# In Re Peter Gordon Balbus, Debtor. Brown and Company Securities Corporation v. Peter Gordon Balbus > Court of Appeals for the Fourth Circuit · June 4, 1991 · 933 F.2d 246 URL: https://www.frixlaw.com/law-library/cases/9481622 ## Case - **Full name:** In Re Peter Gordon BALBUS, Debtor. BROWN AND COMPANY SECURITIES CORPORATION, Plaintiff-Appellant, v. Peter Gordon BALBUS, Defendant-Appellee - **Court:** Court of Appeals for the Fourth Circuit - **Decided:** June 4, 1991 - **Citations:** 933 F.2d 246 - **Precedential status:** Published - **Opinion:** Dissent by Murnaghan - **Judges:** Ervin, Mullen, Murnaghan - **Cited by:** 76 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9481622 ## How later opinions describe it (automated extraction) - holding that for Chapter 12 plan confirmation purposes, hypothetical costs should not be deducted from fair market value in valuing collateral to be retained by debtor ## Opinion text MURNAGHAN, Circuit Judge, dissenting: Brown & Co. has asserted that, for purposes of 11 U.S.C. § 506 (a), the fair market value of the debtor’s real property should be reduced, in all cases, by an amount equal to the hypothetical costs of sale of the property. The majority’s quarrel with the proposition so stated is that the reduction should take place only if the debtor intends to dispose of the property. That quarrel pits authorities favoring a general rule of the deduction in all cases against what my brothers characterize as a “growing number” of jurisdictions endorsing the disposition distinction and disallowing the deduction when the debtor intends to retain the property. As the majority indicates, the split in authorities tends generally to follow a perceived tension between the first and second sentences of section 506(a). In arguing in favor of what may, up to now, be called the general rule, Brown & Co. begins by focusing on the language of the first sentence— “the value of [the] creditor’s interest in the estate’s interest in [the] property” — in asserting that because the purpose of the valuation is to determine the amount of security that exists for the benefit of secured creditors, that interest cannot logically exceed the amount a creditor would realize if he attempted to liquidate the creditor’s interest. In other words, the gross value, the undiminished fair market value of the real property, does not represent the net value, the dollar amount which would be available to a secured creditor were he ever to look to the property for satisfaction of his claim. As one court held, “The distinction to be drawn is between the value of the property and the value of the creditor’s interest in such property.... This latter value properly takes into account costs of sale and justifies a 10% factor in determining the cash amount realizable by a lien creditor in real estate.” In Re Ward, 13 B.R. 710, 712 (Bankr.S.D.Ohio 1981). Brown & Co.’s position in supported by an impressive array of authority from bankruptcy courts, district courts, one bankruptcy appellate panel, and commentators. See In re Malody, 102 B.R. 745 (9th Cir.B.A.P.1989); In re Smith, 92 B.R. 287 (Bankr.S.D.Ohio 1988); In re Claeys, 81 B.R. 985 (Bankr.D.N.D.1987); In re Richardson, 82 B.R. 872 (Bankr.S.D.Ohio 1987); In re Cook, 38 B.R. 870 (Bankr.D.Utah 1984); In re Parr, 30 B.R. 276 (Bankr.N.D. Ala.1983); In re Van Nort, 9 B.R. 218 (Bankr.E.D.Mich.1981); In re Klein, 10 B.R. 657 (Bankr.E.D.N.Y.1981); In re Jones, 5 B.R. 736 (Bankr.E.D.Va.1980); see also J. Queenan, Standards for Valuation of Security Interests in Chapter 11, 92 *253 Com.LJ. 18, 29-33 (1987); see generally Fortang and Mayer, Valuation in Bankruptcy, 32 U.C.L.A. L.Rev. 1061 (1985). All of those authorities stand for the proposition that the value to which a secured creditor may look to satisfy the obligation owed by the debtor is independent of the intentions of the debtor regarding disposition (sale or retention) of the property. If the debtor intends to retain the property yet the creditor decides to look to the property to satisfy the debt, namely, the “creditor’s interest,” the creditor will foreclose and will receive (in a perfect market) the fair market value of the property less the costs of foreclosure. The majority disagrees, suggesting that if the debtor intends to retain the property, the hypothetical costs of sale are exactly that — hypothetical. The majority then asserts that section 506(a)’s reference to the “creditor’s interest” takes on an entirely different meaning if we focus our attention upon the second sentence of the section, which reads, “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” The majority then goes on to assert that the jurisdictions comprising the “developing majority” have looked to that language in ruling that the hypothetical costs of sale will not be deducted from the value of the collateral where the debtor intends to retain the property. See In re Usry, 106 B.R. 759 (Bankr.M.D.Ga.1989); In re Penz, 102 B.R. 826 (Bankr.E.D.Ok.1989); In re Bellman Farms, 86 B.R. 1016 (Bankr.D.S.D.1988); In re Gerhardt, 88 B.R. 151 (Bankr.S.D.Ohio 1987); In re Crouch, 80 B.R. 364 (Bankr.W.D.Va.1987); In re Robinson Ranch, Inc., 75 B.R. 606 (Bankr.D. Mont.1987); In re Fiberglass Industries, Inc., 74 B.R. 738 (Bankr.N.D.N.Y.1987); In re Courtright, 57 B.R. 495 (Bankr.D.Ore. 1986); In re Crockett, 3 B.R. 365 (Bankr.N. D.Ill.1980). Yet a thorough review of all of the cases cited by the majority in support of its position leads me only to conclude that the “emerging. majority” of authorities is neither, on one hand, emerging nor, on the other, a majority. Four of the cases cited by the majority value the collateral at its fair market value and decline to deduct hypothetical closing costs only when the debtor intends to retain the property and the property is a “going concern” or will be used to produce income essential to the reorganization plan. Usry, 106 B.R. at 762 ; Fiberglass Industries, 74 B.R. at 742 ; Robinson Ranch, 75 B.R. at 608 ; Crockett, 3 B.R. at 367 . Because there is no evidence in the record suggesting that Balbus intends to produce income from the property, those cases are inapposite, yet the majority has not addressed the distinction. Bellman Farms and Crouch engage in no analysis of the question, merely citing to cases in other jurisdictions. The discussion of valuation in Gerhardt is nothing more than dictum; the court cites not a single case or other authority in reaching its conclusion, a conclusion which is also a minority position in the Southern District of Ohio. Courtright makes a feeble attempt at discussing the tension between the first and second sentences of section 506(a) by stating, [the language in section 506(a) which reads “to the extent of the value of such creditor’s interest in the estate’s interest in such property”] appears to care for the problem where the estate’s interest is less than full ownership such as where the debtors’ [sic] own only an undivided interest in the property. If the [language] were interpreted to mean that the value must be fixed at the amount which the creditor would receive on foreclosure, then the last sentence of the statute which provides that the value shall be determined in the light of the purpose of the valuation and of the proposed disposition or use of the property, would be mere surplusage. 57 B.R. at 497 . One may conclude from the line of cases in the “emerging majority” cited by my brothers that the courts involved construed section 506(a) by placing their emphasis on *254 the value of the property to the debtor and thus on the “disposition and use” language found in the section’s second sentence. See In re 222 Liberty Assocs., 105 B.R. 798, 803 (Bankr.E.D.Pa.1989) (citing Smith and Claeys as “[t]he most fully-reasoned of the cases in which calculations including deductions of the respective hypothetical sales costs is made,” but holding that “the debtor’s intention is the cornerstone of the calculation as reflected in both sentences of § 506(a)”). Of course, the argument can be made that such inordinate focus on the statute’s second sentence simply renders the first sentence “mere surplusage,” and moves us no closer to divining Congress’ intent. (Likewise, attention to the first sentence with equal force could be said to render the second sentence “mere surplus-age.”) In addition, a review of the cases which Brown & Co. cites in support of its position demonstrates that there is a fatal flaw in the underlying premise of the majority’s reading of the second sentence of section 506(a): the majority assumes that the purpose of the valuation to be performed under the section is to measure the value of the collateral to the debtor. That premise is simply not correct. The second sentence commences with the words “Such value,” inevitably a reference back to the “creditor’s interest.” The sentence concludes with a requirement that attention should be paid to “such creditor’s interest.” The better view, then, one consistent with the words “such value,” may be found in Claeys, Smith, and Malody. After considering the reasoning relied upon by the majority in Courtright, Crockett, and In re Frost, 47 B.R. 961 (D.Kan.1985), the court in Claeys stated, The fact that a debtor intends to retain the collateral does not emasculate the fact that it is in the first instance the creditor’s interest in the collateral that must be valued. One commentator has suggested that any other construction is meaningless because regardless of the circumstance of bankruptcy or the eventual circumstances of repossession, a secured creditor, in order to obtain its value in collateral, will have to sell it and incur expenses in so doing. No creditor, and indeed not even the debtor itself could obtain full market value without some reduction for sale expenses. 81 B.R. at 991 -92 (citing J. Queenan, Standards for Valuation of Security Interests in Chapter 11, 92 Com.L.J. 18, 29-37 (1987)). The Claeys court then went on to provide a compelling construction of the second sentence of section 506(a), compelling because it goes far beyond any of the cases cited by the majority in demonstrating that meaning can be given to the whole of the section without having to focus on either of its parts at the expense of the other: The emphasis to be placed upon the concept of “use” or “disposition” of property should not be placed in the context of collateral retention by the debtor via a reorganization plan, but rather ought to focus on a use or disposition of collateral that is either destructive or unanticipated in the sense that it would increase the risk of loss to the creditors’ interest in the collateral. Illustrative of such use in a Chapter 12 treatment context might be a post-confirmation proposal to use a combine for custom work where previously it had been used seasonally to harvest the debtor’s own crop. Id. at 992 . See also Smith, 92 B.R. at 290-91 (“[Bjecause it is the creditor’s interest in the estate’s interest in property which must be valued, it is appropriate to deduct costs of sale regardless of whether a debtor intends to retain and use the property under a plan of reorganization”). Claeys provides full meaning to the second sentence of section 506(a) consistent with the first sentence’s (and the whole section’s) emphasis on the “creditor’s interest,” disposing of the majority’s claim that emphasis on the creditor’s interest “reads the second sentence of § 506(a) out of the statute.” In re Balbus, at 251. Equally compelling is the reasoning to be found in In re Malody, a case decided by *255 the Ninth Circuit’s Bankruptcy Appellate Panel. 3 Malody concerned valuation under section 506(a) in the context of whether the “cram-down” provisions of 11 U.S.C. § 1325 (a)(5)(B) were satisfied for Chapter 13 reorganization. The issue before the court was whether the value to be given to the collateral — an automobile — should be the wholesale value or the proceeds of a commercially reasonable sale. There it was the creditor, seeking to maximize its interest in the collateral, who argued that the second sentence of section 506(a) had to be interpreted as mandating valuation based upon the collateral’s intended retention and use by the debtor. The Malody panel rejected the argument, citing three lines of reasoning for holding that the commercially reasonable costs of sale had to enter into the valuation calculus: 1. the purpose of valuation is to protect a secured claimant from loss by assuring that it will receive as much money under the plan as it would receive if it were permitted to sell the vehicles in a commercially reasonable manner; 2. replacement value is the proper means of valuing the collateral when the collateral is essential to the effectuation of the debtor’s reorganization plan; and 3. replacement value ignores the inherent risk a lender undertakes when it makes the loan; namely, that if the debt- or defaults the lender might have to repossess the collateral and sell it at a value most likely less than its retail value. 102 B.R. at 749. In my view, the clear weight of authority supports a ruling, in light of the instant facts, that hypothetical costs of sale must be included in calculating the extent to which the claims on the real property in question are secured. Yet my task is not quite complete. In adopting the emerging view, the majority relies on dictum found in the Supreme Court’s decision in United Savings Ass’n of Texas v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365 , 108 S.Ct. 626 , 98 L.Ed.2d 740 (1988). As noted in Liberty Assocs., the Balbus case [ 104 B.R. 767 (Bankr.E. D.Va.1989)], taking another tack, relies heavily on dictum in [Timbers']. There, in harmonizing the phrase “value of such entity’s interest” in 11 U.S.C. § 361 (1) with similar phrases elsewhere in the Code, the Court observed that “[t]he phrase ‘value of such creditor’s interest’ in § 506(a) means ‘the value of the collateral,’ ” without allowances for the creditor’s “lost opportunity costs.” 105 B.R. at 803 . I find the majority’s reliance on that dictum problematic. The holding in Timbers is that, for purposes of adequate protection, an undersecured creditor is not entitled to post-petition interest on its collateral while the automatic stay is in effect. As the court below acknowledged, Timbers did not focus on the issue of whether hypothetical costs of sale should be taken into account in a valuation of collateral. Here, of course, at issue is Brown & Co.’s secured interest and not its entitlement to post-petition interest. The issue Timbers leaves unanswered is how to make an initial determination of the value of a secured creditor’s interest, precisely the issue on appeal here. I agree with Brown & Co.’s assertion that the bankruptcy court below read out of context the sentence in Timbers that appears to equate “value of such creditor’s interest” with “value of the collateral.” In fact, if read literally, the statement is demonstrably false because the creditor’s interest must, at a minimum, equal the value of the collateral less any liens placed upon it. A far more reasonable interpretation of the Timbers dictum, given the holding, is that “the value of such creditor’s interest” in collateral cannot exceed the “value of the collateral” and therefore cannot include the creditor’s lost opportunity to take possession of the property. In any event, the Timbers dictum fails to figure into the *256 question whether or not the debtor intends to retain the collateral. We should adopt the “general rule” so cogently articulated in Claeys . Because the majority has chosen to do otherwise, I respectfully dissent. . In the Ninth Circuit, an appeal from a decision of a bankruptcy court may be taken to a district court or to the bankruptcy appellate panel. The panel consists of three Article I judges who sit by designation. Appeals from a decision of the bankruptcy appellate panel are taken to the Ninth Circuit Court of Appeals. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9481622. Public record. Not legal advice.