Summary of a Recent
Judicial Development in
Bankruptcy

Oral Modifications That Adversely Affect Creditors Not Allowed;
Analysis of the Till Formula

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Field, Case No. 04-00028-TLM, 2005 Bankr. LEXIS 2343 (Bankr. D. Idaho Oct. 17, 2005), the United States Bankruptcy Court for the District of Idaho held that a Chapter 12 debtor's plan was not confirmable because it did not provide the appropriate rate of interest to creditors, and the court refused to consider oral modifications made at the confirmation hearing because it would not afford the creditors reasonable opportunity to respond.

Background

The Debtors, who ran a farming operation, had co-interest in 436 acres of real estate. Id. at *2. U.S. Bank, Les Bois Leasing, and Owyhee County were secured creditors of the farm. Id. The Debtors filed their Chapter 11 case, but prior to plan confirmation they converted to Chapter 12. Id. at *1. The Chapter 12 trustee also suggested amending the plan. Id. The plan allowed for semi-annual payments to U.S. Bank for 25 years at 7% interest, with payments being made in January and July of each year. Id. at *2-3. The Trustee was concerned about the timing of the payments because his analysis indicated the Debtors would not have positive cash flow in July, so the Debtors made an oral motion at their hearing to amend the plan and change payments to U.S. Bank to March and October of each year. Id. at *3. U.S. Bank objected to the 7% interest and argued that 8.75% should be the appropriate market rate. Id. at *4. In response, the Debtors made an oral motion at their hearing to amend their plan to propose a 4.5% rate of interest, and U.S. Bank objected again. Id. The plan proposed annual payments to Les Bois for 25 years with no interest at all. Id. at *6. The plan also sought to impose a post-petition injunction against creditors to prohibit any attempted collection until January 1, 2012. Id. The plan proposed to pay pre-petition taxes owed to Owyhee County over a period of ten years at 12% interest. Id. at *8. Debtor's brother, Howard Field, obtained a secured interest in equipment, crops, and accounts receivable by purchasing the claim of Washington Mutual Bank. Id. The plan proposed to postpone payments to Field until 2009, and then make annual payments at 6% interest until 2018. Id. Les Bois Leasing and U.S. Bank were the only creditors that objected to confirmation of the plan. Id. at *1.

Arguments

U.S. Bank objected to the proposed interest rate of the plan, and argued that 8.75% should be the appropriate rate. Id. at *4.

Les Bois argued that the Debtors' proposed injunction improperly treated its lien rights and was effectively an attempt to discharge a nondischargeable debt. Id. at *7. They also objected to the absence of interest on their claim, objected to confirmation on the basis of bad-faith, objected to Howard Field's secured interest in the farm equipment, and argued the plan was not feasible. Id.

Debtors argued that their plan was proper and should be confirmed. Id.

Analysis and Holdings

Oral motions to modify the plan
Regarding the Debtors' oral motions to amend the plan to change the timing of payments to U.S. Bank and reduce the interest rate to 4.5%, the court noted that Fed. R. Bankr. P. 2002(a)(5) requires 20 days notice of the time fixed to accept or reject a proposed plan. Id. at *10-11. Furthermore, the court stated that "Debtors may not orally suggest modifications at the hearing that adversely effect creditors without providing such creditors a reasonable opportunity to respond[,]" and to allow it would be a violation of due process. Id. at *11.

Effective date of the plan
Section 1225(a)(5)(B)(ii) states that a plan must provide that the creditor retain its lien securing the claim, and that "the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of such claim [be] not less than the allowed amount of such claim." Id. at *12. The Debtors claimed that the "effective date of the plan" was at the time of filing their petition, and 4.5% was the appropriate interest rate at the time they filed. Id. But the court noted that their own plan contained a provision that stated the effective date of the plan would be "on the date the order confirming the plan is non-appealable." Id. at *13. Moreover, the Debtors did not present sufficient authority that the "effective date" should be the filing date. Id. Case law and treatise authority supported the notion that the "effective date" should be no earlier than the date of the confirmation hearing. Id. This court had previously determined that in the absence of a provision in the plan specifying otherwise, the "effective date," was the date of the confirmation hearing. Id. at *17. Since the prime rate at the time of their confirmation hearing in 2005 was significantly higher than the prime rate at the time of filing in 2004, the court rejected their proposed modification. Id.

Appropriate interest rate for U.S. Bank's claim
The court used the formula created in Till v. SCS Credit Corp., 124 S. Ct. 1951 (2004), to determine an appropriate rate of interest. Id. at *20. The formula is essentially the market rate at the time of the effective date of the plan, plus an increase to compensate for bankruptcy debtors being high-risk. Id. at *21. U.S. Bank's proposed 8.75% interest rate took into account the market rate, 6.5%, and added 2.25% as risk adjustment. Id. at *22. They claimed the adjustment was based on their past dealings with the Debtor. Id. The court pointed out, however, that when adjusting for risk the court should only consider objective circumstances and not subjective circumstances like the creditor's individual history. Id. The court determined the appropriate adjustment to be 1.5%, making a total interest rate of 8% acceptable, and refused to confirm the plan until it was so modified. Id. at *23.

Appropriate interest rate for Les Bois' claim
The Debtors argued that they did not have to provide any interest to Les Bois, because Les Bois was an undersecured creditor. Id. at *25. The court concluded that the Debtors misinterpreted the statutes, and that § 1225(a)(5)(B) does not distinguish between oversecured and undersecured creditors. Id. Thus the court refused to confirm their plan until it provided for interest to Les Bois. Id. at *26.

Feasibility
The court held that "[g]iven the Plan's current negative cash flow . . . and the Plan's failure to provide adequate interest on the allowed secured claim of U.S. Bank, or any interest on Les Bois' allowed secured claim, the Plan is clearly not feasible." Id. at *27.

The case was decided on October 17, 2005.