§ 9.9.8.7.1 Payment of Secured Claim over Time.

• Jurisdiction: Arizona

§ 9.9.8.7.1 Payment of Secured Claim over Time. ² A chapter 11 plan may provide for the creditor to retain its lien and receive payments in cash with a present value equal to the allowed secured claim. 11 U.S.C. § 1129(b)(2)(A). The payments must be made in cash. Compare this provision with the “best interests test,” which requires only distribution of “property,” not necessarily cash, of a value equal to what the claimant would receive on liquidation. 11 U.S.C. § 1129(a)(7)(A)(ii) .

11 U.S.C. § 1129(b)(2)(A)(i)(II) has two requirements specifying the amount that must be paid to secured creditors. First, the deferred cash payments must total the allowed amount of the claim (the “principal amount test”). See Kenneth N. Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J. 133, 155 (Spring 1979) . Second, § 1129(b)(2)(A)(i)(II) requires that the payment stream must have a present value of at least the value of the holder’s interest in the collateral (the “present value test”). Id.

Unless the election under § 1111(b) is made, satisfaction of the present value test necessarily will satisfy the principal amount test. Payment of the claim with a present market rate of interest always will exceed the amount needed simply to pay the claim’s principal amount. See In re Arnold, 806 F.2d 937 (9th Cir. 1986) (upholding plan that paid secured creditor owed $320,000¾only appraised value of collateral). If the creditor makes the election under 11 U.S.C. § 1111(b) , the principal value and present value tests may differ. The effect of the § 1111(b) election is discussed in § 9.9.9 below.

The Code sets no limit on the length of time over which payments may be deferred in chapter 11. The only limits are the requirements of adequate protection of the secured party’s interest and feasibility of the plan. If the collateral is depreciable, the deferral should not exceed the remaining useful life of the collateral. Appeal of California Gulf Partnership, 48 B.R. 959, 964 (E.D. La. 1984) (based on 20-year useful life of supply boat, court approved 17-year deferred payment schedule). It may be possible to exceed this limitation by provisions for replacement liens. Demonstrating that future replacement liens would provide adequate protection for the claim, however, may impose “a difficult if not impossible burden of proof for the debtor in a payout extended beyond the life of the collateral.” In re White, 36 B.R. 199, 204 (Bankr. D...