Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC (In the Matter of Texas Grand Prairie Hotel Realty, LLC), No. 11-11109 (5th Cir. Mar. 1, 2013)
Fifth Circuit Court of Appeals rules contra to how 9th Circuit Court of Appeals determines “cram down” interest rate to be used in Chapter 11 bankruptcy cases, to “cram down” Chapter 11 plan on objecting secured creditor. “Cram down” means that the Bankruptcy Judge confirms (approves) Chapter 11 plan over objection of secured creditor)The U.S. Court of Appeals for the Fifth Circuit has held that, in chapter 11 cases, the bankruptcy court decides the formula to use to determine the appropriate “cram down” rate under a plan, and the bankruptcy court’s decision is reviewed for clear error rather than de novo. In doing so, the Fifth Circuit rejected the universal application of Till v. SCS Credit Corp., 541 U.S. 465 (2004), in chapter 11 cases, which is the way cram down interest rate is calculated in the Ninth Circuit (includes California Bankruptcy Courts).
Facts and Procedural Background
The debtors owned a number of hotels on which Wells Fargo Bank (the "Bank") held a lien to secure a loan balance of about $49 million. Unable to pay the loan when it came due, the debtors filed chapter 11 cases. The bankruptcy court valued the property and the Bank’s secured claim at $39 million. The debtors proposed a cram down plan under which they proposed to pay the Bank’s claim with interest at 5% per annum (1.75% over prime). The parties agreed that Till controlled the interest rate issue. The bankruptcy court confirmed the plan at the debtors’ proposed interest rate. The district court affirmed and the Bank appealed.
Presuming that Till applied in all chapter 11 cases as a matter of law, the Bank contended that a de novo standard of review was required.
The Firth Circuit’s Ruling and Analysis
The Fifth Circuit disagreed with the Bank. Although Till suggested that the prime-plus methodology applicable in chapter 13 cases also should apply in chapter 11 cases (at least absent an efficient market for the loan at issue), the Court of Appeals concluded that Till is not binding on the issue.
Moreover, the Fifth Circuit declined to adopt any specific legal standard for determining cram down rates in chapter 11 cases, preferring instead to leave it to the bankruptcy court to adopt a formula appropriate for the particular case. With the appropriate formula left for the bankruptcy court to decide, the court’s cram down analysis is reviewed for clear error, not de novo.
In this instance, the parties stipulated that the Till formula should be used. Applying a clear error standard of review to the bankruptcy court’s application of the Till formula, the Fifth Circuit affirmed the bankruptcy court’s ruling.