Chapter 11 Bankruptcy and Cramdowns: Adopting a Contract Rate Approach

Wong, Daniel R. | September 1, 2012

One of the key issues in many Chapter 11 bankruptcy proceedings is the determination of a proper interest rate that debtors must pay on secured claims existing at the time of a bankruptcy reorganization. For decades, the courts of appeals have debated the proper cramdown determination approach. In Till v. SCS Credit Corp., the Supreme Court addressed the issue in a Chapter 13 context and produced a plurality opinion endorsing a formula approach. However, there is not yet a consensus for Chapter 11 cases. This Comment argues for the adoption of a “contract rate” approach whereby courts will default to the prepetition contract rate of the secured claim. I believe this method adequately protects the creditor’s lending expectations while also helping to limit the debtor-in- possession’s evidentiary costs. Unlike the other approaches, the contract rate approach is more objective; courts will no longer have to consider evidential material to make a determination of the appropriate risk premiums or the existence of an “efficient market.” More importantly, the contract rate approach will provide predictability and greater fairness by ensuring that similar cases are treated alike. Overall, the ease, simplicity, and fairness of the contract rate approach make it a better option.