Opposition Brief — Key Bank National Ass'n v. Milham, 119 S. Ct. 169 (1998) (No. 98-95)

Supreme Court, U.S.

FILED

AUG 1 7 1998

RSE any

No. 98-95

Inu Che

Supreme Court Of Che United States

October Term 1997

+

KEY BANK NATIONAL ASSOCIATION f/k/a

KEY BANK OF NEW YORK,

Petitioner,

i

RONALD P. MILHAM, BENEDETTA MILHAM

AND ANDREA E. CELLI,

Respondents.

>

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Fourth Circuit

+>

RESPONDENTS’ BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

a

Martin J. Goodman

Counsel for Respondents

Ronald P. Milham and Benedetta Milham

350 Northern Boulevard

Albany, New York 12204

(518) 449-7777

QUESTION PRESENTED

Is an oversecured creditor entitled to be

paid its contract rate of interest post-

confirmation, even if payment of that rate of

interest will enable the creditor to receive

more than the present value of its claim as of

the effective date of the plan?

TABLE OF CONTENTS

Section Page

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STATSRNT OF THE CAGE. ck tisetcanescueseskuws 1

REASONS FOR DENYING THE WRIT........csceceses g

a U.S. v. Ron Pair precludes an

interpretation of 506(b) that mandates

contract rate of interest after

SORE SROESOS oo 6c CeO RR EERE Ee Ok 4

II. Rake v. Wade defines the limited scope

of §506(b)........ scesteneectencs seeecee®

III. Congress considered and rejected an

amendment which would require the

payment of interest at the contract

IV. The number of oversecured claims is

declining, not increasing............... 9

Vv. Milham and Smithwick agree that

§1325(a) (5) (B) (ii) controls post-

OGRE SINEEOR: 6 6 ko c's ck bo os ROKR eR 11

VI. A decision by the U.S. Supreme Court in

this case could very well be mooted by

revisions to the Bankruptcy Code....... 13

VII. The Milham case has been converted to

one under Chapter 7, and the issue

could very well be considered to be

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APPENDIX

Trustee’s report of disbursements to

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TABLE OF AUTHORITIES CITED

I. Federal Statutes

23. U.B.C. SOSH) oc cicccvvusvcn 4, 5, 6, ii, ia

£3: OB SOOT CE io ck A eke ee ee eee ens 2

13 U.8.C. SERA ES AAs os vc de woes se bee eat es 14

a2. G.8 Sc Re COS 05 Cais CaaS Ka ES ON ee es 7

11 U.S.C. 1325 (a) (5) (B) (12)..3, 6, 11, 12, 14

II. Supreme Court Cases

U.S. v. Ron Pair Enterprises, Inc., 489

ee Pa 2) Be 2 ee er ee ee re a, 5

Rake v. Wade, 113 S.Ct. 2187

ine & a ous dae Oe le ee ee a ee eee ee 6

III. Court of Appeals Cases

In re Milham, 141 F.3d 420 (2nd Cir.

EER i cee ee KK COU OSCE eee heeds a 4. ae

Smithwick v. Green Tree Financial

Servicing Corp., 121 F.3d 211, at 213

(Sth Cir. 1997), cert. denied, __

U.S. 3, (U.S. Sup. Ct., No. 97-1333,

6720700) 2.8 - 2 ee 6x4 a Oa oes her bees 11

iv

IV. Bankruptcy Appellate Panel for the Second

Circuit Cases

In re Harko, 211 B.R. 116 (2nd Cir.BAP

BEES AHER EE CAA Se PKG N SEE Ci hie he Bee ke 1

V. Bankruptcy Court Cases

Green Tree Financial Servicing v. Smithwick,

sane @,R. BF 420 (8.D. Tem. 1996)... ikke vv ck 8

In re Collins, 167 B.R. 842 (E.D.Tex.1994)...8

VI. Other Authorities

Consumer Reports, v.60, no.4 (Cons. Union,

BOE 6 54 e RAY O65 DONE abe Le eee eee 9

Consumer Reports, v.61, no.4 (Cons. Union,

ROPE RENN DES CERT E ETRE ECE RSOE OE 10

Consumer Reports, v.62, no.4 (Cons.

es RPE oo cae oS bak Ook ok ee ees 9, 10

H.R. 4786, 97 Cong. 1st Sess. 19(2) (A)

King, L., 3 Collier on Bankruptcy (15th ed.

King, L., 5 Collier on Bankruptcy (15th ed.

st

Pawlowic, Dean, "Entitlement to Interest

Under the Bankruptcy Code," 12 Bankr.Dev.J.

149 (Emory Univ. School of Law 1995)......... 6

Ponoroff, L. & Knippenberg, S., “The

Immovable Object Versus The Irresistible

Force: Rethinking the Relationship Between

Secured Credit and Bankruptcy Policy,” 95

Mich. L. Rev. 2235 (Mich. Univ. School of

EE 6A eC SORA CA CAWDOR MOREOHLD OCU wR 13

STATEMENT OF THE CASE

A. Procedural History

This brief responds to a petition filed on

July 8, 1998, and docketed July 17, 1998, that

seeks leave to appeal from the final order of

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the U.S. Circuit Court of Appeals f

Circuit, filed on April 10, 1998, reported under

the title In re Milham, 141 F.3d 420 (2d

Cir.1998), which unanimously affirmed the final

order of the Bankruptcy Appellate Panel Service

of the Second Circuit entered on July 31, 1997,

officially reported under the title of In re

Harko,* 211 B.R. 116 (2nd Cir.BAP 1997), which

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affirmed the final order of the Hon. Robert E.

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Littlefield, Jr., entered in the United States

‘In re Milham was decided along with

a companion case, In re Harko, in

bankruptcy court and in the appeal to the

BAP. The combined cases are reported

under the name In re Harko.

h

Bankruptcy Court for the Northern District cf

New York, confirming the Chapter 13 plan of the

respondents over the objection of the petitioner

herein.

Pursuant to the confirmed plan, Key Bank

was paid in full as of February 20, 1997. On

June 1, 1998, under extreme financial hardship

caused by the ioss of employment, the case was

converted to one under Chapter 7 pursuant to

§1307 (a) .?

B. The Facts

Ronald and Benedetta Milham and Key Bank

entered into a retail installment contract on

December 11, 1992, secured by a 1991 Lincoln

automobile. The debtors filed for relief under

Chapter 13 of the Bankruptcy Code on April 24,

*Trustee’s disbursement report at

Appendix “A.”

*Notice of conversion at Appendix “B.”

2

1996.

In their Chapter 13 plan, the Milhams

proposed to pay the secured claim of the bank by

paying the close-out balance of the loan at 8.5%

annual interest.

Key Bank filed an objection to the plan,

Claiming that because its loan was oversecured,

it was entitled to the contract rate of 9.5%

interest over the life of the plan.

The Milham's response was that from the

date of filing up to the effective date of the

plan, the rate of interest was determined under

§506(b), and that from the effective date of the

plan onward, the bank was entitled to present

value under §1325 (a) (5) (B) (ii).

The Milhams and the bank agreed that the

value of the collateral exceeded the balance due

on the loan.

REASONS FOR DENYING THE WRIT

-

U.S. v. Ron Pair precludes an interpretation

of 506(b) that mandates contract rate of

interest after confirmation.

11 U.S.C. 506 (b)

To the extent that an allowed secured claim is

secured by property the value of which, after

any recovery under subsection (q@ of this

section, is greater than the amount of such

claim, there shall be allowed to the holder of

such claim, interest on such claim, and any

reasonable fees, costs, or charges provided for

under the agreement under which such claim

arose.

(Emphasis added).

§506(b) does not say that an oversecured

creditor collects interest at the contract rate.

Milham, supra, at 2512. In U.S. v. Ron Pair

Enterprises, Inc., 489 U.S. 235 (1989), the

Supreme Court, applying principles of statutory

and grammatical construction, asserted that the

phrase “provided for under the agreement under

which claims arose" does not qualify the phrase

"interest on such claim." Id., at 241-242.

In concluding that the comma after

"interest on such claim" effectively separates

it from the phrase "provided for under the

agreement," the Court precluded an interpret-

ation of §506(b) which would statutorily mandate

zz.

Rake v. Wade defines the limited scope of

§506(b).

The Supreme Court took cognizance of the

limited application of §506(b): “It is generally

recognized that the interest allowed by §506 (b)

will accrue until payment of the secured claim

or until the effective date of the plan. "Rake

v. Wade, 113 S.Ct. 2187 (1993) at 2190, citing

King, L., 3 Collier on Bankruptcy 4506.05, at

506-43 and n. 5c (15th ed. 1993). In setting

forth the scope of §506(b), Rake addressed the

requirements for pendency and plan interest and

how §506 and §1325 interrelate. Pawlowic, Dean,

"Entitlement to Interest Under the Bankruptcy

Code," 12 Bankr.Dev.J. 149 (Emory Univ. School

of Law 1995), at 159.2.

ifI.

Congress considered and rejected an amendment

which would require the payment of interest at

the contract rate.

The reluctance of Congress to grant special

status for oversecured claims is demonstrated in

its failure to provide for special status in the

Bankruptcy Code of 1978 and again in 1981, when

Congress refused to revise the Code to require

payment of contract interest in Chapter SF

Legislation was proposed in 1981 to require

“Interest ...to be paid at the rate specified in

the consumer’s contract,” but was never enacted.

H.R. 4786, 97 Cong. lst Sess. 19(2) (A) 1981. In

1994, Congress added §1322(e) to provide for

contract rate of interest on oversecured

mortgage arrears, but did not provide this

preferential treatment for any other class of

secured creditors.

“Congress considered and rejected an

amendment which would require the payment of

interest at the contract rate for present value

purposes.” Green Tree Financial Servicing v.

Smithwick, 1202 B.R. at 423 (S.D.Tex.1996),

citing In re Collins, 167 B.R. at 845 n. 4.

“Contrary to the holdings of a number of courts,

it is rarely appropriate to select the rate

charged the debtor in the original transaction

as the present value discount rate.” Smithwick,

supra, citing 5 Collier on Bankruptcy, $1235.06

at 1235.51 (15th ed.1995) .*

‘This writer located the passage cited

at 5 Collier on Bankruptcy, 41325.06[3] [b]

at 1325.36 (15th ed.1995).

8

IV.

The number of oversecured claims

is declining, not increasing.

Although petitioner claims that the number

of oversecured claims is increasing, it offers

no evidence to support this claim, and it is the

opinion of this writer that oversecured claims

are as much in the minority as ever.

There is reason to believe that the number

of oversecured claims is declining with the

rapid emergence of leasing as an alternative to

the purchase of a motor vehicle.

In 1987, 7% of new automobiles were leased.

Consumer Reports, v.62, no.12, at 30 (Dec.97).

The percentage of automobiles rolling off

assembly lines and into leases increased to 10%

in 1990. Consumer Reports, v.60, no.4, at 268

(Apr.95). By 1995, the percentage of leased

vehicles rose to 25%. Id. In 1996 the percentage

of leased automobiles increased to 30%. Consumer

Reports, v.61, no.4, at 58 (Apr.96). And by

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Milham and ae agree that

§1325(a) (5) (B) (ii) controls post-

confirmation.

Milham and Smithwick do not conflict to

the degree suggested by petitioner. Milham,

supra, at 2512-15, provides for §506(b) interest

until confirmation and §1325(a) (5) (B) (ii)

present value subsequent to confirmation.

The decision in Smithwick v. Green Tree

Financial Servicing Corp., 121 F.3d 211, at 213

(Sth Cir. 1997), cert. denied, __U.S.__; (U.S.

Sup. Ct., No. 97-1333, 4/20/98) U.S. LEXIS

2552), likewise provides for §1325(a) (5) (b) (ii)

interest subsequent to confirmation, adding the

rebuttable presumption, wholly judge-made, that

the contract rate is the proper rate of

§1325 (a) (5) (B) (ii) interest. Smithwick does not

support petitioner’s position of entitlement to

the contract rate as an absolute under §506(b).

11

The decision does not suggest, as petitioner

claims, that §506(b) overcomes §1325(a) (5) (B)

(ii) .°

SPetition for Writ at 10.

12

vi.

A decision by the U.S. Supreme Court in this

case could very well be mooted by revisions to

the Bankruptcy Code.

Legislation is pending in Congress to

extensively revise the Bankruptcy Code. There

are three competing bills in the House,® and

one bill in the Senate.’ Moreover, there are

those who urge Congress to “clarify once and for

all the nature and status of...secured claims in

bankruptcy.” Ponoroff, L. & Knippenberg, S.,

“The Immovable Object Versus The Irresistible

Force: Rethinking the Relationship Between

Secured Credit and Bankruptcy Policy,” 95 Mich.

L. Rev. 2235 (Mich. Univ. School of Law 1997).

The final version of bankruptcy reform

legislation could moot the decision of the Court

should certiorari be granted.

‘H.R. 2500, H.R. 3146 and H.R. 3150.

"SB. 23G2.

13

VII.

The Milham case has been converted to one

under Chapter 7, and the issue could very well

be considered to be moot.

On February 20, 1997, pursuant to the order

of confirmation, the Trustee disbursed the final

payment to Key Bank.® Under extreme financial

hardship caused by the loss of employment, on

June 1, 1998, pursuant to §1307(a), the Milhams

converted their case from one under Chapter 13

to one under Chapter 7.’

The conversion removes the case from

consideration under §1322(b) (2) and §1325(a) (5)

(B) (ii), so that the issue raised could be

considered to be moot.

"Appendix “A,” supra.

*Appendix “B,” supra.

14

CONCLUSION

The Milham case was properly decided at all

levels, and should not be reconsidered.

96~-12157 RONALD P. MILHAM & BENEDETTA MILHAM

Date Code Creditor Nase Cred Cle ID Amount Check No

Oct 18, 1996 CR S-KEY BANK @21523 8ee2 T99 9796.18 &£@225is3

Oct 18, 1996 INT S-KEY BANK @21523 eee2 T99 112.83 48225182

Nov 25, 1996 CR S-KEY BANK @2iS23 eee2 T99 1,284.27 &@226537

Nov 25, 1996 INT S-KEY BANK @21523 @e@e2 T99 135.39 £8226537

Dec 16, 1996 CR S-KEY BANK @21523 @ee2 TI9 296.85 £@227784

Dec 16, 1996 INT S-KEY BANK @21523 9ee2 T99 6.86 £80227784

Jan 21, 1997 CR S-KEY BANK @21523 @@62 T99 685.88 £8229¢055

Jan 21, 1997 INT S-KEY BANK @21523 8ee2 T99 4.735 4£8229¢@5=5

Feb 28, 1997 CR S-KEY BANK 821523 8ee2 TI9 65.49 £8238422

Feb 28, 1997 INT S-KEY BANK @21523 @ee2 T99 «46 &£8238422

saz TOTAL 822 3,382.56

Appendix "A"

UNITED STATES BANKRUPTCY COURT FOR THE

NORTHERN DISTRICT OF NEW YORK

In re

Ronald P. Milham and Case No. 96-12157

Benedetta Milham,

Debtor(s).

WOTICE OF CONVERSION OF CASE TO CHAPTER 7 UNDER SECTION 1307 (a)

The debtor(s), by their attorney, represents as follows:

i. Tae debtor(s) are no longer able to comply with their

Chapter 13 plan and do nec desire to modify the plan.

- - Tne destcris) qualify as destor(s) under Csaptcer 7 of

3 Uecer 1. U.S.C. 1207(a), the detcsr‘s) are enziztled es

conver: cre:> Cmasters 13 case <2 a case under Chatter 7 at any time

SSS .S)° Sow wish ss comver= shis Chascer 12 case 5 a case

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Aszany, New York 12234

$23) 449-7777

Appendix "B”