Source: http://caselaw.findlaw.com/us-supreme-court/520/953.html
Timestamp: 2017-02-23 07:09:30
Document Index: 777919141

Matched Legal Cases: ['§ 506', '§1325', '§1325', '§1325', '§506', '§506', '§506', '§506', '§1325', '§ 1325', '§1325', '§1325', '§1325', '§1325', '§506', '§506', '§506', '§506', '§506', '§506', '§506', '§ 361', '§506', '§506', '§1325', '§ 506', '§506', '§ 506', '§ 1325', '§506', '§506', '§ 361', '§506', '§506', '§506', '§506', '§506', '§506', '§1325', '§ 361']

ASSOCIATES COMMERCIAL CORP. v. RASH et ux. | FindLaw
ASSOCIATES COMMERCIAL CORP. v. RASH et ux., (1997)
Argued: April 16, 1997 Decided: June 16, 1997
Petitioner Associates Commercial Corporation (ACC) holds a loan and lien on a tractor truck purchased by respondent Elray Rash for use in his freight hauling business. Elray and Jean Rash, also a respondent, filed a joint petition and repayment plan under Chapter 13 of the Bankruptcy Code (Code), listing ACC as a secured creditor. Under the Code, ACC's claim for the $41,171 balance owed on the truck was secured only to the extent of the value of the collateral; its claim over and above that value was unsecured. See 11 U.S.C. § 506(a). The Rashes could gain confirmation of their Chapter 13 plan only if ACC accepted it, if the Rashes surrendered the truck to ACC, or if the Rashes invoked the so called "cram down" provision. See §1325(a)(5). The cram down option allows the debtor to keep the collateral over the objection of the creditor; the creditor retains the lien securing the claim, see §1325(a)(5)(B)(i), and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the collateral, see §1325(a)(5)(B)(ii). The value of the allowed secured claim is governed by §506(a) of the Code. The Rashes invoked the cram down power, proposing to keep the truck for use in the freight hauling business. ACC objected to the plan, sought to repossess the truck, and disputed the value the Rashes had assigned to the truck. At an evidentiary hearing held to resolve the dispute, ACC maintained that the proper valuation was the price the Rashes would have to pay to purchase a like vehicle (the replacement value standard), estimated to be $41,000. The Rashes, however, maintained that the proper valuation was the net amount ACC would realize upon foreclosure and sale of the collateral (the foreclosure value standard), estimated to be $31,875. The Bankruptcy Court adopted the Rashes' valuation figure and approved the plan. The DistrictCourt and the Fifth Circuit affirmed.
Under §506(a), the value of property retained because the debtor has exercised Chapter 13's "cram down" option is the cost the debtor would incur to obtain a like asset for the same proposed use. Pp. 6-12.
The words "the creditor's interest in the estate's interest in such property" contained in the first sentence of §506(a) do not call for the foreclosure value standard adopted by the Fifth Circuit. Even read in isolation, the phrase imparts no valuation standard. The first sentence, read as a whole, instructs that a secured creditor's claim is to be divided into secured and unsecured portions. The sentence tells a court what it must evaluate, but it is not enlightening on how to value collateral. Section 506(a)'s second sentence, however, speaks to the how question, providing that "[s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property." By deriving a foreclosure value standard from §506(a)'s first sentence, the Fifth Circuit rendered inconsequential the sentence that expressly addresses how "value shall be determined." The "proposed disposition or use" of the collateral is of paramount importance to the valuation question. Such "disposition or use" turns on which alternative the debtor chooses when a secured creditor refuses to accept the debtor's Chapter 13 plan--in one case the collateral will be surrendered to the creditor, and in the other, the collateral will be retained and used by the debtor. Applying a foreclosure value standard attributes no significance to the different consequences of the debtor's choice. A replacement value standard, on the other hand, distinguishes retention from surrender and renders meaningful the key statutory words "disposition or use." Surrender and retention are not equivalent acts. When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds. If a debtor keeps the property and continues to use it, the creditor obtains at once neither the property nor its value, and is exposed to double risks against which the Code affords incomplete protection: The debtor may again default and the property may deteriorate from extended use. Of prime significance, the replacement value standard accurately gauges the debtor's "use" of the property. The debtor in this case elected to use the collateral to generate an income stream. That actual use, rather than a foreclosure sale that will not take place, is the proper guide under a prescription hinged to the property's "disposition or use." Pp. 6-9.
To qualify for confirmation under Chapter 13, the Rashes' plan had to satisfy the requirements set forth in §1325(a) of the Code. The Rashes' treatment of ACC's secured claim, in particular, is governed by subsection (a)(5). 1
Under this provision, a plan's proposed treatment of secured claims can be confirmed if one of three conditions is satisfied: the secured creditor accepts the plan, see 11 U.S.C. § 1325(a)(5)(A); the debtor surrenders the property securing the claim to the creditor, see §1325(a)(5)(C); or the debtor invokes the so called "cram down" power, see §1325(a)(5)(B). Under the cram down option, the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim, see §1325(a)(5)(B)(i), and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim, i.e, the present value of the collateral, see §1325(a)(5)(B)(ii). The value of the allowed secured claim is governed by §506(a) of the Code.
Reading the first sentence of §506(a) as a whole, we are satisfied that the phrase the Fifth Circuit considered key is not an instruction to equate a "creditor's interest" with the net value a creditor could realize through a foreclosure sale. The first sentence, in its entirety, tells us that a secured creditor's claim is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 238
-239 (1989); 4 L. King, Collier on Bankruptcy ¶506.02[1][a], p. 506-6 (15th ed. rev. 1996). To separate the secured from the unsecured portion of a claim, a court must compare the creditor's claim to the value of "such property," i.e., the collateral. That comparison is sometimes complicated. A debtor may own only a part interest in the property pledged as collateral, in which case the court will be required to ascertain the "estate's interest" in the collateral. Or, a creditor may hold a junior or subordinate lien, which would require the court to ascertain the creditor's interest in the collateral. The §506(a) phrase referring to the "creditor's interest in the estate's interest in such property" thus recognizes that a court may encounter, and in such instances must evaluate, limited or partial interests in collateral. The full first sentence of §506(a), in short, tells a court what it must evaluate, but it does not say more; it is not enlightening on how to value collateral.
The second sentence of §506(a) does speak to the how question. "Such value," that sentence provides, "shall be determined in light of the purpose of the valuation andof the proposed disposition or use of such property." §506(a). By deriving a foreclosure value standard from §506(a)'s first sentence, the Fifth Circuit rendered inconsequential the sentence that expressly addresses how "value shall be determined."
When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds. We recall here that ACC sought that veryadvantage. See supra, at 3. If a debtor keeps the property and continues to use it, the creditor obtains at once neither the property nor its value and is exposed to double risks: The debtor may again default and the property may deteriorate from extended use. Adjustments in the interest rate and secured creditor demands for more "adequate protection," 11 U.S.C. § 361 do not fully offset these risks. See 90 F. 3d, at 1066 (Smith, J., dissenting) ("vast majority of reorganizations fail . . . leaving creditors with only a fraction of the compensation due them"; where, as here, "collateral depreciates rapidly, the secured creditor may receive far less in a failed reorganization than in a prompt foreclosure") (internal cross reference omitted); accord In re Taffi, 96 F. 3d, at 1192-1193. 3
(1994) (court made rule defining, for purposes of Code's fraudulent transfer provision, "reasonably equivalent value" to mean 70% of fair market value "represent[s] [a] policy determinatio[n] that the Bankruptcy Code gives us no apparent authority to make"). The Seventh Circuit rested on the "economics of the situation," In re Hoskins, 102 F. 3d, at 316, only after concluding that the statute suggests no particular valuation method. We agree with the Seventh Circuit that "a simple rule of valuation is needed" to serve the interests of predictability and uniformity. Id., at 314. We conclude, however, that §506(a) supplies a govern ing instruction less complex than the Seventh Circuit's "make two valuations, then split the difference" formulation.
In sum, under §506(a), the value of property retained because the debtor has exercised the §1325(a)(5)(B) "cram down" option is the cost the debtor would incur to obtain a like asset for the same "proposed . . . use." 6
Although the meaning of 11 U.S.C. § 506(a) is not entirely clear, I think its text points to foreclosure as the proper method of valuation in this case. The first sentence in §506(a) tells courts to determine the value of the "creditor's interest in the estate's interest" in the property. 11 U.S.C. § 506(a) (emphasis added). This language suggests that the value should be determined from the creditor's perspective, i.e., what the collateral is worth, on the open market, in the creditor's hands, rather than in the hands of another party.
The second sentence explains that "[s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property." Ibid. In this context, the "purpose of the valuation" is determined by 11 U.S.C. § 1325(a)(5)(B). Commonly known as the Code's "cram down" provision, this section authorizes the debtor to keep secured property over the creditor's objections in a Chapter 13 reorganization, but, if he elects to do so, directs the debtor to pay the creditor the "value" of the secured claim. The "purpose" of this provision, and hence of the valuation under §506(a), is to put the creditor in the same shoes as if hewere able to exercise his lien and foreclose. *
It is crucial to keep in mind that §506(a) is a provision that applies throughout the various chapters of the bankruptcy code; it is, in other words, a "utility" provision that operates in many different contexts. Even if the words "proposed disposition or use" did not gain special meaning in the cram down context, this would not render them surplusage because they have operational significance in their many other Code applications. In this context, I also think the foreclosure standard best comports with economic reality. Allowing any more than the foreclosure value simply grants a general windfall to undersecured creditors at the expense of unsecured creditors. Cf. In re Hoskins, 102 F. 3d 311, 320 (CA7 1996) (Easterbrook, concurring in judgment). As Judge Easterbrook explained in rejecting the split the difference approach as a general rule, see id., at 318-320, a foreclosure value standard is also consistent with the larger statutory scheme by keeping the respective recoveries of secured and unsecured creditors the same throughout the various bankruptcy chapters.
] On this matter, amici curiae supporting ACC contended: " `Adequate protection' payments under 11 U.S.C. §§ 361 362(d)(1) typically are based on the assumption that the collateral will be subject to only ordinary depreciation. Hence, even when such payments are made, they frequently fail to compensate adequately for the usually more rapid depreciation of assets retained by the debtor." Brief for American Automobile Manufacturers Association, Inc., et al. as Amici Curiae 21, n. 9.
] We give no weight to the legislative history of §506(a), noting that it is unedifying, offering snippets that might support eitherstandard of valuation. The Senate Report simply repeated the phrase contained in the second sentence of §506(a). See S. Rep. No. 95-989, p. 68 (1978). The House Report, in the Fifth Circuit's view, rejected a "replacement cost" valuation. See In re Rash, 90 F. 3d 1036, 1056 (CA5 1996) (quoting H. Rep. No. 95-595, p. 124 (1977)). That Report, however, appears to use the term "replacement cost" to mean the cost of buying new property to replace property in which a creditor had a security interest. See id., at 124. In any event, House Report excerpts are not enlightening, for the provision pivotal here--the second sentence of §506(a)--did not appear in the bill addressed by the House Report. The key sentence originated in the Senate version of the bill, compare H. R. 8200, 95th Cong., 1st Sess., §506(a) (1977), with S. 2266, 95th Cong., 1st Sess., §506(a) (1977), and was included in the final text of the statute after the House Senate conference, see 124 Cong. Rec. 33997 (1978).
] As our reading of §506(a) makes plain, we also reject a ruleless approach allowing use of different valuation standards based on the facts and circumstances of individual cases. Cf. In re Valenti, 105 F. 3d 55, 62-63 (CA2 1997) (permissible for bankruptcy courts to determine valuation standard case by case).
] The Court states that "surrender and retention are not equivalent acts" from the creditor's perspective because he does not receive the property and is exposed to the risk of default and deterioration. Ante, at 8. I disagree. That the creditor does not receive the property is irrelevant because, as §1325(a)(5)(B)(ii) directs, he receives the present value of his security interest. Present value includes both the underlying value and the time value of that interest. The time value component similarly vitiates the risk concern. Higher risk uses of money must pay a higher premium to offset the same opportunity cost. In this case, for instance, the creditor was receiving nine percent interest, see In re Rash, 90 F. 3d 1036, 1039 (CA5 1996) (en banc), well over the prevailing rate for an essentially risk free loan, such as a United States Treasury Bond. Finally, the concern with deterioration is addressed by another provision of the Code, 11 U.S.C. § 361 which authorizes the creditor to demand "adequate protection," including increased payments, to offset any derogation of his security interest during a cram down. FindLaw Career Center
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