In re O&S Trucking, Inc.
| Decision Date | 06 June 2014 |
| Docket Number | No. 12–61003.,12–61003. |
| Citation | 514 B.R. 296 |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
| Parties | In re O & S TRUCKING, INC., Debtor. |
OPINION TEXT STARTS HERE
Donald G. Scott, Jonathan A. Margolies, McDowell Rice Smith & Buchanan, Kansas City, MO, for Debtor.
Jerry L. Phillips, Office of the U.S. Trustee, Kansas City, MO, for U.S. Trustee.
ORDER SUSTAINING, IN PART, DEBTOR'S OBJECTION TO CLAIM OF MERCEDES BENZ FINANCIAL SERVICES USA, LLC d/b/a DAIMLER TRUCK FINANCIAL and DETERMINING SECURED STATUS OF DAIMLER'S CLAIM
As announced in open court at the close of the hearing held on May 8, 2014, in Springfield, Missouri, the claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial (“Daimler”) is ALLOWED as a secured claim in the amount of $1,425,309.40. The remainder of Daimler's claim is unsecured, in the amount of $819,183.48 less the proceeds received by Daimler from a commercially reasonable sale of the eleven vehicles previously surrendered by Debtor, and still in Daimler's possession.
Section 506(a)(1) of the Bankruptcy Code provides generally that a creditor's claim is secured to the extent of the value of its collateral. The statute then provides 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, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.”
At the outset of the case, Daimler held a security interest in 99 vehicles being operated by the Debtor or its lessee drivers, as well as the proceeds of such collateral, and was owed $6,966,162.82.1 On August 7, 2012, the Debtor and Daimler entered into an Agreed Adequate Protection Order 2providing generally that the Debtor could continue to use such vehicles provided that the Debtor made monthly adequate protection payments to Daimler. The Agreed Adequate Protection Order also contemplated that the Debtor would be surrendering some of those vehicles to Daimler, and that the debt would be reduced upon liquidation of such vehicles. Therefore, rather than the parties agreeing on a fixed total monthly adequate protection payment, such Agreed Adequate Protection Order set out a value for each such vehicle, and set the adequate protection payment per vehicle at 2% of such value. The Agreed Adequate Protection Order does not specify what basis was used to arrive at such values.
In the course of the case, all but 23 of such vehicles have been surrendered by the Debtor to Daimler. Liquidation of such vehicles has reduced the total debt. In addition, the Debtor has made adequate protection payments in the total amount of $1,577,488.01. Such adequate protection payments serve to reduce the total debt owed, before any determination is made as to how much of that debt is secured.3 The parties stipulated that, with those and other adjustments, the total remaining debt secured by the 23 vehicles and their proceeds was $2,244,492.88, as of May 5, 2014.
Pursuant to § 506(a), the issue here is the value of Daimler's remaining collateral.
In his well-reasoned opinion in In re Civic Partners Sioux City LLC,4 the Honorable Thad J. Collins concluded, based on § 506(a), that “collateral valuation can happen at a variety of times during the case—and often at confirmation.” 5 Such conclusion comports with the holding of the Eighth Circuit in In re Ahlers,6 to the effect that an initial valuation of collateral for adequate protection purposes is not res judicata in determining value of the collateral for plan confirmation purposes. In so holding, the Circuit Court relied on the legislative history of § 506(a), which states that “... a valuation early in the case in a proceeding under sections 361–363 would not be binding upon the debtor or creditor at the time of confirmation of the plan.” 7
While the Debtor has argued here that the agreed value for adequate protection purposes is somehow binding on Daimler in determining value for confirmation purposes, or should be used as a starting point in valuing the collateral now, such arguments are contrary to the statute, its legislative history, and the caselaw interpreting it. I turn then to the proper basis for valuing Daimler's collateral at this point in the case, for the purpose of determining whether the Plan filed by the Debtor is confirmable.
The Supreme Court has held that in valuing a claim secured by personal property for plan confirmation purposes, where the debtor intends to retain possession of the property, the appropriate valuation standard is replacement value.8 In other words, what would the Debtor be required to pay to replace such vehicles?
The most reliable evidence offered of replacement cost was the NADA retail values which, as stipulated by the parties, would be $1,373,400.00. Such total is based on a per vehicle retail value of $62,100 for the bulk of the remaining vehicles, which are 2010 Freightliners.
Each party offered various alternative valuations. Daimler argued for a valuation of $85,000 for the 2010 Freightliners, based on the fact that Debtor had entered into lease/purchase agreements with various drivers and that, as to one of such agreements, the total stream of payments over a period of three years came to approximately $85,000. But this argument ignores the time value of money and the possibility that it will not be paid by the drivers, and no evidence was offered as to the effect such factors might have on value.
The Debtor, by contrast, argues for lower values based on the auction prices Daimler received for approximately 65 vehicles it sold after the Debtor surrendered them, and the sale of another three vehicles by the Debtor. But the auctions at which Daimler sold such vehicles are only open to dealers, not retail customers, and the prices do not reflect the costs needed to refurbish such vehicles for resale. And the Debtor's sample of three sales is too small to be reliable.
In Rash, the Court held that “a simple rule of valuation is needed to serve the interests of predictability and uniformity.” 9 NADA retail provides a predictable and uniform means of determining replacement cost and I find it to be the best approach here.
Debtor's counsel seemed to argue at the close of the hearing that such value could not be correct because the agreed value for adequate protection payments per vehicle, less the adequate protection payments made, would come to a much lower number per vehicle. But, as stated, the issue is not what the parties agreed on as to value at the beginning of the case, or whether the adequate protection payments made accurately reflect a decline in the value of the vehicles over the course of the case. The issue instead is what the Debtor would have to pay to replace these vehicles at this time. As stated, the most reliable evidence on that issue was NADA retail. Therefore, I hold their replacement cost to be $1,373,400.
Daimler's loan documents also gave it a security interest in proceeds of its collateral. Thus, the next question is whether the value of its secured claim should be increased by proceeds generated post-bankruptcy from the use of the trucks on which it held a security interest.
Section 552(b) of the Bankruptcy Code provides, as relevant here, that if the debtor and a creditor entered into a security agreement before the filing of the bankruptcy petition, and if the security interest extends to proceeds, products, offspring, or profits of the collateral, then such security interest continues in any proceeds, products, offspring, or profits generated post-petition. Daimler's security interest here did cover proceeds from the use of Daimler's trucks.
The Debtor argued that because the Agreed Adequate Protection Order did not specifically provide that proceeds attributable to Daimler's trucks be segregated, and that the security interest continued in such funds, then the security interest was lost. That argument is contrary to § 552(b), which itself continues the lien in effect. Daimler argued that its secured claim was increased to the extent the Debtor received funds from the use of its trucks post-petition, and should then be reduced only by the amount of adequate protection payments made. As explained at the hearing, however, that analysis ignores the expenses the Debtor incurred in order to generate that new income each month. If the Daimler trucks were the only ones being operated by the Debtor, the cash now in the Debtor's accounts would represent the net of its post-petition income, less adequate protection payments and expenses. That net amount would represent the post-petition increase in Daimler's secured claim. As of the hearing date, that amount was $207,637.61.
However, the parties agreed that Debtor is now operating 92 vehicles, of which just 23, or 25% of them, are Daimler vehicles. Therefore, in the absence of any evidence to the contrary, I hold that Daimler's security interest has been increased by 25% of the total amount of funds in the Debtor's accounts, or $51,909.40, as proceeds of its vehicles.
Accordingly, I hold that for plan confirmation purposes, Daimler holds a secured claim in the total amount of $1,425,309.40. The remainder of its claim is unsecured. The Debtor's Objection to the Claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial is, therefore, SUSTAINED, IN PART.
IT IS SO ORDERED.
Debtor O & S Trucking, Inc. requests that I reconsider my ruling on its objection to the claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial (“Daimler”) and determining the amount of Daimler's claim. Creditors People's Capital and Leasing...
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