Answer and Analysis Roy is probably out of luck. Recently, the United States Supreme Court considered its second commercial case (the prior one having dealt with the question of the use of a setoff in a commercial bankruptcy) in Rash v.______. What led up to the Court considering this case was the fact that various circuits had disagreed over the procedure to be used in valuing security. Several of the circuits held that the valuation should be based on the price the particular debtor would have to pay for something (e.g., a truck or an automobile) of similar vintage and condition. This was variously referred to as "replacement value" or "retail value." Other circuit courts contended that the value should be determined as if there were a foreclosure of the property, and it had been sold at an open auction. This was referred to as "foreclosure value" or "wholesale value." Still other circuits were not quite sure which value should be used, and they chose a compromise of the positions the other circuits had taken. The major issue was Section 506(A) of the Bankruptcy Code, which reads as follows: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under Section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be and is an unsecured claim to the extent that the value of such creditor interest or the amount so subject to setoff is less than the amount such allowed claim. Such value shall be determined in light of the purpose of the evaluation and the proposed disposition or use of such property and in connection with any hearing on such disposition or use or on a plan affecting such creditors' interest." The Fifth Circuit interpreted this section to mean that the collateral should be valued from the creditor's prospective, because the language spoke of "the value of such creditor' interest" in the collateral. Other courts seem to speak of valuing the collateral from the key words "proposed disposition or use of such property." The theory behind this was that when a bankrupt proposed to retain the collateral, the measure of that use is what the debtor should pay. Still other courts disagreed with both approaches and ended up with half-hearted compromises that did not solve the problem at all. The Supreme Court rejected the use of the foreclosure method because it totally ignores the options of the bankrupt who may either to surrender the vehicle or to utilize it by using a cram-down method of valuation. Since the bankrupt keeps and uses the vehicle, the foreclosure method is inapplicable. As the court stated: "The value of the property is the price a willing buyer in the debtor's trade, business, or situation would pay to obtain like property from a willing seller." The court is inferring here that the property to be purchased from a willing seller should be property of similar age and condition and not what it would cost the bankrupt to purchase a brand new vehicle. Unfortunately, the court also seemed to indicate that the circuits would have to look at the entire situation on a case-by-case basis, thereby hedging its bets a bit and allowing the circuit courts discretion to determine the value depending upon the circumstances then and there prevailing. For example, the court specifically said that a creditor should not be able to include certain items that affect the value of an automobile, such as warranties, inventory storage, and reconditioning. While the difference between a foreclosure value and the value as determined by the price a willing buyer in the debtor's trade or business would pay to obtain a like property from a willing seller may seem insignificant, one must realize that the difference between different vehicles may range from $500 to $1,000. Considering the fact that there are one quarter of a million Chapter 13 cases filed every year, we are talking about $250 million being paid annually to secured creditors from Chapter 13 debtors who decide to retain their collateral. While the decision seems to allow for a certain amount of argument as to what the value of an automobile actually is, the starting point will not be the foreclosure value or the liquidation value but, more likely, the retail value of the particular vehicle. Once the court determines what the starting point of the value of the vehicle is, then each party will be allowed to either negotiate adjustments and hopefully agree upon these adjustments, or in the alternative, present the arguments to the bankruptcy court. The retail value or the replacement value is certainly going to be higher than the value that the debtor was paying in past Chapter 13 cases. Exactly how much higher is determined by the bankruptcy court. It is probably realistic to believe that before a final resolution is made, the decisions of the bankruptcy court may reach the Circuit Court of Appeal in the various districts. The Rash decision probably also applies to Chapter 11 Chapter 7 cases in the event that the debtor should choose to redeem the personal property. In Chapter 7 cases the debtor has to pay the amount of the allowed secured claim and a valuation is also necessary. In Chapter 11 cases, there may be other circumstances that come into play from a business point of view with regard to the actual value of the property. The decision resolves the dilemma before the courts by stating that the major concern of the court should be the disposition and use of the vehicle and therefore, that the criterion should be what a willing buyer will pay a willing seller. This seemed a victory for the creditors, since this value should probably be greater than a foreclosure value. Unfortunately, to what extent the courts will choose to adjust this figure on a case-by-case basis, as was suggested by the court, is another question. Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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