OCTOBER TERM, 1996
Syllabus
ASSOCIATES COMMERCIAL CORP.
v. RASH ET ux.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH
CIRCUIT
No. 96-454. Argued April 16, 1997-Decided June 16, 1997
Petitioner Associates Commercial Corporation
(ACC) holds
a loan and lien on a tractor truck purchased by respondent Elray
Rash for use in his freight-hauling business. Elray and Jean Rash,
also a respondent, filed a joint petition and repayment plan under
Chapter 13 of the Bankruptcy Code (Code), listing
ACC as a
secured creditor. Under the Code, ACC's claim for the $41,171
balance owed on the truck was secured only to the extent of the
value of the collateral; its claim over and above that value was
unsecured. See 11 U. S. C. § 506(a). The Rashes could gain
confirmation of their Chapter 13 plan only if
ACC accepted
it, if the Rashes surrendered the truck to
ACC, or if the
Rashes invoked the so-called "cram down" provision. See §
1325(a)(5). The cram down option allows the debtor to keep the
collateral over the objection of the creditor; the creditor retains
the lien securing the claim, see § 1325(a)(5)(B)(i), and the debtor
is required to provide the creditor with payments, over the life of
the plan, that will total the present value of the collateral, see
§ 1325(a)(5)(B)(ii). The value of the allowed secured claim is
governed by § 506(a) of the Code. The Rashes invoked the cram down
power, proposing to keep the truck for use in the freight-hauling
business.
ACC objected to the plan, sought to repossess the
truck, and disputed the value the Rashes had assigned to the truck.
At an evidentiary hearing held to resolve the dispute,
ACC
maintained that the proper valuation was the price the Rashes would
have to pay to purchase a like vehicle (the replacement-value
standard), estimated to be $41,000. The Rashes, however, maintained
that the proper valuation was the net amount
ACC would
realize upon foreclosure and sale of the collateral (the
foreclosure-value standard), estimated to be $31,875. The
Bankruptcy Court adopted the Rashes' valuation figure and approved
the plan. The District Court and the Fifth Circuit affirmed.
Held: Under § 506(a), the value of property retained
because the debtor has exercised Chapter 13's "cram down" option is
the cost the debtor would incur to obtain a like asset for the same
proposed use. pp. 960-965.
(a) The words "the creditor's interest in the estate's interest
in such property" contained in the first sentence of § 506(a) do
not call for the foreclosure-value standard adopted by the Fifth
Circuit. Even read in
954
isolation, the phrase imparts no valuation standard. The first
sentence, read as a whole, instructs that a secured creditor's
claim is to be divided into secured and unsecured portions. The
sentence tells a court what it must evaluate, but it is not
enlightening on how to value collateral. Section 506(a)'s second
sentence, however, speaks to the
how question, providing
that "[s]uch value shall be determined in light of the purpose of
the valuation and of the proposed disposition or use of such
property." By deriving a foreclosure-value standard from § 506(a)'s
first sentence, the Fifth Circuit rendered inconsequential the
sentence that expressly addresses how "value shall be determined."
The "proposed disposition or use" of the collateral is of paramount
importance to the valuation question. Such "disposition or use"
turns on which alternative the debtor chooses when a secured
creditor refuses to accept the debtor's Chapter 13 plan-in one case
the collateral will be surrendered to the creditor, and in the
other, the collateral will be retained and used by the debtor.
Applying a foreclosure-value standard attributes no significance to
the different consequences of the debtor's choice. A
replacement-value standard, on the other hand, distinguishes
retention from surrender and renders meaningful the key statutory
words "disposition or use." Surrender and retention are not
equivalent acts. When a debtor surrenders the property, a creditor
obtains it immediately, and is free to sell it and reinvest the
proceeds. If a debtor keeps the property and continues to use it,
the creditor obtains at once neither the property nor its value,
and is exposed to double risks against which the Code affords
incomplete protection: The debtor may again default and the
property may deteriorate from extended use. Of prime significance,
the replacement-value standard accurately gauges the debtor's "use"
of 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." Pp. 960-963.
(b) The Fifth Circuit considered the replacement-value standard
disrespectful of Texas law, which permits the secured creditor to
sell the collateral, thereby obtaining only its net foreclosure. In
allowing Chapter 13 debtors to retain and use collateral over the
objection of secured creditors, however, the Bankruptcy Code has
reshaped debtor and creditor rights in marked departure from state
law. It no more disrupts state law to make "disposition or use" the
guide for valuation than to authorize the rearrangement of rights
the cram down power entails. There is also no warrant in the Code
for a valuation standard that uses the midpoint between foreclosure
and replacement values. pp. 964-965.
90 F.3d
1036, reversed and remanded.
955
GINSBURG, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and O'CONNOR, KENNEDY, SOUTER, THOMAS, and
BREYER, JJ., joined, and in all but n. 4 of which SCALIA, J.,
joined. STEVENS, J., filed a dissenting opinion,
post, p.
966.
Carter G. Phillips argued the cause for petitioner. With him on
the briefs were Shalom L. Kohn, David M. Schiffman, Ben L.
Aderholt, and Raymond
J. Blackwood.
Kent L. Jones argued the cause for the United States as amicus
curiae urging reversal. With him on the brief were Acting Solicitor
General Dellinger, Assistant Attorney General Argrett, Deputy
Solicitor General Wallace, and Gary D. Gray.
John J. Durkay argued the cause and filed a
brief for respondents. *
JUSTICE GINSBURG delivered the opinion of the Court.t We resolve
in this case a dispute concerning the proper application of §
506(a) of the Bankruptcy Code when a bankrupt debtor has exercised
the "cram down" option for which Code § 1325(a)(5)(B) provides.
Specifically, when a debtor, over a secured creditor's objection,
seeks to retain and use the creditor's collateral in a Chapter 13
plan, is the value of the collateral to be determined by (1) what
the secured creditor could obtain through foreclosure sale of the
property (the "foreclosure-value" standard); (2) what the debtor
would have to pay for comparable property (the "replacement-
*Briefs of
amici curiae urging reversal were filed for N
ationsBank, N. A., et al. by
John H. Culver III; and for the
Washington Legal Foundation by
David R. Kuney, Daniel
J. Popeo, and
Penelope K. Shapiro.
Briefs of
amici curiae urging affirmance were filed for
the National Association of Chapter 13 Trustees by
Henry E.
Hildebrand and
Christopher M. Minton; for the National
Association of Consumer Bankruptcy Attorneys, Inc., by
Norma L.
Hammes and
James J. Gold; and for Donald
and Madelaine Taffi by
A. Lavar Taylor.
Jan T. Chilton and
Phillip D. Brady filed a brief
for the American Automobile Manufacturers Association, Inc., et al.
as
amici curiae.
tJUSTICE SCALIA joins all but footnote 4 of this opinion.
956
value" standard); or (3) the midpoint between these two
measurements? We hold that § 506(a) directs application of the
replacement-value standard.
I
In 1989, respondent Elray Rash purchased for $73,700 a Kenworth
tractor truck for use in his freight-hauling business. Rash made a
downpayment on the truck, agreed to pay the seller the remainder in
60 monthly installments, and pledged the truck as collateral on the
unpaid balance. The seller assigned the loan, and its lien on the
truck, to petitioner Associates Commercial Corporation (ACC).
In March 1992, Elray and Jean Rash filed a joint petition and a
repayment plan under Chapter 13 of the Bankruptcy Code (Code), 11
U. S. C. §§ 1301-1330. At the time of the bankruptcy filing, the
balance owed to ACC on the truck loan was $41,171. Because it held
a valid lien on the truck, ACC was listed in the bankruptcy
petition as a creditor holding a secured claim. Under the Code,
ACC's claim for the balance owed on the truck was secured only to
the extent of the value of the collateral; its claim over and above
the value of the truck was unsecured. See 11 U. S. C. § 506(a).
To qualify for confirmation under Chapter 13, the Rashes' plan
had to satisfy the requirements set forth in § 1325(a) of the Code.
The Rashes' treatment of ACC's secured claim, in particular, is
governed by subsection (a)(5).1 Under this
1 Section 1325(a)(5) states:
"(a) Except as provided in subsection (b), the 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
957
provision, a plan's proposed treatment of secured claims can be
confirmed if one of three conditions is satisfied: The secured
creditor accepts the plan, see 11 U. s. C. § 1325(a)(5) (A); the
debtor surrenders the property securing the claim to the creditor,
see § 1325(a)(5)(C); or the debtor invokes the so-called "cram
down" power, see § 1325(a)(5)(B). Under the cram down option, the
debtor is permitted to keep the property over the objection of the
creditor; the creditor retains the lien securing the claim, see §
1325(a)(5)(B)(i), and the debtor is required to provide the
creditor with payments, over the life of the plan, that will total
the present value of the allowed secured claim, i.
e., the
present value of the collateral, see § 1325(a)(5)(B)(ii). The value
of the allowed secured claim is governed by § 506(a) of the
Code.
The Rashes' Chapter 13 plan invoked the cram down power. It
proposed that the Rashes retain the truck for use in the
freight-hauling business and pay ACC, over 58 months, an amount
equal to the present value of the truck. That value, the Rashes'
petition alleged, was $28,500. ACC objected to the plan and asked
the Bankruptcy Court to lift the automatic stay so ACC could
repossess the truck. ACC also filed a proof of claim alleging that
its claim was fully secured in the amount of $41,171. The Rashes
filed an objection to ACC's claim.
The Bankruptcy Court held an evidentiary hearing to resolve the
dispute over the truck's value. At the hearing, ACC and the Rashes
urged different valuation benchmarks. ACC maintained that the
proper valuation was the price the Rashes would have to pay to
purchase a like vehicle, an amount ACC's expert estimated to be
$41,000. The Rashes, however, maintained that the proper valuation
was the net amount ACC would realize upon foreclosure and sale of
the collateral, an amount their expert estimated to be $31,875.
"(C) the debtor surrenders the property securing such
claim to such holder."
958
The Bankruptcy Court agreed with the Rashes and fixed the amount
of ACC's secured claim at $31,875; that sum, the court found, was
the net amount ACC would realize if it exercised its right to
repossess and sell the truck. See
In re Rash, 149 B. R. 430,
431-432 (Bkrtcy. Ct. ED Tex. 1993). The Bankruptcy Court thereafter
approved the plan, and the United States District Court for the
Eastern District of Texas affirmed.
A panel of the Court of Appeals for the Fifth Circuit reversed.
In re Rash, 31 F.3d
325 (1994). On rehearing en banc, however, the Fifth Circuit
affirmed the District Court, holding that ACC's allowed secured
claim was limited to $31,875, the net foreclosure value of the
truck.
In re Rash, 90 F.3d
1036 (1996).
In reaching its decision, the Fifth Circuit highlighted, first,
a conflict it perceived between the method of valuation ACC
advanced, and the law of Texas defining the rights of secured
creditors. See
id., at 1041-1042 (citing Tex. Bus. &
Com. Code Ann. §§ 9.504(a), (c), 9.505 (1991)). In the Fifth
Circuit's view, valuing collateral in a federal bankruptcy
proceeding under a replacement-value standard-thereby setting an
amount generally higher than what a secured creditor could realize
pursuing its state-law foreclosure remedywould "chang[e] the extent
to which ACC is secured from what obtained under state law prior to
the bankruptcy filing." 90 F. 3d, at 1041. Such a departure from
state law, the Fifth Circuit said, should be resisted by the
federal forum unless "clearly compel[led]" by the Code.
Id.,
at 1042.
The Fifth Circuit then determined that the Code provision
governing valuation of security interests, § 506(a), does not
compel a replacement-value approach. Instead, the court reasoned,
the first sentence of § 506(a) requires that collateral be valued
from the creditor's perspective. See
id., at 1044. And
because "the creditor's interest is in the nature of a security
interest, giving the creditor the right to repos-
959
sess and sell the collateral and nothing more[,] ... the
valuation should start with what the creditor could realize by
exercising that right."
Ibid. This foreclosure-value
standard, the Fifth Circuit found, was consistent with the other
relevant provisions of the Code, economic analysis, and the
legislative history of the pertinent provisions. See
id., at
1045-1059. Judge Smith, joined by five other judges, dissented,
urging that the Code dictates a replacement-value standard. See
id., at 1061-1075.
Courts of Appeals have adopted three different standards for
valuing a security interest in a bankruptcy proceeding when the
debtor invokes the cram down power to retain the collateral over
the creditor's objection. In contrast to the Fifth Circuit's
foreclosure-value standard, a number of Circuits have followed a
replacement-value approach. See,
e. g., In re Taffi,
96 F.3d
1190, 1191-1192 (CA9 1996) (en bane), cert. pending
sub nom.
Taffi v.
United States, No. 96881; 2
In re Winthrop
Old Farm Nurseries, Inc., 50 F.3d
72, 74-75 (CAl1995);
In re Trimble, 50 F.3d
530, 531-532 (CA8 1995). Other courts have settled on the
midpoint between foreclosure value and replacement value. See
In
re Hoskins, 102 F.3d
311, 316 (CA7 1996); cf.
In re Valenti, 105 F. 3d 55, 62
(CA2 1997) (bankruptcy courts have discretion to value at midpoint
between replacement value and foreclosure value). We granted
certiorari to resolve this conflict among the Courts of Appeals,
see 519 U. S. 1086 (1997), and we now reverse the Fifth Circuit's
judgment.
2 In
In re Taffi, the Ninth Circuit contrasted
replacement value with fair-market value and adopted the latter
standard, apparently viewing the two standards as incompatible. See
96 F. 3d, at 1192. By using the term "replacement value," we do not
suggest that a creditor is entitled to recover what it would cost
the debtor to purchase the collateral brand new. Rather, our use of
the term replacement value is consistent with the Ninth Circuit's
understanding of the meaning of fair-market value; by replacement
value, we mean the price a willing buyer in the debtor's trade,
business, or situation would pay a willing seller to obtain
property of like age and condition. See also
infra, at 965,
n. 6.
960
II
The Code provision central to the resolution of this case is
§ 506(a), which states:
"An allowed claim of a creditor secured by a lien on property in
which the estate has an interest ... is 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. Such value shall be determined in
light of the purpose of the valuation and of the proposed
disposition or use of such property .... " 11 U. S. C. §
506(a).
Over ACC's objection, the Rashes' repayment plan proposed,
pursuant to § 1325(a)(5)(B), continued use of the property in
question, i.
e., the truck, in the debtor's trade or
business. In such a "cram down" case, we hold, the value of the
property (and thus the amount of the secured claim under § 506(a))
is the price a willing buyer in the debtor's trade, business, or
situation would pay to obtain like property from a willing
seller.
Rejecting this replacement-value standard, and selecting instead
the typically lower foreclosure-value standard, the Fifth Circuit
trained its attention on the first sentence of § 506(a). In
particular, the Fifth Circuit relied on these first sentence words:
A claim is secured "to the extent of the value of such
creditor's interest in the estate's interest in such
property." See 90 F. 3d, at 1044 (emphasis added) (citing §
506(a)). The Fifth Circuit read this phrase to instruct that the
"starting point for the valuation [is] what the creditor could
realize if it sold the estate's interest in the property according
to the security agreement," namely, through "repossess[ing] and
sell[ing] the collateral."
Ibid.
We do not find in the § 506(a) first sentence words-"the
creditor's interest in the estate's interest in such property"-
961
the foreclosure-value meaning advanced by the Fifth Circuit.
Even read in isolation, the phrase imparts no valuation standard: A
direction simply to consider the "value of such creditor's
interest" does not expressly reveal
how that interest is to
be valued.
Reading the first sentence of § 506(a) as a whole, we are
satisfied that the phrase the Fifth Circuit considered key is not
an instruction to equate a "creditor's interest" with the net value
a creditor could realize through a foreclosure sale. The first
sentence, in its entirety, tells us that a secured creditor's claim
is to be divided into secured and unsecured portions, with the
secured portion of the claim limited to the value of the
collateral. See
United States v.
Ron Pair Enterprises,
Inc., 489 U. S.
235, 238-239 (1989); 4 L. King, Collier on Bankruptcy ,
506.02[1][a], p. 506-6 (15th ed. rev. 1996). To separate the
secured from the unsecured portion of a claim, a court must compare
the creditor's claim to the value of "such property," i.
e.,
the collateral. That comparison is sometimes complicated. A debtor
may own only a part interest in the property pledged as collateral,
in which case the court will be required to ascertain the "estate's
interest" in the collateral. Or, a creditor may hold a junior or
subordinate lien, which would require the court to ascertain the
creditor's interest in the collateral. The § 506(a) phrase
referring to the "creditor's interest in the estate's interest in
such property" thus recognizes that a court may encounter, and in
such instances must evaluate, limited or partial interests in
collateral. The full first sentence of § 506(a), in short, tells a
court what it must evaluate, but it does not say more; it is not
enlightening on how to value collateral.
The second sentence of § 506(a) does speak to the
how
question. "Such value," that sentence provides, "shall be
determined in light of the purpose of the valuation and of the
proposed disposition or use of such property." § 506(a). By
deriving a foreclosure-value standard from § 506(a)'s first
sentence, the Fifth Circuit rendered inconsequential the
962
sentence that expressly addresses how "value shall be
determined."
As we comprehend § 506(a), the "proposed disposition or use" of
the collateral is of paramount importance to the valuation
question. If a secured creditor does not accept a debtor's Chapter
13 plan, the debtor has two options for handling allowed secured
claims: surrender the collateral to the creditor, see §
1325(a)(5)(C); or, under the cram down option, keep the collateral
over the creditor's objection and provide the creditor, over the
life of the plan, with the equivalent of the present value of the
collateral, see § 1325(a)(5)(B). The "disposition or use" of the
collateral thus turns on the alternative the debtor chooses-in one
case the collateral will be surrendered to the creditor, and in the
other, the collateral will be retained and used by the debtor.
Applying a foreclosure-value standard when the cram down option is
invoked attributes no significance to the different consequences of
the debtor's choice to surrender the property or retain it. A
replacement-value standard, on the other hand, distinguishes
retention from surrender and renders meaningful the key words
"disposition or use."
Tying valuation to the actual "disposition or use" of the
property points away from a foreclosure-value standard when a
Chapter 13 debtor, invoking cram down power, retains and uses the
property. Under that option, foreclosure is averted by the debtor's
choice and over the creditor's objection. From the creditor's
perspective as well as the debtor's, surrender and retention are
not equivalent acts.
When a debtor surrenders the property, a creditor obtains it
immediately, and is free to sell it and reinvest the proceeds. We
recall here that ACC sought that very advantage. See
supra,
at 957. If a debtor keeps the property and continues to use it, the
creditor obtains at once neither the property nor its value and is
exposed to double risks: The debtor may again default and the
property may deteriorate from extended use. Adjustments in the
interest rate and secured
963
creditor demands for more "adequate protection," 11 U. S. c. §
361, do not fully offset these risks. See 90 F. 3d, at 1066 (Smith,
J., dissenting) ("vast majority of reorganizations fail ... leaving
creditors with only a fraction of the compensation due them";
where, as here, "collateral depreciates rapidly, the secured
creditor may receive far less in a failed reorganization than in a
prompt foreclosure" (internal cross-reference omitted)); accord,
In re Taffi, 96 F. 3d, at 1192-1193.3
Of prime significance, the replacement-value standard accurately
gauges the debtor's "use" of the property. It values "the
creditor's interest in the collateral in light of the proposed
[repayment plan] reality: no foreclosure sale and economic benefit
for the debtor derived from the collateral equal to ... its
[replacement] value."
In re Winthrop Old Farm Nurseries, 50
F. 3d, at 75. 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."
See
ibid.4
3 On this matter,
amici curiae supporting
ACC
contended: "'Adequate protection' payments under 11 U. S. C. §§
361, 362(d)(1) typically are based on the assumption that the
collateral will be subject to only ordinary depreciation. Hence,
even when such payments are made, they frequently fail to
compensate adequately for the usually more rapid depreciation of
assets retained by the debtor." Brief for American Automobile
Manufacturers Association, Inc., et al. as
Amici Curiae 21,
n. 9.
4 We give no weight to the legislative history of § 506(a),
noting that it is unedifying, offering snippets that might support
either standard of valuation. The Senate Report simply repeated the
phrase contained in the second sentence of § 506(a). See S. Rep.
No. 95-989, p. 68 (1978). The House Report, in the Fifth Circuit's
view, rejected a "'replacement cost'" valuation. See
In re
Rash, 90 F.3d
1036, 1056
(CA5 1996) (quoting H. Rep. No. 95-595, p.
124 (1977)). That Report, however, appears to use the term
"replacement cost" to mean the cost of buying new property to
replace property in which a creditor had a security interest. See
ibid. In any event, House Report excerpts are not
enlightening, for the provision pivotal here-the second sentence of
§ 506(a)-did not appear in the bill addressed by the House Report.
The key sentence originated in the
964
The Fifth Circuit considered the replacement-value standard
disrespectful of state law, which permits the secured creditor to
sell the collateral, thereby obtaining its net foreclosure value
"and nothing more." See 90 F. 3d, at 1044. In allowing Chapter 13
debtors to retain and use collateral over the objection of secured
creditors, however, the Code has reshaped debtor and creditor
rights in marked departure from state law. See,
e.
g., Uniform Commercial Code §§ 9504, 9-505, 3B U. L. A. 127,
352 (1992). The Code's cram down option displaces a secured
creditor's state-law right to obtain immediate foreclosure upon a
debtor's default. That change, ordered by federal law, is attended
by a direction that courts look to the "proposed disposition or
use" of the collateral in determining its value. I t no more
disrupts state law to make "disposition or use" the guide for
valuation than to authorize the rearrangement of rights the cram
down power entails.
Nor are we persuaded that the split-the-difference approach
adopted by the Seventh Circuit provides the appropriate solution.
See
In re Hoskins, 102 F. 3d, at 316. Whatever the
attractiveness of a standard that picks the midpoint between
foreclosure and replacement values, there is no warrant for it in
the Code.5 Section 506(a) calls for the value the property
possesses in light of the "disposition or use" in fact "proposed,"
not the various dispositions or uses that might have been proposed.
Cf.
BFP v.
Resolution Trust Corporation, 511 U. S. 531, 540 (1994)
(court-made rule defining, for purposes of Code's fraudulent
transfer provi-
Senate version of the bill, compare H. R. 8200, 95th Cong., 1st
Sess., § 506(a) (1977), with S. 2266, 95th Cong., 1st Sess., §
506(a) (1977), and was included in the final text of the statute
after the House-Senate conference, see 124 Congo Rec. 33997
(1978).
5 As our reading of § 506(a) makes plain, we also reject a
ruleless approach allowing use of different valuation standards
based on the facts and circumstances of individual cases. Cf.
In
re Valenti, 105 F.3d
55,
62-63 (CA2 1997) (permissible for bankruptcy courts
to determine valuation standard case-by-case).
965
sion, "reasonably equivalent value" to mean 70% of fair market
value "represent[s] [a] policy determinatio[n] that the Bankruptcy
Code gives us no apparent authority to make"). The Seventh Circuit
rested on the "economics of the situation,"
In re Hoskins,
102 F. 3d, at 316, only after concluding that the statute suggests
no particular valuation method. We agree with the Seventh Circuit
that "a simple rule of valuation is needed" to serve the interests
of predictability and uniformity.
Id., at 314. We conclude,
however, that § 506(a) supplies a governing instruction less
complex than the Seventh Circuit's "make two valuations, then split
the difference" formulation.
In sum, under § 506(a), the value of property retained because
the debtor has exercised the § 1325(a)(5)(B) "cram down" option is
the cost the debtor would incur to obtain a like asset for the same
"proposed ... use." 6
***
For the foregoing reasons, the judgment of the Court of Appeals
is reversed, and the case is remanded for further proceedings
consistent with this opinion.
It is so ordered.
6 Our recognition that the replacement-value standard, not the
foreclosure-value standard, governs in cram down 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. Cf. 90 F. 3d, at
1051-1052. 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.
966
JUSTICE STEVENS, dissenting.
Although the meaning of 11 U. S. C. § 506(a) is not entirely
clear, I think its text points to foreclosure as the proper method
of valuation in this case. The first sentence in § 506(a) tells
courts to determine the value of the
"creditor's interest in
the estate's interest" in the property. 11 U. S. C. § 506(a)
(emphasis added). This language suggests that the value should be
determined from the creditor's perspective, i.
e., what the
collateral is worth, on the open market, in the creditor's hands,
rather than in the hands of another party.
The second sentence explains that "[s]uch value shall be
determined in light of the purpose of the valuation and of the
proposed disposition or use of such property."
Ibid. In this
context, the "purpose of the valuation" is determined by 11 U. S.
C. § 1325(a)(5)(B). Commonly known as the Bankruptcy Code's "cram
down" provision, this section authorizes the debtor to keep secured
property over the creditor's objections in a Chapter 13
reorganization, but, if he elects to do so, directs the debtor to
pay the creditor the "value" of the secured claim. The "purpose" of
this provision, and hence of the valuation under § 506(a), is to
put the creditor in the same shoes as if he were able to exercise
his lien and foreclose. *
*The Court states that "surrender and retention are not
equivalent acts" from the creditor's perspective because he does
not receive the property and is exposed to the risk of default and
deterioration.
Ante, at 962. I disagree. That the creditor
does not receive the property is irrelevant because, as §
1325(a)(5)(B)(ii) directs, he receives the present value of his
security interest. Present value includes both the underlying value
and the time value of that interest. The time-value component
similarly vitiates the risk concern. Higher risk uses of money must
pay a higher premium to offset the same opportunity cost. In this
case, for instance, the creditor was receiving nine percent
interest, see
In re Rash, 90 F.3d
1036,
1039 (CA5 1996) (en bane), well over the
prevailing rate for an essentially risk-free loan, such as a United
States Treasury Bond. Finally, the concern with deterioration is
addressed by another provision of the Code, 11 U. S. C. § 361,
which authorizes the creditor to demand "adequate protec-
967
It is crucial to keep in mind that § 506(a) is a provision that
applies
throughout the various chapters of the Bankruptcy
Code; it is, in other words, a "utility" provision that operates in
many different contexts. Even if the words "proposed disposition or
use" did not gain special meaning in the cram down context, this
would not render them surplusage because they have operational
significance in their many other Code applications. In this
context, I also think the foreclosure standard best comports with
economic reality. Allowing any more than the foreclosure value
simply grants a general windfall to undersecured creditors at the
expense of unsecured creditors. Cf.
In re Hoskins, 102 F.3d
311, 320 (CA7 1996) (Easterbrook, J., concurring in judgment).
As Judge Easterbrook explained in rejecting the split-thedifference
approach as a general rule, see
id., at 318-320, a
foreclosure-value standard is also consistent with the larger
statutory scheme by keeping the respective recoveries of secured
and unsecured creditors the same throughout the various bankruptcy
chapters.
Accordingly, I respectfully dissent.
tion," including increased payments, to offset any derogation of
his security interest during a cram down.
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