Experience – Transparency – Professionalism – Tenacity

Thoughts And Questions For Discussion On Till And Experts Final 5 16 2014

Edmond J. Ford, Esq.1
May, 2014
a. The Supreme Court in Till footnote 14 appears to suggest that the
formula approach might not be appropriate in a Chapter 11 case if there is
an efficient market. Footnote 14: “Thus, when picking a cram down rate
in a Chapter 11 case, it might make sense to ask what rate an efficient
market would produce. In the Chapter 13 context, by contrast, the absence
of any such market obligates courts to look to first principles and ask only
what rate will fairly compensate a creditor for its exposure.” Till v. SCS
Credit Corp., 541 U.S. 465, n.14 (2004).
b. Most courts will first determine whether there is an efficient market
in the kind of financing proposed by the debtor to the secured creditor in
the plan. See, e.g., In re SW Boston Hotel Venture, LLC, 460 B.R. 38, 55-
57 (Bankr. D. Mass. 2011), aff’d, ____ F.3d
___, 2014 U.S.App. LEXIS
6768 (April 11, 2014); Bank of Montreal v. Official Comm. Of Unsecured
Creditors (In re American Home Patient, Inc.), 420 F.3d
559, 568 (6th Cir.
2006), cert. denied, 549 U.S. 942, 127 S. Ct. 55, 166 L.Ed. 2d 251 (2006);
In re Rocky Mountain Land Company, 2014 Bankr. LEXIS 1370 (Bankr.
D. Co. April 3, 2014); In re Turner, 2013 BNH. 17, 2013 Bankr. LEXIS

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5025 (Bankr. D.N.H. 2013); In re SCC Kyle Partners, Ltd. 2013 Bankr.
LEXIS 2439 (Bankr. W.D. Tex. 2013); In re Moultonborough Hotel
Group, LLC, 2012 B.N.H. 6, 2012 Bankr. LEXIS 5243 * 20 (Bankr.
D.N.H. 2012); In re Pamplico Highway Dev., LC, 468 B. R. 783, 795
(Bankr. D.S.C. 2012); 20 Bayard Views, LLC, 445 B.R. 83, 108 (Bankr.
E.D. NY 2011) (collecting cases); In re Northwest Timberline Enterprises,
Inc., 348 B.R. 412 (N.D. Tex. 2006). Most courts find that there is no
efficient market. In re Texas Grand Prairie Realty, LLC, 710 F.3rd 324,
333 (5th Cir. 2013) (noting that “courts almost invariably conclude that
such markets are absent.” Citing cases in footnote 52). Even the Fifth
Circuit, while rejecting the proposition that the decision in Till has any
effect at all on the Fifth Circuit approach to cram down interest,
nevertheless allows the Bankruptcy Court to apply a holistic approach that
is based on Till. In Re Texas Grand Prairie Realty, LLC, 710 F.3d
324 (5th
Cir. 2013) (holding that the Supreme Court’s splinter of opinions creates
no binding precedent in the Fifth Circuit and reaffirming the Fifth Circuits
declination to “’establish a particular formula for determining an
appropriate cram down interest rate’” At. 330)
c. Why is an efficient market important in the Till analysis? Is it because
the market price in a properly functioning market is, we believe, a just
price? Or is it because we generally believe that any invocation of
concepts of “value” necessarily means an objective measure of value and
that, in turn, we believe is what a properly functioning market produces?
d. What is an efficient market:
Investopedia.com: Definition of ‘Efficient Market Hypothesis – EMH’ An
investment theory that states it is impossible to “beat the market” because
stock market efficiency causes existing share prices to always incorporate
and reflect all relevant information. According to the EMH, stocks always
trade at their fair value on stock exchanges, making it impossible for
investors to either purchase undervalued stocks or sell stocks for inflated
prices. As such, it should be impossible to outperform the overall market
through expert stock selection or market timing, and that the only way an
investor can possibly obtain higher returns is by purchasing riskier
e. What do the courts mean? What evidence do bankruptcy courts look to?
Judge Feeney suggested that “[t]o determine whether there is an efficient
market for the loan at issue, most courts look to expert evidence and
evidence of actual loan offers. See, e.g., In re Deep River Warehouse,
Inc., No. 04-52749, 2005 Bankr. LEXIS 1793, 2005 WL 2319201 at *12
(Bankr. M.D. N.C. Sept. 22, 2005). In re SW Boston Hotel Venture, LLC,
460 B.R. 38, 54 (Bankr. D. Mass. 2011) (relying on expert testimony to
the effect that “there was no interest in this type of loan.” At. 56).
f. Is the efficient market the same concept that the Supreme Court
referred to in permitting a “fraud on the market” theory of reliance in
a securities fraud case? Basic Inc. v. Levinson, 485 U.S. 224, 248, 108
S.Ct. 978, 992 (1988); Eric P. John Fund, Inc. v. Halliburton Co., 131
U.S. 2179, 2185 (2011) (referring to Basic as establishing that a securities
plaintiff may establish reliance through a “fraud on the market” theory by
establishing that “the stock traded in an efficient market”). In the fraud on
the market line of cases, the First Circuit has said “an efficient market is
one in which the market price of the stock fully reflects all publicly
available information. By ‘fully reflect’ we mean that market price
responds so quickly to new information that ordinary investors cannot
make trading profits on the basis of such information.” Bowe v.
Polymedia, 431 F.3d
118 (1st Cir. 2005). In that same line of cases, the
Sixth Circuit concluded that the primary market for newly issued
municipal bonds is not efficient. Freeman v. Laventhol & Horwath, 915
F.2d 193, 199 (6th Cir. 1990). The Sixth Circuit referred to five elements
that establish that a market might be efficient:
The court in Cammer identified five factors that would be
useful in proving that a security was traded in an efficient
market, justifying the application of the fraud on the market
theory: (1) a large weekly trading volume; (2) the existence
of a significant number of reports by securities analysts; (3)
the existence of market makers and arbitrageurs in the
security; (4) the eligibility of the company to file an S-3
Registration [**17] Statement; and (5) a history of
immediate movement of the stock price caused by
unexpected corporate events or financial releases.
Id. at 198, citing, Cammer v. Bloom, 711 F.Supp. 1264, 1276 n. 17
(D.N.J. 1989)
g. What testimony may be elicited to establish an efficient market in exit
i. Does the definition of an efficient market in the context of
securities fraud have a bearing on the definition of an efficient market
for the purpose of Justice Stevens’ musings in footnote 14? Or is a
better gauge the language that Justice Scalia used in his dissent in Till:
is the applicable market “largely efficient,2
” or is the market
“reasonably competitive so that the pricing in those markets is
reasonably efficient.”3
ii. If the expert is to testify that a market for exit financing is “largely
efficient” or “reasonably efficient,” what are the standards that the
expert must apply?
iii. What is it a market for? Is it a market for financing of some kind
in any kind of structure, or is the relevant market only the market for
the financing proposed by the plan? Cf. In re SCC Kyle Partners, Ltd.,
2013 Bankr. LEXIS 2439 (W.D. Tex 2013) (“an efficient market for
financing exists in Chapter 11 only if the market offers a loan with a
term, size, and collateral comparable to the forced loan contemplated
under the cramdown plan.” Internal quotations omitted. At *59); In re
Pamplico Highway Development, 468 B.R. 783 (Bankr. D.S.C. 2012)
(neither party asserted that an efficient market existed, but the
testimony of the banker that no one would lend 100% loan to value as
under the plan established the lack of an efficient market. At 793); 20
Bayard Views, LLC, 445 B.R. 83 (Bankr. E.D.N.Y. 2011) (concluding
that no efficient market exists because, among other things, the
financing offers in the record were not on the same terms as the 100%

541 U.S. at 492: “The contract-rate approach makes two assumptions, both of which are reasonable. First,
it assumes that subprime lending markets are competitive and therefore largely efficient. If so, the high
interest rates lenders charge reflect not extortionate profits or excessive costs, but the actual risks . . .”
(emphasis added)
541 U.S. at 496 fn.3: “To the extent the plurality argues that subprime lending markets are not “perfectly
competitive,” ante, at ____, 158 L. Ed. 2d, at 801 (emphasis added), I agree. But there is no reason to doubt
they are reasonably competitive, so that pricing in those markets is reasonably efficient.” (emphasis
financing proposed in the plan); Bank of Montreal v. Official
Committee of Unsecured Creditors (In Re American Home Patient),
420 F.3rd 559, 569 (6th Cir. 2005), cert. denied, 549 U.S. 942, 127 S.
Ct. 55, 166 L.Ed. 2d 251 (2006) (suggesting that the lender’s efficient
market testimony based on a three tranche scheme was not the plan
and therefore “pure hypothetical”); but see In re North Valley Mall,
LLC, 432 B.R. 825 (Bankr. C.D. Cal. 2010) (using a tranche approach
to determining the market rate of interest even though the plan is a
single loan.); In re Sundance Self Storage, 2012 B.R. LEXIS 6124,
*33-34 (Bankr. E.D. Cal. 2012) (using the tranche approach to
determining interest rate); but see In re Seasons Partners, LLC, 439
B.R. 505, 518-519 (Bankr. D. Ariz. 2010) (rejecting the blended /
tranche approach as not consistent with 9th Circuit precedent).
iv. Is it enough that the Debtor has received an exit financing offer?
Cf. Deep River Warehouse, 2005 Bankr. LEXIS 1793, *38-39 (Bankr.
M.D. N.C. 2005) (using an offer in evidence to support the Till based
formula adjustment). Does the Debtor have to have attempted to
obtain exit financing? Probably not: In re SW Boston Hotel Venture
LLC, 460 B.R. 38, 54 (Bankr. D. Mass. 2011) (“A debtor, however, is
not required to show that it was unsuccessful in attempting to obtain
postpetition financing in order for the court to find that an efficient
market does not exist.”); SPCP Group, LLC, v. Cypress Creek Assisted
Living Residence, Inc., 434 B.R. 650, 658 (D.M.D. Fla. 2010) (“After
reviewing the cases cited by SPCP, and Till, this Court finds no
absolute mandate that a Chapter 11 debtor must attempt to find exit
financing before the bankruptcy court can determine whether an
efficient market exists.” )
v. Does the existence of a loan shark or vulture capital marketplace
mean that that market is efficient? Cf. In re Northwest Timberline
Enterprises, Inc., 348 B.R. 412 (N.D. Tex. 2006) (finding no efficient
market, but selecting a rate based on expert testimony at the “closest
thing to a market” and choosing an interest rate of 13.5%, making the
plan not confirmable because not feasible and therefore granting relief
from the stay). Or merely profitable? Is profitability a contraindication of efficiency? In Till, Justice Scalia in dissent argued that
the sub-prime market for truck loans must be highly competitive
because it is not profitable: “Here the assumption is borne out by
empirical evidence: One study reports that subprime lenders are nearly
twice as likely to be unprofitable as banks, suggesting a fiercely
competitive environment.” 541 U.S. at 493.
II. The role of experts in Till: the “risk adjustment” conundrum.
a. The Till rule: Start with the national prime rate
“reported daily in the press, which reflects the financial
market’s estimate of the amount a commercial bank should
charge a creditworthy commercial borrower to compensate
for the opportunity costs of the loan, the risk of inflation,
and the relatively slight risk of default. Because bankrupt
debtors typically pose a greater risk of nonpayment than
solvent commercial borrowers, the approach then requires a
bankruptcy court to adjust the prime rate accordingly. The
appropriate size of that risk adjustment depends, of course,
on such factors as the circumstances of the estate, the
nature of the security, and the duration and feasibility of the
reorganization plan. The court must therefore hold a
hearing at which the debtor and any creditors may present
evidence about the appropriate risk adjustment.”
541 U.S. at 479.
b. The risk conundrum: what is risk? Is risk merely a way of talking about
our ignorance? We use a number of proxies for risk, but do those proxies
just distort our discussion about justice? For example, in statistics or
social science, we often study interactions and outcomes. The outcomes
vary and we use a statistical model that envisions each interaction as
unaffected by the others and then assumes that the unexplained difference
in outcomes is the result of chance. Chance is equated to risk and risk is
measured by the standard deviation of the population of the outcomes
around the mean. But the assumption that the difference in outcomes is a
matter of chance is merely a way of hiding the contradiction between a
model that assumes causal connections, and experience that confounds
that assumption. Experience tells us that the same measured interactions
have many unmeasured elements that affect outcome. Hence the standard
deviation may be merely a measure of our ignorance. But if risk is just a
measure of our ignorance, why is it just to adopt a rule that burdens one
person (the debtor) and benefits another (the creditor) from our ignorance.
Or in circumstances where equity is out of the money, why is it more just
to impose a penalty arising from the uncertainty of our judgments on the
unsecured creditors?
i. In Till Justice Scalia explicitly adopts the notion of risk as a
mathematical concept using probability theory and an expected value
analysis to conclude that the expected value of the premium range in
Till is too little. 541 U.S. at 501-505 (“Even accepting petitioners’
low estimate of the plan failure rate, a creditor choosing the stream of
future payments instead of the immediate lump sum would be
selecting an alternative with an expected cost of about $590 ($1,600
multiplied by 37%, the chance of failure) and an expected benefit of
about $100 (as computed above). No rational creditor would make
such a choice.” At 504-505).
ii. Given the popularity of lotteries where millions of presumably
rational people purchase lottery tickets (investments?) with an
expected value far below the cost of the ticket, one wonders whether
the expected value analysis represents either the way that markets
(comprised of those same rational people) actually act or a proper
analysis of justice.
c. The compensation conundrum: what are we really trying to do? Are
we trying to achieve a just result or a result that provides appropriate
economic incentives: is the expert simply irrelevant? The statutory
problem is to compensate the secured creditor “value as of the effective
date” of the plan. The term “value” might not be understood as a price but
a command to the court to provide to the lender payments that justly
compensate it. Justice and markets could be different: justice is about
fairly allocating the burdens and benefits arising from past actions;
markets are about prices that provide appropriate incentives for future
actions. Because the opinion of an expert is about the current incentives
being offered in the market place and not about the just value of the plan
payments, is there not a reasonable argument that that opinion is
i. The plurality of the Supreme Court in Till described the process as
determining an “appropriate” “risk adjustment.” 4 The Court directed
that the trial court consider “such factors as the circumstances of the
estate, the nature of the security, and the duration and feasibility of the
reorganization plan.”5
The Supreme Court saw no need for experts;
rather “many of the factors relevant to the adjustment fall squarely
within the bankruptcy court’s area of expertise.”6
The plurality’s
language praising the bankruptcy court’s expertise with “appropriate”
risk adjustment contrasts sharply with the language used just two
pages earlier about the coerced loan approach (and the application of
the market rate of interest) where the court refers to the consideration
of evidence about the market rate of interest for comparable loans to
similar debtors as “an inquiry far removed from such court’s usual task
of evaluating debtors’ financial circumstances and the feasibility of
their debt adjustment plans.”7

541 U.S. at 479.
Id. at. 477.
ii. The requirement that the value as of the effective date be not less
than the amount of the secured claim is part of the general requirement
that a plan may be confirmed only if it is “fair and equitable.” 11
U.S.C. §1129(b)(1). Determining what is fair and equitable between
two or more actors is quintessentially the job of a court. Courts do
justice. Doing justice is not the job of a market. If the market is
totally “efficient,” then the best that can be said is that it provides the
correct incentives for allocating resources among productive uses, but
the price established is not thereby made just. If the market is not
“efficient,” if instead it is marked by disparities in bargaining power, a
lack of complete information, barriers to competition, transaction
costs, irrational prejudice, or the like, then it may produce neither a
just result nor an efficient allocation of resources. But in any event, no
market can do the Court’s job of meting out justice and so no opinion
as to what a market might do is in the least bit relevant to the value
that the Court must determine. Is there a market clearing price for
d. Individualized justice and the appearance of fairness in the judicial
system. Does the court simply adopt a language that has the appearance of
conforming to current societal norms of proper compensation for lending?
Does the loan shark’s (or credit card company’s) justification for its rates
color our perception of justice? Is it a question of reasonable
compensation like reasonable compensation in attorney’s fees
applications? Why isn’t the proper analogy an eminent domain
proceeding: a fair price for the taking?
a. Rule 702:
A witness who is qualified as an expert by knowledge,
skill, experience, training, or education may testify in the
form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and
methods; and
(d) the expert has reliably applied the principles and
methods to the facts of the case.
b. Daubert, Kumho, and Joiner.
In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993),
the Supreme Court announced that the adoption of the Federal Rules of
Evidence had changed the law with respect to expert opinions and that the
standard of “general acceptance” as the measure of admissibility
was superseded by the adoption of the Rules. In the Court’s role as
gatekeeper, it must be satisfied that the proposed testimony is from an
expert whose testimony is reliable and relevant:
The inquiry envisioned by Rule 702 is, we emphasize, a
flexible one. Its overarching subject is the scientific
validity — and thus the evidentiary relevance and reliability
— of the principles that underlie a proposed submission.

8 Frye v. United States, 293 F. 1013 (D.C. Cir. 1923) (expert scientific testimony admissible if based on
generally accepted scientific principles.)
The focus, of course, must be solely on principles and
methodology, not on the conclusions that they generate.

509 U.S. at 594-595 (footnote omitted). Daubert involved scientific
testimony. Fed. R. Evid. 702 includes experts who are expert by virtue of
experience, having thereby acquired a specialized knowledge. The Court
applied the rationale of Daubert in the context of testimony based on
technical or other specialized knowledge in Kumho Tire Co. v.
Carmichael, 526 U.S. 137 (1998). In the context of non-scientific expert
testimony, the court articulated the standard thus:
The objective of that requirement is to ensure the reliability
and relevancy of expert testimony. It is to make certain that
an expert, whether basing testimony upon professional
studies or personal experience, employs in the courtroom
the same level of intellectual rigor that characterizes the
practice of an expert in the relevant field.
526 U.S. at 152. In making the evaluation, the “the trial judge must have
considerable leeway in deciding in a particular case how to go about
determining whether particular expert testimony is reliable.” Id. The trial
court’s “decision to admit or exclude expert testimony under Daubert” is
reviewed by the appellate court under an abuse of discretion standard.
General Electric Co. v. Joiner, 522 U.S. 136, 138-139 (1997); cf. Argo
Fund v. Board of Directors of Telecom Argentina (In re Board of
Directors of Telecom Argentina), 528 F. 3d
162, 175-176 (2d
Cir. 2008)
(Sotomayor, J,) (“exclusion of a proposed expert witness will not
constitute an abuse of discretion unless it is manifestly erroneous.”)
Rule 702 after Daubert is said to “embod[y] a trilogy of restrictions on
expert testimony: qualification, reliability and fit.” Schneider v. Fried,
320 F. 3d
396, 404 (3d
Cir. 2004); In Re Young Broadcasting, Inc., 430
B.R. 99, 122-126 (Bankr. S.D.N.Y. 2010) (applying the trilogy of
restrictions to confirmation expert).
c. First prong: is the witness an expert?
While the expert might not need to have a degree, see, e.g., In re Young
Broadcasting, Inc., 430 B.R. 99, 122-126 (Bankr. S.D.N.Y. 2010)
(allowing testimony by Mr. Kuhn based on nine years practical experience
in the industry), experience often appears to be a key factor in the expert’s
qualifications. See, e.g., SPCP Group, LLC v. Cypress Creek Assisted
Living Residence, Inc., 434 B.R. 650, 658-659 (M.D. Fl. 2010) (not an
abuse of discretion to accept 16 years general commercial banking
experience as expertise on efficient market and Till adjustments for risk);
In re SW Boston Hotel Venture, LLC, 460 B.R. 38 (Bankr. D. Mass. 2011),
aff’d, ____ F. 3d
___, 2014 U.S.App. LEXIS 6768 (April 11, 2014)
(Debtor’s expert, Mr. Reiss, had over 30 years experience in the
restructuring industry, had written and lectured extensively, and had
testified in numerous contested chapter 11 cases); In re Northwest
Timberline Enterprises, Inc., 348 B.R. 412 (N.D. Tex. 2006) (bank’s
expert is managing director of middle market investment bank).
d. Second Prong: is the opinion testimony reliable?
“Nothing in either Daubert or the Federal Rules of Evidence requires a
district court to admit opinion evidence which is connected to existing
data only by the ipse dixit of the expert. A court may conclude that there is
simply too great an analytical gap between the data and the opinion
proffered.” General Electric Co. v. Joiner, 522 U.S. 136, 146 (1997).
Without reliable methodology applied to relevant data, the opinion is the
“mere ipse dixit” of the expert and may be rejected. Cf. Williams v.
Daimler Chrysler Corp., 2008 U.S. Dist. LEXIS 119040 *18 (N.D. Miss.
2008); cf. Hebbler v. Turner, 2004 U.S. Dist. LEXIS 3258 (E.D. La. 2004)
(excluding realtor’s opinion of value which was based on personal
experience, general market knowledge, a review of the available listings,
interviews of the defendants, and her knowledge of market terms for
comparable commercial space, but which had no true methodology). The
courts will allow an expert to survey the market for an indication of the
likelihood of financing or other interest in a market for the debt of the
restructured debtor. See, e.g., In re SW Boston Hotel Venture, LLC, 460
B.R. 38 (Bankr. D. Mass. 2011), aff’d, ____ F. 3d
___, 2014 U.S.App.
LEXIS 6768 (April 11, 2014). In SW Boston Hotel Venture, the debtor’s
expert reported an extensive survey of the marketplace:
He based his opinion on his knowledge and involvement of his firm’s real
estate loan transactions, his review of publications and research materials,
his communications with a number of large commercial lenders whose
responses to the opportunity to make a loan to the Debtors on terms set
forth in the Plan he described as “less than tepid,” as well as current poor
market conditions. In reaching his opinion, Mr. Reiss reviewed the
unprecedented negative market conditions for financing in the present
economy, the nature and type of the cramdown loan proposed under the
Plan, the amount due to Prudential, the characteristics of the loan, in
particular, the rapid amortization which has occurred during these cases
and which is projected to continue, and the proposed loan terms,
especially the quarterly minimum payments. He and his company
surveyed a number of commercial mortgage lenders, and he reviewed a
number of other real estate Chapter 11 cases in which his company had
been involved, and he found that there was no interest in this type of loan.
Mr. Reiss’s opinion was credible and substantiated by substantial
460 B.R. at 55-56.
In opining as to a Till adjustment, the expert should give a rationale for
each adjustment. See, e.g., In re SW Boston Hotel Venture, LLC, 460 B.R.
38 (Bankr. D. Mass. 2011), aff’d, ____ F. 3rd ___, 2014 U.S.App. LEXIS
6768 (April 11, 2014) (court gives great weight to the debtor’s expert’s
adjustments under Till and criticizes the bank’s expert for doing no Till
analysis. At 57); In re Rocky Mountain Land Company, 2014 Bankr.
LEXIS 1370 (Bankr. D. Col. April 3, 2014) (relying on the expert’s
testimony to determine lack of efficient market and as a foundation for the
Court’s Till adjustments. At 25 -*31)
e. Third Prong: is the testimony relevant? Is it a good fit to the facts of
the case? Is it relevant?
The testimony has to be tied by the methodology to the specific facts of
the case, failing which the testimony will be, at best, unpersuasive, and at
worse inadmissible. SPCP Group, LLC v. Cypress Creek Assisted Living
Residence, Inc., 434 B.R. 650, 659 (M.D. Fl. 2010) (trial court properly
rejected bank’s expert’s opinion on applicable rates of interest because
“[He] did not base his testimony on any facts or data concerning specific
loans to ALFs”). It is important that the expert’s opinion not contain
substantial errors in the applicable facts. See, e.g., In re SW Boston Hotel
Venture, LLC, 460 B.R. 38 (Bankr. D. Mass. 2011), aff’d, ____ F. 3d
2014 U.S.App. LEXIS 6768 (April 11, 2014) (bank’s expert criticized for
using assumptions that were wrong. At 57); In re Pamplico Highway
Development, 468 B.R. 783 (Bankr. D.S.C. 2012) (Debtor’s expert
followed Till and was more persuasive. At 794).
In Till, the Court was split 4-4-1, with Justice Thomas the outlier.
Justice Thomas opined that the appropriate starting and ending point was the
riskless rate of return. In Justice Thomas’s view, the calculation of the value as of the
effective date of the plan referred to the payments proposed under the plan. Since the
payments proposed under the plan are what they are and no subsequent events in the
future might change them, the statute does not contemplate adjusting for risk. Instead,
the statute simply asks the Court to make a determination as to the value of the proposed
payments, irrespective of whether those payments are ever actually made. Justice
Thomas concluded that, as a matter of statutory construction, the calculation
contemplated the use of a pure time value of money discount and not a discount which
embodies any concepts of risk.9
Since he viewed that as a matter of statutory
construction, to him that ended the matter. If an adjustment for risk was appropriate, he
would leave that up to Congress.
The plurality allowed that Justice Thomas might be correct if writing on a blank
slate, but the Court was not writing on a blank slate, and many years of practice which
had incorporated a risk adjustment, and the decision of the Supreme Court in Rash meant

541 U.S. at 486.
that the appropriateness of adjusting for risk was long since decided and not now open to
Justice Scalia responds to Justice Thomas by agreeing with the majority that the
issue is already decided and by making the observation that, in his view, Justice
Thomas’s interpretation leads to “anomalous” results.
11 In his view, it would do so
because if the payments are made as payments under the plan, then you would have a net
present value calculation done using the riskless rate of interest. However, if the plan
payments are effected through the issuance of new notes, then the trial court would be
expected to value those new notes which would mean that you value them at the market
value which takes into account an adjustment for risk.12
Justice Scalia’s argument is weak. First, we have never been under a regime
where the payments in a Chapter 11 plan are discounted to a present value based on the
riskless rate of return without any adjustment, so there is no case law developed around
Justice Scalia’s alleged anomaly.
Second, Justice Scalia sees that alleged anomaly as the obvious result only
because he does not explore the hard limit to the period over which payments can be
extended. That limit is five years. That limitation is applied to payments under the plan
whether structured as a note modification or plan payment.13 If the form of the obligation
to make the payments in the present Chapter 13 world does not modify the statutory

10 541 U.S. at 483.
11 541 U.S. at 505-506.
12 Id.
13 See, e.g., In re Hussain, 250 B.R. 502 (Bankr. D.N.J. 2000) (Chapter 13 plan may not modify a note to
provide for payments beyond the five year term of the plan); In re Schafer, 99 B.R. 352 (W.D. Mich. 1989)
(same); In re Javarone, 181 B.R. 151, 154-155 (Bankr. N.D.N.Y. 1995) (same).
treatment, then Justice Scalia’s “anomaly” would never come to pass in the hypothetical
Chapter 11 world that Justice Thomas would create.
Third, Justice Scalia’s approach (and less so the plurality’s approach) assures that
no secured creditor will actually receive the “right” set of payments under the plan.
Justice Scalia uses a probability theory concept of an expected value to argue that, in the
face of the uncertainty of the future, no rational secured creditor would be indifferent
between the payment proposed under the plan and simply receiving the reorganization
value of its collateral.14 But the indifference analysis depends upon the idea that what is
proper policy for a population of 1,000 similar cases is a just result in the individual case
in front of the Court. To put those words into concrete numeric examples, Justice Scalia
would posit that 37% of all truck loans similar to that in Till would fail. Failure involves
a cost. Therefore, the cost multiplied by a percentage equal to the percentage of such
cases that fail needs to be recovered by the secured creditor. Justice Scalia accepts the
concept that if the plan payments are actually made, then the appropriate discount rate is
the riskless rate. However, he asserts that because some plans will fail, all plans must
pay higher interest.
Justice Scalia, in attempting to obtain justice for all, assures justice for none.
Suppose a trial court is faced with the Till creditor and plan. If Justice Thomas’s riskless
rate approach is taken, and if all of the plan payments are made, then everybody agrees
that the outcome is just.15 Further, the outcome under that circumstance is that more
payments are made to the unsecured creditors.

14 541 U.S. at 501-505.
15 The outcome in the individual case might be just, but the incentives thereby created may be askew. If
every debtor could expect to re write their debt at the T-Bill rate, without regard to the individuals before
the court, it might be bad policy to so encourage bankruptcy filings.
If instead a premium is applied to account for the risk of nonpayment, and three
years later the plan completes and all of the payments have been made, then the secured
creditor has been overcompensated and the unsecured creditors have been paid less than
they might otherwise have received. Justice Scalia’s approach assures that if the plan
succeeds, the secured creditor will receive a premium. Likewise, if the plan fails, Justice
Scalia’s approach ensures that, by his numbers at least, a secured creditor does not
receive payment in full. It does not receive payment in full because Justice Scalia’s
numbers were never structured so as to assure that the secured creditor received full
compensation for all costs associated with default but only 37% of such costs.
On the other hand, if the plan fails and all the plan payments are not made, then
the approaches of both Justice Thomas and Justice Scalia have a buffer protecting the
secured creditor. The buffer is the rule that if the debtor is retaining the collateral, then
the collateral is valued not at liquidation value but instead at reorganization value.16 The
effect of the buffer is to permit some level of substantial justice to be done. The
difference is that, in Justice Scalia’s approach, the buffer is increased at the expense of
the unsecured creditors, while in Justice Thomas’s approach, the buffer is more limited.
The problem, perhaps, is the cost of justice. Justice Scalia expressly refers to the
costs of enforcement17 and would seek to structure the risk premium to cover those
costs.18 It is not clear why a risk premium should be used by the courts to cover the costs

16 11 U.S.C §506 (a) (valuing collateral in light of its use).
17 Justice Scalia also refers to the problem of the difference between the replacement value and liquidation
value of the collateral, and structures his risk premium analysis so as to recover that difference through the
interest rate. 541 U.S. at 502. He does not explain why, if the plan fails and the debtor does not retain the
collateral, the secured creditor’s failure to retain the going concern premium is unjust since there is no
longer a going concern.
18 541 U.S. at 503, where Justice Scalia spends a paragraph detailing the attorney’s fees that a secured
creditor might incur to get relief from the stay. He neatly avoids the problem of the American rule by
calling them “administrative costs” and concludes that they could easily amount to “$600 or more.”
of enforcement. The secured creditor almost undoubtedly already has a provision in its
loan documents that allows it to recover attorney’s fees and other costs of enforcement.
The American rule is that, in the absence of a contractual understanding otherwise, each
party bears the burden of its own attorneys (a burden that Justice Scalia expressly shifts
to the borrower).
The economic reality of Justice Scalia’s argument is essentially that the secured
creditor needs to get the money “while the gettin’ is good.” Before a default has
occurred, and if the debtor is making payments, and if the secured creditor can extract a
little extra “vig” in each payment, then it might cover itself if a default arises. After the
default has occurred, there is usually no cash and, therefore, notwithstanding the
contractual right to recover attorney’s fees, a secured creditor is often unable to do so.
A policy question, and the question that a court is faced with ex ante is: is it
appropriate for the secured creditor to extract a little extra “vig” from a debtor (and from
the other creditors in the case) whom the court has found has acted in good faith and has
proposed a feasible plan of reorganization in order to allow the secured creditor to protect
itself from some different debtor who ultimately does not pay?
A reasonable argument could be made that Justice Thomas had it right.
Nevertheless, eight members of the Supreme Court believe that some form of risk
premium is appropriate. And that is the end of the matter. But even at the end of the
matter, it may well be appropriate for us to take into account the arguments for the
riskless rate when thinking about the justice of the actual amount of the risk premium
allowed in the post-Till world.