The U.S. Court of Appeals for the Eleventh Circuit recently held that 11 U.S.C. § 506(a)(2)’s replacement valuation standard applies even when a Chapter 13 debtor surrenders property in a proposed plan under 11 U.S.C. § 1325(a)(5)(C).
A copy of the opinion is available at: http://www.ca11.uscourts.gov/opinions/ops/201313013.pdf
In July 2007, a consumer (“Debtor”) purchased a recreational vehicle and entered into a loan agreement secured by the collateral. Debtor later filed Chapter 13 bankruptcy. The owner of the loan agreement (“Creditor”) filed a proof of secured clam in the amount of the outstanding payoff balance due at the petition date. Debtor’s Chapter 13 plan proposed to surrender the vehicle in full satisfaction of Creditor’s claim.
Creditor objected to the confirmation of Debtors’ plan, arguing that the valuation standard for a surrendered vehicle should be based on its foreclosure value. Debtor argued that the valuation standard should be based on the vehicle’s replacement value pursuant to 11 U.S.C. § 506(a)(2). Therefore, if the vehicle’s replacement value exceeded the debt, his surrender of the collateral would satisfy both his debt and Creditor’s claim under Chapter 13 plan.
The bankruptcy court held that § 506(a)(2) required valuation based on the collateral’s replacement value as set forth by the statute. Creditor appealed the decision with the district court, which affirmed the bankruptcy court decision.
On appeal, the issue before the Eleventh Circuit was whether § 506(a)(2)’s replacement value standard applies when a Chapter 13 debtor surrenders collateral under 11 U.S.C. § 1325(a)(5)(C).
As you may recall, under § 1325(a)(5), a chapter 13 plan’s treatment of an “allowed secured claim” can be confirmed if: (1) debtor retains the collateral and makes payments to creditor, or (2) debtor surrenders the collateral. See 11 U.S.C. § 1325(a)(5)(A)-(C).
The term “allowed secured claims” refers to § 506(a). This provision bifurcates a secured creditor’s allowed claim into secured and unsecured portions based on the underlying collateral’s value:
An allowed claim of a creditor secured by a lien on the property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property … and is an unsecured claim to the extent that the value of such creditor’s interest … is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the purposed disposition or use of such property.
11 U.S.C. § 506(a)(1) (2006).
In other words, where a debtor proposes to surrender collateral to satisfy a claim – such as here – it is to the creditor’s advantage to find the lowest valuation model in order to recover as much of the “deficiency” as possible as an unsecured claim the debtor’s plan.
In this this case, Creditor relied on the Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1993), which held that a foreclosure value is the proper standard where the debtor propose to retain collateral in a chapter 13 plan.
The problem, however, is that Rash predates BAPCPA which added § 506(a)(2). Section 506(a)(2) provides, in pertinent part, that:
If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property…
11 U.S.C. § 506(a)(2) (2006).
The Eleventh Circuit found that § 506(a)(2) applied to this case by its plain terms because Debtor is an individual in a Chapter 13 case. Although Creditor attempted to argue § 506(a)(2) only applies to cases where the debtor retains collateral, not where it surrenders, the Eleventh Circuit rejected the contention because no much limitation exists in the statute.
Creditor also suggested that it would be improper to conduct any valuation at all, because Rash did not state that a court may pre-determine the value of surrendered vehicles under § 506(a). However, this argument was flatly rejected because Creditor conceded that § 506(a)(1) bifurcation applied, and such bifurcation is premised on valuation of the collateral.
Creditor further argued that applying § 506(a)(2) in the surrender context would be absurd because it would create a windfall and allow debtors to surrender collateral potentially in full satisfaction of a debt. The Eleventh Circuit was not convinced, because surrender would satisfy Creditor’s secured claim, not the entire debt. As the Court noted, the Creditor would still have an unsecured claim to the extent the debt exceeds the collateral’s judicially determined replacement value.
The Eleventh Circuit also rejected Creditor’s argument that applying § 506(a)(2) would eliminate Creditor’s contract and state law rights to liquidate and pursue an unsecured claim for deficiency. As explained by the Court, “state law does not govern if the Bankruptcy Code requires a different result.”
Accordingly, the Eleventh Circuit affirmed the district court’s order affirming the bankruptcy court.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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