After experiencing financial difficulties, a farm debtor applied for Chapter 12 bankruptcy. If a secured creditor does not agree to the debtor’s proposed plan and the debtor does not surrender the secured property, the court will provide the creditor with a lien and a promise of future payments. To ensure that a secured creditor receives at least “the value, as of the effective date of the plan” an interest rate may be charged on these payments. 11 U.S.C. § 1225(a).
The appropriate market rate “should consist of a risk-free rate, plus additional interest to compensate a creditor for risks posed by the plan.” United States v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989). The bankruptcy court used the 20-year treasury bond rate, rounded up to two percent, as a starting point plus added a two percent risk adjustment for a final rate of four percent. Farm Credit Services, a secured creditor, agreed with the two percent risk adjustment, but appealed the use of the treasury rate instead of the national prime rate (3.25 percent).
Treasury rates do not account for risk while prime rates do account for “the relatively slight risk of default.” Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004). The Eighth Circuit determined that the final rate matters, not which risk-free rate is used as a starting point. Nevertheless, the starting rate must first be determined because it influences the risk adjustment. In determining the risk adjustment, the bankruptcy court considered how Farm Credit was over secured and the overall risk of default. As a result, the Eighth Circuit affirmed that the bankruptcy court applied the correct rate.
In re Topp, 2023 WL 4921241 (8th Cir. 2023).