creditor’s counsel, the expert acknowledged that additional factors were relevant to the analysis. The factors included: the age and nature of the property; any necessary repairs and maintenance; the duration of the plan; the debtor’s prepetition defaults; and the loan-to-value ratio. The expert did not consider the debtor’s age a factor in his analysis.
Creditor did not offer any expert testimony. It did designate an expert witness on the interest rate issue, but at the hearing Creditor advised the court that its expert had left the industry. Creditor did not identify any other expert, instead relying on its cross-examination of the debtor’s expert.
Reasoning:
In accepting the debtor’s proposed 5% interest rate on the objecting Creditor’s claim, the court noted that under Till a creditor bears the burden of proof as to any risk factors that justify an upward adjustment of the interest rate. It appears that Judge Novack agreed with Judge Weissbrodt’s prior ruling that Till applied in the chapter 11 context, citing, among other cases, In re Dunlop Oil Co., Inc., BAP No. AZ-14-1172-JuKiD, 2014 WL 6883069, at ∗19 (B.A.P. 9th Cir. Dec. 5, 2014).
The court noted that Creditor’s trial brief argued that the debtor’s proposed 5% interest rate failed to consider eight relevant concerns: (1) the initial contract rate of 7.213%; (2) the age and condition of the property, which Creditor alleged required several hundred thousand dollars of deferred maintenance; (3) accrued property taxes which were to be paid off in three years; (4) the debtor had no funds for capital improvements or deferred maintenance; (5) the property was co-owned by a debtor-controlled entity which presented another bankruptcy risk; (6) the debtor was elderly (she was 64), (7) the debtor’s business was not subject to the court’s jurisdiction; and (8) the debtor’s income was historically inadequate to make debt service payments.
The court further noted, however, that Creditor either failed to introduce any evidence to support these arguments or failed to establish them as relevant risk factors. Moreover, Creditor did not introduce any evidence to justify a greater risk premium adjustment or identify any specific rate it believed would be more appropriate than the debtor’s 5% interest rate. While Creditor solicited testimony from the debtor’s expert that certain hypothetical factors might be relevant to consider in setting an appropriate interest rate, Creditor presented no evidence to establish that any of the hypothetical factors were actually present.
The court also made clear that the debtor’s age could not be considered as a potential negative factor as to do so would violate the Equal Credit Opportunity Act. The court also noted that it did not believe Till required a 3% cap on the risk premium. Finally, the court noted that the amount Creditor paid for the note when it purchased it from the initial lender ($500,000) was irrelevant to the court’s analysis.
Commentary:
There are numerous practice points of interest in this case. First, since a secured creditor has the burden to establish the appropriate risk factors, it must put on evidence of those risk factors. While this is possible without its own expert, a creditor is well advised to retain its own expert (and perhaps a back-up expert) in such a situation. While there were potential weaknesses in the debtor’s expert opinion, those weaknesses went effectively unchallenged in this case.
Second, without a controlling decision from the Ninth Circuit on the applicability of
to a chapter 11 case, and given the ambiguity in Till’s plurality opinion, the bankruptcy courts are free to accept or reject Till as an analytical framework. See, e.g., In re MPM Silcones LLC, 531 B.R. 321, 332-334 & n.9 (S.D.N.Y. 2015); In re Texas Grand Prairie Hotel Realty LLC, 710 F.3d 324, 731-734 (5th Cir. 2013). Within the Ninth Circuit, prior to Till, courts applied a formula/market rate approach to determine an appropriate rate of interest to satisfy Bankruptcy Code section 1129(b). This line of reasoning is represented by cases such as Pacific First Bank v. Boulders on the River, Inc. (In re Boulders on the River, Inc.), 164 B.R. 99, 105 (B.A.P. 9th Cir. 1994), In re Fowler, 903 F.2d 694, 697 (9th Cir. 1990), and In re El Camino Real, 818 F.2d 1503, 1508 (9th Cir. 1987). Accordingly, parties ought to determine whether their judge will apply Till or whether they wish to stipulate that Till applies as part of the confirmation process.
Third, even if Till applies, it appears that courts do not feel necessarily limited to the 1%-3% risk premium adjustment discussed therein.
[this case analysis appeared in the California State Bar Insolvency Committee e-newsletter of 02/16/16]