Fifth Circuit Releases Interest-ing Opinion on Chapter 13 Interest Rates

The Fifth Circuit has released a new opinion on interest rates in chapter 13 cases. Drive Financial Services, L.P. v. Jordan, 2008 U.S. App. LEXIS 5334 (5th Cir. 3/12/2008). While the opinion does not contain any earth-shattering conclusions, it provides an excellent starting point for a practitioner wanting to learn treatment of secured claims in chapter 13.

The Facts

Debtor financed a pickup truck with Drive Financial. The contract interest rate was 17.95%. When the Debtor filed chapter 13, he proposed to lower the rate to 6%. At the confirmation hearing, the parties stipulated that the rate would be 7.5% under the Supreme Court's Till v. SCS Credit Corp., 541 U.S. 465 (2004) decision or 17.95% under the Fifth Circuit's Green Tree Fin. Servicing Corp. v. Smithwick, 121 F.3d 211 (5th Cir. 1997). Under Till, the interest rate is to be determined based on the prime rate plus a risk premium, while Smithwick applied a rebuttable presumption that the contract rate should apply. The Bankruptcy Court applied Till and used the lower rate. The parties received permission to take a direct appeal to the Fifth Circuit.

The Hanging Paragraph Does Not Apply

The Fifth Circuit first dispelled the notion that the hanging paragraph of Sec. 1325(a)(*) applies to calculation of interest on a chapter 13 secured debt. Drive Financial argued that because Till dealt with the interest rate on a lienstripped claim, that it had no application to a post-BAPCPA claim on a vehicle claim protected from lienstripping under the hanging paragraph. The Fifth Circuit found that the fact that the claim had been subject to lienstripping did not play any part in the Supreme Court's decision to apply a prime + interest rate calculation and thus concluded that BAPCPA had not overruled the Till decision.

This raises an important point. Loans secured by a principal residence are protected from modification in both chapter 11 and chapter 13. On the other hand, loans incurred for purchase money on a vehicle within 910 days are protected from lienstripping (that is, having the secured claim reduced to the value of the collateral), but are still subject to having their interest rates modified. Thus, home mortgages receive greater protection than recent car loans.

The Till Plurality Is the Law; Smithwick Is Not

Next, the Fifth Circuit explored how to apply a plurality opinion from the Supreme Court. In Till, a plurality of four justices adopted a prime rate + approach, while Justice Thomas concurred in the judgment but found that a risk premium was not mandated. Where no single rationale is approved by a majority, the lower courts are required to follow the position of the justices who concurred in the judgment on the narrowest grounds. Drive Financial argued that because Justice Thomas did not concur in any part of the plurality opinion that Till was not binding. However, the Fifth Circuit noted that the fifth vote cast by Justice Thomas found that a prime + interest rate would always be sufficient to protect the secured creditor because the statute only required a risk free rate of return. Thus, there were five votes for the position that a prime + rate would adequately protect the interest of the secured creditor, and thus, that the lower courts must follow this result.

The Fifth Circuit also pointed out that, even if the reasons for adopting Till were murky, that the facts were the same as the present case. As a result, stare decisis required that the Fifth Circuit follow Till and not its own prior precedent.

As a result, the Fifth Circuit found that the prime rate + approach to calculating the interest rate in chapter 13 remains the law.