Opinions of the United
1996 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-30-1996

Rankin v. Desarno
Precedential or Non-Precedential:

Docket 95-3007,95-3011,95-3037




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     IN THE UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT
                  ___________
                  NO. 95-3007
                  ___________

          LAURA RANKIN; DAVID RANKIN;
         STACY JOHNSON; ALICE BONACCI,
                                            Appellants,


                      v.

       SAMUEL M. DESARNO; ALICE DESARNO;
           COUNTY OF ALLEGHENY; PENN
             HILLS SCHOOL DISTRICT

               GARY J. GAERTNER,
                                            Trustee

                           COUNTY OF ALLEGHENY and
                           PENN HILLS SCHOOL DISTRICT,

                                Appellants.

                  ___________
                  NO. 95-3037
                  ___________

         LAURA RANKIN; DAVID RANKIN;
         STACY JOHNSON; ALICE BONACCI

                      v.

       SAMUEL M. DESARNO; ALICE DESARNO;
COUNTY OF ALLEGHENY; PENN HILLS SCHOOL DISTRICT

               GARY J. GAERTNER,

                                            Trustee

                           STACY JOHNSON,

                                            Appellant.

                  ___________

                  NO. 95-3011
                  ___________
                      COUNTY OF ALLEGHENY;
                  PENN HILLS SCHOOL DISTRICT,

                                                   Appellants,

                               v.

                SAMUEL M. DESARNO; ALICE DESARNO

                    GARY J. GAERTNER, ESQUIRE,

                                                   Trustee.

                           ___________
         On appeal from the United States District Court
             for the Western District of Pennsylvania
              (Civil Action Nos. 94-982 and 94-1174)
                            __________

                    Argued: November 20, 1995

                     BEFORE: BECKER, SAROKIN
and WELLFORD, Circuit Judges
                           ___________

                  (Opinion filed July 30, 1996)

Michael G. McCabe, Esq. (ARGUED)
David W. Ross, Esq.
Goehring, Rutter & Boehm
1424 Frick Building
Pittsburgh, PA 15219

         Attorneys for the County of Allegheny
         and the Penn Hills School District,
         Appellants in Nos. 95-3007 and 95-3011


Catherine T. Martin, Esq. (ARGUED)
Daniel L. Haller, Esq.
Maria Pekich, Esq.
Neighborhood Legal Services Association
Firm No. 213
928 Penn Avenue
Pittsburgh, PA 15222

         Attorneys for Stacy Johnson,
         Appellant in No. 95-3037

Daniel J. Gates, Esq.
Edgardo D. Santillan, Esq.
Law Offices of Daniel J. Gates, P.C.
828 Frick Building
Pittsburgh, PA   15219

         Attorneys for the Debtors
         Samuel M. DeSarno and Alice DeSarno

                             __________

                         OPINION OF THE COURT
                              __________

WELLFORD, Circuit Judge:

                           I. OVERVIEW
         The primary dispute in this appeal concerns the rate of
postpetition interest to which
plaintiffs, the Penn Hills School District and Allegheny County,
Pennsylvania, are entitled in
connection with their oversecured prepetition tax claims against the
defendants, numerous Chapter
Thirteen bankruptcy debtors. Plaintiffs contend that interest should
accrue at the applicable rates
set forth in the Pennsylvania Municipal Code, and thus, that the
bankruptcy and district courts
erred in approving defendants' bankruptcy plans, which proposed to pay
postpetition interest at
a substantially lesser rate. Having carefully considered this issue and
the others presented in this
appeal, we AFFIRM in part and REVERSE in part.

                    II. STATEMENT OF THE CASE
         Samuel and Alice DeSarno, Laura and David Rankin, Stacy Johnson,
and Alice
Bonacci defaulted on real estate taxes owed to Allegheny County and the
Penn Hills School
District. Because the salient facts are identical as to each defendant,
we limit our background
discussion to the DeSarnos. After the Desarnos defaulted on their tax
obligations, plaintiffs filed
secured claims against their principal residence in the approximate amount
of $4,500. Under
Pennsylvania law, these claims constitute first liens on the property and
plaintiffs are entitled to
receive interest on the underlying debts at certain statutorily prescribed
rates. The DeSarnos'
residence is worth many times the amount of the principal debt plus
interest; thus, plaintiffs'
claims are substantially oversecured.
         In June 1993, to avoid a foreclosure on their house, the DeSarnos
filed a voluntary
petition for bankruptcy under Chapter Thirteen of the United States
Bankruptcy Code. The
DeSarnos subsequently filed a plan proposing to pay in full plaintiffs'
prepetition claims (100
percent of the principal debt plus interest at the statutory rates), but
proposing to pay postpetitioninterest at a rate much lower than those
prescribed by the relevant Pennsylvania statutes.
         In November 1993, the bankruptcy court confirmed the DeSarnos'
plan subject to
a determination of the appropriate postpetition interest rate. The
bankruptcy court directed the
parties to file briefs supporting their respective positions, but did not
schedule oral argument or
conduct an evidentiary hearing on the matter. Allegheny County and Penn
Hills argued at the
confirmation hearing that they were entitled to interest at twelve and ten
percent per annum,
respectively, pursuant to Pennsylvania statutes. The DeSarnos, on the
other hand, argued that
plaintiffs' postpetition claims were modifiable under 11 U.S.C.
1322(b)(2) and that postpetition
interest should be set to accrue at a "reasonable" rate, as opposed to the
statutory rates.
         In May 1994, the bankruptcy court confirmed the DeSarnos' plan in
its entirety,
holding that plaintiffs' claims were modifiable and that the proposed rate
of postpetition interest
met and exceeded the rate that the court determined to be reasonable.
Thereafter, plaintiffs sought
review of the plan in the district court. Notwithstanding initial concern
over the bankruptcy
court's failure to hold an evidentiary hearing to aid in its determination
of an appropriate interest
rate, the district court affirmed the bankruptcy court's decision. This
timely appeal ensued.
Defendant Stacy Johnson subsequently filed a cross-appeal challenging the
applicable rate of
prepetition interest for Allegheny County.

                      III. ISSUES ON APPEAL
         The following issues are before us in this appeal and cross-
appeal: (1) whether it
was error to determine that Allegheny County is entitled under
Pennsylvania statutory law to
prepetition interest at a rate of twelve percent per annum; (2) whether
the lower courts erred in
holding that a tax claim secured by a statutory lien on a Chapter Thirteen
debtor's principal
residence is modifiable pursuant to 11 U.S.C.   1322(b)(2); and (3) if so,
whether the reduced
rate of postpetition interest approved by the lower courts provides
plaintiffs with the "present
value" of their claims pursuant to 11 U.S.C.   1325(a)(5)(B)(ii).

                      IV. STANDARD OF REVIEW
          We review the bankruptcy court's findings of fact for clear
error.   Sharon Steel
Corp. v. National Fuel Gas Distrib. Corp., 

, 38 (3d Cir. 1989).
We exercise plenary
review, however, in regard to the bankruptcy court's "choice, application
and interpretation of
legal precepts." 

                           V. DISCUSSION
                      A. Prepetition Interest
         We first address whether the bankruptcy court correctly
determined that Allegheny
County is entitled to prepetition interest on its tax claims at a rate of
twelve percent under
Pennsylvania law. Although most of the defendants have conceded this
point, defendant Johnson
argues that the county is entitled to a maximum interest rate of only ten
percent. We disagree.
         Pursuant to 72 Pa. Cons. Stat. Ann.     5648, "second class"
Pennsylvania
counties are entitled to interest on all county tax delinquencies and may
adopt a maximum interest
rate of twelve percent per annum on these debts. It is undisputed that
Allegheny County is the
only "second class" county for purposes of     5648 and that its County
Commissioners have chosen
to charge tax debtors the maximum amount allowed under that statute.
Nevertheless, Johnson
argues that   5648 conflicts with and is governed by 53 Pa. Cons. Stat.
Ann.   7143, which
provides that interest claims made by municipalities for unpaid taxes
cannot exceed ten percent
per annum.
         We agree that    7143 conflicts with    5648, but we do not find
7143 to be
controlling. Notwithstanding Johnson's assertions to the contrary,      5648
is the more specific of
the two statutes because it deals with tax delinquencies in second class
counties. Further, the ten
percent interest rate of    7143, established by an amendment dated October
29, 1981, predatesthe twelve percent interest rate of     5648, which was
established on May 5, 1982. See Pa. Laws
319, No. 113,   1; Pa. Laws 372, No. 106,     1. Section 1933 of the
Pennsylvania Statutory
Construction Act of 1972 provides:

              Whenever a general provision in a statute shall be in
              conflict with a special provision in the same or
              another statute, the two shall be construed, if
              possible, so that effect may be given to both. If the
              conflict between the two provisions is irreconcilable,
              the special provisions shall prevail and shall be
              construed as an exception to the general provision,
              unless the general provision shall be enacted later
              and it shall be the manifest intention of the General
              Assembly that such general provisions shall prevail.
1 Pa. Cons. Stat. Ann.    1933 (emphasis added). Based on    1993, the
special provision
allowing twelve percent interest to second class counties embodied in
5648 prevails over the
general provision of    7143 and must be construed as an exception to it.
         To summarize,    5648 is inconsistent with   7143 because it
specifically empowers
the Allegheny County commissioners to establish an interest rate of up to
twelve percent on
delinquent taxes. Section 7143, on the other hand, provides for a maximum
rate of only ten
percent. Thus, the two statutes are in conflict because they authorize
different rates. The
commissioners, taking advantage of the full authorization of    5648,
established the applicable rate
at twelve percent. We believe that     5648--the later, more specific
statute--controls here.
Accordingly, we hold that Allegheny County is entitled to prepetition
interest at a rate of twelve
percent per annum under    5648 and thus AFFIRM the ruling of the lower
courts on that issue.

                     B. Postpetition Interest
         Turning to the next issue, we note that the parties agree that
plaintiffs are entitled
to some amount of postpetition interest on their claims, but they disagree
as to the rate at which
such interest should accrue. In this regard, plaintiffs first argue that
the lower courts erred in
holding that their claims to postpetition interest at the statutory rates
are modifiable under 11
U.S.C.   1322(b)(2). Alternatively, plaintiffs assert that the confirmed
interest rates are
insufficient to provide them with the present value of their allowed
secured claims under 11
U.S.C.   1325(a)(5)(B)(ii). We address each of these contentions in turn.

                   (1) 11 U.S.C.   1322(b)(2)
         Section 1322(b)(2) of the Bankruptcy Code provides that Chapter
Thirteen plans
may "modify the rights of holders of secured claims, other than a claim
secured only by a security
interest in real property that is the debtor's principal residence." 11
U.S.C.   1322(b)(2)
(emphasis added). Defendants concede that plaintiffs' claims are secured
by liens on their
principal residences. Therefore, the key issue is whether those liens
constitute "security interests"
for purposes of the antimodification provision of   1322(b)(2).
         The Bankruptcy Code defines "security interest" as "a lien
created by an
agreement." 11 U.S.C.    101(51) (emphasis added). In contrast, the Code
provides that the term
"statutory lien" means a "lien arising solely by force of a statute on
specified circumstances or
conditions . . . but does not include security interest or judicial lien."
11 U.S.C.    101(53)
(emphases added). Because plaintiffs' tax liens arose under state
statute, and not from a
consensual or voluntary agreement with the taxpayer defendants, we concur
in the bankruptcy
court's ruling that those liens are not "security interests" for purposes
of   1322(b)(2).
         The foregoing interpretation of    1322(b)(2) is supported by
substantial authority
from other jurisdictions. See, e.g., In re DeMaggio, 

, 146-47
(Bankr. D.N.H.
1994) (holding that plain language and statutory history of    1322(b)(2)
establish that
nonconsensual tax liens do not fall within antimodification provision of
that statute); In re Sabec,

, 667-68 (Bankr. W.D. Mich. 1992) (finding antimodification
provision of
1322(b)(2) inapplicable because creditor's interest in the principal
residence of the debtor was a
"lien," rather than a "security interest," based on the fact that it arose
nonconsensually under state
tax act); In re Venable, 

, 856 (Bankr. S.D.N.Y. 1985) (holding
that city's tax lien
on debtor's principal residence was modifiable despite    1322(b)(2)
because not consensual, and
thus, not a "security interest"); In re Mitchell, 

, 700 (Bankr.
D. Or. 1984) (finding
IRS lien on debtor's principal residence modifiable because statutory, not
created by agreement
as required by    1322(b)(2)); In re Seel, 

, 695-96 (Bankr. D.
Kan. 1982) (holding
modifiable a mechanic's lien on debtor's principle residence because it
was a "statutory lien").
Nevertheless, plaintiffs urge us to hold that statutory tax liens on
principal residences are not
modifiable under    1322(b)(2) because Congress has historically made
explicit reference to tax
liens in provisions of the Bankruptcy Code intended to affect such liens.
Plaintiffs further assert
that the existence of public policy concerns analogous to those invoked by
Congress in exempting
liens for unpaid postpetition property taxes from the automatic stay
indicates that Congress did
not mean for tax liens to be modifiable under    1322(b)(2). In light of
the plain language of
1322(b)(2), however, we must decline plaintiffs' invitation to speculate
as to the intent of
Congress in this context. "Where the statutory language is clear, our
"'sole function . . . is to
enforce it according to its terms.'" Rake v. Wade, 

, 471
(1993) (quoting United
States v. Ron Pair Enters., Inc., 

, 241 (1989)).

               (2) 11 U.S.C.    1325(a)(5)(B)(ii)
         Our conclusion that plaintiffs' claims are modifiable under
1322(b)(2) does not
dispose of this appeal. We must also determine whether the postpetition
interest rate confirmed
by the lower courts passes muster under 11 U.S.C.   1325(a)(5)(B)(ii). In
a Chapter 13
bankruptcy, the debtor is given the opportunity to retain property which
would otherwise be
subject to foreclosure by secured creditors. "In exchange for giving the
debtor a right to continue
possession of the property,   1325(a)(5)(B) directs two things: (i) the
secured creditor shall retain
a continuing lien on the property; and (ii) the secured creditor shall
receive from the debtor 'the
value, as of the effective date of the plan, of such property to be
distributed under the plan on
account of such claim [which shall be] not less than the allowed amount of
such claim.'" GMAC
v. Jones, 

, 66 (3d Cir. 1993) (quoting 11 U.S.C.
1325(a)(5)(B)(ii)). The latter
provision requires that the payments to the secured creditor have a
"present value" equal to the
creditor's allowed secured claim. 5 Collier on Bankruptcy
1325.06[4][b][iii][B] (15th ed.
1982). Present value is a market rate concept, determined by the use of
an interest rate which
fairly compensates the creditor for not receiving the full amount of its
secured claim upon
confirmation of the debtor's plan. There is wide disagreement, however,
as to what constitutes
an appropriate rate of interest in this context. See In re 

. Although this
court has posited a framework for determining an appropriate interest rate
under
1325(a)(5)(B)(ii) in the context of commercial creditors, neither this
court nor the Supreme Court
has addressed that issue in the context of nonconsensual tax lien
creditors such as plaintiffs.

         In the case at bar, the bankruptcy court began its   1325(a)
analysis with the
statutory interest rates, but dismissed them as being in the nature of a
penalty. According to the
court, the statutory rates were raised by the Pennsylvania Legislature
from six percent to their
present levels in response to the extremely high commercial interest rates
of the late 1970's and
early 1980's. In the court's view, the state's purpose in raising the
statutory rates was to "coerce
and encourage prompt payment of taxes in competition with other higher
commercial rates."
         Having rejected the statutory rates, the bankruptcy court
attempted to determine
a more reasonable interest rate, ultimately concluding that the
appropriate rate under
1325(a)(5)(B)(ii) was "the reasonable cost of interest to the
[plaintiffs], as of the effective date of
the plan, over a 60 month period." Consulting published historical
interest rates for municipal
bonds, the court determined that, at a minimum, postpetition interest
should accrue at 4.05 percent
for Allegheny County and 4.30 percent for Penn Hills. Since defendants'
plans proposed to pay
postpetition interest at seven percent per annum, they were confirmed.
         Plaintiffs contend that the bankruptcy court's rejection of the
statutory rates was
erroneous. In support of their position, plaintiffs rely principally upon
our previously cited
decision in Jones, wherein we addressed the issue of interest rates under
  1325(a) in the context
of a commercial creditor. In Jones, General Motors Acceptance Corporation
("GMAC") filed
secured claims against a number of Chapter 13 debtors who, prior to taking
bankruptcy, had
purchased GMC trucks and defaulted on their financing obligations. 

.
GMAC subsequently objected to the debtors' bankruptcy plans on grounds
that the proposed
interest rates were too low to provide it with the present value of its
claims under
1325(a)(5)(B)(ii). 

         Reversing the bankruptcy and district courts, this court held
that the interest rate
should be determined with reference to the purpose behind
1325(a)(5)(B)(ii): "to put the secured
creditor in an economic position equivalent to the one it would have
occupied had it received the
allowed secured amount immediately, thus terminating the relationship
between the creditor and
the debtor." 

The Jones court then rejected the bankruptcy
court's "cost of funds"
approach, which looks to the rate at which the creditor can borrow funds,
as falling short of this
statutory objective by failing to account for: (1) the cost to the
creditor of sustaining its lending
relationship with the debtor past the point contemplated in the original
agreement; and (2) the
expectation of commercial creditors to make a profit when extending
credit. 

69.

         Ultimately, the Jones court concluded that a "coerced loan"
theory should provide
the starting point for determining interest rates under
1325(a)(5)(B)(ii). 

Thus, the
court held that the appropriate rate of interest is "that which the
secured creditor would charge,
at the effective date of the plan, for a loan similar in character, amount
and duration to the credit
which the creditor will be required to extend under the plan." 

(footnote added).
According to the court, this approach, unlike the cost of funds method,
closely approximates the
creditor's immediate liquidation position because it recognizes that
creditors incur costs associated
with the coerced extension of credit and because it incorporates a
consideration of profit into the
determination of the    1325(a) interest rate. 

The court
further found the coerced
loan approach appealing because it would reduce the litigation and
transaction costs of Chapter
13 cases due to the fact that "regularly maintained documents of the
creditor should make it
possible for the debtor and creditor to stipulate on the interest rate the
creditor would charge for
a new loan of similar character, amount and duration." 

         Plaintiffs in the case at bar make two arguments based on Jones.
First, they
contend that the plain language of that decision requires that interest in
the present case be set to
accrue at the rates that they charge nonbankrupt, delinquent taxpayers
(i.e., the statutory rates).
Second, plaintiffs assert that the bankruptcy court erred in applying a
cost of funds approach
because that approach was specifically rejected in Jones. We agree with
plaintiffs that the
bankruptcy court's analysis was flawed.
         In our view, the district court plainly erred by looking solely
to plaintiffs' cost of
funds in assessing the appropriateness of the proposed postpetition
interest rates in this case. As
the Ninth Circuit has noted, such an approach forces a governmental
creditor to

              incur an unconditional obligation to repay the money
              it was required to borrow . . . in exchange [for] only
              an inherently risky promise by the debtor to repay
              the same amount over the applicable time period at
              essentially the same rate paid by the government on
              its obligation.

In re Camino Real Landscape Maint. Contractors, Inc., 

, 1506
(9th Cir. 1987)
(citation omitted). Thus, the governmental creditor is "worse off as a
result of the exchange."

is no indication that Congress meant to subsidize
debtors by making
available to them the government's own favorable rate of interest." 

hold that for
plaintiffs to be properly compensated, consistent with Jones, postpetition
interest rates must be
set in accordance with the municipalities' costs of maintaining their
creditor relationship.
         Since municipalities are not for-profit lending institutions and
do not regularly
extend loans that can be used to determine the appropriate rate of
interest, the case at bar is not
on all-fours with Jones. Nevertheless, we do not believe that Jones is
totally inapplicable in this
situation, despite GMAC's status as a for-profit entity, or that the "cost
of funds" approach would
be proper if applied to the debtor instead of the creditor. Therefore,
the principles of Jones must
be given effect, even if it is not factually identical.
         We believe that the closest analog to the market loan in Jones is
the statutory
interest rate here. While the analogy is not perfect, it is sufficient:
an entity forced to delay
payment that it is entitled to receive is, in effect, extending a loan.
And the rate that the
municipality charges for those that coerce loans by not paying their
property tax bills is twelve
percent. In fact, as the difficulties in arriving at another rate have
shown, the statutory rate is
really the only practical and reasonable rate to apply. The statutory
rate also serves the
administrative efficiency goal of establishing a readily ascertainable
"market" rate that will not
require the time and expense of case-by-case litigation and potentially
inconsistent results.
         Political and financial market forces will generally operate to
keep the statutory rate
reasonable. The rate is set by elected officials accountable to citizens
who, after all, must balance
their desire to make their neighbors pay their property taxes with the
consideration that they
themselves may be in default some day. In addition, the financial market
might provide the best
check against oppressive rates. If a debtor can, in fact, do better than
the statutory rate, he or she
will rationally do what consumers normally do when rates (for instance,
mortgage notes) become
higher than the market. The debtor will "refinance" by obtaining the new
loan at the lower
available rate, using the funds to pay off the old loan. Indeed, the
statutory rate at issue in this
case--twelve percent--is not unreasonable. Credit card companies
regularly charge their
customers, who are not even high credit risks, interest at rates as high
as eighteen percent. The
debtors in this case, of course, are in bankruptcy and, although the
municipality currently holds
liens that are oversecured, property values can decline.
         In support of our holding, we note that numerous courts have held
that
nonconsensual oversecured creditors are entitled to receive the rates of
interest dictated by the
statutes under which their liens arose, unless those rates constitute a
penalty. See, e.g., Galveston
Ind. Sch. Dist. v. Heartland Fed. Sav. & Loan Ass'n, 

, 204
(Bankr. S.D. Tex.
1993); see also In re Parr Meadows Racing Ass'n, 

, 1549 (2d
Cir. 1989), cert.
denied sub nom., Suffolk County Treasurer v. Barr, 

(1990).
Although the
bankruptcy court initially determined that the statutory rates at issue in
this appeal are in the
nature of a penalty, we find this decision to be in error. See Meilink v.
Unemployment Reserves
Commission, 

(1942). In Meilink, a unanimous Supreme Court
held that a
statutorily imposed interest rate of twelve percent on debts owed to a
state's unemployment fund
did not constitute a penalty within the meaning of the Bankruptcy Code.
In that regard, the Court
stated:
                   It is common knowledge that interest rates vary
              not only according to the general use value of money
              but also according to the hazard of particular classes
              of loans. Delinquent taxpayers as a class are a poor
              credit risk; tax default, unless an incident of
              legitimate tax litigation, is, to the eye sensitive to
              credit indications, a signal of distress. A rate of
              interest on tax delinquencies which is low in
              comparison to the taxpayer's borrowing rate--if he
              can borrow at all--is a temptation to use the state as
              a convenient, if involuntary, banker by the simple
              practice of deferring the payment of taxes.

                   Another variable is the amount necessary to
              compensate for the trouble of handling the item.
              The legislature may include compensation to the
              state for the increased costs of administration in the
              exaction for delay in paying taxes without thereby
              changing it from interest to penalty.

         We believe that Judge Sarokin's arguments for using the prime
rate prove too
much. If the prime rate represents the appropriate rate in the commercial
marketplace, why did
not the Jones court use the prime rate in that case, which, after all,
involved a commercial lender?
         Moreover, that the Pennsylvania legislature has not seen fit to
change the statutory
rate on delinquent tax loans for some years, in our view, does not render
the twelve percent rate
penal or unreasonable.    If the statutory rate, as suggested by the
dissent, "far exceed[s]   what the
Plaintiffs could obtain   under current market conditions," then the debtors
(or the bankruptcy
trustee) can proceed to   obtain the more favorable rate in the market.

                          VI. CONCLUSION
         Based on the foregoing, we AFFIRM the district court's award of
prepetition
interest to Penn Hills and Allegheny County at the statutory rates of ten
and twelve percent per
annum, respectively. We REVERSE, however, the decisions of the bankruptcy
court and district
court on the issue of postpetition interest rates and hold that Penn Hills
and Allegheny County are
also entitled to postpetition interest at the respective statutory rates.
Rankin v. DeSarno, Nos. 95-3007/3011/3037
_________________________________________________________________
SAROKIN, Circuit Judge, concurring in part and dissenting in part:
         I join Parts I, II, III, IV, V.A, and V.B.(1) of the Majority's
opinion. However,
because I do not believe that the statutory rate should apply to
postpetition interest, I dissent from
the Majority's analysis and conclusion in Part V.B.(2).
         I agree with the Majority that the "cost of funds" approach
adopted by the
bankruptcy court is flawed because it under-compensates the municipality
and it offers the debtors
a windfall by enabling them, in effect, to borrow funds from the
municipality at rates that are
generally available only to state entities.
         But because I do not agree with the Majority's reliance on
General Motors
Acceptance Corp. v. Jones, 

, 67 (3d Cir. 1993), I would reject
as well the Plaintiffs'
suggestion that we apply the statutory rate to post-petition interest
payments.
         The situation here differs from that in Jones in one important
way: in Jones, the
creditor was a commercial lender, in the business of lending money to earn
a profit. Unlike the
Majority, see Majority Op., typescript at 12, I believe that this
difference is significant.
                      I. The statutory rate
         In a market that is subject to the rigors and constraints of
competition, the interest
rate charged by a commercial lender (Lender A) should reflect the
approximate cost of capital
plus transaction costs, and a small profit component. If interest is set
at a rate that substantially
exceeds Lender A's costs in order to yield greater profits, competitors
should be able to lure
borrowers away from Lender A by setting their rates below that charged by
Lender A while still
earning a profit. Ultimately, the more competitive the market, the more
closely the rate will
reflect the costs incurred by the lender. Therefore, setting post-
petition interest at a rate equal to
the rate charged by a creditor-lender in the commercial market should come
closest to
compensating that creditor both for the non-availability of its capital
and for the costs of
maintaining the relationship, and should therefore "put the secured
creditor in an economic
position equivalent to the one it would have occupied had it received the
allowed secured amount
immediately, thus terminating the relationship between the creditor and
the donor." 

.
         Here, the creditors are governmental entities. The interest
rates that they can
charge "debtors" -- i.e., those who have defaulted on their tax payments -
- are not constrained by
competitive considerations, but imposed by statute. These rates were set
at their current level in
the early 1980s, and have not been modified since. "Courts are generally
in agreement that an
interest rate to compute present value must be responsive to current
economic conditions" and
"that an unchanging fixed rate established at some prior time is not
appropriate in a present value
analysis." In re DeMaggio, 

, 150-51 (Bankr. N.H. 1994). It
is easy to understand
why: market rates have dropped significantly since the early 1980s. The
statutory rates have not
followed the commercial market's downward path and as a result "ha[ve] no
relation to current
economic conditions." 

In fact, they far exceed what the
Plaintiffs could obtain under
current market conditions. Because they are so high, the statutory rates
now "include a punitive
element that is contrary to the purposes of the Bankruptcy Code" and
"inimical to financial
rehabilitation of the debtor." In re Camino Real Landscape Maintenance
Contractors, Inc., 

, 1507 n.2 (9th Cir. 1987). See also In re 

(noting that
"[i]nterest rates on delinquent taxes frequently incorporate a punitive
aspect to discourage
nonpayment.").
         Because statutory rates are not subject to the discipline of the
market, and because
considerations of deterrence may in fact warrant a rate of interest for
tax evasion that far exceeds
costs, there is no reason to expect that the statutory rates are
calculated to compensate the
Plaintiffs for the present value of their claims, and to serve the
objective of section
1325(a)(5)(B)(ii), which is "to put the creditor in the same position it
would have been in if it had
been allowed to end the lending relationship at the point of the
bankruptcy filing by repossessing
the collateral." 

.       Therefore, I reject the
approach recommended by
the Plaintiffs and espoused by the Majority, and would not set the
postpetition interest rate at the
statutory rate.
                        II. The prime rate
         I would hold, instead, that the appropriate rate to compute the
present value of a
claim by an oversecured government creditor pursuant to section
1325(a)(5)(B)(ii) is the rate
charged by commercial banks to prime commercial loan customers -- that is,
the prime rate -- for
a loan of equivalent amount and duration. This method has been adopted by
other courts, see,
e.g., In re Jordan, 

, 191 (D.N.J. 1991); In re Hudock, 

, 534 (N.D.
Ill. 1991), and it addresses most of the concerns raised by alternative
methods.
         First, because it imposes a rate higher than the municipal bond
rate, it offers the
Plaintiffs a measure of compensation for the various costs, beyond the
costs of capital, incurred
in the delayed collection of tax payments.
         Second, because it is based on a market rate, it is sensitive to
changes in the costs
of borrowing in the larger economy, and derivatively to the costs of
borrowing for municipal
governments as well. "Market rates are the best indicators of the present
value of deferred
payments because they are products of supply and demand, reflecting the
interactions of economic
variables that affect the cost of lending money." In re Ivey, 

, 49 (Bankr. N.C. 1991).
         Third, because it is divorced from the statutory rate, it does
not include a punitive
element that is inimical to the purposes of bankruptcy reorganization.
         Fourth, it is a readily available figure, and therefore
relatively easy to compute.
         Fifth, it does not create any incentives for debtors to delay
payment of their real
property taxes, since they would incur little benefit from such a delay.
         I note that the Plaintiffs had urged that we consider a variation
of this approach if
we rejected the statutory rate. Specifically, they had urged that we
adopt the prevailing
commercial market rate, but taking into account factors such as the term
of the payout period, the
value of security and the risk of default, the statutory rate of interest,
and the characteristics of
the debtor in each case. Clm. Brf. at 34. Several circuits have adopted
this measure of present
value for debt owed to government, albeit in the context of a Chapter 11
bankruptcy. See, e.g.,
In re Camino Real Landscape Maintenance Contractors, 

(holding that "the
debtor must pay the government interest at the rate the debtor would pay a
commercial lender for
a loan of equivalent amount and duration, considering the risk of default
and any security); United
States v. Neal Pharmacal Co., 

, 1289 (8th Cir. 1986); In re
Southern States Motor
Inns, Inc., 

, 652-53 (11th Cir. 1983) (same). Under this more
refined approach,
"the bankruptcy court must make a case-by-case determination of what
interest the reorganizing
debtor would have to pay a creditor in order to obtain a loan on
equivalent terms in the open
market." In re Camino Real Landscape Maintenance Contractors, 

.
         The approach urged upon us by the Plaintiffs is unnecessarily
unwieldy, and
therefore I would reject it. All three cases cited by the Plaintiffs
dealt with the proper method for
determining the rate of interest to be applied in calculating deferred
payments of delinquent federal
taxes pursuant to 11 U.S.C.   1129(a)(9)(C). However, section
1129(a)(9)(C) applies only to
unsecured claims. Therefore, the risk of default on such debt is
substantial. The risk present in
the instant case is much less significant. As the DeSarnos note, the
County and School District
"are at very low risk of not receiving payment while enjoying a
correspondingly high quality of
security in the event of default under the Plan. The taxing bodies both
enjoy priority status as
creditors of the Debtors and are first in line to receive the amounts owed
due to their position of
possessing a statutory lien upon the Debtors' residence." DeSarno Brief
at 24. Therefore, it is
not necessary to refine our approach to account for the particular
characteristics of each debtor.
         I recognize that the prime rate approach, which reflects
transactions between
commercial lenders and borrowers, is not a perfect fit for government
creditors. As 

,
the costs of borrowing for a municipal government and for a commercial
lender are not identical,
both with regard to their "replacement costs" -- i.e., the rate at which
they can borrow funds --
and "transaction costs." In addition, the market rate reflects the profit
margin that motivates
commercial lenders in the first place, but that is not a consideration for
municipalities.
         While the commercial market rate of interest for a low-risk,
secured loan is not a
perfectly accurate measure, exactitude is not the only consideration --
judicial economy and
efficiency are also important factors, especially in matters involving
high volume and relatively
low amounts. Numerous courts, including this one, have recognized "the
importance of
minimizing the expense of getting a chapter 13 plan formulated and
approved," 

, and therefore devising a formula that is relatively easy to
compute. I believe that the
approach I suggest here strikes the best balance between these two
priorities and satisfactorily
addresses our various other concerns as well.