In re Frost
| Decision Date | 08 March 1985 |
| Docket Number | No. 82-4296.,82-4296. |
| Citation | 47 BR 961 |
| Parties | In re Delmer Lee FROST, Sr. a/k/a Delmer L. Frost, Edith Pearl Frost, d/b/a Frost Trash Hauling. |
| Court | U.S. District Court — District of Kansas |
Jim J. Marquez, U.S. Atty., Karen Humphreys, Asst. U.S. Atty., Topeka, Kan., Glen R. Dawson, Trial Atty., Dept. of Justice, Tax Division, Washington, D.C., for plaintiffs.
Larry E. Schneider, Topeka, Kan., for defendants.
Debtors, Delmer Lee Frost, Sr. and Edith Pearl Frost d/b/a Frost Trash Hauling, filed their petition under Chapter 13 of the Bankruptcy Code on July 31, 1981. Debtors' business involved hauling trash in the Topeka, Kansas area. The debtors' first amended plan was confirmed by the bankruptcy court on July 30, 1982. The United States Internal Revenue Service (IRS) appeals from that confirmation and raises a number of issues. The court has heard oral argument on this appeal and is now prepared to rule.
The IRS filed claims in the debtors' bankruptcy proceeding in the total amount of $77,279.14. It asserted a secured claim of $53,391.01. The debtors' Chapter 13 petition and schedules showed the total value of their property as $36,414.32. The amount asserted by the IRS as secured claims presents the primary basis for the disputes in this case.
The issues designated on appeal by the IRS are: (1) whether the debtors' trash hauling routes have an ascertainable value; (2) whether the debtors can designate which liens are to be treated as secured when the value of debtors' assets is less than the total amount of the IRS tax liens; (3) whether a ten percent interest rate on secured claims satisfies the "present value" concept of 11 U.S.C. § 1325(A)(5)(B)(ii); (4) whether payment of only one percent of the general unsecured debts satisfies the "good faith" test of 11 U.S.C. § 1325(a)(3); (5) whether, after discharge, the IRS can collect post-petition interest accrued on debtors' priority and unsecured tax claims; and (6) whether the income tax debt incurred by debtor for the 1981 tax year is, in total, an administrative expense of the estate when the bankruptcy petition was filed on July 31, 1981.
At oral argument, the IRS withdrew the sixth issue from the court's consideration. In addition, the debtors acknowledged that the fourth issue raised by the IRS needed to be remanded to the bankruptcy court for application of a recent decision of the Tenth Circuit, In re Flygare, 709 F.2d 1344 (10th Cir.1983). The court agrees that the bankruptcy court needs to reexamine its earlier decision on the fourth issue in light of Flygare. Therefore, the court shall not discuss either of these two issues in this opinion.
The IRS contends that the bankruptcy court erred in not including the value of the debtors' trash hauling routes in the total value of the debtors' estate. Both parties agree that the trash hauling routes are property of the debtors' estate but they disagree as to the value to be placed on them.
The bankruptcy court held a hearing on the issue of the valuation to be assigned to the trash hauling routes. At the hearing, the court heard the testimony of Ray Cunningham, a trash hauler, regarding the value of trash hauling routes. No other witnesses testified. Mr. Cunningham testified that the routes definitely have value as an intangible asset. He further stated that there were several factors which impacted on the value of a trash hauling route including the gross profits from the business, the geography of the route, the customers' names and bookkeeping records, the condition of the trash containers and the location of the route. Based upon these factors, Mr. Cunningham valued the debtors' trash hauling routes at from $15,000 to $25,000. Mr. Cunningham, however, was unable to testify as to what the routes would bring at a forced sale or at a voluntary sale if no covenant to compete accompanied the transfer. In its order, the bankruptcy court concluded as follows:
The IRS contends that the bankruptcy court erred in applying a "forced sale" value to this property. The IRS argues that the bankruptcy court ignored the fact that the debtors were not going to sell or otherwise dispose of their trash hauling business but were going to continue to operate it. The IRS suggests that the debtors' trash hauling routes should be valued as a "going concern." The debtors contend that the bankruptcy court properly resolved this issue. The debtors assert that the bankruptcy court correctly applied a "forced sale" value based on the circumstances of this case. They argue that since no evidence was presented as to the "forced sale" value of the trash hauling routes then the court could only conclude that the routes had no ascertainable value.
11 U.S.C. § 506(a) provides the only statutory guidance given on valuing property under the Bankruptcy Code. It provides in pertinent part:
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.
The legislative history of § 506(a) is discussed in Barash v. Public Finance Corp., 658 F.2d 504, 512 (7th Cir.1981), as follows:
The legislative history of § 506(a) indicated that no fixed formula exists for establishing the value of collateral. Congress did not necessarily contemplate the use of forced sale or liquidation value; nor is fair market value always appropriate. "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. 95-595, supra, at 356, 5 U.S. Code Cong. & Admin.News at 6312. Value should be determined by the purpose of the valuation and the proposed disposition or use of the property. S.Rep. No. 95-989, supra, at 68, 5 U.S.Code Cong. & Admin.News at 5854.
Thus, the courts have been provided with little guidance in deciding the value of collateral under § 506. The focus of § 506 is directed at (1) the purpose of the valuation and (2) the proposed disposition or use of the property. Here, since this is a Chapter 13 proceeding, the purpose of the valuation was to define the extent of the protection or benefits to be afforded the IRS. As to the use of the property, it was the intention of the debtors to continue to use the trash routes in their business.
After carefully considering the circumstances of this case, we agree with the IRS that the bankruptcy court overlooked the debtors' proposed use of the property in reaching a determination of the value to be placed on the trash hauling routes. The application by the bankruptcy court of a "forced sale" value to a situation where retention and use by the debtors of the property was proposed was improper. See In re Davis, 14 B.R. 226, 228 (Bkrtcy.D.Me. 1981); In re Cohen, 13 B.R. 350, 353 (Bkrtcy.E.D.N.Y.1981); In re Crockett, 3 B.R. 365, 367 (Bkrtcy.N.D.Ill.1980). The rationale for this conclusion is succintly stated in In re Crockett, supra, as follows:
Under a Chapter 13 plan the secured claim should be valued with due regard to the value of the property to the estate. "The proposed disposition or use of such property" (Sec. 506(a)) in the instant case is for the debtors\' retention and use. Therefore, the debtors cannot eat with the hounds and run with the hares. Seeking retention of the property, they cannot insist on liquidation values to be paid to the creditor in installments.
If retention and use by the debtor of the collateral is proposed, § 506(a) envisions a valuation premised on a simulated conversion of the collateral into cash in the most commercially reasonable manner practicable under the circumstances. In re Davis, supra. Here, it would be proper for the bankruptcy court to value the trash hauling routes based on a commercially reasonable disposition which would include a covenant not to compete. See 3 Collier on Bankruptcy § 506.04, p. 506-24 (15th ed. 1979).
In sum, we find that the bankruptcy court erred when it applied a "forced sale" value to the debtors' trash hauling routes. This case shall be remanded to the bankruptcy court for a determination of the value of the property based on what it would bring if sold in a commercially...
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