The rate of interest forced on a secured creditor under a Chapter 11 plan that is confirmed over the creditor’s objection.
The court has the power to confirm a reorganizing plan over the objection of an impaired class of secured creditors (a “cramdown”) if the plan meets certain requirements. One of the requirements for a successful cramdown is that the debtor prove that the payments to the lender on its secured claim have a present value (as of the effective date of the plan) of at least the amount of the secured claim. If the debtor and creditor cannot agree on an interest rate, then the court must decide in connection with the confirmation hearing what rate of interest would be appropriate. The court’s determination of the cramdown interest rate usually involves a battle between expert witnesses for the debtor and the objecting secured creditor.
Courts have used a variety of approaches to determine the appropriate cramdown interest rate, including the formula approach, the prime plus formula approach, the treasury plus formula approach, the coerced loan approach (often called the forced loan approach), the cost of funds approach and the presumptive contract rate approach.
As a result of the decision of the United States Supreme Court in Till v. SCS Credit Corporation, the most likely approach that a bankruptcy court will use in any given case is the formula approach. (See Formula Approach). But the decision in the Till case is not entirely clear, and courts in subsequent cases have been divided on how to apply Till including whether Till applies to Chapter 11 cases at all.
Bankruptcy Code § 1129(b)(2)(A)(ii). See also Coerced Loan Approach, Cost of Funds Approach, Cramdown, Forced Loan Approach, Formula Approach, Market Rate Approach, Presumptive Contract Rate Approach, Prime Plus Formula Approach, Treasury Plus Formula Approach.