Second Circuit: Market Rate Preferred Over Formula Rate For Purposes of Secured Creditor Cramdown in Chapter 11 Issues
October 24, 2017
Authored by: Bob Miller and Brian Walsh
Courts and professionals have wrestled for years with the appropriate approach to use in setting the interest rate when a debtor imposes a chapter 11 plan on a secured creditor and pays the creditor the value of its collateral through deferred payments under section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code. Secured lenders gained a major victory on October 20, 2017, when the Second Circuit Court of Appeals concluded that a market rate of interest is preferred to a so-called “formula approach” in chapter 11, when an efficient market exists. In re MPM Silicones (Momentive), LLC, 2017 WL 4700314 (2d Cir. Oct. 20, 2017).
In Momentive, the bankruptcy court categorically dismissed expert testimony presented by the lenders to demonstrate a market rate of 5-6+%. Because the debtor had offered to cash out the lenders (and prepared to borrow the funds necessary to do it), there was direct evidence of the economic terms on which an arm’s-length lender would have been willing to make a loan similar to the obligation held by the lenders after confirmation of the plan. The bankruptcy court declined to consider this evidence, instead relying on a formula approach offered by the debtor, which started with a