Wells Fargo Bank National Ass'n Ex Rel. Morgan Stanley Capital I Inc. v. Texas Grand Prairie Hotel Realty, L.L.C. (In Re Texas Grand Prairie Hotel Realty, L.L.C.)

Case: 11-11109 Document: 00512161496 Page: 1 Date Filed: 03/01/2013

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

March 1, 2013

No. 11-11109 Lyle W. Cayce

Clerk

In the Matter of: TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C.,

Debtor

------------------------------

WELLS FARGO BANK NATIONAL ASSOCIATION, as Trustee for the Morgan

Stanley Capital I Incorporated, Commercial Mortgage Pass - Through

Certificates Trust, Series 2007-XLF9, acting by and through its Special Servicer,

Berkadia Commercial Mortgage, L.L.C.,

Appellant

v.

TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C.; TEXAS AUSTIN HOTEL

REALTY, L.L.C.; TEXAS HOUSTON HOTEL REALTY, L.L.C.; TEXAS SAN

ANTONIO HOTEL REALTY, L.L.C.,

Appellees

Appeal from the United States District Court

for the Northern District of Texas

Before HIGGINBOTHAM, ELROD, and HAYNES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

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Wells Fargo Bank National Association (“Wells Fargo”) appeals from a

district court decision affirming confirmation of a Chapter 11 cramdown plan.

Finding no error in the bankruptcy court’s judgment,1 we affirm.

I.

In 2007, Texas Grand Prairie Hotel Realty, LLC, Texas Austin Hotel

Realty, LLC, Texas Houston Hotel Realty, LLC, and Texas San Antonio Hotel

Realty, LLC (collectively, “Debtors”) obtained a $49,000,000 loan from Morgan

Stanley Mortgage Capital, Inc., applying the proceeds to acquire and renovate

four hotel properties in Texas. Morgan Stanley — not a party to this case —

took a security interest in the hotel properties and in substantially all of the

Debtors’ other assets. Wells Fargo eventually acquired the loan from Morgan

Stanley.

In 2009, the Debtors’ hotel business soured. Unable to pay Wells Fargo’s

loan as payment came due, the Debtors filed for Chapter 11 protection and

proposed a plan of reorganization. When Wells Fargo rejected the proposed

reorganization, the Debtors sought to cram down their plan under 11 U.S.C.

§ 1129(b). The plan valued Wells Fargo’s secured claim at roughly $39,080,000,

in accordance with Wells Fargo’s own appraisal. Under the plan, the Debtors

proposed to pay off Wells Fargo’s secured claim over a term of ten years, with

interest accruing at 5% — 1.75% above the prime rate on the date of the

confirmation hearing.2

1

See In re Berryman Prods., Inc., 159 F.3d 941, 943 (5th Cir. 1998) (“In the bankruptcy

appellate process, we perform the same function as did the district court: Fact findings of the

bankruptcy court are reviewed under a clearly erroneous standard and issues of law are

reviewed de novo.”).

2

The Debtors later agreed to reduce the repayment term to seven years.

2

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The bankruptcy court held a two-day evidentiary hearing to assess

whether it could confirm the Debtors’ plan under § 1129(b) over Wells Fargo’s

objection. Among other things, Wells Fargo challenged the Debtors’ proposed 5%

interest rate on its secured claim. Both parties stipulated that the applicable

rate should be determined by applying the “prime-plus” formula endorsed by a

plurality of the Supreme Court in Till v. SCS Credit Corp.3 However, the

parties’ experts disagreed on the application of that formula: whereas the

Debtors’ expert — Mr. Louis Robichaux — testified that it supported a 5% rate,

Wells Fargo’s expert insisted that it mandated a rate of at least 8.8%.

Wells Fargo filed a Daubert motion seeking to strike Robichaux’s

testimony under Rule 702, insisting that “Robichaux’s . . . failure to correctly

apply Till and its progeny show[s] that his methodology is flawed, does not

comport with applicable law, and is unreliable.” The bankruptcy court denied

Wells Fargo’s motion to strike, adopted Robichaux’s analysis as correct, and

confirmed the Debtors’ cramdown plan.

Wells Fargo appealed to the district court, challenging the bankruptcy

court’s decision to admit Robichaux’s testimony as well as the court’s adoption

of Robichaux’s § 1129(b) interest-rate analysis. The district court affirmed and

this appeal followed. The Debtors have moved to dismiss the appeal as equitably

moot.

II.

We begin by reviewing de novo the Debtors’ equitable mootness defense.4

The doctrine of equitable mootness is unique to bankruptcy proceedings,

responsive to the reality that “there is a point beyond which a court cannot order

3

541 U.S. 465 (2004).

4

See In re GWI PCS 1, Inc., 230 F.3d 788, 799–800 (5th Cir. 2000).

3

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fundamental changes in reorganization actions.”5 To establish equitable

mootness, a debtor must show that (i) the plan of reorganization has not been

stayed, (ii) the plan has been “substantially consummated,” and (iii) the relief

requested by the appellant would “affect either the rights of parties not before

the court or the success of the plan.”6 Wells Fargo here stipulates that the first

two elements are satisfied.

This Circuit has taken a narrow view of equitable mootness, particularly

where pleaded against a secured creditor.7 Reasoning that “the possibility of

partial recovery obviates the need for equitable mootness,”8 we have permitted

appeals to go forward even where granting full relief “could have imposed a very

significant liability on the estate, to the great detriment of both the success of

the reorganization and third parties.”9 For example, in Matter of Scopac, we

permitted secured creditors to appeal a bankruptcy court valuation order whose

reversal had the potential to — and ultimately did — impose millions of dollars

in liability on a cash-starved entity just emerging from bankruptcy.10 In Matter

5

In re Scopac, 624 F.3d 274, 281 (5th Cir. 2010) (Scopac I).

6

Id.

7

See In re Pacific Lumber Co., 584 F.3d 229, 243 (5th Cir. 2009) (“Secured credit

represents property rights that ultimately find a minimum level of protection in the takings

and due process clauses of the Constitution. . . . Federal courts should proceed with caution

before declining appellate review of the adjudication of these rights under a judge-created

abstention doctrine.”).

8

In re Scopac, 649 F.3d 320, 322 (5th Cir. 2011) (Scopac II).

9

Scopac I, 624 F.3d at 282.

10

See id. at 286 (awarding judgment of $29,700,000 to appellants). But see Scopac II,

649 F.3d at 322 (clarifying that bankruptcy court had discretion to award less than the full

judgment if necessary to avoid “jeopardiz[ing] the reorganized debtor’s financial health”).

4

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of Pacific Lumber Co., we allowed a secured creditor to appeal under similar

circumstances.11

The Debtors insist that granting relief to Wells Fargo could result in a

cataclysmic unwinding of the reorganization plan. According to the Debtors, “all

of the nearly $8 million in distributions made under the Plan, and all of the

other actions taken in furtherance and implementation of the Plan — including

transactions with third parties — will be in jeopardy of needing to be undone,

clawed back, or otherwise abrogated.” Moreover, the Debtors contend, any

money judgment against them would come out of the pockets of unsecured

creditors, as “[t]here is just one ‘pot’ of funds to distribute.” Finally, the Debtors

aver, a judgment in favor of Wells Fargo would affect the rights and expectations

of the “Equity Purchaser” — that is, the Debtors themselves — who paid a

substantial sum to acquire equity in the bankrupt entities pursuant to the

reorganization plan.

While the Debtors’ concerns might be realized, they need not be. This

Court could grant partial relief to Wells Fargo without disturbing the

reorganization, by, for example, awarding a slightly higher § 1129(b) cramdown

interest rate or granting a small money judgment. The Debtors present no

credible evidence that granting such fractional relief would require unwinding

any of the transactions undertaken pursuant to the reorganization plan; indeed,

by the Debtors’ own account, they are not cash starved like the debtors in Pacific

Lumber or Scopac, having enjoyed a substantial improvement in their revenues

and cash position after filing for bankruptcy.

Nor do the Debtors present compelling evidence that granting fractional

relief would unduly burden the rights of third parties not before the court.

11

See Pacific Lumber, 584 F.3d at 243–50 (allowing secured creditors to appeal

valuation order whose reversal could have imposed up to $90,000,000 on a cash-poor entity

just emerging from bankruptcy).

5

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Though the reorganization plan ties the unsecured creditors’ recovery to the

Debtors’ projected net operating income through 2015, the Debtors’ actual net

operating income may be higher. Moreover, in fiscal years 2016 and 2017 —

after the Debtors’ payment obligations to unsecured creditors have ended — the

Debtors’ own projections show a net operating income of approximately

$3,200,000. In other words, the possibility exists that the Debtors could afford

a fractional payout without reducing distributions to third-party claimants.

As for the Debtors’ assertion that a fractional award to Wells Fargo would

affect their interest as equity holders in the reorganized bankrupt, perhaps they

are correct. But equitable mootness protects only “the rights of parties not before

the court.”12 The fact “that a judgment might have adverse consequences [to the

equity holders of the reorganized bankrupt] is not only a natural result of any

appeal . . . but [should have been] foreseeable to them as sophisticated

investors.”13

Unpersuaded by the Debtors’ motion to dismiss this appeal as equitably

moot, we proceed to the merits, turning first to Wells Fargo’s claim that the

bankruptcy court erred in admitting the testimony of the Debtors’ restructuring

expert — Mr. Louis Robichaux — regarding the appropriate § 1129(b) cramdown

rate of interest.

III.

According to Wells Fargo, Robichaux’s testimony is inadmissible under

Rule 702 because his “purely subjective approach to interest-rate setting”

violates the Supreme Court’s decision in Till, which “call[s] for an objective

inquiry.”

12

In re Manges, 29 F.3d 1034, 1039 (5th Cir. 1994) (emphasis added).

13

Pacific Lumber, 584 F.3d at 244.

6

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We review a trial court’s decision to admit expert testimony for abuse of

discretion.14 As read by Daubert, Rule 702 requires trial courts to ensure that

proffered expert testimony is “not only relevant, but reliable.”15 To determine

reliability, the trial court must make a “preliminary assessment of whether the

reasoning or methodology underlying the testimony is scientifically valid and of

whether that reasoning or methodology can properly be applied to the facts in

issue.”16 Two cautions signify: the trial court ought not “transform a Daubert

hearing into a trial on the merits,”17 and “most of the safeguards provided for in

Daubert are not as essential in a case . . . where a district judge sits as the trier

of fact in place of a jury.”18

Here, Wells Fargo does not challenge Robichaux’s factual findings,

calculations, or financial projections, but rather argues that Robichaux’s analysis

as a whole rested on a flawed understanding of Till. As we read it, Wells Fargo’s

Daubert motion is indistinguishable from its argument on the merits. It follows

that the bankruptcy judge reasonably deferred Wells Fargo’s Daubert argument

to the confirmation hearing instead of deciding it before the hearing.19 We

pursue the same path and proceed to the merits.

14

Moore v. Ashland Chem. Inc., 151 F.3d 269, 274 (5th Cir. 1998).

15

Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993).

16

Id. at 590–91.

17

Pipitone v. Biomatrix Inc., 288 F.3d 239, 250 (5th Cir. 2002).

18

Gibbs v. Gibbs, 210 F.3d 491, 500 (5th Cir. 2000).

19

As the bankruptcy court observed, “[Wells Fargo’s] objections to Mr. Robichaux’s

testimony really go to its disagreement to the merits of his opinion, and so that disagreement

is really properly voiced as a response to the opinion itself.”

7

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IV.

Wells Fargo claims that the bankruptcy court erred in setting a 5%

cramdown rate. We turn first to the standard under which this Court reviews

a Chapter 11 cramdown rate determination, then to its application.

A.

Under 11 U.S.C. §1129(b), a debtor can “cram down” a reorganization plan

over the dissent of a secured creditor only if the plan provides the creditor — in

this case Wells Fargo — with deferred payments of a “value” at least equal to the

“allowed amount” of the secured claim as of the effective date of the plan.20 In

other words, the deferred payments, discounted to present value by applying an

appropriate interest rate (the “cramdown rate”), must equal the allowed amount

of the secured creditor’s claim.21

Wells Fargo contends that though a bankruptcy court’s factual findings

under § 1129(b) are reviewed only for clear error, a bankruptcy court’s choice of

methodology for calculating the § 1129(b) cramdown rate is a question of law

subject to de novo review. Wells Fargo suggests that the Supreme Court’s

decision in Till supports its position, reasoning that Till is “controlling

authority” that requires bankruptcy courts to apply the prime-plus formula to

calculate the Chapter 11 cramdown rate.

We disagree. In T-H New Orleans, we “[declined] to establish a particular

formula for determining an appropriate cramdown interest rate” under

20

See 11 U.S.C. § 1129(b)(1)(A)(i)(II) (“[E]ach holder of a [secured claim must] receive

on account of such claim deferred cash payments totaling at least the allowed amount of such

claim, of a value, as of the effective date of the plan, of at least the value of such holder’s

interest in the estate’s interest in such property.”).

21

E.g., In re T-H New Orleans Ltd. P’ship, 116 F.3d 790, 800 (5th Cir. 1997) (“[The

Chapter 11 cramdown provision] has been interpreted to require that the total deferred

payments have a present value equal to the amount of the secured claim.”).

8

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Chapter 11, reviewing the bankruptcy court’s entire § 1129(b) analysis for clear

error.22 We reasoned that it would be imprudent to “tie the hands of the lower

courts as they make the factual determination involved in establishing an

appropriate interest rate.”23 Though Wells Fargo contends that we overruled

T-H New Orleans in our subsequent decision in Matter of Smithwick,24 this

reading of Smithwick is untenable. In Smithwick, we held that bankruptcy

courts must calculate the Chapter 13 cramdown rate using the “presumptive

contract rate” approach.25 However, we reaffirmed that “[t]his court has declined

to establish a particular formula for the cramdown interest rate in Chapter 11

cases.”26 We justified our departure from T-H New Orleans in the Chapter 13

context on the ground that the need for judicial guidance is more acute in the

case of individual bankruptcies, given the “greater need to reduce litigation

expenses associated with an individualized discount rate determination.”27

Smithwick is not in tension with T-H New Orleans’s application in Chapter 11

proceedings.

Nor is Till. In Till, a plurality of the Supreme Court ruled that

bankruptcy courts must calculate the Chapter 13 cramdown rate by applying the

22

See T-H New Orleans, 116 F.3d at 800; see also In re Briscoe Enters., Ltd., II, 994

F.2d 1160, 1169 (5th Cir. 1993) (“We review a bankruptcy court’s calculation of an appropriate

interest rate for clear error. Courts have used a wide variety of different rates as benchmarks

in computing the appropriate interest rate (or discount rate as it is frequently termed) for the

specific risk level in their cases.”).

23

T-H New Orleans, 116 F.3d at 800.

24

121 F.3d 211 (5th Cir. 1997).

25

Id. at 214–15.

26

Id.

27

Id.

9

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prime-plus formula.28 While the plurality suggested that this approach should

also govern under Chapter 11,29 we have held that “[a] Supreme Court decision

must be more than merely illuminating with respect to the case before us,

because a panel of this court can only overrule a prior panel decision if such

overruling is unequivocally directed by controlling Supreme Court precedent.”30

As we recognized in Drive Financial Services, L.P. v. Jordan,31 Till was a

splintered decision whose precedential value is limited even in the Chapter 13

context.32 While many courts have chosen to apply the Till plurality’s formula

method under Chapter 11, they have done so because they were persuaded by

the plurality’s reasoning, not because they considered Till binding.33 Ultimately,

the plurality’s suggestion that its analysis also governs in the Chapter 11

context — which would be dictum even in a majority opinion — is not

“controlling . . . precedent.”34

28

541 U.S. 465, 479–81 (2004).

29

See id. at 474–75.

30

Reed v. Fla. Metro. Univ., Inc., 681 F.3d 630, 648 (quoting Martin v. Medtronic, Inc.,

254 F.3d 573, 577 (5th Cir. 2001) (quoting United States v. Zuniga–Salinas, 945 F.2d 1302,

1306 (5th Cir. 1991))).

31

521 F.3d 343 (5th Cir. 2008).

32

Id. at 350 (“[W]e hold that the Till plurality’s adoption of the prime-plus interest rate

approach is binding precedent in cases presenting an essentially indistinguishable factual

scenario.”); see also Good v. RMR Invs., Inc, 428 B.R. 249, 255 (E.D. Tex. 2010) (“In Drive

[Financial], the Fifth Circuit only narrowly adopted the formula approach for Chapter 13

cases. . . . Therefore, in the Fifth Circuit, bankruptcy courts still enjoy some latitude in

determining which method should be applied to determine the cramdown interest rate in

Chapter 11 cases.”).

33

See, e.g., In re Am. HomePatient, Inc., 420 F.3d 559, 567 (6th Cir. 2005) (adopting Till

plurality approach as persuasive); In re Prussia Assocs., 322 B.R. 572, 585, 589 (Bankr. E.D.

Pa. 2005) (same); In re Cantwell, 336 B.R. 688, 692 (Bankr. D.N.J. 2006) (same).

34

Reed, 681 F.3d at 648 (quoting Martin, 254 F.3d at 577 (quoting Zuniga–Salinas, 945

F.2d at 1306)).

10

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Today, we reaffirm our decision in T-H New Orleans. We will not tie

bankruptcy courts to a specific methodology as they assess the appropriate

Chapter 11 cramdown rate of interest; rather, we continue to review a

bankruptcy court’s entire cramdown-rate analysis only for clear error.

B.

At length, we turn to address whether the bankruptcy court clearly erred

in assessing a 5% cramdown rate under § 1129(b). While both parties stipulate

that the Till plurality’s formula approach governs the applicable cramdown rate,

they disagree on what that approach requires.

1.

Under the Till plurality’s formula method, a bankruptcy court should

begin its cramdown rate analysis with the national prime rate — the rate

charged by banks to creditworthy commercial borrowers — and then add a

supplemental “risk adjustment” to account for “such factors as the circumstances

of the estate, the nature of the security, and the duration and feasibility of the

reorganization plan.”35 Though the plurality “d[id] not decide the proper scale

for the risk adjustment,” it observed that “other courts have generally approved

adjustments of 1% to 3%.”36

In ruling that the formula method governs under Chapter 13, the Till

plurality was motivated primarily by what it viewed as the method’s simplicity

and objectivity.37 First, the plurality reasoned, the method minimizes the need

for costly evidentiary hearings, as the prime rate is reported daily, and as “many

35

541 U.S. 465, 479 (2004).

36

Id. at 480.

37

Id. at 474–76.

11

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of the factors relevant to the [risk] adjustment fall squarely within the

bankruptcy court’s area of expertise.”38 Second, the plurality observed, the

approach varies only in “the state of financial markets, the circumstances of the

bankruptcy estate, and the characteristics of the loan” instead of inquiring into

a particular creditor’s cost of funds or prior contractual relations with the

debtor.39

For these same reasons, the plurality “reject[ed] the coerced loan,

presumptive contract rate, and cost of funds approaches,” as “[e]ach of these

approaches is complicated, imposes significant evidentiary costs, and aims to

make each individual creditor whole rather than to ensure the debtor’s payments

have the required present value.”40 The plurality was particularly critical of the

coerced loan approach applied by the Seventh Circuit below, noting that it

“requires bankruptcy courts to consider evidence about the market for

comparable loans to similar (though nonbankrupt) debtors — an inquiry far

removed from such courts’ usual task of evaluating debtors’ financial

circumstances and the feasibility of their debt adjustment plans.”41

Having explained its prime-plus formula, the plurality applied it to the

case before the Court, in which the secured creditor — an auto-financing

company — objected to the bankruptcy court’s assessment of a cramdown rate

at 1.5% over prime.42 The creditor claimed that this cramdown rate was woefully

inadequate to compensate it for the risk that the debtor would default on its

restructured obligations, presenting evidence that the subprime financing

38

Id. at 479.

39

Id. at 479–80.

40

Id. at 477.

41

Id.

42

Id. at 471–72.

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market would demand a rate of at least prime plus 13% for a comparable loan.43

The plurality rejected the creditor’s arguments and affirmed the bankruptcy

court’s 1.5% risk adjustment, observing that the debtor’s expert had testified

that the rate was “very reasonable given that Chapter 13 plans are supposed to

be feasible.”44

In a spirited dissent, Justice Scalia warned that the plurality’s approach

would “systematically undercompensate” creditors.45 Justice Scalia observed

that “based on even a rudimentary financial analysis of the facts of this case, the

1.5% [risk adjustment assessed by the plurality] is obviously wrong — not just

off by a couple percent, but probably by roughly an order of magnitude.”46 As for

the plurality’s reference to the testimony of the debtors’ economics expert,

Justice Scalia noted that “[n]othing in the record shows how [the expert’s]

platitudes were somehow manipulated to arrive at a figure of 1.5 percent.”47

Justice Scalia concluded that it was “impossible to view the 1.5% figure as

anything other than a smallish number picked out of a hat.”48

While Till was an appeal from a Chapter 13 proceeding, the plurality

observed that “Congress [likely] intended bankruptcy judges and trustees to

follow essentially the same [formula] approach when choosing an appropriate

interest rate under [Chapters 11],” reasoning that the applicable statutory

language was functionally identical in both contexts.49 However, in Footnote 14,

43

Id.

44

Id.

45

Id. at 492 (Scalia, J., dissenting).

46

Id. at 501.

47

Id. at 500.

48

Id. at 501.

49

Id. at 474–75 (plurality opinion).

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the plurality appeared to qualify its extension of the prime-plus formula to

Chapter 11, observing that as “efficient markets” for exit financing often exist

in business bankruptcies, a “market rate” approach might be more suitable for

making the cramdown rate determination under § 1129(b).50

In spite of Justice Scalia’s warning, the vast majority of bankruptcy courts

have taken the Till plurality’s invitation to apply the prime-plus formula under

Chapter 11.51 While courts often acknowledge that Till’s Footnote 14 appears

to endorse a “market rate” approach under Chapter 11 if an “efficient market”

for a loan substantially identical to the cramdown loan exists, courts almost

invariably conclude that such markets are absent.52 Among the courts that

follow Till’s formula method in the Chapter 11 context, “risk adjustment”

calculations have generally hewed to the plurality’s suggested range of 1% to

3%.53 Within that range, courts typically select a rate on the basis of a holistic

50

See id. at 477 n.14.

51

Gary W. Marsh & Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 AM.

BANKR. L. J. 209, 221 (2010) (“Till’s formula approach, which adds the prime rate to a

debtor-specific risk adjustment, should now be considered the default interest rate for a

Chapter 11 cramdown.”); see In re Mirant Corp., 334 B.R. 800, 821 (Bankr. N.D. Tex. 2005)

(concluding that Till is “clearly relevant” in the Chapter 11 context, and that “Till makes clear

that the market in fact does not properly measure the [cramdown rate].”); see also In re

Pamplico Highway Dev., LLC, 468 B.R. 783, 795 (Bankr. D.S.C. 2012) (collecting cases); In re

SW Boston Hotel Venture, 460 B.R. 38, 55 (Bankr. D. Mass. 2011) (collecting cases).

52

See, e.g., In re Nw. Timberline Enters., 348 B.R. 412, 432, 435 (Bankr. N. D. Tex.

2006) (applying prime-plus formula after concluding that the evidence was insufficient to

establish the existence of an efficient market); Pamplico, 468 B.R. at 793 (same); In re

Walkabout Creek Ltd. Divident Hous. Ass’n Ltd, 460 B.R. 567, 574 (Bankr. D.D.C. 2011)

(same); In re 20 Bayard Views, LLC, 445 B.R. 83 (Bankr. E.D.N.Y. 2011) (same); SW Boston

Hotel, 460 B.R. at 55 (same); In re Hockenberry, 457 B.R. 646, 657 (Bankr. S.D. Ohio 2011)

(same); In re Riverbend Leasing LLC, 458 B.R. 520, 536 (Bankr. S.D. Iowa 2011) (same); In

re Bryant, 439 B.R. 724, 742–43 (Bankr. E.D. Ark. 2010) (same).

53

E.g., In re Prussia Assocs., 322 B.R. 572, 591 (Bankr. E.D. Pa. 2005) (“The risk

premium, per Till, will normally fluctuate between 1% and 3%.”); Riverbend Leasing, 458 B.R.

at 535 (“[T]he general consensus that has emerged provides that a one to three percent

adjustment to the prime rate as of the effective date is appropriate.”); see also Pamplico, 468

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assessment of the risk of the debtor’s default on its restructured obligations,54

evaluating factors including the quality of the debtor’s management, the

commitment of the debtor’s owners, the health and future prospects of the

debtor’s business, the quality of the lender’s collateral, and the feasibility and

duration of the plan.55

2.

Returning to the proceedings in this case, both Wells Fargo and the

Debtors presented the bankruptcy court with expert testimony on the

appropriate prime-plus cramdown rate. Mr. Louis Robichaux, the Debtors’

expert, began his analysis by quoting the prime rate at 3.25%. He then

proceeded to assess a risk adjustment by evaluating the factors enumerated by

the Till plurality, looking to “the circumstances of the [D]ebtors’ estate, the

nature of the security, and the duration and feasibility of the plan.” Robichaux

concluded that the Debtors’ hotel properties were well maintained and

excellently managed, that the Debtors’ owners were committed to the business,

that the Debtors’ revenues exceeded their projections in the months prior to the

hearing, that Wells Fargo’s collateral was stable or appreciating, and that the

Debtors’ proposed cramdown plan would be tight but feasible. On the basis of

B.R. at 795 (collecting cases).

54

Marsh & Weiss, supra note 51, at 221; see also Pamplico, 468 B.R. at 794 (“[T]he

general consensus among courts is that a one to three percent adjustment to the prime rate

is appropriate, with a 1.00% adjustment representing the low risk debtor and a 3.00%

adjustment representing a high risk debtor”); In re Lilo Props., LLC, 2011 WL 5509401 at *2

(Bankr. D. Vt. 2011) (“The Court starts with the premise that the lowest-risk debtors would

pay prime plus 1% and the highest-risk debtors would pay prime plus 3%.”).

55

See, e.g., SW Boston Hotel, 460 B.R. at 57 (examining quality of management);

Prussia Assocs., 322 B.R. at 593 (examining commitment of owner); Riverbend Leasing, 458

B.R. at 536 (examining health and future prospects of business); Walkabout Creek, 460 B.R.

at 574 (examining quality of collateral); Bryant, 439 B.R. at 743 (examining repayment term).

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these findings, Robichaux assessed the risk of default “just to the left of the

middle of the risk scale.” As Till had suggested that risk adjustments generally

fall between 1% and 3%, Robichaux reasoned that a 1.75% risk adjustment

would be appropriate.

Wells Fargo’s expert, Mr. Richard Ferrell, corroborated virtually all of

Robichaux’s findings with respect to Debtors’ properties, management,

ownership, and projected earnings. Ferrell also agreed that the applicable prime

rate was 3.25%. However, Ferrell devoted the vast majority of his cramdown

rate analysis to determining the rate of interest that the market would charge

to finance an amount of principal equal to the cramdown loan. Because Ferrell

concluded that there was no market for single, secured loans comparable to the

forced loan contemplated under the cramdown plan, he calculated the market

rate by taking the weighted average of the interest rates the market would

charge for a multi-tiered exit financing package comprised of senior debt,

mezzanine debt, and equity. Ferrell’s calculations yielded a “blended” market

rate of 9.3%.56

To bring his “market influenced” analysis within the form of Till’s prime-

plus method, Ferrell purported to “utilize the [3.25%] Prime Rate as the Base

Rate,” making an upward “adjustment” of 6.05% to account for “the nature of the

security interest.” This calculation yielded Ferrell’s 9.3% blended market rate.57

56

More precisely, Mr. Ferrell determined that the market could finance the first

$23,448,000 of the cramdown loan at a rate of 6.25%, in exchange for a first mortgage on the

Debtors’ hotel properties. He then determined that the balance of the cramdown loan could

be financed through a combination of mezzanine debt, at a rate of 11%, and equity, at a

constructive rate of 22%. The weighted average of the interest rates on these three financing

tranches was 9.3%.

57

As Wells Fargo’s briefs on appeal implicitly concede, Mr. Ferrell thus effectively chose

the market rate, and not the prime rate, as the starting point of his cramdown rate analysis.

Cf. C.B. Reehl & Stephen P. Milner, Chapter 11 Real Estate Cram-Down Plans: The Legacy

of Till, 30 CAL. BANKR. J. 405, 410 (“[I]f the risk adjustment could take on any value, Till

would have no relevance since cram-down interest rates could be determined reverse

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Mr. Ferrell then adjusted the blended rate in accordance with the remaining Till

factors, making a downward adjustment of 1.5% to account for the sterling

“circumstances of the bankruptcy estate” and an upward adjustment of 1% to

account for the plan’s tight feasibility. Ultimately, Mr. Ferrell concluded that

Wells Fargo was entitled to a cramdown rate of 8.8%.

The bankruptcy court agreed with the parties that Till was “instructive,

if not controlling” under Chapter 11. Turning to Mr. Robichaux’s analysis, the

court concluded that “Mr. Robichaux properly interpreted Till and properly

applied it,” and that his “assessment of the circumstances of the estate, the

nature of the security, and the feasibility of the plan . . . [were] credible and

persuasive.” As for Mr. Ferrell’s analysis, the court rejected it as inconsistent

with Till’s prime-plus method:

I disagree with [Mr. Ferrell’s] approach because it establishes a

benchmark before adjustment that I just view to be completely

inconsistent with Till. Till set that benchmark at national prime,

but according to Mr. Ferrell, you first determine what level any

portion of a loan would be financeable, and then you begin to work

from there. . . . The Court finds no support for that type of analysis

in Till. If anything this strikes the Court as more in the nature of

a forced loan approach that the majority in Till expressly rejected.

Ultimately, the court determined, “[Robichaux’s] risk adjustment rate of 1.75%

is defensible, . . . especially . . . in light of the modifications to the plan which

render, in the Court’s opinion, the plan feasible.” Consequently, the court

concluded that Wells Fargo was entitled to a 5% cramdown rate.

engineered through application of other methodologies . . . . In other words, the same market

factors used to develop cram-down interest rates before Till, could now be used to determine

the value of the risk adjustment.”).

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3.

We agree with the bankruptcy court that Robichaux’s § 1129(b) cramdown

rate determination rests on an uncontroversial application of the Till plurality’s

formula method. As the plurality instructed, Robichaux engaged in a holistic

evaluation of the Debtors, concluding that the quality of the bankruptcy estate

was sterling, that the Debtors’ revenues were exceeding projections, that Wells

Fargo’s collateral — primarily real estate — was liquid and stable or

appreciating in value, and that the reorganization plan would be tight but

feasible. On the basis of these findings — which were all independently verified

by Ferrell — Robichaux assessed a risk adjustment of 1.75% over prime. This

risk adjustment falls squarely within the range of adjustments other bankruptcy

courts have assessed in similar circumstances.58

We also agree that Ferrell predicated his 8.8% cramdown rate on the sort

of comparable loans analysis rejected by the Till plurality. Wells Fargo’s briefs

repeatedly aver that the plurality characterized “the market for comparable

loans” as “relevant,” complaining that Ferrell’s analysis can “hardly be consigned

to the dustbin for considering relevant information.” However, aside from the

fact that Wells Fargo takes the quoted language out of context, the plurality

expressly rejected methodologies that “require[] the bankruptcy courts to

consider evidence about the market for comparable loans,” noting that such

approaches “require an inquiry far removed from such courts’ usual task of

58

See SW Boston Hotel, 460 B.R. at 57 (assessing risk adjustment of 1.0% over prime

for a Chapter 11 cramdown loan secured by hotel properties); In re Indus. W. Commerce Ctr.,

LLC, 2011 WL 330018 (9th Cir. BAP 2011) (assessing risk adjustment of 1.70% over prime for

Chapter 11 cramdown loan secured by commercial real property); Prussia Assocs., 322 B.R.

at 591 (assessing risk adjustment of 1.5% above prime where “the risks attendant to the

proposed loan [were] neither negligible nor extreme”); see also Pamplico, 468 B.R. at 795

(collecting cases).

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evaluating debtors’ financial circumstances and the feasibility of their debt-

adjustment plans.”59

Wells Fargo complains that Robichaux’s analysis produces “absurd

results,” pointing to the undisputed fact that on the date of plan confirmation,

the market was charging rates in excess of 5% on smaller, over-collateralized

loans to comparable hotel owners. While Wells Fargo is undoubtedly correct

that no willing lender would have extended credit on the terms it was forced to

accept under the § 1129(b) cramdown plan, this “absurd result” is the natural

consequence of the prime-plus method, which sacrifices market realities in favor

of simple and feasible bankruptcy reorganizations.60 Stated differently, while it

may be “impossible to view” Robichaux’s 1.75% risk adjustment as “anything

other than a smallish number picked out of a hat,”61 the Till plurality’s formula

approach — not Justice Scalia’s dissent — has become the default rule in

Chapter 11 bankruptcies.

Notably, Wells Fargo makes no attempt to predicate Ferrell’s “market-

influenced” blended rate calculation on the Till plurality’s Footnote 14, which

suggests that a “market rate” approach should apply in Chapter 11 cases where

59

Till, 541 U.S. at 477. Wells Fargo also urges that Till characterized the formula

approach as an “objective inquiry,” apparently viewing this language as a ringing endorsement

of the type of quantitative market analysis performed by Ferrell. In fact, the plurality was

merely suggesting that its prime-plus approach incorporated an objective baseline — the prime

rate — and did not depend on a complicated market analysis of any specific creditor’s cost of

funds. See id. at 466–67.

60

See Till, 541 U.S. at 479 (“[U]nlike the coerced loan, presumptive contract rate, and

cost of funds approaches, the formula approach entails a straightforward, familiar, and

objective inquiry, and minimizes the need for potentially costly additional evidentiary

proceedings); id. at 504 (Scalia, J. dissenting) (“[T]he 1.5% premium adopted in this case is far

below anything approaching fair compensation. That result . . . is the entirely predictable

consequence of a methodology that tells bankruptcy judges to set interest rates based on

highly imponderable factors.”).

61

Id. at 501 (Scalia, J., dissenting).

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“efficient markets” for exit financing exist.62 Footnote 14 has been criticized by

commentators, who observe that it rests on the untenable assumption that the

voluntary market for forced cramdown loans is somehow less illusory in the

Chapter 11 context than it is in the Chapter 13 context.63 Nevertheless, many

courts — including the Sixth Circuit — have found Footnote 14 persuasive,

concluding that a “market rate” approach should be used to calculate the

Chapter 11 cramdown rate in circumstances where “efficient markets” for exit

financing exist.64

Even assuming, however, that Footnote 14 has some persuasive value, it

does not suggest that the bankruptcy court here committed any error. Among

the courts that adhere to Footnote 14, most have held that markets for exit

financing are “efficient” only if they offer a loan with a term, size, and collateral

comparable to the forced loan contemplated under the cramdown plan.65 In the

present case, Ferrell himself acknowledged that “there’s no one in this market

today that would loan this loan to the debtors — one to one loan-to-value ratio,

62

Till, 541 U.S. at 477 n.14. Footnote 14 demonstrates that the Till plurality itself

drew a clear distinction between its “prime-plus” approach on the one hand, and a “market

rate” approach on the other.

63

COLLIER ON BANKRUPTCY ¶ 1129.05[2][c][i] (16th ed. rev. 2012) (“The problem with

[Footnote 14] is that the relevant market for involuntary loans in chapter 11 may be just as

illusory as in chapter 13.”); Thomas J. Yerbich, How Do You Count the Votes — or did Till tilt

the Game?, AM. BANKR. INST. J., July/Aug. 2004, at 10 (“There is no more of a ‘free market of

willing cramdown lenders’ in a chapter 11 . . . than in a chapter 13.”).

64

See In re Am. HomePatient, Inc., 420 F.3d 559, 568 (6th Cir. 2005) (“[W]e opt to take

our cue from Footnote 14 of the [plurality] opinion, which offered the guiding principle that

“when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate

an efficient market would produce.”); see also Marsh & Weiss, supra note 51, at 213 (“Since

American HomePatient . . . [a] majority of courts hold that, where an efficient market exists,

the market rate should be applied, but where no efficient market can be established, the court

should apply the prime-plus formula adopted in Till.”).

65

E.g., In re 20 Bayard Views, LLC 445 B.R. 83, 110–11 (Bankr. E.D.N.Y. 2011); In re

SW Boston Hotel Venture, 460 B.R. 38, 55 (Bankr. D. Mass. 2011).

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39 million dollars, secured by these properties.” While Ferrell concluded that

exit financing could be cobbled together through a combination of senior debt,

mezzanine debt, and equity financing, courts including the Sixth Circuit have

rejected the argument that the existence of such tiered financing establishes

“efficient markets,” observing that it bears no resemblance to the single, secured

loan contemplated under a cramdown plan.66

***

The bankruptcy court in this case calculated the disputed 5% cramdown

rate on the basis of a straightforward application of the prime-plus approach —

an approach that has been endorsed by a plurality of the Supreme Court,

adopted by the vast majority of bankruptcy courts, and, perhaps most

importantly, accepted as governing by both parties to this appeal. On this

record, we cannot conclude that the bankruptcy court’s cramdown rate

calculation is clearly erroneous. However, we do not suggest that the prime-plus

formula is the only — or even the optimal — method for calculating the Chapter

11 cramdown rate.

V.

The judgment of the district court is AFFIRMED.

66

Am. HomePatient, 420 F.3d at 568–69; 20 Bayard Views, 445 B.R. at 110–11; SW

Boston Hotel, 460 B.R. at 55–58; see also Marsh & Weiss, supra note 51, at 221 (“[C]ourts have

generally been unreceptive to the use of tiered financing as a basis for establishing a market

interest rate.”).

21