Brief Fact Summary. E.I. Parks No. 1 Ltd. Partnership, (Defendant), has an outstanding mortgage debt of $700,000. The holder of the mortgage, Shady Grove, (Plaintiff), objects to Defendant’s plan for reorganization because the interest rate proposed does not allow Plaintiff the present value of its secured claim.
Synopsis of Rule of Law. If a plan proposes to pay a secured creditor in installments, the present value of the future stream of payments must equal the amount of the creditor’s secured claim. The present value equals the exact amount the debt is worth today plus the rate of interest that the dollar would earn if invested at an appropriate rate. The elements to be considered in arriving at the appropriate market rate of interest should include the terms of the payout period, the quality of the security, and the risk of subsequent default.
Issue. Whether a 10.5% to be paid on the secured claim constitutes the appropriate market rate of interest.
Held. Yes. Under the facts of this case, 10.5% constitutes the appropriate market rate of interest to be applied to the payments on Plaintiff’s secured claim.
Thus, in determining the discount rate, the court must consider the prevailing market rate for a loan of a term equal to the payout period, with due consideration for the quality of the security and the risk of subsequent default.View Full Point of Law