Opinion
CASE NO. 00-07218-AJM-13
November 2, 2000
William Price, Attorney for the Debtor.
Richard Darst, Attorney for Bank of Illinois.
ENTRY ON OBJECTION FILED BY BANK OF ILLINOIS TO CONFIRMATION OF DEBTOR'S PLAN
The Debtor filed his voluntary petition for relief under Chapter 13 of the Bankruptcy Code on June 16, 2000, and along with the petition, filed his chapter 13 plan (the "Plan"). The Plan valued the 1995 model Jeep Wrangler (the "Jeep") in which Bank of Illinois (the "Bank") has a lien at $10,000, payable at 7% interest. The Bank has objected to the Plan, claiming that does not meet the requirements of § 1325(a)(5)(B)(ii), which generally provides that, for a chapter 13 plan to be confirmed, the debtor must pay to each holder of a secured claim the fair market value of its collateral, with interest, if the fair market value is to be paid over time. See, In re Carson, 227 B.R. 719, 721 (Bankr.S.D.Ind. 1998). The Bank agrees that the $10,000 valuation on the Jeep is fair, but contends that it should be receiving the contract rate of interest which is 16.950%.
Hearing on the Bank's objection and confirmation of the Plan was held on October 31, 2000 wherein the Debtor appeared by counsel, William Price; the Bank appeared by counsel, Richard Darst; the Chapter 13 Trustee, Robert Brothers, also was present.
The Seventh Circuit Court of Appeals has decided that a secured creditor in a chapter 12 case is entitled to the rate of interest it could have obtained had it foreclosed and reinvested the proceeds in loans of equivalent duration and risk. In re Koopmans, 102 F.3d 874 (7th Cir. 1996). However, the Seventh Circuit also went on to hold that, in that circumstance, the proper measure of an interest rate was a "prime plus" approach: i.e., the prime rate of interest plus an added factor to reflect that the extension of credit was riskier than the norm. In the Koopmans case, that factor was 1.5%. So, under the facts in Koopmans, the interest rate applied was prime plus 1.5%; although Koopmans acknowledged that the "prime plus" approach was not the only way to "approximate the market rate of interest", it also discussed the drawbacks in applying only the contract rate of interest where the debtor, through the chapter 12 plan, was changing the duration of the original contract:
A debtor who wants to change the duration of a loan must refinance, which occurs at the current market rate. This may be lower than the one provided by contract. Just as the debtor cannot insist on the lower of the contract or current market rates, neither may the creditor obtain the higher of contract or current market.
Koopmans, 102 F.3d at 875.
Under the original terms of the contract here, the last payment was to be made in August, 2003. Under the terms of the Plan, it appears that the payment schedule is modified and stretched to a point longer than August, 2003 but no longer than 2005 (the Plan is a five year plan). Indeed, one of the advantages to chapter 13 debtors is to"modify" the original terms of repayment and therefore the rights of holders of secured claims under § 1322(b)(2). The "prime plus 1.5%" approach in Koopmans is persuasive and applicable here.
Besides, another bankruptcy court in this district has determined that a "prime plus 1.5%" was the appropriate rate of interest for a chapter 13 debtor's payment on a creditor's allowed secured claim. The prime rate applied is the prime rate in existence as of the date of the petition. In re Carson, 227 B.R. 719 (Bankr.S.D.Ind. 1998). This Court will employ that standard here, and therefore, the proper rate of interest to be applied to the Bank's $10,000 secured claim on the Jeep is 11% (prime rate of 9.5% plus 1.5%).
Accordingly, the Bank's objection is SUSTAINED, but only to the extent that the applicable interest rate shall be 11%, not 7% as originally provided for in the Plan. The Plan will be confirmed, with the order confirming the Plan reflecting the appropriate 11% interest rate.