Cite as: Keith M. Lundin, Lundin On Chapter 13, § 76.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
In June of 1997, in Associates Commercial Corp. v. Rash,1 the Supreme Court took sides in the Great Valuation Debate.2 The simple holding of Rash is that “replacement value” is the standard required by § 506(a) when a Chapter 13 debtor crams down an undersecured claim at confirmation under § 1325(a)(5)(B). In Rash, the Supreme Court defined replacement value by giving examples of what it is not. More importantly, Rash offers no methodology for determining replacement value in the real world, and its articulation of a standard is neutralized by adjustments buried in the footnotes.
The debtors in Rash owned a Kenworth tractor they used in a freight-hauling business. Associates Commercial Corporation had a lien on the tractor. The Chapter 13 plan valued the tractor at $31,875—the value Associates would realize upon foreclosure and sale. Associates’ expert valued the tractor at $41,000—the amount the Rashes would have to pay to purchase a replacement tractor. The bankruptcy court accepted the debtors’ valuation and confirmed a plan that crammed down Associates’ allowed secured claim to $31,875, and paid that amount (with interest) over the life of the plan.3
As detailed above,4 on appeal a panel of the Fifth Circuit reversed, holding that retail or replacement value was the value of the tractor at confirmation.5 On rehearing en banc, the Fifth Circuit reached the opposite conclusion, holding that the bankruptcy court correctly limited Associates’ allowed secured claim to the net foreclosure value, $31,875.6
The Supreme Court first reviewed the fractured valuation decisions from the courts of appeals,7 finding three different standards for valuing retained collateral at cramdown in Chapter 13 cases: the foreclosure value standard adopted by the en banc opinion of the Fifth Circuit in Rash;8 the replacement value approach taken by the Ninth Circuit in Taffi v. United States (In re Taffi);9 and the midpoint between foreclosure value and replacement value, adopted by the Seventh10 and Second11 Circuits.
The foreclosure value standard failed, explained the Supreme Court, because the “proposed disposition or use” language in § 506(a) “points away from a foreclosure value standard when a Chapter 13 debtor, invoking cramdown power, retains and uses the property. . . . The debtor in this case elected to use the collateral to generate an income stream. That actual use, rather than a foreclosure sale that will not take place, is the proper guide under a prescription hinged to the property’s ‘disposition or use.’”12
With respect to the midpoint cases, the Supreme Court found the Seventh Circuit’s “split the difference approach”13 unsupported by § 506(a) and too complex because it required “two valuations, then split the difference.”14 The Second Circuit’s approval of a local bankruptcy rule that averaged wholesale and retail values15 was dispatched as “a ruleless approach allowing use of different valuation standards based on the facts and circumstances of individual cases.”16
The Supreme Court adopted replacement value, defined as “the price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller.”17 In a note, the Court refined replacement value to exclude new for old collateral—“replacement” means “property of like age and condition.”18 Had the Supreme Court stopped there, the credit community would have declared victory. But then there is footnote six:
Our recognition that the replacement-value standard, not the foreclosure-value standard, governs in cramdown cases leaves to bankruptcy courts, as triers of fact, identification of the best way of ascertaining replacement value on the basis of the evidence presented. Whether replacement value is the equivalent of retail value, wholesale value, or some other value will depend on the type of debtor and the nature of the property. We note, however, that replacement value, in this context, should not include certain items. For example, where the proper measure of the replacement value of a vehicle is its retail value, an adjustment to that value may be necessary: A creditor should not receive portions of the retail price, if any, that reflect the value of items the debtor does not receive when he retains his vehicle, items such as warranties, inventory storage, and reconditioning. . . . Nor should the creditor gain from modifications to the property—e.g., the addition of accessories to a vehicle—to which a creditor’s lien would not extend under state law.19
Footnote six states clearly that the “facts and circumstances of individual cases” will determine the methodology for implementing the replacement value standard. Put another way, the content of replacement value will change depending on “the type of debtor,” “the nature of the property” and “the evidence presented” in individual cases. The valuation standard—replacement value—is a moving target. This “simple rule of valuation” suffers the infirmities assigned by the Supreme Court to the Seventh and Second Circuits’ pre-Rash efforts—it is ruleless and invites the use of different valuation methods based on the facts in every next case.
Footnote six is an invitation to litigation nearly as formless as the valuation litigation that preceded Rash.20 Is this Chapter 13 debtor the “type of debtor” that replaces a car at a retail dealer? From a private seller in the classified ads? Through Wheels and Deals? If Chapter 13 debtors in Nashville, Tennessee, can (and sometimes do) bid for real property at HUD auctions, is “public foreclosure auction” the replacement value of real estate? What if the debtor’s home is in a neighborhood where foreclosure sales control the market? Do debtors who cruise flea markets get a different valuation standard at cramdown than debtors who shop at Wal-Mart?
What about the adjustments in footnote six? The Supreme Court excises from replacement value some of the items that made replacement cost unpalatable to the original Fifth Circuit panel in Rash itself. The “for example” at the beginning of the sentence telegraphs that “proper measure of the replacement value” is subject to other adjustments limited only by the imaginations of the lawyers who represent Chapter 13 debtors. In the same sense that a Chapter 13 debtor who keeps a car does not “receive . . . warranties, inventory storage, and reconditioning,” the debtor also does not receive sales commissions or profit or the return on investment in the hypothetical replacement value transaction.
What can we say for sure about valuation at confirmation after Rash? Replacement value is the standard when the debtor proposes to retain collateral—at least for property used in the debtor’s trade or business. The opinion states that replacement value also applies to a Chapter 13 debtor’s “situation.” If “situation” includes ordinary consumer debtors, then replacement value will control at cramdown in all Chapter 13 cases.
Under the replacement value standard, the property to be valued is “of like age and condition” to the property retained by the debtor. “Property of like age and condition,”21 coupled with “nature of the property,”22 indicates that the brand, model, age, condition, serviceability and life expectancy of the retained property controls. For personal property such as cars and maybe even large appliances, such as washing machines and refrigerators, these factors translate into actual marketplaces where property of similar characteristics changes hands. There is much fun ahead when the only evidence is the debtor’s testimony that “no one would buy my used waterbed.”
The buyer in the Supreme Court’s replacement value transaction is “willing” and is “in the debtor’s trade, business, or situation.”23 The buyer is appropriately assigned the debtor’s characteristics—the debtor’s age, sex, business, trade, profession, intellect, life experiences, habits, prejudices, physical or mental limitations and the like.
There are no stated conditions or refinements to the “willing seller” on the other side of the hypothetical replacement value transaction. The seller is not necessarily like the creditor or like the seller from whom the debtor obtained the collateral in the first instance. With respect to most of the collateral in Chapter 13 cases, there will be many potential willing sellers. The Supreme Court’s prescription suggests that the characteristics of the debtor will drive selection of the willing seller. A debtor who has no computer skills is unlikely to win the argument that the willing seller is a vendor accessible only through a Web page on the Internet. On the other hand, nothing in Rash suggests that the neighborhood “We Tote the Note” creditor that charged more than retail for the car the debtor wants to keep is necessarily the willing seller at cramdown.
The replacement value of a broken washing machine may be quite different if the willing seller is a neighbor who cannot fix the machine or a Sears, Roebuck that can fix anything in its own shop for next to nothing. If the debtor is willing and able to shop either place—at Sears or through the classified ads—which willing buyer and which willing seller controls the replacement-value calculation? Are “commercially disadvantaged” debtors who routinely shop at expensive but close-at-hand retail stores stuck with (higher than) retail replacement cost valuations in Chapter 13 cases because their “situation” isn’t the same as an almost middle-class debtor living on the other side of town? Is the debtor’s “situation” at the petition controlling or at some other date? Can a debtor who attends a Chapter 13 trustee’s classes on careful consuming command a lower replacement value at cramdown than one who cuts the classes?
In footnote six, the Supreme Court directs that retail value must be adjusted to determine replacement value. Does it follow that wholesale value must also be adjusted when wholesale value is the “proper measure of the replacement value”? If a debtor would replace the used washing machine through the want ads, what are the proper adjustments to the want ad price that correct for the components of want ad value not received when the debtor retains the used washing machine? If wholesale is proper replacement value for a debtor who belongs to a “wholesale buying club,” is it adjusted by any sales commission that is avoided when the debtor retains the collateral through a Chapter 13 plan?
What about an adjustment for the seller’s profit that a Chapter 13 debtor does not receive? How is a seller’s profit different from “inventory storage” in this context?—both are items of value included in replacement cost that are not received by the debtor. In every hypothetical “willing buyer . . . willing seller” transaction, there will be some profit for the seller—whether the sale price is characterized as retail, wholesale or flea market. If replacement value at cramdown in a Chapter 13 case excludes all items of value that are not received by the debtor, the adjusted replacement value will always be lower than the retail or wholesale analogue that began the calculation. Debtors’ counsel once beloved of wholesale are but a footnote (six) away from valuations adjusted below wholesale.
This bleak account of Rash could be salvaged with a bit of perspective: smart creditors learned a long time ago that valuation litigation rarely pays in Chapter 13 cases. If nothing else, Rash proves that the “rule” you get after the (expensive) trek to the Supreme Court is sometimes no better than the anarchy pleaded in the cert petition. It will be said that the Supreme Court accomplished much in Rash if the decision becomes another reason to negotiate and settle valuation disputes in Chapter 13 cases.
1 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997).
2 See § 108.1 [ Valuation in Chapter 13 Cases before Rash ] § 76.4 Valuation in Chapter 13 Cases before Rash.
3 In re Rash, 149 B.R. 430 (Bankr. E.D. Tex. 1993).
4 See § 108.1 [ Valuation in Chapter 13 Cases before Rash ] § 76.4 Valuation in Chapter 13 Cases before Rash.
5 Associates Commercial Corp. v. Rash (In re Rash), 31 F.3d 325 (5th Cir. 1994).
6 Associates Commercial Corp. v. Rash (In re Rash), 90 F.3d 1036 (5th Cir. 1996) (en banc).
7 See § 108.1 [ Valuation in Chapter 13 Cases before Rash ] § 76.4 Valuation in Chapter 13 Cases before Rash.
8 Associates Commercial Corp. v. Rash (In re Rash), 90 F.3d 1036 (5th Cir. 1996) (en banc).
9 96 F.3d 1190 (9th Cir. 1996) (en banc). But see GMAC v. Mitchell (In re Mitchell), 954 F.2d 557 (9th Cir. 1992).
10 See In re Hoskins, 102 F.3d 311 (7th Cir. 1996).
11 See GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997).
12 520 U.S. at 962–63.
13 In re Hoskins, 102 F.3d 311 (7th Cir. 1996).
14 520 U.S. at 965.
15 GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997).
16 520 U.S. at 965 n.5.
17 520 U.S. at 960.
18 520 U.S. at 959 n.2.
19 520 U.S. at 965 n.6.
20 See § 108.1 [ Valuation in Chapter 13 Cases before Rash ] § 76.4 Valuation in Chapter 13 Cases before Rash.
21 520 U.S. at 959 n.2.
22 520 U.S. at 965 n.6.
23 520 U.S. at 959 n.2.