The Problem With Present-value: How Local Bankruptcy Rules Impose Heavy Burdens on Chapter 13 Debtors

• Citation: Vol. 69 No. 3
• Publication year: 2019

The Problem with Present-Value: How Local Bankruptcy Rules Impose Heavy Burdens on Chapter 13 Debtors

Jake McDonough

THE PROBLEM WITH PRESENT-VALUE: HOW LOCAL BANKRUPTCY RULES IMPOSE HEAVY BURDENS ON CHAPTER 13 DEBTORS

Abstract

When Congress created the Bankruptcy Code in 1978, it left open several gaps that needed to be resolved through the judicial system. One of these gaps concerns the process behind the present-value analysis required by Section 1325, which states that debtors must pay creditors the present value of their claims over the course of the debtor's Chapter 13 bankruptcy plan. This process implicitly dictated that debtors must pay a discount rate to properly compensate their creditors. Because Congress never indicated how this discount rate should be calculated, bankruptcy courts created several different solutions to the problem. This left the bankruptcy system in a state of chaos as the rules varied substantially from district to district.

In Till v. SCS Credit Corp., the Supreme Court attempted to tackle this problem and bring clarity to the situation but was unable to do so. The Court was split 4-4-1, which seemingly left the process for creating the Chapter 13 discount rate unclear. While many courts chose to treat the plurality decision as binding precedent, some bankruptcy courts created local rules that set a presumptive Chapter 13 discount rate to be used in all bankruptcy cases.

These courts failed to see that Till did in fact reach a majority holding: A Chapter 13 debtor is presumed to satisfy their present-value burden when they pay a discount rate that is greater than or equal to the national prime rate. The creditor then bears the burden of showing that the discount rate should be higher. By setting a presumptive rate, the local rules created by bankruptcy courts shift at least part burden of proof onto the shoulders of debtors, who do not have reliable access to the information they need to litigate the claim and lower the discount rate.

This Comment argues that these local rules violate the Rules Enabling Act because they alter the substantive rights of debtors. Burdens of proof are substantive aspects of a litigant's claim, and rulemaking committees that shift this burden are encroaching on Congress's rulemaking power. By setting a presumptive discount rate and giving the debtor burden to change it, debtors may be forced to pay more money over the course of their plans, therefore affecting their ability to repay their debts and obtain the financial relief that they are entitled to receive.

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Introduction............................................................................................. 565

I. Sources of and Limitations on Bankruptcy Rulemaking Powers............................................................................................. 570

A. Sources of Bankruptcy Rulemaking Power............................... 570
B. Substance vs. Procedure........................................................... 571

II. Till v. SCS Credit Corporation: A Colossal Failure to Bring Clarity to the Chapter 13 Present-Value Analysis ... 573

A. Present-Value Analysis Prior to Till ........................................ 574
B. The Factual Background and Procedural History of Till ........ 576
C. The Supreme Court's (In)decision in Till................................. 578
D. Implications of the Supreme Court's Indecision ...................... 581

1. Minor Questions Resolved by Till ...................................... 581
2. The Creditor Bears the Burden of Rebutting the Discount Rate..................................................................................... 582
3. The Creation of Local Present-Value Analysis Rules......... 583

III. How Differing Local Bankruptcy Rules Impact Similarly Situated Chapter 13 Debtors...................................................... 584

A. Compiled Information About the Scope of Bankruptcy Courts Using Local Bankruptcy Rules to Set the Chapter 13 Rate ...... 585

1. Districts That Use the Formula Approach but Set a Predetermined Risk Adjustment.......................................... 585
2. Districts That Use the Presumptive Contract Rate Approach ............................................................................ 588
3. The District of South Carolina and the Southern District of Georgia........................................................................... 590

B. How Differing Local Rules Affect Similarly-Situated Debtors . 591

1. Presumptive Discount Rate vs. Till Plurality Rate............. 592
2. Western District of Missouri vs. Eastern District of Missouri .............................................................................. 593
3. Presumptive Contract Rate Approach vs. Formula Approach ............................................................................ 594
4. Summary of the Impact of Presumptive Interest Rates on Debtors ............................................................................... 595

IV. Problems Created by Local Rules that Set Presumptive Rates................................................................................................ 596

A. Violation of the Rules Enabling Act ......................................... 597
B. Non-Uniformity ......................................................................... 601
C. Access to Justice ....................................................................... 602
D. Implications .............................................................................. 604

Conclusion................................................................................................. 605

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Introduction

When Congress passed the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code, one of its primary goals was to create uniform laws to govern the bankruptcy process.¹ While Congress was largely able to accomplish this goal, the Bankruptcy Code still contains several gaps that must be filled by the judicial system.² One of these gaps concerns the Chapter 13 present-value analysis, which has led courts to create a variety of potential solutions in an attempt to bring clarity to the situation.³

When debtors file a Chapter 13 bankruptcy plan, they promise to pay back their creditors over a period of three to five years using their future income.⁴ The Bankruptcy Code requires that over the course of the debtor's plan, secured creditors should receive the present value of their claim and unsecured creditors should receive the present value of the amount each creditor would receive if its claim was liquidated in Chapter 7.⁵ This places a burden on debtors by requiring them to show that they can pay each of their creditors the amount they are owed in order to confirm their plan.⁶ This "present-value analysis" essentially requires bankruptcy courts to select a "discount rate," which accounts for factors such as inflation and opportunity cost, in order to determine whether the debtor's stream of future payments to creditors has a present value equal to the amounts to which the Bankruptcy Code entitles them.⁷

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While the Bankruptcy Code places this burden on the debtor, it does not give guidance on how to calculate a discount rate that satisfies it.⁸ Over time, circuit courts developed four different methods to fill this gap in the Bankruptcy Code: the formula approach, the coerced loan approach, the presumptive contract approach, and the cost-of-funds method.⁹ These differing approaches resulted in vastly different discount rates, which forced similarly situated debtors to pay their creditors varying amounts and potentially affected their ability to repay their debts.¹⁰ Importantly, a failed Chapter 13 bankruptcy plan could lead a court to dismiss the case or convert it to a Chapter 7 case, in which the debtor's assets would be liquidated to satisfy creditor claims.¹¹

In Till v. SCS Credit Corp. ,¹² the Supreme Court attempted to solve this issue and bring clarity to the Chapter 13 present-value analysis.¹³ Unfortunately, it failed.¹⁴ The Justices split 4-4-1 on the issue, thus failing to come to a majority consensus on which method to adopt.¹⁵ Justice Thomas disagreed with the other eight Justices about whether it was appropriate to include a debtor-specific risk adjustment in the discount rate, and thus did not join either side.¹⁶ Although the Court ultimately used the formula approach to calculate the discount rate,¹⁷ its apparent failure to reach a majority decision meant that some bankruptcy courts did not treat it as binding precedent.¹⁸

Till has drawn criticism from commentators, many of whom believe that the Supreme Court spoiled "a marvelous opportunity to impose some much-needed

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order and predictability on these determinations" by failing to reach a majority decision.¹⁹ The Supreme Court seemingly did nothing to solve the present-value analysis problem, and many believed its only real accomplishment was that it eliminated two of the four methods that bankruptcy courts had previously applied to Till.²⁰

Since the Court was seemingly unable to conclusively decide the proper approach to conducting the present-value analysis, bankruptcy courts once again looked to fill in this gap in the Bankruptcy Code.²¹ Some courts have created local rules that govern how they will calculate the discount rate used in the Chapter 13 present-value analysis.²² While these rules generally follow the formula-approach framework laid out by the Till plurality, the problem is that the rules created a district-wide presumptive discount rate for all Chapter 13 cases that does not account for the individual debtor's financial situation.²³

Even though the rules include provisions that allow each party to rebut this presumptive rate,²⁴ this system is biased against debtors because they have less access to relevant information.²⁵ Creditors receive all relevant information about the debtor's...