What is the present value of deferred payments made to secured creditors under a Chapter 11 reorganization plan? Courts agree that the present value depends on the interest rate that is used to compute the payments' value. They cannot agree, however, on how the proper interest rate should be determined. In their attempts to set a proper interest rate, most courts travel down the dead-end road of market rate analysis. Bogged down in the intricacies of this analysis, courts frequently ignore their fundamental role in bankruptcy proceedings: Resolving the tension between giving creditors protection while giving debtors a chance to save their businesses. Examinations of economic data and theories preoccupy the courts as well as creditors and debtors. This effort to determine the proper interest rate takes place in a vacuum, cut off from considerations of creditors' and debtors' rights and the bankruptcy system's purposes. The method used by courts for setting interest rates in business reorganization cases should be reevaluated. Instead of case-by-case determinations, courts could use, in all cases, Treasury securities yields of an appropriate maturity. With these relatively low interest rates, more reorganizations will be feasible. Low rates will also increase the chance of preserving the economic viability of the debtor and insure continuing employment. In addition, treasury rates are accessible, making expensive litigation unnecessary and saving the debtor's assets for distribution among creditors. Loan markets can adapt to the standard. Finally, creditors can protect themselves from the risk of loss from Chapter 11 proceedings by slightly raising contract interest rates. A single, clear standard for interest rate determination will decrease the tension between creditors' and debtors' interests in the bankruptcy process.
Waltraud S. Scott,
Deferred Cash Payments to Secured Creditors in Cram Down of Chapter 11 Plans: A Matter of Interest,
63 Wash. L. Rev.
Available at: https://digitalcommons.law.uw.edu/wlr/vol63/iss4/25