Assocs. Commer. Corp. v. Rash - 520 U.S. 953, 117 S. Ct. 1879 (1997)

Rule:

When a debtor, over a secured creditor's objection, seeks to retain and use the creditor's collateral in a Chapter 13 plan, 11 U.S.C.S. § 506(a) directs application of the replacement-value standard to determine the value of the collateral.

Facts:

In 1989, an individual purchased a truck for use in his freight-hauling business. With respect to the truck's purchase price of $ 73,700, the individual made a down payment, agreed to pay the seller the remaining balance and finance charges in 60 equal monthly installments, and pledged the truck as collateral on the unpaid balance. Thereafter, the seller assigned its lien on the truck and its other rights under the sales agreement with the individual to another corporation. In 1992, the individual and his wife filed a joint petition and a repayment plan under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Texas. At the time of the bankruptcy filing, the balance owed to the corporation which held the lien on the truck was $ 41,171. The lienholder was listed in the debtors' petition as a creditor holding a secured claim. In the debtors' repayment plan, the debtors--invoking the so-called "cram down" option under 11 USCS 1325(a)(5)(B) for treatment of the lienholder's allowed secured claim--proposed to retain the truck for use in the freight-hauling business, and pay the lienholder an amount equal to the present value of the truck, which the debtors alleged was $ 28,500, over a period of 58 months. The bankruptcy court applied the foreclosure value. The appellate court affirmed, holding that the replacement value standard changed the extent to which the creditor was secured from what obtained under state law prior to bankruptcy. Certiorari was granted.

Issue:

Did the foreclosure value of the truck represent the creditor's interest under 11 U.S.C.S. § 506(a)?

Answer:

No.

Conclusion:

The Court reversed the decision of the Fifth Circuit, holding that where a debtor, in a repayment plan under Chapter 13, exercised the cram down option under 1325(a)(5)(B), the value of the property--and thus the amount of the creditor's allowed secured claim under 506(a)--was the replacement value, that is, the price a willing buyer in the debtor's trade, business, or situation would pay to obtain property of like age and condition from a willing seller. According to the Court, such standard accurately gauged the debtors' actual use of the property, and valued the creditor's interest in the collateral from the creditor's perspective, based on what the collateral was worth on the open market, rather than in the hands of another party.