Court Opinion

ID: 9488627
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:50:37.008708+00
Date Added: 2024-06-11T17:52:59.734399
License: Public Domain

KOZINSKI, Circuit Judge,
dissenting:
1. My colleagues adopt a plausible interpretation of 11 U.S.C. § 506(a), but one foreclosed by our earlier opinion in In re Mitchell, 954 F.2d 557 (9th Cir.1992). The majority’s attempt to distinguish Mitchell is unconvincing. The question in Mitchell was how to value a security interest in a car. Mitchell answered that the “creditor’s interest” is “what the creditor would obtain if the creditor were to make a reasonable disposition of the collateral.” Id. at 560. Mitchell rejected the alternate value suggested by the creditor, namely the “replacement cost to the debtor.” Id.
It’s true that Mitchell referred to the two values as “wholesale” and “retail,” but that was merely a shorthand. Mitchell made it clear that by “retail value” it meant the value of the car in the hands of the debtor, and by “wholesale value” it meant what the car would bring the creditor on foreclosure. It chose the wholesale price, not because it was the “fair market value,” cf. Maj. op. at 309, but because, it “appear[ed] to ... best approximate!;]” the creditor’s collection value. Mitchell, 954 F.2d at 560.
Mitchell construed the same section of the Bankruptcy Code as we, and it rejected exactly the same approach we accept today: In Mitchell, as in our case, “[t]he use of the property [was] to be by the debtor.” Id. at 559-60. The creditor argued, as does the Commissioner here, that “since the debtor intends to use the [property], the value of the creditor’s secured interest should be based upon the replacement cost to the debtor.” *311Compare id. at 560, with Appellee’s Br. at 16-17 (advocating “the price at which the property would change hands between a willing buyer and a willing seller” because “debt- or intends to retain the property”).
Mitchell reached its conclusion over a vigorous dissent. Like the majority today, Judge Noonan protested that the debtor would retain possession and therefore “the cost of providing a similar car” (replacement value) was the only appropriate valuation method under the second sentence of section 506(a). 954 F.2d at 561. The Mitchell majority rejected this approach because it values the asset in the hands of the debtor and therefore “ignores the clause of the statute that defines the value of the secured claim as the value of the ‘creditor’s interest’ in the property.” Id. at 560 (citing James F. Queenan, Jr., Standards for Valuation of Security Interests in Chapter 11, 92 Com. L.J. 18, 30 (1987)).
Mitchell leaves open the possibility of taking the debtor’s use of the property into account where it’s part of a going concern, or where use by the debtor is either “particularly beneficial” or “particularly detrimental.” Id. In the ordinary ease, however, it holds that the proper valuation is what the creditor would get if it foreclosed on the collateral.
The majority makes much of the fact that the parties here identified what the IRS could get for the property as the “forced sale” value. In my colleagues’ view, this distinguishes our ease from Mitchell because a “forced sale” doesn’t yield a “market value.” Maj. op. at 309. I don’t see the point. Section 506(a) doesn’t call for “market value;” the majority pulls that term out of thin air. The statute calls for a determination of the “creditor’s interest” in the property. Quite often, what the creditor realizes from the collateral is not the market value. This depends a great deal on the type of asset and the nature of the security interest. In Mitchell, the asset was a ear; the relevant valuation terms were “retail” and “wholesale” because cars, unlike real estate, may be repossessed by the creditor and sold “at wholesale or retail and at any time and place and on any terms, provided the secured party acts in good faith and in a commercially reasonable manner,” Cal.Com.Code § 9504(3). A security interest in real estate, by contrast, can normally be realized only by some sort of forced sale. See, e.g., Harry D. Miller & Marvin B. Starr, Current Law of California Real Estate §§ 9:121 et seq. (power of sale under a deed of trust), §§ 9:161 et seq. (judicial sale) (2d ed.1989); 26 U.S.C. §§ 6331, 6335 (auction after tax seizure). Applying Mitchell, the Commissioner’s interest in the real estate here is its forced sale value, which is what she could reasonably hope to collect from enforcing her lien.
Were the matter not otherwise clear, one could examine the cases on which the majority relies. All three draw a sharp distinction between the foreclosure or hypothetical sale value (which they reject) and the retained value to the debtor (which they adopt). See In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72 (1st Cir.1995); In re Trimble, 50 F.3d 530, 531 (8th Cir.1995); In re Rash, 31 F.3d 325, 328-29 (1994), modified, 62 F.3d 685 (5th Cir.1995). This is precisely the division between the majority and the dissent in Mitchell. Indeed, Rash and Trimble specifically mention Mitchell and reject it. Rash goes so far as to rely on Judge Noonan’s dissent: “The ‘estate’s interest in the property’ is the ownership and possession of vehicle by the debtor, see Mitchell, 954 F.2d at 561 (Noonan, J., dissenting)_” 31 F.2d at 329. Rash and Trimble, which also involved motor vehicles, used the valuation nomenclature of Mitchell, referring to the values in question as wholesale and retail. Winthrop cites and rejects the Queenan article which the Mitchell majority follows. In short, it is quite impossible to read the cases the majority cites without concluding that they consciously rejected the Ninth Circuit’s approach in Mitchell. I find it most peculiar for us to go chasing consistency with other circuits when those circuits have already declared themselves in conflict with us.
This is an area where consistency within the law of the circuit matters a great deal because valuation of assets is at the heart of most bankruptcy proceedings. After today, we’ll have two separate valuation methods, one for cars and another for homes. How will parties trying to value a multitude of *312other assets — from aalii to zwieback — know which rule applies to them?
If my colleagues believe that Mitchell was wrongly decided, they can call for en banc. But to dismiss so lightly a prior opinion of this court that addresses the very question we confront today only gives aid and comfort to those who claim the Ninth Circuit cannot or will not maintain the integrity of its case-law.
2. The majority also rejects the Taffis’ alternative argument that the value of the IRS’ lien should be diminished by the costs of a hypothetical sale that could yield such a value. Its decision not to deduct costs of sale follows from its erroneous resolution of the principal issue. Since the majority measures the IRS’ security interest by the value of the property in the debtors’ hands (rather than by what it would fetch on foreclosure) it would make no sense to deduct hypothetical costs of sale.
I’m concerned, however, that the majority writes too broadly, as it seems to reject consideration of the costs of sale in all cases, even those involving ears (or ear-like assets) that presumably continue to be governed by Mitchell. MitchellAike cases do contemplate a disposition of the collateral by the creditor; in those circumstances, it becomes relevant to ask what, if anything, the creditor would have to spend to realize on its security. The normal rule is that the costs of a foreclosure sale are paid from any excess proceeds after the secured debt is satisfied — in other words, from the debtor’s equity. Cal.Com.Code § 9504(l)(a), (b). But where there is no debtor’s equity, the costs of sale perforce are paid by the creditor. A simple example illustrates the point. If a creditor with a $1,000 lien on a car sells the collateral (at a cost of $100) for $1,500 to satisfy the debt, it will be entitled to take its full $1,000 from the proceeds and then deduct the costs of sale from the debtor’s remaining $500. If the car brings in only $500, however, the creditor will have to pay the costs of sale out of its own pocket; the net proceeds from foreclosure would be only $400.
Whether the creditor’s interest in property should be diminished by the hypothetical costs of sale, then, turns on whether the creditor is oversecured. If the creditor is oversecured in the amount of the sales costs, it will recover the full amount of its lien. If it’s oversecured by a lesser amount, or is undersecured, the costs of sale will necessarily diminish what it will take in to satisfy its lien.
Because I disagree with the majority as to the valuation issue, I also come to a contrary conclusion as to the sales costs issue. Here, the IRS had a lien of almost $500,000 against the Taffis’ house and personal property. The parties have stipulated that the house is worth no more than $300,000. After taking out senior liens, that leaves the Commissioner about $70,000, so the Commissioner is heavily undersecured. Were there a foreclosure sale, there would be no debtor’s equity to cover the sales costs. Accordingly, under Mitchell, the Bankruptcy Court should have diminished the value of the IRS’ interest by the stipulated $27,000 in sales costs.