SCALIA, J., DISSENTING
TILL V. SCS CREDIT CORP.
541 U. S. ____ (2004)
SUPREME COURT OF THE UNITED STATES
NO. 02-1016
LEE M. TILL, et ux., PETITIONERS
v.
SCS CREDIT CORPORATION
on writ of certiorari to the united states court of
appeals for the seventh circuit
[May 17, 2004]
Justice Scalia, with whom The
Chief Justice, Justice O’Connor, and Justice Kennedy join,
dissenting.
My areas of agreement with the
plurality are substantial. We agree that, although all confirmed
Chapter 13 plans have been deemed feasible by a bankruptcy judge,
some nevertheless fail. See
ante, at 14. We agree that any
deferred payments to a secured creditor must fully compensate it
for the risk that such a failure will occur. See
ante, at
7. Finally, we agree that adequate compensation may sometimes
require an “ ‘eye-popping’ ” interest rate, and that, if
the rate is too high for the plan to succeed, the appropriate
course is not to reduce it to a more palatable level, but to refuse
to confirm the plan. See
ante, at 14.
Our only disagreement is over what procedure
will more often produce accurate estimates of the appropriate
interest rate. The plurality would use the prime lending rate— a
rate we
know is too low—and require the judge in every
case to determine an amount by which to increase it. I believe
that, in practice, this approach will systematically
undercompensate secured creditors for the true risks of default. I
would instead adopt the contract rate—
i.e., the rate at
which the creditor actually loaned funds to the debtor—as a
presumption that the bankruptcy judge could revise on motion of
either party. Since that rate is generally a good indicator of
actual risk, disputes should be infrequent, and it will provide a
quick and reasonably accurate standard.
I
The contract-rate approach makes
two assumptions, both of which are reasonable. First, it assumes
that subprime lending markets are competitive and therefore largely
efficient. If so, the high interest rates lenders charge reflect
not extortionate profits or excessive costs, but the actual risks
of default that subprime borrowers present. Lenders with excessive
rates would be undercut by their competitors, and inefficient ones
would be priced out of the market. We have implicitly assumed
market competitiveness in other bankruptcy contexts. See
Bank
of America Nat. Trust and Sav. Assn. v.
203 North LaSalle
Street Partnership, 526 U. S. 434, 456–458
(1999). Here the assumption is borne out by empirical evidence: One
study reports that subprime lenders are nearly twice as likely to
be unprofitable as banks, suggesting a fiercely competitive
environment. See J. Lane, Associate Director, Division of
Supervision, Federal Deposit Insurance Corporation, A Regulator’s
View of Subprime Lending: Address at the National Automotive
Finance Association Non-Prime Auto Lending Conference 6 (June
18–19, 2002) (available in Clerk of Court’s case file). By relying
on the prime rate, the plurality implicitly assumes that the
prime lending market is efficient, see
ante, at
12; I see no reason not to make a similar assumption about the
subprime lending market.
The second assumption is that the
expected costs of default in Chapter 13 are normally no less than
those at the time of lending. This assumption is also reasonable.
Chapter 13 plans often fail. I agree with petitioners that the
relevant statistic is the percentage of
confirmed plans
that fail, but even resolving that issue in their favor, the risk
is still substantial. The failure rate they offer—which we may take
to be a conservative estimate, as it is doubtless the lowest one
they could find—is 37%. See Girth, The Role of Empirical Data in
Developing Bankruptcy Legislation for Individuals, 65 Ind.
L. J. 17, 40–42 (1989) (reporting a 63.1% success
rate).[
Footnote 1] In every one
of the failed plans making up that 37%, a bankruptcy judge had
found that “the debtor will be able to make all payments under the
plan,” 11 U. S. C. §1325(a)(6), and a trustee had supervised
the debtor’s compliance, §1302. That so many nonetheless failed
proves that bankruptcy judges are not oracles and that trustees
cannot draw blood from a stone.
While court and trustee oversight may provide
some marginal benefit to the creditor, it seems obviously
outweighed by the fact that (1) an already-bankrupt borrower has
demonstrated a financial instability and a proclivity to seek legal
protection that other subprime borrowers have not, and (2) the
costs of foreclosure are substantially higher in bankruptcy because
the automatic stay bars repossession without judicial permission.
See §362. It does not strike me as plausible that creditors would
prefer to lend to individuals already in bankruptcy than
to those for whom bankruptcy is merely a possibility—as if Chapter
13 were widely viewed by secured creditors as some sort of godsend.
Cf. Dunagan, Enforcement of Security Interests in Motor Vehicles in
Bankruptcy, 52 Consumer Fin. L. Q. Rep. 191, 197 (1998).
Certainly the record in this case contradicts that implausible
proposition. See App. 48 (testimony of Craig Cook, sales manager of
Instant Auto Finance) (“Q. Are you aware of how other lenders
similar to Instant Auto Finance view credit applicants who appear
to be candidates for Chapter 13 bankruptcy?” “A. Negative[ly] as
well”). The better assumption is that bankrupt debtors are riskier
than other subprime debtors—or, at the very least, not
systematically
less risky.
The first of the two assumptions means that
the contract rate reasonably reflects actual risk at the time of
borrowing. The second means that this risk persists when the debtor
files for Chapter 13. It follows that the contract rate is a decent
estimate, or at least the lower bound, for the appropriate interest
rate in cramdown.[
Footnote
2]
The plurality disputes these two assumptions.
It argues that subprime lending markets are not competitive because
“vehicles are regularly sold by means of tie-in transactions, in
which the price of the vehicle is the subject of negotiation, while
the terms of the financing are dictated by the seller.”
Ante, at 15.[
Footnote
3] Tie-ins do not
alone make financing markets
noncompetitive; they only cause prices and interest rates to be
considered
in tandem rather than separately. The force of
the plurality’s argument depends entirely on its claim that “the
terms of the financing are dictated by the seller.”
Ibid.
This unsubstantiated assertion is contrary to common experience.
Car sellers routinely advertise their interest rates, offer
promotions like “zero-percent financing,” and engage in other
behavior that plainly assumes customers are sensitive to interest
rates and not just price.[
Footnote
4]
The plurality also points to state and federal
regulation of lending markets.
Ante, at 15–16. It claims
that state usury laws evince a belief that subprime lending markets
are noncompetitive. While that is one
conceivable
explanation for such laws, there are countless others. One
statistical and historical study suggests that usury laws are a
“primitive means of social insurance” meant to ensure “low interest
rates” for those who suffer financial adversity. Glaeser &
Scheinkman, Neither a Borrower Nor a Lender Be: An Economic
Analysis of Interest Restrictions and Usury Laws, 41 J. Law
& Econ. 1, 26 (1998). Such a rationale does not reflect a
belief that lending markets are inefficient, any more than rent
controls reflect a belief that real estate markets are inefficient.
Other historical rationales likewise shed no light on the point at
issue here. See
id., at 27. The mere existence of usury
laws is therefore weak support for any position.
The federal Truth in Lending Act, 15 U.
S. C. §1601
et seq., not only fails to support the
plurality’s position; it positively refutes it. The plurality
claims the Act reflects a belief that full disclosure promotes
competition, see
ante, at 16, and n. 24; the Act itself
says as much, see 15 U. S. C. §1601(a). But that belief
obviously
presumes markets are competitive (or, at least,
that they were noncompetitive only because of the absence of the
disclosures the Act now requires). If lending markets were not
competitive—if the terms of financing were indeed “dictated by the
seller,”
ante, at 15—disclosure requirements would be
pointless, since consumers would have no use for the
information.[
Footnote 5]
As to the second assumption (that the expected
costs of default in Chapter 13 are normally no less than those at
the time of lending), the plurality responds, not that Chapter 13
as currently administered is less risky than subprime
lending generally, but that it
would be less risky, if
only bankruptcy courts would confirm fewer risky plans.
Ante, at 16–17. Of course, it is often quite difficult to
predict which plans will fail. See Norberg, Consumer Bankruptcy’s
New Clothes: An Empirical Study of Discharge and Debt Collection in
Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 462 (1999). But
even assuming the high failure rate primarily reflects judicial
dereliction rather than unavoidable uncertainty, the plurality’s
argument fails for want of any reason to believe the dereliction
will abate. While full compensation can be attained either by
low-risk plans and low interest rates, or by high-risk plans and
high interest rates, it cannot be attained by
high-risk
plans and
low interest rates, which, absent cause to
anticipate a change in confirmation practices, is precisely what
the formula approach would yield.
The plurality also claims that the contract
rate overcompensates creditors because it includes “transaction
costs and overall profits.”
Ante, at 11. But the same is
true of the rate the plurality prescribes: The prime lending rate
includes banks’ overhead and profits. These are necessary
components of
any commercial lending rate, since creditors
will not lend money if they cannot cover their costs and return a
level of profit sufficient to prevent their investors from going
elsewhere. See
Koopmans v.
Farm Credit Services of
Mid-America, ACA, 102 F. 3d 874, 876 (CA7 1996). The
plurality’s criticism might have force if there were reason to
believe subprime lenders made exorbitant profits while banks did
not—but, again, the data suggest otherwise. See Lane, Regulator’s
View of Subprime Lending, at 6.[
Footnote 6]
Finally, the plurality objects that similarly
situated creditors might not be treated alike.
Ante, at
11, and n. 17. But the contract rate is only a presumption. If
a judge thinks it necessary to modify the rate to avoid unjustified
disparity, he can do so. For example, if two creditors charged
different rates solely because they lent to the debtor at different
times, the judge could average the rates or use the more recent
one. The plurality’s argument might be valid against an approach
that
irrebuttably presumes the contract rate, but that is
not what I propose.[
Footnote
7]
II
The defects of the formula
approach far outweigh those of the contract-rate approach. The
formula approach starts with the prime lending rate—a number that,
while objective and easily ascertainable, is indisputably too low.
It then adjusts by adding a risk premium that, unlike the prime
rate, is neither objective nor easily ascertainable. If the risk
premium is typically small relative to the prime rate—as the 1.5%
premium added to the 8% prime rate by the court below would lead
one to believe—then this subjective element of the computation
might be forgiven. But in fact risk premiums, if properly computed,
would typically be substantial. For example, if the 21% contract
rate is an accurate reflection of risk in this case, the risk
premium would be 13%—nearly two-thirds of the total interest rate.
When the risk premium is the greater part of the overall rate, the
formula approach no longer depends on objective and easily
ascertainable numbers. The prime rate becomes the objective tail
wagging a dog of unknown size.
As I explain below, the most
relevant factors bearing on risk premium are (1) the probability of
plan failure; (2) the rate of collateral depreciation; (3) the
liquidity of the collateral market; and (4) the administrative
expenses of enforcement. Under the formula approach, a risk premium
must be computed in every case, so judges will invariably grapple
with these imponderables. Under the contract-rate approach, by
contrast, the task of assessing all these risk factors is entrusted
to the entity most capable of undertaking it: the market. See
Bank of America, 526 U. S., at 457 (“[T]he best way to
determine value is exposure to a market”). All the risk factors are
reflected (assuming market efficiency) in the debtor’s contract
rate—a number readily found in the loan document. If neither party
disputes it, the bankruptcy judge’s task is at an end. There are
straightforward ways a debtor
could dispute it—for
example, by showing that the creditor is now substantially
oversecured, or that some other lender is willing to extend credit
at a lower rate. But unlike the formula approach, which requires
difficult estimation in every case, the contract-rate approach
requires it only when the parties choose to contest the issue.
The plurality defends the formula approach on
the ground that creditors have better access to the relevant
information.
Ante, at 18–19. But this is not a case where
we must choose between one initial estimate that is too low and
another that is too high. Rather, the choice is between one that is
far too low and another that is generally reasonably accurate (or,
if anything, a bit too low). In these circumstances, consciously
choosing the less accurate estimate merely because creditors have
better information smacks more of policymaking than of faithful
adherence to the statutory command that the secured creditor
receive property worth “
not less than the allowed amount”
of its claim, 11 U. S. C. §1325(a)(5)(B)(ii) (emphasis added).
Moreover, the plurality’s argument assumes it is plausible—and
desirable—that the issue will be litigated in most cases. But the
costs of conducting a detailed risk analysis and defending it in
court are prohibitively high in relation to the amount at stake in
most consumer loan cases. Whatever approach we prescribe, the norm
should be—and undoubtedly will be—that the issue is not litigated
because it is not worth litigating. Given this reality, it is far
more important that the initial estimate be accurate than that the
burden of proving inaccuracy fall on the better informed party.
There is no better demonstration of the
inadequacies of the formula approach than the proceedings in this
case. Petitioners’ economics expert testified that the 1.5% risk
premium was “very reasonable” because Chapter 13 plans are
“supposed to be financially feasible” and “the borrowers are under
the supervision of the court.” App. 43. Nothing in the record shows
how these two platitudes were somehow manipulated to arrive at a
figure of 1.5%. It bears repeating that feasibility determinations
and trustee oversight do not prevent at least 37% of confirmed
Chapter 13 plans from failing. On cross-examination, the expert
admitted that he had only limited familiarity with the subprime
auto lending market and that he was not familiar with the default
rates or the costs of collection in that market.
Id., at
44–45. In light of these devastating concessions, it is impossible
to view the 1.5% figure as anything other than a smallish number
picked out of a hat.
Based on even a rudimentary financial analysis
of the facts of this case, the 1.5% figure is obviously wrong—not
just off by a couple percent, but probably by roughly an order of
magnitude. For a risk premium to be adequate, a hypothetical,
rational creditor must be indifferent between accepting (1) the
proposed risky stream of payments over time and (2) immediate
payment of its present value in a lump sum. Whether he is
indifferent—
i.e., whether the risk premium added to the
prime rate is adequate—can be gauged by comparing benefits and
costs: on the one hand, the expected value of the extra interest,
and on the other, the expected costs of default.
Respondent was offered a risk premium of 1.5%
on top of the prime rate of 8%. If that premium were fully paid as
the plan contemplated, it would yield about $60.[
Footnote 8] If the debtor defaulted, all or part
of that interest would not be paid, so the expected value is only
about $50.[
Footnote 9] The
prime rate itself already includes some compensation for risk; as
it turns out, about the same amount, yielding another $50.[
Footnote 10] Given the 1.5% risk
premium, then, the total expected benefit to respondent was about
$100. Against this we must weigh the expected costs of default.
While precise calculations are impossible, rough estimates convey a
sense of their scale.
The first cost of default involves
depreciation. If the debtor defaults, the creditor can eventually
repossess and sell the collateral, but by then it may be
substantially less valuable than the remaining balance due—and the
debtor may stop paying long before the creditor receives permission
to repossess. When petitioners purchased their truck in this case,
its value was almost equal to the principal balance on the
loan.[
Footnote 11] By the
time the plan was confirmed, however, the truck was worth only
$4,000, while the balance on the loan was $4,895. If petitioners
were to default on their Chapter 13 payments and if respondent
suffered the same relative loss from depreciation, it would amount
to about $550.[
Footnote
12]
The second cost of default involves
liquidation. The $4,000 to which respondent would be entitled if
paid in a lump sum reflects the
replacement value of the
vehicle,
i.e., the amount it would cost the debtor to
purchase a similar used truck. See
Associates Commercial
Corp. v.
Rash,
520 U. S. 953, 965 (1997). If the
debtor defaults, the creditor cannot sell the truck for that
amount; it receives only a lesser
foreclosure value
because collateral markets are not perfectly liquid and there is
thus a spread between what a buyer will pay and what a seller will
demand. The foreclosure value of petitioners’ truck is not in the
record, but, using the relative liquidity figures in
Rash
as a rough guide, respondent would suffer a further loss of about
$450.[
Footnote 13]
The third cost of default consists of the
administrative expenses of foreclosure. While a Chapter 13 plan is
in effect, the automatic stay prevents secured creditors from
repossessing their collateral, even if the debtor fails to pay. See
11 U. S. C. §362. The creditor’s attorney must move the
bankruptcy court to lift the stay. §362(d). In the District where
this case arose, the filing fee for such motions is now $150. See
United States Bankruptcy Court for the Southern District of
Indiana, Schedule of Bankruptcy Fees (Nov. 1, 2003) (available in
Clerk of Court’s case file). And the standard attorney’s fee for
such motions, according to one survey, is $350 in Indiana and as
high as $875 in other States. See J. Cossitt, Chapter 13 Attorney
Fee Survey, American Bankruptcy Institute Annual Spring Meeting
(Apr. 10–13, 2003) (available in Clerk of Court’s case file).
Moreover, bankruptcy judges will often excuse first offenses, so
foreclosure may require multiple trips to court. The total expected
administrative expenses in the event of default could reasonably be
estimated at $600 or more.
I have omitted several other costs of default,
but the point is already adequately made. The three figures above
total $1,600. Even accepting petitioners’ low estimate of the plan
failure rate, a creditor choosing the stream of future payments
instead of the immediate lump sum would be selecting an alternative
with an expected cost of about $590 ($1,600 multiplied by 37%, the
chance of failure) and an expected benefit of about $100 (as
computed above). No rational creditor would make such a choice. The
risk premium over prime necessary to make these costs and benefits
equal is in the neighborhood of 16%, for a total interest rate of
24%.[
Footnote 14]
Of course, many of the estimates I have made
can be disputed. Perhaps the truck will depreciate more slowly now
than at first, perhaps the collateral market is more liquid than
the one in
Rash, perhaps respondent can economize on
attorney’s fees, and perhaps there is some reason (other than
judicial optimism) to think the Tills were unlikely to default. I
have made some liberal assumptions,[
Footnote 15] but also some conservative ones.[
Footnote 16] When a risk premium is
off by an order of magnitude, one’s estimates need not be very
precise to show that it cannot possibly be correct.
In sum, the 1.5% premium adopted in this case
is far below anything approaching fair compensation. That result is
not unusual, see,
e.g.,
In re Valenti, 105
F. 3d 55, 64 (CA2 1997) (recommending a 1%–3% premium over the
treasury rate—
i.e., approximately a 0% premium
over prime); it is the entirely predictable consequence of a
methodology that tells bankruptcy judges to set interest rates
based on highly imponderable factors. Given the inherent
uncertainty of the enterprise, what heartless bankruptcy judge can
be expected to demand that the unfortunate debtor pay
triple the prime rate as a condition of keeping his sole
means of transportation? It challenges human nature.
III
Justice Thomas rejects both the
formula approach and the contract-rate approach. He reads the
statutory phrase “property to be distributed under the plan,” 11 U.
S. C. §1325(a)(5)(B)(ii), to mean the proposed payments
if made
as the plan contemplates, so that the plan need only pay the
risk-free rate of interest.
Ante, at 3 (opinion concurring
in judgment). I would instead read this phrase to mean the right to
receive payments that the plan vests in the creditor upon
confirmation. Because there is no guarantee that the promised
payments will in fact be made, the value of this property right
must account for the risk of nonpayment.
Viewed in isolation, the phrase
is susceptible of either meaning. Both the promise to make payments
and the proposed payments themselves are property rights, the
former “to be distributed under the plan” immediately upon
confirmation, and the latter over the life of the plan. Context,
however, supports my reading. The cramdown option which the debtors
employed here is only one of three routes to confirmation. The
other two—creditor acceptance and collateral surrender,
§§1325(a)(5)(A), (C)— are both creditor protective, leaving the
secured creditor roughly as well off as he would have been had the
debtor not sought bankruptcy protection. Given this, it is unlikely
the third option was meant to be substantially
underprotective; that would render it so much more
favorable to debtors that few would ever choose one of the
alternatives.
The risk-free approach also leads to anomalous
results. Justice Thomas admits that, if a plan distributes a note
rather than cash, the value of the “property to be distributed”
must reflect the risk of default on the note.
Ante, at
4–5. But there is no practical difference between obligating the
debtor to make deferred payments under a plan and obligating the
debtor to sign a note that requires those same payments. There is
no conceivable reason why Congress would give secured creditors
risk compensation in one case but not the other.
Circuit authority uniformly rejects the
risk-free approach. While Circuits addressing the issue are divided
over
how to calculate risk, to my knowledge all of them
require some compensation for risk, either explicitly or
implicitly. See
In re Valenti,
supra, at 64
(treasury rate plus 1%–3% risk premium);
GMAC v.
Jones, 999 F. 2d 63, 71 (CA3 1993) (contract rate);
United Carolina Bank v.
Hall, 993 F. 2d
1126, 1131 (CA4 1993) (creditor’s rate for similar loans, but not
higher than contract rate);
In re Smithwick, 121
F. 3d 211, 214 (CA5 1997) (contract rate);
In re
Kidd, 315 F.3d 671, 678 (CA6 2003) (market rate for similar
loans); 301 F. 3d 583, 592–593 (CA7 2002) (case below)
(contract rate);
In re Fisher, 930 F.2d 1361, 1364 (CA8
1991) (market rate for similar loans) (interpreting parallel
Chapter 12 provision);
In re Fowler, 903 F. 2d
694, 698 (CA9 1990) (prime rate plus risk premium);
In re
Hardzog, 901 F.2d 858, 860 (CA10 1990) (market rate for
similar loans, but not higher than contract rate) (Chapter 12);
In re Southern States Motor Inns, Inc., 709 F.2d 647,
652–653 (CA11 1983) (market rate for similar loans) (interpreting
similar Chapter 11 provision); see also 8 Collier on Bankruptcy, ¶
;1325.06[3][b], p. 1325–37 (15th ed. rev. 2004). Justice Thomas
identifies no decision adopting his view.
Nor does our decision in
Rash,
520 U. S. 953, support the risk-free
approach. There we considered whether a secured creditor’s claim
should be valued at what the debtor would pay to replace the
collateral or at the lower price the creditor would receive from a
foreclosure sale. Justice Thomas contends that
Rash
selected the former in order to compensate creditors for the risk
of plan failure, and that, having compensated them once in that
context, we need not do so again here.
Ante, at 5. I
disagree with this reading of
Rash. The Bankruptcy Code
provides that “value shall be determined in light of the purpose of
the valuation and of the proposed disposition or use of [the]
property.” 11 U. S. C. §506(a).
Rash held that the
foreclosure-value approach failed to give effect to this language,
because it assigned the same value whether the debtor surrendered
the collateral or was allowed to retain it in exchange for promised
payments. 520 U. S., at 962. “From the creditor’s perspective as
well as the debtor’s, surrender and retention are not equivalent
acts.”
Ibid. We did point out that retention entails risks
for the creditor that surrender does not.
Id., at 962–963.
But we made no effort to correlate that increased risk with the
difference between replacement and foreclosure value. And we also
pointed out that retention benefits the debtor by allowing him to
continue to use the property—a factor we considered “[o]f prime
significance.”
Id., at 963.
Rash stands for the
proposition that surrender and retention are fundamentally
different sorts of “disposition or use,” calling for different
valuations. Nothing in the opinion suggests that we thought the
valuation difference reflected the degree of increased risk, or
that we adopted the replacement-value standard
in order to
compensate for increased risk. To the contrary, we said that
the debtor’s “actual use … is the proper guide under a prescription
hinged to the property’s ‘disposition or use.’ ”
Ibid.
If Congress wanted to compensate secured
creditors for the risk of plan failure, it would not have done so
by prescribing a particular method of valuing collateral. A plan
may pose little risk even though the difference between foreclosure
and replacement values is substantial, or great risk even though
the valuation difference is small. For example, if a plan proposes
immediate cash payment to the secured creditor, he is entitled to
the higher replacement value under
Rash even though he
faces no risk at all. If the plan calls for deferred payments but
the collateral consists of listed securities, the valuation
difference may be trivial, but the creditor still faces substantial
risks. And a creditor oversecured in even the slightest degree at
the time of bankruptcy derives no benefit at all from
Rash, but still faces some risk of collateral
depreciation.[
Footnote
17]
There are very good reasons for Congress to
prescribe full risk compensation for creditors. Every action in the
free market has a reaction somewhere. If subprime lenders are
systematically undercompensated in bankruptcy, they will charge
higher rates or, if they already charge the legal maximum under
state law, lend to fewer of the riskiest borrowers. As a result,
some marginal but deserving borrowers will be denied vehicle loans
in the first place. Congress evidently concluded that widespread
access to credit is worth preserving, even if it means being
ungenerous to sympathetic debtors.
* * *
Today’s judgment is unlikely to
burnish the Court’s reputation for reasoned decisionmaking. Eight
Justices are in agreement that the rate of interest set forth in
the debtor’s approved plan must include a premium for risk. Of
those eight, four are of the view that beginning with the contract
rate would most accurately reflect the actual risk, and four are of
the view that beginning with the prime lending rate would do so.
The ninth Justice takes no position on the latter point, since he
disagrees with the eight on the former point; he would reverse
because the rate proposed here, being above the risk-free rate,
gave respondent no cause for complaint. Because I read the statute
to require full risk compensation, and because I would adopt a
valuation method that has a realistic prospect of enforcing that
directive, I respectfully dissent.
Footnote 1
The true rate of plan failure is almost
certainly much higher. The Girth study that yielded the 37% figure
was based on data for a single division (Buffalo, New York) from
over 20 years ago (1980–1982). See 65 Ind. L. J., at 41. A
later study concluded that “the Buffalo division ha[d] achieved
extraordinary results, far from typical for the country as a
whole.” Whitford, The Ideal of Individualized Justice: Consumer
Bankruptcy as Consumer Protection, and Consumer Protection in
Consumer Bankruptcy, 68 Am. Bankr. L. J. 397, 411, n. 50
(1994). Although most of respondent’s figures are based on studies
that do not clearly exclude unconfirmed plans, one study includes
enough detail to make the necessary correction: It finds 32% of
filings successful, 18% dismissed without confirmation of a plan,
and 49% dismissed after confirmation, for a postconfirmation
failure rate of 60% (
i.e., 49%/(32% + 49%)). See
Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of
Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst.
L. Rev. 415, 440–441 (1999). This 60% failure rate is far
higher than the 37% reported by Girth.
Footnote 2
The contract rate is only a presumption,
however, and either party remains free to prove that a higher or
lower rate is appropriate in a particular case. For example, if
market interest rates generally have risen or fallen since the
contract was executed, the contract rate could be adjusted by the
same amount in cases where the difference was substantial enough
that a party chose to make an issue of it.
Footnote 3
To the extent the plurality argues that
subprime lending markets are not “
perfectly competitive,”
ante, at 15 (emphasis added), I agree. But there is no
reason to doubt they are
reasonably competitive, so that
pricing in those markets is
reasonably efficient.
Footnote 4
I confess that this is “nonresponsive” to the
argument made in the plurality’s footnote (that the contract
interest rate may not accurately reflect risk when set jointly with
a car’s sale price), see
ante, at 15, n. 20; it is in
response to the quite different argument made in the plurality’s
text (that joint pricing shows that the subprime lending market is
not competitive), see
ante, at 15. As to the
former issue, the plurality’s footnote makes a fair point.
When the seller provides financing itself, there is a possibility
that the contract interest rate might not reflect actual risk
because a higher contract interest rate can be traded off for a
lower sale price and vice versa. Nonetheless, this fact is not
likely to bias the contract-rate approach in favor of creditors to
any significant degree. If a creditor offers a promotional interest
rate—such as “zero-percent financing”—in return for a higher sale
price, the creditor bears the burden of showing that the true
interest rate is higher than the contract rate. The opposite
tactic—inflating the interest rate and decreasing the sale price—is
constrained at some level by the buyer’s option to finance through
a third party, thus taking advantage of the lower price while
avoiding the higher interest rate. (If a seller were to condition a
price discount on providing the financing itself, the debtor should
be entitled to rely on that condition to rebut the presumption that
the contract rate reflects actual risk.) Finally, the debtor
remains free to rebut the contract rate with any other probative
evidence. While joint pricing may introduce some inaccuracy, the
contract rate is still a far better initial estimate than the prime
rate.
Footnote 5
The plurality also argues that regulatory
context is relevant because it “distorts the market.”
Ante, at 16. Federal disclosure requirements do not
distort the market in any meaningful sense. And while state usury
laws do, that distortion works only to the benefit of debtors under
the contract-rate approach, since it keeps contract rates
artificially low.
Footnote 6
Some transaction costs are avoided by the creditor
in bankruptcy— for example, loan-origination costs such as
advertising. But these are likely only a minor component of the
interest rate. According to the record in this case, for example,
the average interest rate on new-car loans was roughly 8.5%—only
about 0.5% higher than the prime rate and 2.5% higher than the
risk-free treasury rate. App. 43 (testimony of Professor Steve
Russell). And the 2% difference between prime and treasury rates
represented “mostly … risk [and] to some extent transaction costs.”
Id., at 42. These figures suggest that loan-origination
costs included in the new-car loan and prime rates but not in the
treasury rate are likely only a fraction of a percent. There is no
reason to think they are substantially higher in the subprime auto
lending market. Any transaction costs the creditor avoids in
bankruptcy are thus far less than the additional ones he
incurs.
Footnote 7
The plurality’s other, miscellaneous
criticisms do not survive scrutiny either. That the cramdown
provision applies to prime as well as subprime loans,
ante, at 18, proves nothing. Nor is there any substance to
the argument that the formula approach will perform better where
“national or local economic conditions drastically improved or
declined after the original loan was issued.”
Ibid. To the
extent such economic changes are reflected by changes in the prime
rate, the contract rate can be adjusted by the same amount. See
n. 2,
supra. And to the extent they are not, they
present the same problem under either approach: When a party
disputes the presumption, the court must gauge the significance of
the economic change and adjust accordingly. The difference, again,
is that the contract-rate approach starts with a number that (but
for the economic change) is reasonably accurate, while the formula
approach starts with a number that (with or without the economic
change) is not even close.
Footnote 8
Given its priority, and in light of the
amended plan’s reduced debtor contributions, the $4,000 secured
claim would be fully repaid by about the end of the second year of
the plan. The average balance over that period would be about
$2,000,
i.e., half the initial balance. The total interest
premium would therefore be
1.5% x 2 x $2,000 = $60. In this and
all following calculations, I do not adjust for time value, as
timing effects have no substantial effect on the conclusion.
Footnote 9
Assuming a 37% rate of default that results
on average in only half the interest’s being paid, the expected
value is $60 x (1 – 37%/2), or about $50.
Footnote 10
According to the record in this case, the
prime rate at the time of filing was 2% higher than the risk-free
treasury rate, and the difference represented “mostly … risk [and]
to some extent transaction costs.” App. 42 (testimony of Professor
Steve Russell); see also Federal Reserve Board, Selected Interest
Rates, http://www.federalreserve.gov/releases/ h15/data.htm (as
visited Apr. 19, 2004) (available in Clerk of Court’s case file)
(historical data showing prime rate typically exceeding 3-month
constant-maturity treasury rate by 2%–3.5%). If “mostly” means
about three-quarters of 2%, then the risk compensation included in
the prime rate is 1.5%. Because this figure happens to be the same
as the risk premium over prime, the expected value is similarly
$50. See nn. 8–9,
supra.
Footnote 11
The truck was initially worth $6,395; the
principal balance on the loan was about $6,426.
Footnote 12
On the original loan, depreciation ($6,395 –
$4,000, or $2,395) exceeded loan repayment ($6,426 – $4,895, or
$1,531) by $864,
i.e., 14% of the original truck value of
$6,395. Applying the same percentage to the new $4,000 truck value
yields approximately $550.
Footnote 13
The truck in
Rash had a replacement
value of $41,000 and a foreclosure value of $31,875,
i.e.,
22% less. 520 U. S., at 957. If the market in this case had similar
liquidity and the truck were repossessed after losing half its
remaining value, the loss would be 22% of $2,000, or about
$450.
Footnote 14
A 1.5% risk premium plus a 1.5% risk
component in the prime rate yielded an expected benefit of about
$100, see
supra, at 11–12, so, to yield $590, the total
risk compensation would have to be 5.9 times as high,
i.e., almost 18%, or a 16.5% risk premium over prime.
Footnote 15
For example, by ignoring the possibility that
the creditor might recover some of its undersecurity as an
unsecured claimant, that the plan might fail only after full
repayment of secured claims, or that an oversecured creditor might
recover some of its expenses under 11 U. S. C. §506(b).
Footnote 16
For example, by assuming a failure rate of
37%, cf. n. 1,
supra, and by ignoring all costs of default
other than the three mentioned.
Footnote 17
It is true that, if the debtor defaults, one
of the costs the creditor suffers is the cost of liquidating the
collateral. See
supra, at 13. But it is illogical to
“compensate” for this risk by requiring all plans to pay the full
cost of liquidation (replacement value minus foreclosure value),
rather than an amount that reflects the possibility that
liquidation will actually be necessary and that full payments will
not be made.
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