Judge Somers

10-42327 Schuckenbrock and Crawford (Doc. # 129)

In Re Schuckenbrock and Crawford, 10-42327 (Bankr. D. Kan. Oct. 30, 2012) Doc. # 129

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SIGNED this 29th day of October, 2012.



Opinion Designated for Electronic Use, But Not for Print Publication

In re:


This matter comes before the Court for a ruling on the discount rate that must be
applied to the Debtors’ proposed deferred payments to Class 6 under their Chapter 12
plan, the class of general unsecured creditors, in order to satisfy the requirement of
§ 1225(a)(4) that “the value, as of the effective date of the plan, of property to be
distributed under the plan on account of each allowed unsecured claim is not less than the
amount that would be paid on such claim if the estate were liquidated under chapter 7.”
The Debtors appear by counsel David R. Klaassen. The Chapter 12 Trustee, Eric C.

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Rajala, objected to the Debtors’ plan, and appears on his own behalf. The Court has
reviewed the relevant materials and is now ready to rule.


The Debtors filed their Chapter 12 petition on December 31, 2010, and on January
25, 2011, they filed their schedules. On Schedule F, they listed 16 creditors holding
unsecured claims totaling just over $80,000. However, only 11 creditors have filed
proofs of claim showing themselves to be completely unsecured, asserting debts totaling
over $60,000. One creditor filed a proof of claim for a secured claim of just over $9,000
and an unsecured claim of just over $18,000. The only other creditor to file a secured
claim asserted its claim for almost $290,500 was fully secured. Thus, there are presently
approximately $78,000 in allowed unsecured claims in this case.

The Debtors filed a Chapter 12 plan dated December 5, 2011. In it, they proposed
to pay administrative claims, one priority tax claim, two secured claims, and then, from
any portion of their disposable income that exceeds the amounts needed to pay the
previously-listed claims, to pay Class 6, their unsecured claims, minus the Trustee’s
percentage fee. They stated a minimum amount they would pay to the Trustee for this
class of unsecured claims, which they have now agreed to increase to $30,000. This is
not enough to pay the unsecured claims in full. Because the Debtors are not proposing to
pay the $30,000 on the effective date of the plan but instead at some unspecified future
date, the Trustee objected that the Debtors must pay interest on the $30,000 so its value
“as of the effective date of the plan” would not be less than $30,000. The parties now


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agree that a discount rate must be applied (or, in effect, that interest must be paid) on the
$30,000 so that the present value of the money the Debtors will pay the Trustee in the
future for the class of unsecured creditors will equal the $30,000 liquidation value of the
nonexempt assets that would be available in a Chapter 7 case to be distributed on those
claims. But the parties contest the rate at which interest should accrue until the Debtors
have paid the required amount to the Trustee.

Relying on the plurality opinion in Till v. SCS Credit Corporation,1 the Trustee
argues the Debtors must pay interest based on a published prime rate, plus an upward risk
adjustment. He says in a footnote that the discount factor (or interest rate) that the
Chapter 13 Standing Trustees for the District of Kansas are currently using is 4.75%. The
Debtors ask the Court to adopt the view accepted by the concurring opinion in Till,2
which concluded the relevant statute only requires debtors to pay a riskless rate, with no
upward adjustment for the risk that they won’t complete their plan. Although the
concurring opinion said “the prime rate” most closely approximates the riskless rate for
money, the Debtors contend that because U.S. Treasury securities are backed by the full
faith and credit of the federal government, they represent a riskless interest rate, and
because the Debtors’ plan is to run no less than 36 nor more than 60 months, “the rate of
the Five-Year Treasury Constant Maturity Treasury securities most closely fits” their

1541 U.S. 465, 468-85 (2004).

2Id. at 485-91.


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For Chapter 12 cases, § 1225(a)(4) imposes a plan confirmation requirement
commonly known as the best interests of creditors test. Simply stated, this test requires a
Chapter 12 plan to provide for the holders of allowed unsecured claims to receive
property worth at least as much under the plan as they would receive if the bankruptcy
estate were instead liquidated under Chapter 7 and they were paid with liquidation
proceeds. And the provision requires the Court to compare the “value, as of the effective
date of the plan, of property to be distributed under the plan on account of each allowed
unsecured claim” to the liquidation value, as of the effective date of the plan, that would
be paid on such claims to determine whether the test is met. The quoted language means
that plan payments to be made in the future must be discounted to their present value
before comparing them to the value a Chapter 7 liquidation would pay on each unsecured
claim.4 Because accurately discounting future payments to their present value can only
be done when the exact dates and amounts of the payments are known and debtors are
highly unlikely to make the payments to the case trustee on exactly the projected dates
and in exactly the projected amounts, the present value determination is normally made
by the mathematically equivalent process of applying an interest rate to a specific amount

3Dkt. 122 at 9.
4See 8 Collier on Bankruptcy, ¶ 1225.02[4] at 1225-8 to 1225-9 (Alan N. Resnick & Henry J.
Sommer, eds.-in-chief, 16th ed. 2012).

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that is to be paid to the class of unsecured claims.5 The interest rate can then be applied
to the amount remaining to be paid until the debtor actually makes each payment, thus
assuring that the required present value is actually paid to the class.

The language requiring a present value determination of plan payments to be made
in the future also appears in § 1225(a)(5)(B)(ii), which provides an option to pay a
secured claim through future payments having a present value not less than the allowed
amount of the claim. The same present value language applies to plans in Chapter 13
cases as well, with § 1325(a)(4) covering unsecured claims and § 1325(a)(5)(B)(ii)
covering secured claims, so case law interpreting either of those provisions should be just
as helpful in construing the Chapter 12 provisions. Consequently, although Till was
interpreting § 1325(a)(5)(B)(ii), the decision also controls interpretations of § 1225(a)(4)
to the extent a controlling conclusion can be drawn from the case. But Till’s precedential
value is less than might be hoped because no single construction of the present value
language was approved by more than four members of the Supreme Court.

The Trustee suggests the Court should apply the prime-rate-plus-risk-adjustment
approach that the four-justice plurality adopted in Till. The plurality described this
approach as starting with “the national prime interest rate, reported daily in the press,
which reflects the financial market’s estimate of the amount a commercial bank should
charge a creditworthy customer to compensate for the opportunity costs of the loan, the
risk of inflation, and the relatively slight risk of default,” and adding a risk adjustment

5See 8 Collier on Bankruptcy, ¶1225.03[4][c].

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because “bankrupt debtors typically pose a greater risk of nonpayment than solvent
commercial borrowers.”6 The Debtors argue the Till plurality’s opinion is not binding
precedent, and ask the Court instead to adopt the approach accepted by Justice Thomas in
his concurring opinion, namely, that the statute requires no adjustment in the present
value calculation for the risk of nonpayment, and only a riskless interest rate is required.7

While it may be true that the plurality’s approach to determining the proper
present-value interest rate is not binding because neither Justice Thomas nor the four-
member dissent agreed with it, the Court believes the Debtors have overlooked one facet
of the Till opinions that undoubtedly is binding. As Justice Thomas himself noted:
“Respondent argues, and the plurality and the dissent agree, that the proper interest rate
must also reflect the risk of nonpayment.”8 That is, both the plurality and the dissent, a
total of eight justices, rejected Justice Thomas’s theory that the present-value language
only requires a riskless interest rate. Therefore, Till is binding authority for the rejection
of a risk-free rate, and this Court is not allowed to adopt one.

Neither side in this dispute has presented any evidence on the discount rate
question. The Trustee did not state in his brief what he thinks the applicable prime rate is
or what an appropriate risk adjustment would be, although he said in a footnote that a
Till-rate discount rate of 4.75% is currently being used in Chapter 13 cases in this

6541 U.S. at 478-80.

7Id. at 485-91.

8Id. at 487.


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District, and in his conclusion, he asked the Court to require the Debtors to pay that rate
on the $30,000 they are to pay to the class of the general unsecured creditors through their

Under the circumstances, all the Court is prepared to do at this point is reject the
Debtors’ argument that a risk-free discount or interest rate would be sufficient to satisfy
§ 1225(a)(4). The Debtors are hereby given 21 days from the entry of this opinion to
advise the Trustee and the Court whether, given this ruling, they are willing to accept the
interest rate proposed by the Trustee, or instead wish to participate in an evidentiary
hearing about the rate the Court should apply.

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