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payment stream must have a present value of at least the value of the holder's interest in the collateral, the "present value test."276
Where the claim is fully secured, or is undersecured but no § 1111(b) election is made, satisfaction of the present value test will necessarily satisfy the principal amount test; payment of the claim with a present market rate of interest over any period of time satisfies both requirements.277 If a § 1111(b) election is made on an undersecured claim, however, the principal amount test and the present value test may differ, because the total of the deferred payments must equal the total of the debt, not just the value of the collateral.278
One simple method to determine how to satisfy both requirements is to determine the payment stream necessary to satisfy the present value requirement, and then see if the total of those payments equals or exceeds the total claim; if not, the difference could be added as a balloon at the end.279 Where the payment stream necessary to satisfy the present value test also satisfied the principal amount requirement, the undersecured creditor would not receive
53 AMER. BANKR. L.J. 133, 155 (Spring 1979)(hereafter "Klee").
276
Id.
277
See In re Arnold, 806 F.2d 937 (9th Cir. 1986)(upholding plan that paid secured creditor owed $320,000 only the appraised value of the collateral, $280,000; footnote 3 states "The election under § 1111(b) does not apply in this case," without further explanation).
278
See In re California Gulf Partnership, 48 B.R. 959 (E.D. La. 1984). For a good discussion of the two tests of § 1111(b), and what protection it really provides the undersecured creditor, see In re Weinstein, 227 B.R. 284 (9th Cir. BAP 1998).
279
For example, assume the claim is $1 million, the collateral value is $500,000 and a market rate of interest is 10%. Payment of the $500,000 on a ten year amortization requires monthly payments of $6,607.54, which yields a total payment stream over the ten years of $792,904.43 ($6,607.54 X 12 X 10). This does not satisfy the $1 million principal amount test. Both requirements can be satisfied in at least three ways: (1) Payment of $1 million in equal monthly payments over ten years (monthly payments of $8,333.33) provides a payment stream totaling $1 million and the $8,333 monthly payments provides a present value in excess of $500,000 (which would require only $6,607/month).
(2) Alternatively, both requirements could be satisfied more cheaply (in a present value sense) by making monthly payments of $6,607 (yielding an amortized present value of $500,000) and a balloon payment in ten years of $207,096 (the difference between the $1 million total payment requirement and the total payment stream of $792,904). (3) If the payments were not amortized, the present value requirement would require interest-only payments of at least $50,000 per year (10% X $500,000) or $4,166.67 per month. Since this payment stream totals $500,000, a balloon payment of $500,000 in the tenth year satisfies both requirements. For an example of this method of satisfying § 1111(b), see In re Broad Associates, 125 B.R. 707 (Bankr. D. Conn. 1991)(confirmation denied due to inadequate discount rate failing to provide sufficient present value). Under either method 2 or 3, the plan proponent would also have to prove the feasibility of making the substantial balloon at the end of ten years. Caveat: These analyses are somewhat simplified for discussion purposes. A technically correct present value analysis may yield different results. For example, because interest-only payments delay return of principal, this may increase the risk factor inherent in the interest rate.
59
