Fair Equivalents and Market Prices: Bankruptcy Cramdown Interest Rates
50 Pages Posted: 7 Jan 2017
Date Written: January 4, 2017
When a bankruptcy debtor confirms a chapter 11 plan of reorganization, it must address the claims of its secured creditors. The Bankruptcy Code allows for non-consensual confirmation of a plan, and hence the involuntary restructuring of existing debt, through a process colloquially known as "cramdown." One aspect of cramdown is the selection of an interest rate sufficient to compensate fairly non-consenting secured creditors. Much debate has ensued over the proper method of selecting such a rate. This article notes that much of this debate has paid insufficient attention to the history of cramdown, and has marginalized relevant Supreme Court cases. After reviewing the history of cramdown, the article formulates three apothegms for cramdown: Don't Pay Too Much; Don't Pay Too Little; and Don't Expect Precision. Using this apothegms as guidelines, the article argues that the "prime rate plus" method established in Till v SCS Credit is an acceptable method to pick such cramdown rates in Chapter 11, and that the use of so-called "market rates" is both illusory and inconsistent with Supreme Court valuation precedents.
Keywords: Cramdown, bankruptcy, nonconsensual confirmation,
JEL Classification: k 10, k19, k20, k29
Suggested Citation: Suggested Citation