Reconceptualizing Present-Value Analysis in Consumer Bankruptcy

Washington and Lee Law Review Volume 68 | Issue 1 Article 4 Winter 1-1-2011 Reconceptualizing Present-Value Analysis in Consumer Bankruptcy Rafael I. Pardo Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Bankruptcy Law Commons Recommended Citation Rafael I. Pardo, Reconceptualizing Present-Value Analysis in Consumer Bankruptcy, 68 Wash. & Lee L. Rev. 113 (2011), https://scholarlycommons.law.wlu.edu/wlulr/vol68/iss1/4 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact . Reconceptualizing Present-Value Analysis in Consumer Bankruptcy Rafael I. Pardo* Abstract During the three decades following the enactment of the Bankruptcy Code, courts and commentators have been vexed by the problem of determining the present value of future payments to creditors proposed in a debtor’s repayment plan. The issue central to this problem has been the discount rate to be applied when conducting present-value analysis. While the Code unmistakably requires the discounting of future payments as part of the process for confirming a repayment plan, the Code does not explicitly specify the rate itself or the manner in which the rate should be calculated. No uniform rule of decision has emerged on this issue. Instead, a multitude of approaches has proliferated within and across circuits. Not even the Supreme Court has been able to bring uniformity to bear on the issue. When given the opportunity to do so in 2004, the Court in 1 Till v. SCS Credit Corp. could muster only a plurality opinion. In the wake of Till, disarray over the discount-rate calculus continues to abound. The main goal of this Article is to reconceptualize present-value analysis in consumer bankruptcy. It argues that, as a positive matter, the Bankruptcy Code compels use of a discount rate that solely accounts for expected inflation, but that does not take into account opportunity cost or the risk of nonpayment. The Article also examines whether the * Professor of Law, University of Washington. For helpful comments and suggestions, I am grateful to Robert Ahdieh, Joanna Shepherd Bailey, William Buzbee, William Carney, David Epstein, David Hoffman, Timothy Holbrook, Michael Kang, Margaret Lemos, Jonathan Nash, Charles O’Kelley, the Honorable Pamela Pepper, Lawrence Ponoroff, Frederick Tung, and Kathryn Watts. This Article has also benefited greatly from the commentary of participants at the 2010 Annual Meeting of the Canadian Law and Economics Association and at faculty workshops at Emory University School of Law; the University of California, Irvine School of Law; and the University of Washington School of Law. 1. Till v. SCS Credit Corp., 541 U.S. 465 (2004). 113 114 68 WASH. & LEE L. REV. 113 (2011) doctrinal prescription for the application of an inflation discount rate is normatively desirable. The Article concludes that, not only does an inflation rate comport with generally held theory of bankruptcy law’s procedural and substantive goals, it also optimizes the statutory design of the Bankruptcy Code and the institutional design of the bankruptcy courts. Table of Contents I. Introduction 115 II. The Problem and the Court’s Solution A. Present-Value Analysis in Chapter 13 B. Till v. SCS Credit Corp. 1. The Plurality and Dissenting Opinions 2. Justice Thomas’s Concurring Opinion 3. Till’s Postmortem 119 121 125 126 129 131 III. Textual and Contextual Arguments for an Inflationary Discount Rate A. "Property to Be Distributed" B. Contextualizing the Propriety of a Risk-Free Discount Rate 1. Probability of Default (Pd) 2. Actual Default Costs (Ca) a. Default Costs Relating to Collateral Value b. Default Costs Relating to Estate Insolvency c. Default Costs Relating to Collateral Illiquidity d. Default Costs Relating to Enforcement Actions C. A Discount Rate That Accounts Only for Expected Inflation IV. The Recovery of Interest in Bankruptcy A. The Nominal Amount of Allowed Claims B. Deviations from the Nominal-Amount Baseline 1. Allowance of Accrued Post-Petition Interest on Oversecured Pre-Petition Claims—Code § 506(b) 2. Monthly Interest Payments to Single-Asset-RealEstate Creditors—Code § 362(d)(3)(B)(ii) 3. Payment of Post-Petition Interest Accrued on Chapter 7 Pre-Petition Claims—Code § 726(a)(5) 133 134 139 140 150 151 155 156 158 160 164 165 168 170 172 172 RECONCEPTUALIZING PRESENT-VALUE ANALYSIS 115 4. Payment of Post-Petition Interest Accrued on Chapter 12 and Chapter 13 Pre-Petition Nondischargeable Claims—Code §§ 1222(b)(11) and 1322(b)(10) C. The Implications of the Nominal-Amount Baseline 174 175 V. A Normative Appraisal of an Inflationary Discount Rate in Consumer Bankruptcy A. Advancing Bankruptcy Law’s Procedural Goal B. Advancing Bankruptcy Law’s Substantive Goal C. Optimizing Statutory and Institutional Design 178 179 182 183 VI. Conclusion 186 I. Introduction During the three decades following the enactment of the Bankruptcy Code,2 courts and commentators have been vexed by the problem of determining the present value of future payments to creditors proposed in a debtor’s repayment plan. The issue central to this problem has been the discount rate to be applied when conducting present-value analysis. While the Code unmistakably requires the discounting of future payments as part of the process for confirming a repayment plan, the Code does not explicitly specify the rate itself or the manner in which the rate should be calculated. No uniform rule of decision has emerged on this issue. Instead, a multitude of approaches has proliferated within and across circuits.3 The lack of uniformity has generated a great deal of criticism, including that from the National Bankruptcy Review Commission (NBRC), which Congress authorized in 1994 to evaluate and recommend revisions to the Bankruptcy Code.4 In its final report in 1997, the NBRC recommended that the discount rate for present-value analysis "should be determined using a 2. This Article uses the terms "Bankruptcy Code" and "Code" to refer to the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (codified as amended primarily at 11 U.S.C. §§ 101-1532 (2006)). 3. See infra notes 22–24 and accompanying text (discussing the manner in which intercircuit and intracircuit splits culminated in the Till decision). 4. See Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 603, 108 Stat. 4106, 4147 (listing the duties of the NBRC). 116 68 WASH. & LEE L. REV. 113 (2011) nationally recognized rate to promote the equal treatment of similarly situated debtors and creditors,"5 but it failed to specify a particular rate.6 Not even the Supreme Court has been able to bring uniformity to bear on the (...truncated)