Rash, Matter of, 93-5396
| Decision Date | 16 August 1995 |
| Docket Number | No. 93-5396,93-5396 |
| Citation | 62 F.3d 685 |
| Parties | Bankr. L. Rep. P 76,684 In the Matter of: Elray RASH and Jean Rash, Debtors. ASSOCIATES COMMERCIAL CORPORATION, Appellant, v. Elray RASH and Jean Rash, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Appeal from the United States District Court for the Eastern District of Texas; Howell Cobb, Judge.
ON PETITION FOR REHEARING
Before REYNALDO G. GARZA, SMITH, and PARKER, Circuit Judges.
The petition for panel rehearing is DENIED. The opinion, 31 F.3d 325 (5th Cir.1994), is modified to delete, as dicta, the last portion of part II, beginning with the incomplete paragraph that begins on 31 F.3d at 329, through the end of part II, id. at 331.
In their suggestion for rehearing en banc, which remains pending despite our denial of panel rehearing, the debtors assail this court's holding that retail or replacement value is to be used to value collateral that a debtor proposes to retain in a chapter 13 plan. Our opinion, id. at 329, speaks for itself on that issue. We wish now to note, however, that since this case was decided, the law of the various circuits has moved decidedly in the direction we have proposed.
For example, in Metrobank v. Trimble (In re Trimble), 50 F.3d 530 (8th Cir.1995), the court specifically approved of our approach as follows:
We adopt the reasoning of the Fifth Circuit in In re Rash, and other courts that have focused on the second sentence of section 506(a), and we now conclude that the value of Metrobank's lien interest is properly based on the retail value of the collateral without deduction for costs of sale. We agree with the Fifth Circuit that the retail valuation method is the only method that gives full effect to the entire language of Sec. 506(a).... Under the wholesale valuation method, the creditor's interest would always be valued at the amount the creditor would receive upon disposition of the collateral, regardless of the purpose of the valuation or of the proposed disposition or use of the property. The wholesale method would not be affected by whether the debtor intended to release the property or intended, instead, to retain and use the property. Rather, where a debtor intends to retain and use the collateral, the purpose of the valuation is to determine the amount an undersecured creditor will be paid for the debtor's continued possession and use of the collateral, not to determine the amount such creditor would receive if it hypothetically had to repossess and sell the collateral. Such an interpretation ignores the express dictates of section 506(a).
Id. at 531-32 (). Thus, the Eighth Circuit agrees with our conclusion that retail value is the proper measure.
A few days after Trimble was decided, the First Circuit followed suit, in Winthrop Old Farm Nurseries v. New Bedford Inst. for Sav. (In re Winthrop Old Farm Nurseries), 50 F.3d 72 (1st Cir.1995). Like the Eighth Circuit, the Winthrop court gave meaning to the second sentence of 11 U.S.C. Sec. 506(a):
... A number of courts ..., including four Circuit Courts, have adhered to this clear expression of congressional intent and declined to value collateral that a debtor proposes to retain based on a hypothetical foreclosure sale. These courts reason that because the reorganizing debtor proposes to retain and use the collateral, it should not be valued as if it were being liquidated; rather, courts should value the collateral "in light of" the debtor's proposal to retain it and ascribe to it its going-concern or fair market value with no deduction for hypothetical costs of sale. 2
. . . . .
We are persuaded that [this] line of cases 1 correctly interprets the statute[,] gives meaning to both sentences of Sec. 506(a), and enables bankruptcy courts to exercise the flexibility Congress intended. By retaining collateral, a Chapter 11 debtor is ensuring that the very event Winthrop proposes to use to value the property--a foreclosure sale--will not take place. At the same time, the debtor should not be heard to argue that, in valuing the collateral, the court should disregard the very event that, according to the debtor's plan, will take place--namely, the debtor's use of the collateral to generate an income stream. In ordinary circumstances the present value of the income stream would be equal to the collateral's fair market value. Under such circumstances, a court remains faithful to the dictates of Sec. 506(a) by valuing the creditor's interest in the collateral in light of the proposed post-bankruptcy reality: no foreclosure sale and economic benefit for the debtor derived from the collateral equal to or greater than its fair market value. Our approach allows the bankruptcy court, using its informed discretion and applying historic principles of equity, to adopt in each case the valuation method that is fairest given the prevailing circumstances.
The [contrary] interpretation ... renders the second sentence of Sec. 506(a) virtually meaningless....
50 F.3d at 74-76 (second emphasis added).
Finally, in Huntington Nat'l Bank v. Pees (In re McClurkin), 31 F.3d 401 (6th Cir.1994), decided the week Rash was argued but before it was issued, the court focused, as we did in Rash, on the second sentence of Sec. 506(a) in declaring that in a chapter 13 proceeding where, as here, the collateral is being retained by the debtor, no hypothetical costs of sale should be deducted, because " 'a disposition of the property is not reasonably in the offing.' " Id. at 404 (quoting Brown & Co. Sec. Corp. v. Balbus (In re Balbus), 933 F.2d 246, 251 (4th Cir.1991)). This holding, tantamount to declaring replacement, or retail, value, to be appropriate, is cited in the passage from Winthrop that we have quoted above.
It is so ORDERED.
I respectfully dissent from the panel's denial of the petition for rehearing. I would grant the petition because I believe the original panel opinion was in error.
Because Associates Commercial Corp. (ACC) refused to accept Rash's Chapter 13 plan, Rash was compelled to invoke the provisions of Sec. 1325(a)(5) of the Bankruptcy Code, which provides, in relevant part:
[T]he court shall confirm a plan if--
. . . . .
(5) with respect to each allowed secured claim provided for by the plan--
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder....
11 U.S.C. Sec. 1325(a)(5) (emphasis added).
Since Rash proposed to retain the truck, he had only one alternative under Sec. 1325(a)(5)--allow ACC to retain its lien and pay ACC the present value of its secured claim. Since, under the code, the value of the secured claim is equivalent to the value of the collateral, see 11 U.S.C. Sec. 506(a), the bankruptcy court had to resolve the dispute between ACC and Rash over the value of the truck. The bankruptcy court correctly held that the value of ACC's secured claim under Sec. 506(a) was the truck's value on the wholesale market because that is all ACC, a lender not in the business of selling trucks, would be able to realize if it were forced to take possession and dispose of the truck.
Under Sec. 1325(a)(5), with respect to each allowed secured claim, the debtor must either surrender the property securing the claim, i.e., the collateral, to the holder of the claim, or allow the creditor to retain its lien on the collateral and pay the creditor, over the life of the plan, the present value of its secured claim. These two Sec. 1325 alternatives are set forth as equivalent methods of protecting the secured creditor's interest--retention of lien and payment, or receipt of the collateral. The purpose of determining the present value of the collateral, and thus the secured claim, is to see to it that the creditor will receive as much money under the plan, per Sec. 1325(a)(5)(B), as the creditor would receive were it permitted to sell the collateral in a commercially reasonable manner.
Given the purpose of this valuation, it is appropriate to value the collateral from the creditor's perspective. 2 In this case, the record supports the bankruptcy court's use of wholesale value. ACC is not a retail dealer in Kenworth trucks. Rather, ACC is merely the assignee of the security agreement and loan documents. Accordingly, the amount ACC would realize from a resale would likely be the truck's wholesale value from sale to a retail dealer. ACC presented no evidence that it had the ability to dispose of the truck at its retail value.
Furthermore, assigning retail value to the collateral simply ignores the inherent risk that the creditor took when it made or obtained the loan--the risk that if the debtor defaulted, the creditor might have to repossess the collateral and sell it at less than retail value. This is a risk commercial lenders are well-equipped to address on the front end of the lending process by requiring an adequate down-payment or credit insurance. By properly evaluating the value of the collateral at the time of making or obtaining a loan, a lender is...
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