Balbus, In re
| Decision Date | 04 June 1991 |
| Docket Number | No. 90-2067,90-2067 |
| Citation | 933 F.2d 246 |
| Court | U.S. Court of Appeals — Fourth Circuit |
| Parties | , 24 Collier Bankr.Cas.2d 1841, 21 Bankr.Ct.Dec. 1188, Bankr. L. Rep. P 73,973 In re Peter Gordon BALBUS, Debtor. BROWN AND COMPANY SECURITIES CORPORATION, Plaintiff-Appellant, v. Peter Gordon BALBUS, Defendant-Appellee. |
Thomas C. Power, Winston & Strawn, Washington, D.C., argued (Michael J.
Lichtenstein, Allen S. Rugg, Melrod, Redman & Gartlan, P.C., Washington, D.C., on brief), for plaintiff-appellant.
Robert Glenn Mayer, Robert G. Mayer, P.C., Fairfax, Va., for defendant-appellee.
Before ERVIN, Chief Judge, MURNAGHAN, Circuit Judge, and MULLEN, United States District Judge for the Western District of North Carolina, sitting by designation.
Peter Gordon Balbus ("Balbus") filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. This petition was challenged by one of Balbus' secured creditors, Brown and Company Securities Corporation ("Brown"). Brown asserted that hypothetical costs of sale should be deducted when calculating the value of Balbus' real property providing security for his secured debt. If the costs were deducted, Balbus would not be eligible for relief under Chapter 13, title 11, United States Code. See 11 U.S.C. Sec. 109(e). 1 Therefore, Brown filed a motion to dismiss or to convert Balbus' Chapter 13 filing to Chapter 7. The Bankruptcy Court found that hypothetical costs of sale should not be deducted and, therefore, denied Brown's motion. The United States District Court for the Eastern District of Virginia affirmed the ruling of the Bankruptcy Court. This appeal followed. We find no error in the district court's ruling and hereby affirm.
On January 13, 1989, Balbus filed a voluntary petition for relief pursuant to Chapter 13, title 11, United States Code. Brown is a secured creditor possessing a judgment lien against Balbus; Brown filed a timely proof of claim.
Chapter 13 is available only to debtors who have noncontingent, liquidated, unsecured debts totalling less than $100,000 and noncontingent, liquidated, secured debts totalling less than $350,000. 11 U.S.C. Sec. 109(e). In determining whether Balbus has less than $100,000 in unsecured debts under 11 U.S.C. Sec. 109(e), the court must add the amount of unsecured debt and the amount by which secured creditors are undersecured. See 11 U.S.C. Sec. 506(a). 2
Balbus filed schedules of assets and liabilities, listing secured debts of $324,050.73 and unsecured debts of $57,968.73. Balbus listed one piece of real property and some personalty as security for the secured debts. The parties agree that the unadjusted fair market value of the real property is $282,500, and the fair market value of the personalty is $4,500. Fair market value of the collateral thus totals $287,000, leaving $37,050.73 of the secured claims undersecured. Adding $37,050.73 of undersecured debt to the listed $57,968.73 of unsecured debt results in a total of $95,019.46 in unsecured debt, which falls within the $100,000 limit in 11 U.S.C. Sec. 109(e).
Brown filed a motion to dismiss or, in the alternative, a motion to convert Balbus' Chapter 13 filing to a Chapter 7 filing, thus challenging the right of Balbus to proceed under Chapter 13. Brown argues that the amount of security represented by Balbus' real property should be reduced by the amount of the hypothetical costs of sale of that property. Brown uses a 6% figure for the costs of sale, reducing the dollar amount of Balbus' real property which is security for his secured debt. As a result of this reduction, Brown asserts that the secured claims are undersecured in the amount of $54,000.73, rather than the $37,050.73 stated above. Adding $54,000.73 of undersecured debt to the listed $57,968.73 of unsecured debt results in a total unsecured debt of $111,969.46, which exceeds the $100,000 limit of 11 U.S.C. Sec. 109(e).
The Bankruptcy Court determined that the hypothetical costs of sale should not be deducted from the fair market value of the real property. Because the hypothetical costs were not deducted, the total amount of unsecured debt was under the statutory limit. Therefore, the court denied Brown's motion to dismiss and motion to convert. Brown appealed this determination to the United States District Court for the Eastern District of Virginia. The District Court affirmed the decision of the Bankruptcy Court. Thereafter, the District Court denied Brown's motion for reconsideration. This appeal followed.
In order to resolve this case, we must interpret Sec. 506(a) of the Bankruptcy Code in light of the fact that Balbus intends to keep his real property rather than sell it. Section 506(a) provides:
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's interest or the amount so subject to setoff 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 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.
11 U.S.C. Sec. 506(a) (emphasis added). We review the interpretation of a statute de novo. In re Malody, 102 B.R. 745, 747 (Bankr. 9th Cir.1989).
Bankruptcy courts confronted with how to interpret "valuation" in Sec. 506(a) when a debtor proposes to keep the secured collateral have reached conflicting results. In re 222 Liberty Assoc., 105 B.R. 798, 802 (Bankr.E.D.Pa.1989); In re Usry, 106 B.R. 759, 760 (Bankr.M.D.Ga.1989). The controversy stems largely from the conflicting language in the above underlined sentences in Sec. 506(a). In re Boring, 91 B.R. 791, 794 (Bankr.S.D. Ohio 1988); In re Claeys, 81 B.R. 985, 990-91 (Bankr.D.N.D.1987). The Bankruptcy Court for the District of North Dakota set out a discussion of the conflicting language in Sec. 506(a) which is often cited. See Claeys, 81 B.R. at 990-91. The court explained:
Whether a valuation is made without regard for potential costs of liquidation depends, it seems, upon the emphasis given to the first and second sentences of section 506(a). The first sentence, providing that the claim is secured to the extent of the value of the creditor's interest in the property, suggests that since it is the creditor's interest that is being valued and not the collateral itself, it should not make any difference whether the debtor is retaining the property. Yet, the language of the second sentence suggests that the proposed disposition or use of the collateral itself must be considered when determining that value.
Some courts have determined that hypothetical costs of sale should be deducted even though the debtor intends to retain the property. See In re Smith, 92 B.R. 287, 291 (Bankr.S.D.Ohio 1988); Claeys, 81 B.R. at 992. Others have determined that the hypothetical costs should not be deducted. See In re Courtright, 57 B.R. 495, 497 (Bankr.D.Or.1986); In re Bellman Farms, Inc., 86 B.R. 1016, 1019 (Bankr.D.S.D.1988).
The legislative history of Sec. 506(a) indicates that valuation should be done ad hoc and that no fixed approach is correct:
"Value" does not necessarily contemplate forced sale or liquidation value of the collateral; nor does it always imply a full going concern value. Courts will have to determine value on a case-by-case basis, taking into account the facts of each case and the competing interests in the case.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 356 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6312. The Senate Report further clarifies the duty of the court in determining valuation:
While courts will have to determine value on a case-by-case basis, the subsection makes it clear that valuation is to be determined in light of the purpose of the valuation and the proposed disposition or use of the subject property.
S.Rep. No. 989, 95th Cong., 1st Sess. 68, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5854.
As we have noted, one line of cases has determined that when a debtor proposes to retain the secured collateral, the hypothetical costs of sale should be deducted in order to determine the valuation of the creditor's interest in the collateral. The courts adopting this viewpoint focus on the first sentence of Sec. 506(a). See In re Smith, 92 B.R. 287, 290 (Bankr.S.D.Ohio 1988) () (emphasis in original); Boring, 91 B.R. at 795 () (emphasis in original).
The Bankruptcy Court in the Eastern District of Pennsylvania explained the view of the courts which focus on the first sentence of Sec. 506(a):
[T]he fact that the first sentence references "the creditor's interest in the estate's interest in such property" causes these courts to conclude that valuation must be calculated from the vantage point of the creditor and what the creditor's interest would be worth if liquidation were necessary. Sale costs, they reason, would, in liquidation, be deducted from what the creditor would receive for the property.
In re 222 Liberty Assoc., 105 B.R. 798, 803 (Bankr.E.D.Pa.1989) ()....
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