Opinion ID: 609741
Heading Depth: 2
Heading Rank: 3

Heading: Lien Requirement Under (B)(i)

Text: 35 The core question that remains must then be answered: under what conditions may (B)(i)'s lien requirement be met. The (B)(i) lien provision seeks to protect the secured creditor by ensuring that the property to be distributed actually is transferred according to the reorganization plan. Subsection (B)'s future-oriented language particularly suggests that the lien requirement applies to distributions to be made throughout the entire course of the reorganization plan. See 11 U.S.C. § 1225(a)(5)(B)(ii) (referring to valuation of property to be distributed under the plan); In re Hanna, 912 F.2d 945, 951 (8th Cir.1990) (The lien ... will not suffice to meet Chapter 12's lien retention requirement if it fails to adequately protect the creditor's secured claim over the course of the plan repayment period.) (emphasis added); 5 King, Collier on Bankruptcy, supra, p 1325.06, at 1325-40 (The practical effect of requiring a lien retention provision in the plan is to protect the holder of an allowed secured claim from loss occasioned by a later failure on the part of the debtor to complete the proposed plan....). 36 Secured lenders in this and similar cases receive their primary protection through the valuation process. When distributions occur under (B), the property is valued by the bankruptcy court as of the effective date of the plan and must be found to be not less than the allowed amount of [the secured lender's] claim. See § 1225(A)(5)(B)(ii). The language in (B)(i) relating to a holder retaining its lien guarantees that distribution is carried out under the plan. It does not guarantee any ultimate sale price of property. The guarantee that the secured creditor will receive the full value of its claim is provided by § 1225(a)(5)(B)(ii)'s requirement that the property to be distributed be valued at the amount of the creditor's claim. In that way the statutory scheme protects the secured creditor mainly through the valuation process. 37 We acknowledge that in some cases the property sought to be distributed under (B) may be so difficult to value that it may not be transferred under (B) because (B)(ii)'s valuation requirement could not be met. Kerwin's property does not present that problem. Although valuing real property is not an exact science, it is a chore performed satisfactorily by professionals on a daily basis. Here the record expressly reveals a good bit of evidence that adequately supports the transfer valuation. 38 Where property is to be distributed throughout a reorganization plan, (B)(i)'s lien requirement, as noted, protects the lender only to the extent that it ensures that the debtor completes the plan. Despite the seemingly mandatory language of (B)(i), stating that the plan shall be confirmed if the plan provides that the holder of such claim retain the lien securing such claim, § 1225(a)(5)(B)(i), the lien will be satisfied when the property to be distributed under the plan actually is distributed. See In re Lairmore, 101 B.R. at 684; In re Durr, 78 B.R. at 222. In the case of periodic monetary payments to be made under a plan, for example, the lien does not exist beyond the payment period because the claim will have been fully satisfied by payment as provided in the plan. This remains true even if the value of the payments was actually less than anticipated at the time of valuation, perhaps due, for instance, to interest rate fluctuations, though to protect against this possibility, various protections have been put in place, including variable interest rates. See In re Patterson, 86 B.R. 226, 229 (Bankr. 9th Cir.1988). 39 In the instant case, because distribution of the entire property to be distributed to the bank occurred upon confirmation of the plan--at which point the bank held title to the property--the lien requirement was satisfied by full transfer of all the property to be distributed. Our view that the lien exists only until the claim is deemed satisfied furthers the policy that all the parties agree underlies chapter 12--to give family farmers facing bankruptcy a chance to reorganize their debts and keep their land. See H.R.Conf.Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5246, 5249. The statutory reading we adopt also fits with other provisions of chapter 12--for instance, § 1222(b)(7) and (8)--which provide for payments of claims from the debtor's property, 11 U.S.C. § 1222(b)(7), and for the distribution or sale of all or any part of the property, 11 U.S.C. § 1222(b)(8). 40 Moreover, while § 1225's legislative history is quite sparse, the legislative history of § 1325--on which § 1225 was patterned--supports allowing the transfer while finding the lien requirement satisfied. Congress based chapter 12 on chapter 13 in order to provide a bankruptcy process for family farmers similar to that available under chapter 13. See H.R.Conf.Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5246, 5249 (This new chapter is closely modeled after existing Chapter 13.). Significantly, 11 U.S.C. § 1325(a)(5) in chapter 13 contains language identical to that in § 1225(a)(5). Legislators' statements accompanying § 1325's adoption pointedly noted, Of course, the secured creditors' lien only secures the value of the collateral and to the extent property is distributed of a present value equal to the allowed amount of the creditor's secured claim the creditor's lien will have been satisfied in full. See 11 U.S.C.A. § 1325 West 1979, Historical and Revision Notes, Legislative Statements. This construction applies equally to § 1225(a)(5)(B) and we adopt it for § 1225(a)(5)(B) in order to provide a consistent construction of a statutory provision that is far removed from the crystal-clear category. II 41 First Brandon's remaining contention is that even if a lien on the remaining collateral was not required after completion of the distribution, the bankruptcy court committed clear error in valuing the Cornwall property. Because appellant does not challenge the valuation of the Bridport portion of the property transferred, we are concerned only with the roughly five acres of Cornwall property valued by the court at $2,100 per acre. No one disputes that the bankruptcy court's valuation comprises a finding of fact subject to review under the clearly erroneous standard. See Fed.R.Bankr.P. 8013. 42 The bankruptcy court, the bank alleges, erred in a number of respects: (1) it had no basis on which to reach a conclusion different from that reached by the bank's appraiser, Mr. Devries, (2) the disparity in values it found between the contiguous Bridport and Cornwall properties was wrong, and (3) the portion of the Cornwall property actually transferred did not contain some of the elements the bank believes were incorporated in the district court's valuation. 43 Determining the market value of real property is a constant feature in today's commercial world. Such valuations are regularly used by prudent lenders, like the bank, to make business decisions. Although at least one bankruptcy court has found the transfer of a specific parcel of real estate could not satisfy § 1225(a)(5)(B)(ii)'s requirement that it at least equal in value the amount of the claim because the value of the land was too speculative, see In re Durr, 78 B.R. at 224, that does not mean that the valuation of real property will very often be too speculative to provide sufficient safeguards to the debtor or that (B)(ii)'s requirements may not ordinarily be met in the valuation of real property. 44 Instead, the valuation of property to be distributed under a reorganization plan must be undertaken on a case by case basis, taking account of the particular property and the circumstances of each case. See In re Owens, 120 B.R. 487, 489-90 (Bankr.E.D.Ark.1990). An estate might exist where real property simply could not be transferred in a reorganization plan because the property's value was so speculative the bankruptcy court could not be assured that it was worth not less than the allowed amount of [the] claim as required by 11 U.S.C. § 1225(a)(5)(B)(ii). Cf. In re Graham, 123 B.R. at 332-33 (chapter 13 plan did not comply with analogous (B) provision where value of pro rata portion of closely held corporation's stock to be transferred not clearly established). 45 But the property in this case was capable of valuation by the bankruptcy court. The evidence showed sufficient activity in the local real estate market to make Sharon Kerwin's property susceptible to evaluation. The record includes detailed proof concerning a number of comparable sales in the same county, which the bank's appraiser discussed at length. Cross-examination by Kerwin's counsel further revealed other sales of Cornwall property, which were even closer to Kerwin's farm, but ones that the appraiser had omitted from his report. 46 The actual value fixed by the bankruptcy court was not clearly erroneous. First Brandon disingenuously asserts that the only evidence of valuation on the record were the figures in Devries' appraisal. On the contrary, the record included property valuation records from the Town of Cornwall and the State of Vermont and evidence concerning the market values of property in relation to their appraised values for property tax purposes. Devries' testimony makes up over 100 pages in the transcript and includes a great deal of testimony on the methods of valuing land. Proof reflected the better soil quality of the Cornwall property compared with the flood-prone property in the Bridport section, and showed the Cornwall parcel had a greater potential for development. 47 Devries' cross-examination revealed that he conducted his appraisal after the bank sent him Kerwin's reorganization plan, suggesting that he knew beforehand the valuation he was to make, that he had excluded some comparable property from his appraisal, and that there were flaws in his computations made on the witness stand when he compared the richer, tillable Cornwall parcel to the flood plain land in the Bridport parcel. The trial court expressed skepticism of Devries' credibility and declined to adopt his conclusions. As the fact-finder such is its role. 48 Instead of blindly relying on Devries' conclusions, the trial court critically examined the evidence on which Devries relied. In support of the bankruptcy court's increased valuation of the Cornwall property in relation to the Bridport property, Devries testified on March 1, 1989, [t]he superior soils are on the Cornwall side.... He also agreed that the Cornwall parcel, unlike the Bridport parcel, contained land with development potential. 49 There is no merit to the bank's declaration that the bankruptcy court failed to account for the fact that the house and barn were not on that part of the Cornwall property actually transferred. It had an opportunity to argue these differences. More important, the trial court's opinion shows that it subtracted the value of Kerwin's buildings from the Cornwall parcel before arriving at its per acre valuation. Thus, adequate reasons support the $2,100 valuation of the Cornwall parcel sufficient for us to say that the valuation was not clearly erroneous. See United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). 50 Finally, First Brandon avers that the bankruptcy court acted in an arbitrary and capricious manner in not granting its request for another valuation hearing--after remand from the district court--in order to value the distributed property as of the effective date of the plan, required by § 1225(a)(5)(B)(ii). The bank believes the evidence adduced as to valuation at the original bankruptcy court hearing was too outdated to support that court's findings on remand. 51 The effective date of Kerwin's plan defines the effective date as: the first day of the month after thirty (30) days from the date that the [o]rder confirming the Plan becomes final and no longer subject to appeal. The valuation hearing must take place in advance of the effective date of the plan, that is, the bankruptcy court's valuation necessarily has to be somewhat forward-looking. While we need not decide when evidence is so outdated that reliance on it would make a court's findings clearly erroneous, on the facts in the instant record the bankruptcy court did not wrongly rely on the evidence it had heard earlier. It carefully considered the parties' arguments with respect to whether circumstances had changed to such a degree as to require a new valuation hearing. It found that they had not and that a de novo hearing on this issue was therefore unnecessary. We decline to disturb this exercise of the bankruptcy court's discretion.