Cramdown Case Analysis

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Although only four justices found the prime-plus rate the proper approach to apply, that is the effective rate that lower courts should use when the cramdown provision is invoked. One justice thinks it too high, and four too low, but no majority will ever agree that it is one or the other, and reverse its application.

In Wisconsin, the decision undoes the potential for enormous disparity in the treatment of both creditors and debtors that the Seventh Circuit’s decision had created.

The majority opinion noted that a debtor could own two vehicles — one purchased at a low rate of interest, and a second at a high one. Yet, under the “coerced loan” approach, the two creditors would be paid different interest rates, even though, once the debtor is in Chapter 13, the risk of subsequent default is identical with respect to each.

The dissenters correctly noted that this is not necessarily so, as the “coerced loan” approach only creates a rebuttable presumption, not an irrebuttable one. Thus, a bankruptcy court could treat the creditors the same in such a situation.

Nevertheless, the dissent’s approach would have been unable to prevent systematic discrimination between equally situated debtors.

One debtor may have bought his car at a very high rate of interest, and another at a low one. Yet, once in bankruptcy, their risk of subsequent default could be the same.

However, the “coerced loan” approach would set a presumption of very different interest rates, based on what their credit risk was when they purchased the car, rather than what their current risk is.

	Related Links U.S. Supreme Court Related Article ‘Prime-Plus’ approach adopted in cramdowns

Between different debtors, the dissent’s suggestion that different rates be “averaged” could not work, because there aren’t enough loans in the plan to average.

There is one enigmatic situation that could result from the decision — when the original interest rate was zero, or close to it.

The plurality noted that a zero interest loan could actually be a disguise for an inflated price on the vehicle. Thus, instead of selling a car at a sticker price of $10,000, plus interest, the car is sold for $12,000 at zero interest, and $2,000 is really disguised interest.

By applying the prime-plus method, the creditor actually receives a windfall in this situation; it receives interest on what was actually disguised interest, rather than principal.

Unfortunately, although the plurality recognized this possibility, it offered no guidance as to how it should be handled.

– David Ziemer

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David Ziemer can be reached by email.