MEMORANDUM AND ORDER
AUDREY FLEISSIG, Magistrate Judge
This matter is before the Court on Plaintiff Starsha Monet Sewell's Pro Se Motion for Default Judgment (Doc. 18). Plaintiff filed her amended complaint on September 7, 2010. (Doc. 16.) On September 28, 2010, Defendant Vatterott Educational Centers, Inc. filed its responsive pleading, which was a Motion to Dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 17.) Plaintiff now moves for a default judgment against Defendant because Plaintiff alleges that Defendant served her electronically, and under the Administrative Procedures for Case Management/Electronic Case Filing Sections I.A and III.B, as a pro se litigant, Plaintiff must consent to such electronic service. Plaintiff alleges that she did not offer written consent to be served electronically.
In its response to Plaintiff's Motion for Default Judgment, Defendant explains that counsel for Defendant sent Defendant's responsive pleadings to Plaintiff via Federal Express. The tracking report for that package, which Defendant attached as Exhibit B to its response, shows that Federal Express tried to delivery the package three times, but was unable to deliver it upon Plaintiff personally. On October 11, 2010, after discovering that Plaintiff had not received Defendant's responsive pleadings, counsel for Defendant sent Plaintiff copies of its responsive pleadings via U.S. Mail and electronic mail to the address contained in Plaintiff's pleadings: 7020 Independence Street, Capital Heights, MD 20743 and smsewell2002@yahoo.com.
Federal Rule of Civil Procedure 55(a) states: "When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." (emphasis added). Rule 55 does not provide for a default judgment for Defendant's failure to effect proper service. It permits a default judgment only for a defending party's failure to plead or defend. Here, Defendant filed a Motion to Dismiss, and therefore did not fail to plead or defend as required by Rule 55. Moreover, Defendant has cured any technical deficiency in its service of its responsive pleadings on Plaintiff by service via U.S. Mail and electronic mail on October 11, 2010.
The Court will grant Plaintiff ten (10) days from the date of this order to respond to Defendant's Motion to Dismiss and Memorandum in Support.
Accordingly,
IT IS HEREBY ORDERED that Plaintiff Starsha Monet Sewell's Pro Se Motion for Default Judgment (Doc. 18) is DENIED. IT IS FURTHER ORDERED that Plaintiff shall respond, in writing, to Defendant's Motion to Dismiss and Memorandum in Support, no later than ten (10) days from the date of this Order.
Dated this 1st day of December, 2010.
n-re-white-170#p879260 B.R. 870, 879 (B.A.P. 8th Cir. 2001) ("In its decision in
[U.S. v. Ron Pair Enter., Inc., 489 U.S. 235, 241,
109 S.Ct. 1026 (1989)] the Supreme Court did not set the rate at which an oversecured creditor is entitled to recover such interest; however, most courts have concluded that `postpetition interest should be computed at the rate provided in the agreement, or other applicable law, under which the claim arose — the so-called contract rate of interest.'" (citing 3 Lawrence P. King, Collier on Bankruptcy ¶ 506.04[2][b][i] (15th ed. revised 2000)).
See also Prudential Insurance Company Of America v. Monnier (In re Monnier Brothers), 755 F.2d 1336, 1338 (8th Cir. 1985) ("Since the Prudential loan was accelerated and oversecured, Prudential had a right at the date the plan became effective to the unpaid principal plus any contract rate interest that had accrued up until that time.");
In re Lockard, 234 B.R. 484, 494 (Bankr. W.D. Mo. 1999) ("The Bank is entitled to its contract rate of interest through the date of confirmation . . .");
In re Value Recreation, Inc., 228 B.R. 692, 696 (Bankr. D. Minn. 1999) ("
11 U.S.C. § 506(b) entitles an oversecured creditor to interest at the contract rate during pendency of a bankruptcy case prior to confirmation of a plan.").
Although the Bank's loan officer, Mr. Montgomery, testified that the balance as of the date of the Hearing was $169,682.12, and the Bank has since submitted a claim for $169,876.49, the Debtors' counsel objected to this calculation as including improper attorney fees. That issue was not before the Court at the Hearing, and accordingly, no decision is made at this time as to whether or not particular charges included on the Bank's proof of claim are proper or not.
Cramdown of the Bank's Claim: Post-Confirmation Interest Rate
The Bankruptcy Code provides that the Court may not confirm a plan that all impaired classes have not accepted, unless the plan meets the requirements under 11 U.S.C. § 1129(b), commonly referred to as a "cramdown." 11 U.S.C. § 1129(a)(8) and (b). The cramdown provisions of § 1129(b) require that a plan "not discriminate unfairly," and that it be "fair and equitable with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." If a debtor proposes to keep property securing a claim, the debtor's plan is fair and equitable if it provides:
(I) that the holders of such claims retain the liens securing such claims . . . to the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property.
11 U.S.C. § 1129(b)(2)(A)(i).
Thus, the plan must provide for paying the secured creditor the present value of its claim. However, the Bankruptcy Code does not specify how the appropriate interest rate on such a claim is to be calculated. In the Chapter 13 case context, the Supreme Court embraced what is commonly referred to as the "formula approach" in
Till v. SCS Credit Corp. (In re Till), 541 U.S. 465, 476 n. 14 (2004).
Under the formula
A fair and equitable plan may also provide for the sale of the creditor's collateral subject to the creditor's lien ( 11 U.S.C. § 1129(b)(2)(A)(ii)), or may provide for the realization by the secured creditor of the indubitable equivalent of its claim ( 11 U.S.C. § 1129(b)(2)(A)(iii)).
In adopting the formula approach, the plurality rejected the "coerced loan rate," the "presumptive contract rate" and the "cost of funds rate," finding that "the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings." Till, 541 U.S. at 479. The Court also stated, "[m]oreover, the resulting `prime-plus' rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor's circumstances or its prior interactions with the debtor." Id.
approach, the court first considers the current national prime rate of interest, which according to the Supreme Court, "reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default." Till, 541 U.S. at 466. Then, "[b]ecause bankruptcy debtors typically pose a greater risk of nonpayment than solvent commercial borrowers," a bankruptcy court must adjust the prime rate upwards to account for that risk. 541 U.S. at 479. "The appropriate size of that risk adjustment depends on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The plurality recognized that courts have generally approved a risk premium of 1 to 3%." In re American Trailer Storage, Inc., 419 B.R. 412, 434 (Bankr. W.D. Mo. 2009) (citing Till, 541 U.S. at 479-480). "The appropriate size of the adjustment, per Till, will depend on factors such as the circumstances of the estate, the nature of the security and the duration and feasibility of the reorganization plan. The creditor bears the burden of proof on this issue." In re Prussia Associates, 322 B.R. 572, 591 (Bankr. E.D. Pa. 2005). Till involved a Chapter 13 case. Although the Supreme Court noted the likelihood that Congress intended the same approach to be applied under any cramdown provision, citing to the present value provisions in sections 1129(a), 1129(b), 1173(a), 1125(a) and 1228(b), 541 U.S. at 474-475, n. 10, the Supreme Court recognized a difference in the lending markets for Chapter 13 and Chapter 11 debtors. Specifically, the Supreme Court stated, in dicta, that while there was "no free market of willing cramdown lenders" in the Chapter 13 context, "the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. . . . Thus, when picking a cramdown rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce." 541 U.S. at 476 n. 14 (emphasis in original). This footnote in Till led to the adoption by the Sixth Circuit Court of Appeals of a two-step process for determining the appropriate cramdown interest rate in a Chapter 11 case. See Bank of Montreal v. Official Committee of Unsecured Creditors (In re American Homepatient, Inc.), 420 F.3d 559 (6th Cir. 2005). First, the Court is to determine whether an efficient market exists for a Chapter 11 debtor, and if it does, the Court should look to that market for an appropriate interest rate. If no efficient market exists for a Chapter 11 debtor, then the bankruptcy court should use the formula approach as described in Till. Other courts addressing this issue have reached a similar conclusion and have adopted the same or a similar test for determining whether Till applies in the Chapter 11 context. See In re American Trailer Storage, Inc., 419 B.R. at 436 (listing cases).
See also Till, 541 U.S. at 484-485 ("Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.").
For a much more thorough examination of Till and American Homepatient, see In re American Trailer Storage, Inc., 419 B.R. 412 (Bankr. W.D. Mo. 2009). See also Gary W. Marsh Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 AM. BANKR. L.J. 209 (2010).
In In re American Trailer Storage, Inc., Chief Judge Dennis Dow applied the two-prong analysis set forth in American Homepatient, and found that it also comported with existing pre- Till Eighth Circuit case law. Id. at 436-438 (Judge Dow's opinion includes an in-depth description of existing Eighth Circuit case law regarding appropriate cramdown interest rates). Judge Dow ultimately concluded:
Based on the somewhat confusing and loose use of the term "prevailing market rate" in the Eighth Circuit, this Court finds that it is on firm ground to adopt the nuanced version of
Till in the Chapter 11 context, which involves first considering the existence of an efficient market and if there is not one, then resorting to the formula approach.
Id. at 438. This Court agrees with Judge Dow's analysis and adopts the two-prong test set forth in
American Homepatient.
The Court must first determine whether there is an efficient market for debtor-in-possession ( "DIP") financing in this case. There is no proof of such a market before the Court; in fact, there is no evidence of any market rates. Mr. Montgomery, the Bank's loan officer, testified that in order to determine what interest rate his bank would offer customers like the Debtors today, he "would have to run through the Bank's pricing formula" which uses risk rating to take into account the debtors' creditworthiness, the collateral, and other risk factors. Mr. Montgomery had not applied this formula to determine what interest rate the Bank would charge the Debtors for a similar loan, and therefore, could not say what interest rate the Bank would charge the Debtors for a similar loan today; however, he testified that he believed they would probably qualify for a 10% interest rate today, just as they had when their loans were originally taken out. In any case, even if Mr. Montgomery had determined the interest rate the Bank would charge the Debtors now, that is not evidence of an efficient market.
The Court takes judicial notice that Chapter 11 cases filed in Arkansas account for less than 1% of total cases filed; accordingly, it is unlikely that an efficient market exists for DIP financing for individual farmers like the Debtors in this case. See Bankruptcy Case Statistics for the United States Bankruptcy Court for the Eastern and Western Districts of Arkansas at http://www.arb.uscourts.gov/courtinfo/stats.html; Fed.R.Evid. 201.
With no evidence of an efficient market for DIP financing, the Court is left to apply the formula approach as articulated in Till. The Debtors introduced evidence from the Federal Reserve showing that the national prime rate remained at 3.25% from December 24, 2008 through the date of the Hearing. The prime rate remains at 3.25% as of the date of this Opinion. The Court is left then to determine the percentage of interest necessary to adjust that rate to account for the risk of default. See American Trailer, 419 B.R. at 439; In re Deep River Warehouse, Inc., 2005 WL 2319201, 11 (Bankr. M.D.N.C. 2005). Under Till, the Bank had the burden to prove what an appropriate adjustment to the prime rate would be, and the Bank offered no evidence on this point other than Mr. Montgomery's subjective opinion that the Debtors should still be paying their contract rate of approximately 10% interest.
The Debtors added 2.25% to the prime rate to arrive at what they believed was a fair interest rate that would allow them to repay the Bank. The Court finds this is an appropriate adjustment based on the factors cited by Till ( i.e., the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan). The circumstances of this estate are favorable for allowing the Debtors to fund their Plan (which also goes to the feasibility of the Plan, as discussed earlier in this Opinion). Having experienced financial difficulties in the past while running a large farming operation on many acres of leased land, the Debtors have since scaled back their farming operation to their own acreage (along with one 40 acre leased tract). The Debtors' land is irrigated, and the Debtors already own the equipment they will need. As of the date of the Hearing, the Debtors had already planted 200 acres and stood ready to plant the remaining 150 acres at the close of the Hearing. Mr. Bryant's brothers are committed to helping as much as possible, and their testimony evidenced their experience and capacity. The Debtors have reduced some of their expenses by farming near their home. More importantly, the Debtors are not solely relying on farm income to fund their plan. They have both taken on full-time factory jobs and have earned enough to save up $33,000 to fund their farming operation. (They were not able to farm in prior years because they did not have the cash necessary to plant a crop.) They have been able to make $1,300 monthly payments to the Bank for the majority of their bankruptcy case, and have paid approximately $75,000 to the Bank since they first filed in 2005 (not including the $25,000 the Bank received on account of the 2008 storm damage). Furthermore, the collateral in this case is real estate. There is no evidence the real estate is depreciating or is in any danger of depreciating. The Bank agrees it is oversecured on all its loans. Finally, based on the Court's conclusions regarding feasibility of the Debtors' Plan, the Court finds the proposed duration of payments under the Plan to be reasonable. The Debtors propose to pay the Bank over 12 years, and the FSA over 20 years. Although longer repayment terms may justify an increase in the applicable interest rate, In re American Trailer, 419 B.R. at 440, the Court finds the adjustment proposed by the Debtors of 2.25% above the prime rate adequately adjusts for the risk associated with the Plan and the extended repayment term (discussed below) while providing the Bank with the value of its interest in Debtors' collateral.
Length of Repayment Term on the Bank's Claim
The Bank objects to the Debtors' proposal to extend the repayment terms of the loans to 12 years. Section 1129 does not specifically prohibit a debtor from altering the original repayment period on a loan. See e.g., In re Mulberry Agr. Enterprises, Inc., 113 B.R. 30, 32-33 (D. Kan. 1990). As quoted by the Mulberry court, Bankruptcy Judge Pusateri stated in In re White, 36 B.R. 199, 203 (Bankr. D. Kan. 1983):
The Court believes that § 1129 does not per se prohibit long term payouts. If the mathematical requirements of § 1129(b)(2)(A)(i)(II) are satisfied, if the creditor is adequately protected under the plan, pursuant to the general fair and equitable requirement of § 1129(b)(2), and if the debtors can
prove they can make payments over the life of the plan pursuant to § 1129(a)(11), then the plan is confirmable and can be crammed down on a rejecting class of secured claim holders, regardless of normal lending practices or policies.
Id. at 33.
See also In re Mulnix, 54 B.R. 481, 484 (Bankr. Iowa 1985) ("The legislative history to Section 1129(b) states that, to be fair and equitable, debtor's plan has to satisfy only one of the three conditions as the plan relates to a secured creditor. . . . Here, debtor has proposed to allow creditor to retain her lien and to be paid present value. Thus, the minimum statutory test has been met.") (citations omitted).
Nevertheless, in determining whether a stretched out repayment period is fair and equitable, courts often look to the applicable markets, when at all possible, to determine what is reasonable, and should consider the preexisting contract length and the customary length of repayment for similar loans. See, e.g., In re Torelli, 338 B.R. 390, 397 (Bankr. E.D. Ark. 2006) (citing other cases in application of this principle to a Chapter 12 case); In re Koch, 131 B.R. 128, 131 (Bankr. W.D. Mo. 1999) (Chapter 12 case). "Courts also look at the `life expectancy' of the collateral, the risk of default, and the risk that the collateral will lose value." In re Richards, 2004 WL 764526, 4 (Bankr. N.D. Iowa 2004) (citations omitted). "A payout over 20 years is not excessive or unreasonable when the collateral is real estate." In re Mulnix, 54 B.R. at 484. See also In re SM 104 Ltd., 160 B.R. 202, 231 (Bankr. S.D. Fla. 1993) (collecting cases). Numerous courts have likewise allowed debtors to stretch out repayment periods. See e.g., In re Mulberry Agr. Enterprises, Inc., 113 B.R. at 32 (citing In re Billman, 93 B.R. 657, 660 (Bankr. S.D. Iowa 1988) (seven-year note stretched to 25 years with a balloon payment after 15 years noting that debtors are often allowed to pay claims secured by real estate over a 30-year period); In re Snider Farms, Inc., 83 B.R. 977, 999 (Bankr. N.D. Ind. 1988) (loan secured by farmland stretched to thirty years not unreasonable); In re O'Farrell, 74 B.R. 421, 423 (Bankr. N.D. Fla. 1987) (thirty years is a reasonable period for a loan secured by real estate); In re Martin, 66 B.R. 921 (Bankr. D. Mont. 1986) (stretchout of note and mortgage from seven to twenty years confirmed)).
In this case, the Debtors have provided for the Bank to retain its lien, and have provided for the payment of a fair interest rate so that the Bank will receive the present value of its claim. As discussed earlier, the upward adjustment of 2.25% to the prime rate is sufficient to compensate the Bank, in part, for the lengthened repayment term given that the Debtors are likely to be able to make payments under their Plan, the Bank is oversecured, and the collateral is improved farmland unlikely to depreciate in value. Although Mr. Montgomery testified that the Bank's practice is to hold fixed rate loans of terms no longer than 5 years, the documents filed together with the Bank's proof of claim show that the Bank does indeed make loans with terms at least as long as ten years. Two of the loans giving rise to the Bank's claim originally had ten year terms, including the loan secured by the Debtors' home. Given that the collateral securing the Bank's claim is improved farmland, the Court finds a repayment term of 12 years is both fair and equitable.
Cramdown of FSA's Claim
FSA's loans to Debtors are cross-collateralized and secured by certain personal property, primarily consisting of farm equipment, as well as a junior lien on the Debtors' Home Tract and a first lien on the Debtors' Remaining Tracts. Debtors propose to surrender some equipment while retaining the remainder of their personal property. Debtors propose to retain all their real property. The Plan provides that FSA will keep its first lien on the Remaining Tracts and the Debtors' personal property as security for the debt owed FSA, but that FSA will release its junior lien on the Home Tract in exchange for a $4,000 lump sum treatment. FSA objects to the Debtors' attempt to "bifurcate" its claim secured by all the Debtors' property by proposing to pay off just the junior lien attached to the Home Tract. As explained below, the Court finds that the Debtors' proposal to pay FSA as set forth in their Plan is fair and equitable because the Plan provides FSA with the indubitable equivalent of its secured claim.
For a debtor's plan to be found "fair and equitable" as required by § 1129(b), the debtor must satisfy one of the three tests found in § 1129(b)(2)(A). If the plan provides for the debtor to retain property, the plan must provide for the secured creditor to retain its lien on such property and the secured creditor must be paid the present value of its claim pursuant to § 1129(b)(2)(A)(i) as discussed earlier in this Opinion. The plan may also provide for the sale of the creditor's collateral subject to the creditor's lien pursuant to § 1129(b)(2)(A)(ii)), or the plan may provide for the realization by the secured creditor of the indubitable equivalent of its claim pursuant to § 1129(b)(2)(A)(iii). "The three avenues for cramdown under §§ 1129(b)(2)(A) are phrased in the disjunctive." In re Kellogg Square Partnership, 160 B.R. 343, 367 n. 47 (Bankr. D. Minn. 1993). Accordingly, a plan need satisfy only one of the three tests set forth in § 1129(b)(2)(A). See In re Monnier Bros., 755 F.2d 1336, 1339 (8th Cir. 1985) (describing § 1129(b)(2)(A)(iii)'s "indubitable equivalent" standard as an alternative to deferred repayment of secured debt under § 1129(b)(2)(A)(i)(II), but finding the indubitable equivalent standard also applied to selecting an appropriate interest rate under § 1129(b)(2)(A)(i)(II)).
The Debtors' Plan provides for a $4,000 payment to FSA to satisfy its junior lien on the Home Tract. The FSA's loans are cross-collateralized, and therefore, its claim is secured by both the Home Tract and the Remaining Tracts as well as the Debtors' personal property and crops. Accordingly, the Debtors' plan does not provide that FSA will retain its lien, and therefore, the Plan does not meet the test set forth in § 1129(b)(2)(A)(i). Additionally, because the Debtors seek to retain the Home Tract, the test set forth in § 1129(b)(2)(A)(ii) providing for sale of collateral with liens attaching to the sale proceeds is not applicable. However, the Court must also analyze whether the Debtors' plan provides for the indubitable equivalent of the FSA's secured claim under § 1129(b)(2)(A)(iii). In other words, flunking the test set forth in § 1129(b)(2)(A)(i) which requires that a creditor retain its lien does not preclude a debtor from satisfying the indubitable equivalence test set forth in § 1129(b)(2)(A)(iii). See e.g., CoreStates Bank, N.A., v. United Chemical Technologies, Inc., 202 B.R. 33, 50-51 (E.D. Pa. 1996) (Although district court concluded that the debtor's plan failed to satisfy § 1129(b)(2)(A)(i)(I) because it released the creditor's machinery and equipment liens arising out of several cross-collateralized loans, the district court remanded the case to the bankruptcy court to determine whether the plan provided the creditor with the indubitable equivalent of its secured claim as allowed under § 1129(b)(2)(A)(iii).).
See also In re Keller, 157 B.R. 680, 683 (Bankr. E.D. Wash. 1993) ("Since the Plan forces Creditor to partially release her lien against Broadview without her lien attaching to the proceeds of any of the released properties, the Plan does not satisfy §§ 1129(b)(2)(A)(i). But failure to satisfy § 1129(b)(2)(A)(i) is not fatal to confirmation if the Plan does satisfy § 1129(b)(2)(A)(iii)."); Matter of Atlanta Southern Business Park, Ltd., 173 B.R. 444, 451 (Bankr. N.D. Ga. 1994) ("It is true that the confirmation provisions of the Code contemplate lien retention as a way to determine if a plan offers fair and equitable treatment to an impaired secured creditor. The provision on lien retention, however, is offered as an alternative to, and not a requirement of, the indubitable equivalent test.").
Section 1129(b)(2)(A)(iii) provides that a plan may be confirmed as fair and equitable over the objections of a secured creditor if the plan provides the creditor with the "indubitable equivalent" of its secured claim. "[T]he debtor must show that the creditor will receive the indubitable equivalent of its claims by a preponderance of the evidence." See Matter of Briscoe Enterprises, Ltd., II, 994 F.2d 1160, 1165 n. 26 (5th Cir. 1993). Accordingly to legislative history, this phrase originated in Judge Learned Hand's ruling in In re Murel Holding Co., 75 F.2d 941, 942 (2d Cir. 1935). See In re Monnier Bros., 755 F.2d at 1338-1339 (citing American Mariner Industries, 734 F.2d 426, 433 (9th Cir. 1984)). In Monnier, the Eighth Circuit Court of Appeals stated:
As the Ninth Circuit has noted,
Murel emphasized two factors in determining whether a reorganization plan provided a secured creditor adequate protection
for the full value of his claim:
Judge Hand concluded that the creditor's right to `get his money or at least the property' may be denied under a plan for reorganization only if the debtor provides a `substitute of the most indubitable equivalence.' Such
a substitute clearly must both compensate for present value and insure the safety of the principal.
Id. at 1339 (quoting
Mariner and adding emphasis). The Third Circuit Court of Appeals has described the requirement of "indubitable equivalence" as follows:
Though broad, the phrase "indubitable equivalent" is not unclear. Indubitable means "not open to question or doubt,"
Webster's Third New Int'l Dictionary 1154 (1971), while equivalent means one that is "equal in force or amount" or "equal in value,"
id. at 769. The Code fixes the relevant "value" as that of the collateral.
See 11 U.S.C. § 1129(b)(2)(A)(iii) (requiring the "indubitable equivalent" of the secured claim);
id. § 506(a) (defining a secured claim as "the extent of the value of such creditor's interest in the estate's interest in such property"). Thus the "indubitable equivalent" under subsection (iii) is the unquestionable value of a lender's secured interest in the collateral.
Further, the scope of the "indubitable equivalent" prong is circumscribed by the same principles that underlie subsections (i) and (ii), specifically, the protection of a fair return to secured lenders. As the Fifth Circuit reasoned:
Congress did not adopt indubitable equivalent as a capacious but empty semantic vessel. Quite the contrary, these examples focus on what is really at stake in secured credit: repayment of principal and the time value of
money. Clauses (i) and (ii) explicitly protect repayment to the extent of the secured creditors' collateral value and the time value compensating for the risk and delay of repayment. Indubitable equivalent is therefore no less demanding a standard than its companions.
Pacific Lumber, 584 F.3d [229] at 246 [5
th Cir. 2009].
In re Philadelphia Newspapers, LLC, 599 F.3d 298, 310-311 (3
rd Cir. 2010). Courts interpreting the indubitable equivalence standard have found cash payments, replacement collateral, abandonment of collateral, and combinations thereof, to be the indubitable equivalent of a secured claim.
See e.g., Pacific Lumber, 584 F.3d 229 (holding a cash payout met the "indubitable equivalent" requirement);
Matter of Sandy Ridge Dev. Corp., 881 F.2d 1346 (5
th Cir. 1989) (holding that a deed-back of real estate collateral in its entirety is necessarily the indubitable equivalent of the creditor's secured claim);
Matter of Sun Country, 764 F.2d 406 (5th Cir. 1985) (holding 21 notes secured by 21 lots of land the "indubitable equivalent" of a first lien on a 200 acre tract of land);
Matter of Atlanta Southern Business Park, 173 B.R. 444 (Bankr. N.D. Ga. 1994) (finding combination of cash and real estate collateral equal to value of secured claim satisfies indubitable equivalent test);
In re Keller, 157 B.R. 680 (Bankr. E.D. Wash. 1993) (allowing annuities to be substituted
for real estate collateral);
In re San Felipe @
Voss, Ltd., 115 B.R. 526 (S.D. Tex. 1990) (finding transfer of securities equivalent to first lien on real property).
Debtors propose to pay FSA $4,000 in exchange for FSA's release of its junior lien on the Home Tract. The Debtors also propose to surrender some personal property and to retain some personal property while paying for such property over time. The Debtors propose to pay the remainder of FSA's claim over time, and FSA will keep its first lien on the Remaining Tracts. As explained above, there is no prohibition on a debtor using several methods to provide a secured creditor with the indubitable equivalent of its claim. Courts have routinely allowed combinations of cash payments, payments over time, abandonment of collateral, and substitution of collateral. Courts have also allowed a debtor to abandon a portion of a secured creditor's collateral to the creditor in full satisfaction of its claim while retaining the remaining collateral free and clear of liens. See e.g., Matter of Atlanta Southern Business Park, Ltd., 173 B.R. 444, 449 (Bankr. N.D. Ga. 1994) ("A plan that includes the partial return of collateral may be confirmable under certain circumstances. One circumstance occurs where, as here, the creditor is oversecured and the value of the surrendered collateral is equivalent to the amount of the creditor's claim.") (citing In re Simons, 113 B.R. 942, 946-47 (Bankr. W.D. Tex. 1990); In re Elijah, 41 B.R. 348, 351-52 (Bankr. W.D. Mo. 1984)). See also Matter of May, 174 B.R. 832, 837 (Bankr. S.D. Ga. 1994) (concluding that a proposal to surrender only a portion of collateral to an oversecured creditor in full satisfaction of its claim can provide such a creditor with the indubitable equivalent of its claim).
Accordingly, the Debtors' proposal to satisfy the FSA's claim through a lump sum payment, abandonment of some equipment, and repayment over time of the bulk of FSA's secured claim does not automatically doom confirmation of the Debtors' Plan. Additionally, despite the cross-collateralization of FSA's loans, the Debtors are not prohibited from removing FSA's lien on some of its collateral provided the Debtors adequately compensate the FSA for the entirety of its secured claim. See Matter of May, 174 B.R. 832, 838 (Bankr. S.D. Ga. 1994) (quoting Matter of James Wilson Assoc., 965 F.2d 160, 171 (7th Cir. 1992)) ("`[T]he principle that liens pass through bankruptcy unaffected cannot be taken literally, . . . and it is the law that, provided the plan of reorganization gives the secured creditor the `indubitable equivalent' of its secured interest, the bankruptcy judge can force the creditor to accept the exchange.'").
FSA objects to Debtors' proposed payment of $4,000 in exchange for the FSA's release of its junior lien on the Home Tract on two grounds. First, the FSA asserts that the Debtors raised the value of the equipment they propose to retain from $28,870 in their Second Amended Plan to $32,370 in their Third Amended Plan (thereby paying more to FSA for such equipment) in order to place a lower value on the FSA's junior lien on the Home Tract. This argument fails because the FSA agrees that the equipment is in fact worth $32,370 according to the testimony of Mr. Petty, FSA's farm loan manager. The Debtors initially ascribed a higher value to the equipment, and the FSA appraised the equipment for $88,925 as of December 17, 2007. Mr. Bryant testified it was always his intent to list the higher value of $32,370 for the property indicating that the lower figure of $25,870 was a mistake. For whatever reason, the Debtors placed a lower value on this property in their Second Amended Plan but reflected the higher value on the property in their Third Amended Plan. The Court does not find the change to be in bad faith. The FSA agrees the property is worth at least $32,370, and the Court finds that is an appropriate value to assign to the retained personal property for purposes of determining whether FSA will receive the indubitable equivalent of its secured claim.
Although the Debtors submitted hypothetical liquidation analyses showing that for FSA's junior lien to have any value, a substantially higher value would have to be placed on the Home Tract, the analysis required is not what the FSA would receive if the Home Tract were liquidated today, but whether the value of FSA's secured claim is adequately protected under the Plan.
Second, the FSA objects to the value of approximately $205,000 assigned to the Home Tract by the Debtors arguing that the FSA cannot determine whether that value is appropriate because its appraiser valued all the Debtors' real property as opposed to valuing the Home Tract separately from the Remaining Tracts. The fact that FSA conducted an appraisal of the Debtors' real property as a whole and did not separately value the Home Tract from the Remaining Tracts is not evidence of anything — it is simply an assertion that the values placed on the Debtors' property as a whole may not apply to the tracts individually. The FSA's appraiser, Mr. Watts, testified he would have used different comparable sales had he been asked to separately value these properties, but he did not say the value would necessarily be lower or higher if valued separately. In any case, the Debtors did not use the FSA's appraiser's value of $1,600 per acre but assigned a lower value of $1,362 per acre to their real property. Debtors are competent to testify as to their opinion of their property's value, and Mr. Bryant did so in this case. His values were uncontroverted by any competent evidence. The FSA only asserted the Court should not look to the values it assigned the Debtors' real property in its appraisal, and it is not. The Court accepts the Debtors' valuation of their property.
U.S. v. 79.20 Acres of Land, More or Less, Situated in Stoddard County, Missouri, 710 F.2d 1352, 1357 (8th Cir. 1983) ("A landowner is presumed to have special knowledge of his property. His testimony as to the value of his land is therefore `admitted in federal courts without further qualification.'") (quoting United States v. 3,698.63 Acres of Land, 416 F.2d 65, 67 (8th Cir. 1969) and adding emphasis).
Having rejected the FSA's valuation arguments, the Court turns to whether or not the FSA will receive the indubitable equivalent of its secured claim despite being required to release its junior lien on the Home Tract. Applying the $4,000 value to the FSA's interest in the Home Tract, the Debtors calculate that FSA's secured claim of $425,180 is adequately protected, as shown in the calculation submitted as Debtors' Exhibit 15, which is reproduced below. Payment or Collateral Description Value Personal property surrendered to FSA $ 6,200 Personal property retained by Debtors (value to be paid to $ 32,370 FSA over five years at 5% interest) FSA's first lien on the Remaining Tracts (281 acres at $ 382,722 $1,362 per acre) to be paid at 5% interest over 20 years Cash payment for FSA's junior lien on the Home Tract $ 4,000 Total Payment or Security for FSA $ 425,292
The Court finds that a cash payment of $4,000 to FSA upon confirmation of Debtors' Plan along with the other payments and security provided to FSA under the Debtors' Plan will provide the FSA with the indubitable equivalent of its secured claim.
CONCLUSION
The Court finds the Debtors' Plan was filed in good faith and is not subject to dismissal pursuant to 11 U.S.C. § 1112(b). Further, the Court finds the Debtors' plan is feasible even with the changes contemplated by this Opinion. The Debtors are required to pay the Bank its contract rate of interest through the date of confirmation, and accordingly, must submit a modified plan providing for such interest. The Debtors' proposal to pay the Bank 5.5% on its claim for a 12-year period is confirmed. The Debtors' proposal to pay FSA $4,000 in exchange for the FSA's release of its junior lien on the Home Tract is confirmed pursuant to 11 U.S.C. § 1129(b)(2)(A)(iii). If the Debtors modify their Plan within 14 days from the date of this order to provide for payment terms that are consistent with the findings in this Opinion, an order of confirmation will enter without further notice or hearing. Because the changes to the Third Amended Plan of Reorganization primarily impact the Bank and should not affect the other payments to be made under the Plan, the Debtors need not solicit acceptances of the Modified Third Amended Plan of Reorganization.
"If modifications made to a plan prior to confirmation (but after the ballots have been counted) are minor, impact only a creditor who has been fully involved, and do not adversely impact any other creditor, then it is not necessary to solicit new acceptances." In re American Trailer and Storage, Inc., 419 B.R. 412, 419 (Bankr. W.D. Mo. 2009) (citations omitted).
For the reasons set forth herein, it is hereby ORDERED that the Bank's Motion to Dismiss is DENIED; it is further
ORDERED that the Bank's Objection to Confirmation is SUSTAINED IN PART, and OVERRULED IN PART; it is further
ORDERED that the FSA's Objection to Confirmation is OVERRULED; and it is further
ORDERED that the Debtors' Third Amended Plan of Reorganization is hereby confirmed on the condition that Debtors file a modified plan providing for payment terms that are consistent with the findings in this Opinion within 14 days of the entry of this Opinion.
IT IS SO ORDERED.