Jason A. Pill, Untill the Footnote Was Written: the Effect of Till v. Scs Credit Corporation on 11 U.s.c. Sec. 1129(b)(2)

• Jurisdiction: United States,Federal
• Publication year: 2011
• Citation: Vol. 26 No. 2

UNTILL THE FOOTNOTE WAS WRITTEN: THE EFFECT OF

TILL V. SCS CREDIT CORPORATION ON 11 U.S.C. Sec. 1129(B)(2)

Jason A. Pill^*

INTRODUCTION .............................................................................................. 268

I. REORGANIZATION UNDER CHAPTER 11 .............................................. 271

A. Origins and Policy ...................................................................... 271

B. Cramming Down Dissenters ....................................................... 273

II. TILL V. SCS CREDIT CORP. .................................................................. 275

III. BINDING UNTILL THE FOOTNOTE WAS WRITTEN: WILL TILL APPLY

TO A CHAPTER 11 CASE FILED IN THE ELEVENTH CIRCUIT? .............. 280

A. Looking to the Sixth Circuit: In re American HomePatient,

Inc. .............................................................................................. 281

B. The Lone Voice in the Eleventh Circuit: In re Winn-Dixie

Stores, Inc. .................................................................................. 284

C. Is the Footnote the Exception or the Rule? ................................ 286

IV. WHAT CONSTITUTES A MARKET, HOW DOES IT BECOME

EFFICIENT, AND WHEN IS AN EFFICIENT MARKET CONTROLLING? .... 287

A. Hypothetical Chapter 11 Debtor ................................................ 287

B. What is a Market, and How Does it Become Efficient? ............. 288

1. Deconstructing an "Efficient Market:" What Constitutes a Market? ............................................................................. 291

2. Deconstructing an "Efficient Market:" What Constitutes

Efficiency? ............................................................................ 293

C. When is an Efficient Market Controlling? .................................. 295

V. THE INEFFICIENCY PRESUMPTION ...................................................... 297

CONCLUSION: ADOPTION OF THE INEFFICIENCY PRESUMPTION .................... 299

INTRODUCTION

In Greek mythology, Atlas was one of the primordial Titans who took part in a losing coup against Zeus and the Olympians during the Titanomachia.¹As punishment for his betrayal, Zeus condemned Atlas to stand at the western edge of the Earth and eternally hold aloft the heavens.²To this day, Atlas forever bears the burden of supporting the heavens upon his broad shoulders.³

Like Atlas, chapter 11 debtors bear a heavy burden upon their shoulders-the evidentiary burden required to confirm a chapter 11 plan of reorganization over the objections of creditors. Central to this issue is the debtor's burden of establishing the appropriate cramdown interest rate. Due to the cramdown rate's ability to either subsidize debtors or unfairly reward creditors, it has become "one of the most litigated, contentious, and costly squabbles in the bankruptcy arena."⁴However, given the dismal economic conditions that have diminished debtor-in-possession financing coupled with the myth of an "efficient market" created by the Supreme Court's decision in Till v. SCS Credit Corp.,⁵the evidentiary burden of chapter 11 debtors has become a heavier and more costly burden to bear upon their shoulders.

The most powerful arrow in the chapter 11 debtor's quiver is the threat of cramming down a dissenting creditor. However, a debtor intending to follow- up on a threat of cramming down a creditor bears the evidentiary burden of establishing, by clear and convincing evidence, that the proposed plan is "fair and equitable"⁶with respect to each impaired class of creditors that has not accepted the plan.⁷Accordingly, secured creditors objecting to the cramdown customarily take issue with the cramdown interest rate, arguing that the rate is too low and therefore not fair and equitable. The bankruptcy court may hear this objection by holding an evidentiary hearing. At this hearing, the debtor and creditor present expert witnesses in an attempt to establish the propriety of the cramdown rate applied to the creditor's claim during the payout period.⁸

The debtor may introduce evidence including, but not limited to, a prevailing market rate,⁹the prime rate,¹⁰the London Interbank Offered Rate ("LIBOR"),¹¹the federal discount rate,¹²and similar interest rates under similar conditions.¹³

Deteriorating economic conditions, however, have highlighted and increased the difficulty of the inherent challenges of establishing appropriate cramdowns. The United States is in the midst of a credit crisis brought about by the creation and subsequent collapse of mortgage-backed securities reliant on unprecedented sub-prime lending. Real estate borrowers and lenders engaged in practices that lacked sustainability, and ultimately, fell prey to the downward spiral of real estate values. As real estate values plummeted, the bottom fell out, and the process was exposed. However, the crisis has spread beyond real estate markets and affected every type of lending. Perennial giants of the financial world have filed for bankruptcy or been acquired by competing institutions, and credit markets have seized up as a result. Bankruptcy financing has become scarce as lenders are disappearing and interest rates are rising.¹⁴As "[t]he real estate casino has been closed and shuttered once again[,] . . . [c]an an onslaught of new bankruptcy filings be far behind?"¹⁵

With an increase in bankruptcy filings precipitated by the dismal economic conditions,¹⁶the uncertainty for determining an appropriate cramdown rate in a chapter 11 case has become an emerging issue. Although the Supreme Court's decision in Till established that the formula approach¹⁷is the appropriate method for determining a cramdown rate in chapter 13 cases, the decision was ambiguous as to the precedential ramifications for chapter 11 cases.¹⁸Despite initial language within the Till opinion, striving for uniformity among chapters of the Bankruptcy Code ("the Code"), the Court spoke out of both sides of its mouth by subsequently distinguishing chapter 13 and chapter 11 cases in footnote 14.¹⁹Based on this uncertainty, a schism is quietly emerging between jurisdictions applying the Till formula approach to chapter 11 cases and jurisdictions applying the "efficient market" exception created by footnote 14. This schism has led to an Atlas-sized burden for chapter 11 debtors to bear.

When Atlas was condemned to hold the heavens aloft, he was temporarily relieved of his burden by Heracles.²⁰However, chapter 11 debtors will find no such relief from their burden from courts following the "efficient market" exception. Ostensibly, under the "efficient market" exception, the debtor has the preliminary requirement of establishing the presence of an efficient market, by clear and convincing evidence, before even attempting to establish the appropriate cramdown rate. The increased evidentiary burden of establishing an "efficient market" will require considerable expense as debtors struggle to establish: (1) the amorphous concept of an "efficient market" for a chapter 11 debtor amid the current recession, and (2) the propriety of a cramdown rate produced within that market.

This Article examines the potential collision between the financial realities of the current recession and the elusive concept of an efficient market, while also attempting to parse out the viability and feasibility of the efficient market exception. Part I explores the origin and policy goals of cases filed under chapter 11 (formerly chapter XI) of the Code and discusses Sec. 1129, which contains the cramdown provisions. Part II discusses the Till case, which held that bankruptcy courts should rely on the formula approach when determining the adequate cramdown rate for an undersecured claim within a debtor's proposed chapter 13 payment plan. ²¹Part III analyzes existing case law in an attempt to determine whether Till's holding will be applicable to chapter 11 bankruptcies filed in the Eleventh Circuit or whether courts will rely on the efficient market exception created in footnote 14. Part IV explores the issues that arise when attempting to implement the exception and establish an efficient market by relying on the case law and a hypothetical debtor. Part V distills the issues from the case law attempting to apply the efficient market exception and introduces the inefficiency presumption. Finally, the Conclusion advocates for the implementation of the inefficiency presumption as a flexible rubric to analyze the propriety of a proposed cramdown rate for a chapter 11 plan of reorganization and as a means to reduce the debtor's evidentiary burden.

I. REORGANIZATION UNDER CHAPTER 11

A. Origins and Policy

Chapter XI of the Bankruptcy Act was introduced as part of the Chandler Act in 1938, in the wake of the Great Depression.²²Chapter XI was originally intended to deal with the financial problems encountered by small businesses, while larger publicly traded businesses were intended to use chapter X proceedings.²³As noted by one commentary:

The choice of remedies between Chapters X, XI, and XII was governed partly by the following: statutory limitations and case law, practices and attitudes of government agencies, past relationships with creditors, and judicial attitudes of business and financial considerations. Often times, larger corporations would seek loopholes to avoid the cumbersome Chapter X filing for the benefits available in a Chapter XI proceeding.²⁴

The remedies afforded under chapters X and XI were considered mutually exclusive and choosing between the chapters was a source of great dismay for attorneys of the day.²⁵

Under a chapter XI plan, a debtor-in-possession ("DIP"), trustee, or receiver oversaw the day-to-day operations of the business.²⁶Chapter XI allowed for two main "plans of arrangement:"²⁷(1) plans that provided the debtor additional time to pay obligations or (2) plans that allowed the debtor to pay less than what was owed on the obligations.²⁸A court would confirm the chapter XI plan after all...