§ 76.7     Valuation after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 76.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Under § 506(a)(1) of the Bankruptcy Code, an allowed claim that is secured by a lien on property of the estate becomes a secured claim “to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”1 BAPCPA added a new subparagraph (2) to § 506(a) as follows:

If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.2
[2]

The first sentence of this new subsection applies in Chapter 13 cases to personal property that secures an allowed claim.3 “Allowed claim” is a term of art signaling that the claim holder has filed a proof of claim to which no objection has been filed.4 “Such value” in the first sentence seems to refer to the value of the creditor’s interest in the estate’s interest in property which in the ordinary application of § 506(a)(1) would be the maximum allowable amount of the secured claim. With respect to personal property securing an allowed claim, the first sentence of new § 506(a)(2) states that value will be determined based on replacement value as of the petition date without deduction for costs of sale or marketing.

[3]

Replacement value is the standard that the Supreme Court adopted at cramdown in a Chapter 13 case in Associates Commercial Corp. v. Rash.5 Rash was not particularly revealing of what replacement value means. And there was a distracting footnote in Rash suggesting that replacement value would not include components of value that a Chapter 13 debtor did not receive at cramdown in a Chapter 13 case, such as warranties, inventory storage and reconditioning.6 The Supreme Court in Rash offered no particular methodology for determining replacement value and noted that replacement value could be retail value, wholesale value or some other value depending on “the type of debtor and the nature of the property.”7

[4]

The first sentence of new § 506(a)(2) mimics the replacement value standard for personal property from Rash, but adds that it is determined as of the date of the petition and without deduction for costs of sale or marketing. Further overruling Rash, the prohibition against any deduction for costs of sale or marketing signals that, without regard to what replacement value means, costs of sale or marketing do not reduce value even when those costs do not benefit a Chapter 13 debtor who retains personal property through a confirmed plan. When § 506 applies,8 and when the first sentence controls,9 new § 506(a)(2) could be read to overrule the portion of Rash mentioned above in which the Supreme Court indicated that deductions would be appropriate for items of value that the debtor does not receive when the debtor retains personal property through a plan.

[5]

The second sentence of § 506(a)(2) immensely complicates this discussion. The second sentence provides that, with respect to “property” acquired for personal, family or household purposes, replacement value means “the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.” The second sentence of new § 506(a)(2) is not limited to personal property. Arguably, it is broader and both less and more specific than the first sentence: the second sentence includes real and personal property, but only property acquired for personal, family or household purposes. A plain reading leaves ample content for both sentences but reveals no obvious logic. The more specific retail merchant definition of replacement value in the second sentence applies to real property and personal property acquired for personal, family or household purposes. The generic replacement value standard in the first sentence applies to personal property (only) that was not acquired for personal, family or household purposes. The petition date timing in the first sentence applies only to personal property not acquired for personal, family or household purposes. Neither sentence speaks to the valuation standard for real property not acquired for personal, family or household purposes.

[6]

Property acquired for personal, family or household purposes is a partial extraction from the definition of consumer debt in § 101(8).10 The phrase also has attributes of the description in § 522(f)(1)(B) of the kinds of property in which debtors can avoid nonpossessory, nonpurchase money security interests that impair an exemption.11 The phrase is importantly different than “personal use” in the hanging sentence at the end of § 1325(a).12 With the exception of property used in a trade or business, most property acquired by Chapter 13 debtors is acquired for personal, family or household purposes. It seems likely that most property in Chapter 13 cases will cross the orbit of the second sentence in new § 506(a)(2) and be valued at the price a retail merchant would charge for property of that kind considering age and condition.

[7]

There is an important timing issue at the end of new § 506(a)(2). The second sentence instructs that property acquired for personal, family or household purposes will be valued as of “the time value is determined.” In contrast, the first sentence (discussed above) states that the value of personal property is determined as of the “date of the filing of the petition.” Does the first sentence control the second sentence? Awkwardly, is all personal property valued at the petition under the first sentence of new § 506(a)(2) and then property acquired for personal, family or household purposes also valued at the petition because that is “the time value is determined”? Or is the message of these two different timing provisions that property acquired for personal, family or household purposes is valued at whatever time during the Chapter 13 case value is determined and all other personal property is valued as of the date of the filing of the petition? Logically, if the drafters intended property acquired for personal, family or household purposes to be valued at the petition, they would have used the same language in the second sentence as in the first sentence of new § 506(a)(2), or said nothing at all about timing in the second sentence. A convincing argument emerges that property acquired for personal, family or household purposes is valued as of whatever time value is determined and all other personal property is valued at the petition.

[8]

Because Chapter 13 cases typically last three to five years, this difference in timing can make quite a difference in the valuation that results. Even the three or four months between the petition and confirmation can change the value of a car by hundreds or even thousands of dollars. A car or appliance that breaks down between the petition and a hearing at which value is determined could change in price depending on which date is used for § 506(a)(2) purposes.

[9]

What do you suppose “retail merchant” means in the second sentence of new § 506(a)(2)? Is merchant intended to convey the UCC notion of a seller regularly engaged in a trade or business? What does a retail merchant look like with respect to real property? Would retail merchant exclude a private seller on eBay or through Wheels and Deals? What if the seller regularly sells this kind of property on eBay or through the newspaper? What about a car dealership that also sells used cars on the Internet? Would it be the price the car dealer charges on the lot or the price the car dealer sells for over the Internet? “The price” a retail merchant would charge leaves open the question whether averaging or some other method is appropriate when more than one retail merchant with different prices can be identified.

[10]

There is no statement in new § 506(a)(2) similar to the statement in surviving § 506(a)(1) that value will be determined “in light of the purpose of the valuation and of the proposed disposition or use of such property.”13 Replacement value is the new standard, but it is more than just curious that the first sentence precludes deduction for the costs of sale or marketing, but the second sentence makes no mention of that exclusion. With respect to property acquired for personal, family or household purposes, replacement value means the price a retail merchant would charge for property of that kind and condition, and new § 506(a)(2) does not preclude adjustments for costs of sales or marketing. Personal property not acquired for personal, family or household purposes would be valued at replacement value under the first sentence of new § 506(a)(2) and no deduction is allowed for costs of sale or marketing.

[11]

To date, the reported decisions addressing new § 506(a)(2) have focused on valuing cars: what used-car guide is appropriate for § 506(a)(2) purposes, and how do you use it? Reminiscent of the pre-BAPCPA debate,14 the courts are using published used-car guides to value cars under new § 506(a)(2), but the reported decisions are not in agreement with respect to which book and which numbers to use.

[12]

For example, in In re Eddins,15 the Bankruptcy Court for the Western District of Oklahoma analyzed § 506(a)(2) and concluded that N.A.D.A. retail is the starting point to value cars in Chapter 13 cases, with adjustments higher or lower upon objection. In contrast, in In re DeSardi,16 in the context of valuing a 910-day PMSI car claim,17 the bankruptcy court declared that value would be determined at the petition and absent objection, value would be based on the average of N.A.D.A. retail and wholesale.

[13]

Going a bit deeper, in Midwest Regional Credit Union v. De Anda-Ramirez (In re De Anda-Ramirez),18 the Bankruptcy Appellate Panel for the Tenth Circuit applied § 506(a)(2) to a used car and concluded that the Kelley Blue Book (KBB) private party value, not the KBB retail value, was the appropriate valuation standard. According to the Tenth Circuit BAP, the KBB private party value has very different content than the KBB retail value. Private party value is defined as

what a buyer can expect to pay when buying a used car from a private party. The Private Party Value assumes the vehicle is sold “As Is” and carries no warranty (other than the continuing factory warranty). The final sale price may vary depending on the vehicle’s actual condition and local market conditions.19
[14]

In contrast, the BAP explained that KBB retail value “assumes the vehicle has received the cosmetic and/or mechanical reconditioning needed to qualify it as ‘Excellent.’ This is not a transaction value; it is representative of a dealer’s asking price and the starting point for negotiation.”20 KBB retail value also includes that the vehicle is “in excellent mechanical condition and needs no reconditioning. . . . [H]as never had any paint or body work and is free of rust. . . . [H]as a clean title history and will pass a smog and safety inspection. . . . Less than 5% of all used vehicles fall into this category.”21 These distinctions between KBB private party and KBB retail led the Tenth Circuit BAP to reject KBB retail value for § 506(a)(2) purposes:

Other than both containing the word “retail,” the Code and KBB definitions have little in common. The Bankruptcy Code’s definition of “retail” includes an adjustment for the age and condition of the vehicle; KBB defines “retail” as the price for a vehicle that is in “excellent condition” with the proviso that less than 5% of vehicles for sale qualify as “excellent.” Clearly, these two are not equivalent and . . . reliance on the KBB retail value is misplaced.22
[15]

The Tenth Circuit BAP has done good work for the bankruptcy bar in De Anda-Ramirez by reminding all that the words used by the publishers of used-car guides do not necessarily have the same meaning as similar words in the Bankruptcy Code. It is likely that careful spade work through the methodologies in the N.A.D.A. used-car publications would reveal material insights similar to those revealed in De Anda-Ramirez with respect to KBB. The message for Chapter 13 practitioners is that complacency with respect to the use of used-car guides is not warranted when applying new § 506(a)(2), notwithstanding the use of familiar words.

[16]

Another message in these early cases is that disagreement about the proper standard for valuing cars in Chapter 13 cases has not been laid to rest by the BAPCPA amendments to § 506(a)(2). “Replacement value” in the first sentence of new § 506(a)(2) is no more helpful than the use of those same words by the Supreme Court in Rash. Tacking on that replacement value sometimes means the price a retail merchant would charge in the second sentence of § 506(a)(2), though somewhat more precise, has not produced consensus on the basis for valuation even within a large body of data such as the used-car guides.

[17]

New § 506(a)(2) does not apply at all in a Chapter 11 case. As discussed elsewhere,23 BAPCPA has rendered Chapter 11 a bit more attractive to individual debtors, and the possibility of a valuation standard more favorable than new § 506(a)(2) is one more reason why some individual debtors eligible for both chapters might choose the Chapter 11 alternative.


 

1  11 U.S.C. § 506(a)(1), discussed in § 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1  Valuation, Claim Splitting and Dewsnup.

 

2  11 U.S.C. § 506(a)(2).

 

3  Except, perhaps, when the second sentence of new 11 U.S.C. § 506(a)(2) controls—see below in this section—and when the new dangling sentence at the end of 11 U.S.C. § 1325(a) is in play. S>ee discussion beginning at § 75.1  In General: Modification Without § 506.

 

4  See § 275.2 [ In General: Filing is Required for Allowance ] § 132.2  In General: Filing is Required for Allowance.

 

5  520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997). See discussion of valuation beginning at § 76.1  Valuation, Claim Splitting and Dewsnup.

 

6  520 U.S. at 965 n.6. See § 109.1 [ Rash and Valuation ] § 76.5  Rash and Valuation.

 

7  520 U.S. at 965 n.6.

 

8  See hanging sentence at the end of § 1325(a), discussed in §§ 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506 and 462.1 [ 910-Day PMSI Car Claims: A Reprise ] § 87.7  910-Day PMSI Car Claims after BAPCPA: A Reprise.

 

9  See discussion of second sentence of 11 U.S.C. § 506(a)(2) below in this section.

 

10  See 11 U.S.C. § 101(8) (“[T]he term ‘consumer debt’ means debt incurred by an individual primarily for a personal, family or household purpose.”).

 

11  11 U.S.C. § 522(f)(1)(B)(i), discussed in § 409.1 [ Section 522(f) after BAPCPA: Household Goods Corrupted ] § 49.4  Section 522(f) after BAPCPA: Household Goods Corrupted.

 

12  See § 451.4 [ Acquired for Personal Use of Debtor ] § 75.4  Acquired for Personal Use of Debtor.

 

13  11 U.S.C. § 506(a)(1).

 

14  See § 76.4  Valuation in Chapter 13 Cases before Rash.

 

15  355 B.R. 849 (Bankr. W.D. Okla. 2006).

 

16  340 B.R. 790 (Bankr. S.D. Tex. 2006).

 

17  See discussion beginning at § 75.1  In General: Modification Without § 506.

 

18  359 B.R. 794 (B.A.P. 10th Cir. 2007).

 

19  359 B.R. at 797 n.2.

 

20  359 B.R. at 797.

 

21  359 B.R. at 797.

 

22  359 B.R. at 797.

 

23  See § 8.5  Other Chapters Too Expensive, Too Complicated or Unfriendly.