Amicus Curiae Brief — Associates Commercial Corp. v. Rash

Supreme Court brief1997

Ask Donna

What actually matters in this document.

Text

(9) Supreme Cou, &S

FILED

No. 96-454 FEB 28 1997

In The |

Supreme Court of the United States

October Term, 1996

ASSOCIATES COMMERCIAL CORPORATION,

Petitioner,

Vv.

ELRAY RASH AND JEAN RASH,

Respondents.

On Writ Of Certiorari To The

United States Court Of Appeals

For The Fifth Circuit

BRIEF AMICI CURIAE IN

SUPPORT OF PETITIONER

Joun H. Cutver III

Counsel of Record

Amy L. PritcHarRD

KENNEDY COVINGTON

Lospett & Hickman, L.L.P.

4200 NationsBank Corporate Center

100 North Tryon Street

Charlotte, North Carolina 28202-4006

(704) 331-7400

Counsel for NationsBank, N.A.,

NationsBank, N.A. (South), NationsBank

of Texas, N.A., Bank of America Texas,

N.A., Bank of America National Trust

and Savings Association, BANC ONE

CORPORATION and The Chase

Manhattan Bank USA, N.A.

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

: aaa

QUESTION PRESENTED FOR REVIEW

Whether, when a debtor proposes to retain a secured

creditor’s collateral under the cramdown powers of

Chapter 13 of the Bankruptcy Code, the amount required

to be paid on account of the creditor’s secured claim is

limited to the value that the secured creditor could have

obtained if it had sold the collateral at foreclosure.

TABLE OF CONTENTS

Page

INTEREST OF AMICI CURIAE ...............6.55: 1

SUMMARY OF ARGUMENT...............--00005: 5

Ec eekeh Se henbasesShecascnecccccce 7

I. THE COURT OF APPEALS FAILED TO CON-

STRUE § 506(a) AS A WHOLE................ 7

A. Both Sentences of § 506(a) Should Be Read

Together When Valuing Secured Claims.... 7

B. The Decision Deprives the Second Sentence

of Any Meaning and Ignores its Mandatory

SRS saveereserevcseseccrsvccccceccce 12

Il. USE OF WHOLESALE VALUATION TRANS-

FERS THE VALUE OF COLLATERAL FROM

SECURED TO UNSECURED CREDITORS...... 16

TSEC hGERScbbebccctoceserccccuceccees 20

***

TABLE OF AUTHORITIES

Page

Cases

Associates Commercial Corporation v. Rash (In re

Rash), 90 F.3d 1036 (5th Cir. 1996)......... 1, 7, 8, 13

BFP, Inc. v. Resolution Trust Corp., 511 U.S. 531

ERY PPP T TT CTT TTTTTPPT TTT TTT TC CTT Tie 18

Brown & Co. Securities Corp. v. Balbus (In re Balbus),

SSS FAG SES OR Cie. TOPE)... cccccccccccccccccces 9

Coker v. Sovran Equity Mortgage Co. (In re Coker),

973 F.2G 258 (Gt Cig. 1992)... ccc ccccccccccccvess 8

Dewsnup v. Timm, 502 U.S. 410 (1992)............. 9, 20

General Motors Acceptance Corp. v. Mitchell (In re

Mitchell), 954 F.2d 557 (9th Cir. 1992) ........... 7, 17

General Motors Acceptance Corp. v. Valenti (In re

Valenti), No. 95-5079, 1997 U.S. App. LEXIS 647

(2d Cir. January 15, 1997)......... 6... c cece uee. 13, 14

Group of Institutional Investors v. Chicago, M., St. P.

Gutierrez de Martinez v. Lamagno, 115 S. Ct. 2227

ERECT TTT TTT PETITE TTTTT TTT TTTTT Terre 14

Huntington Nat'l Bank v. Pees (In re McClurkin), 31

ee ED Es 6 ee cd cbcdccccdcccceccesces 9

In re Chateaugay Corp., 154 B.R. 29 (Bankr. S.D.N.Y.

PURER GG bwebhesebeeécdcccescccnccesascdéencesecs 8

In re Dews, 191 B.R. 86 (Bankr. E.D. Va. 1995).. 10, 15, 17

In re Fiberglass Industries, Inc., 74 B.R. 738 (Bankr.

EE ME co needs éedeeéenasedebawbeberces< 11

In re Green, 151 B.R. 501 (Bankr. D. Minn.

Di débidnddeccdwoucdedédectéeéeédecedc 10, 15, 16, 17

EEE

TABLE OF AUTHORITIES —- Continued

In re Hoskins, 102 F.3d 311 (7th Cir. 1996)......... 8, 11

In re Jones, 152 B.R. 155 (Bankr. E.D. Mich. 1993) .... 16

In re Marshall, 181 B.R. 599 (Bankr. N.D. Ala. 1995) 15, 18

In re Penz, 102 B.R. 826 (Bankr. E.D. Okla. 1989) .... 17

In re Perkins, 134 B.R. 408 (Bankr. E.D. Col. 1991).... 11

In re Pizzolato, 268 F. Supp. 353 (W.D. Ark. 1967) 18, 19

In re Reynolds, 17 B.R. 489 (Bankr. N.D. Ga. 1981) 10, 18

In re Riveria, 116 B.R. 17 (Bankr. D. P.R. 1990)....... 11

In re Rutledge, 277 F. Supp. 933 (E.D. Ark. 1967) 18, 19

In re Young, 153 B.R. 886 (Bankr. D. Neb. 1993) ..... 11

Metrobank v. Trimble (In re Trimble), 50 F.3d 530 (8th

GR, BEG cocecccceseocccecedénutense 7, 10, 13, 14, 16

Nantucket Investors II v. California Fed. Bank (In re

Indian Palms Associates, Ltd.), 61 F.3d 197 (3rd

GER BEG eccccceccoccceseddenssccedasaebeinedeces 14

Nobelman v. American Sav. Bank, 508 U.S. 324 (1993) . .9, 17

Rake v. Wade, 508 U.S. 464 (1993) .... 2.2.6.6 ce cee 13

Taffi v. United States (In re Taffi), 96 F.3d 1190 (9th

Gee GEE concocéccusnccnenseanscsusecanens 7, 9, 10, 17

United Sav. Ass'n v. Timbers of Inwood Forest

RN, GB Ge Te CES 0 0 och eeeaseccorscosecess 8

United States v. Ron Pair Enters., 489 U.S. 235

SEED ccvesesccccesanssecnscéncéecesadadeuneesaethes 9

Winthrop Old Farm Nurseries, Inc. v. New Bedford

Inst. for Sav. (In re Winthrop Old Farm Nurseries,

3B B: § Fo bs eT 9

TABLE OF AUTHORITIES — Continued

Page

STATUTES

Pe is cecdundesdséddchcovacdctedadasecsos 11

Be ae te ED vn cocenddescdddvassweednsecsees passim

ids cc casutiedecciwccetecccuccscduade 19

OR sy au nedecetncndudesésrdsccscdscsovcnss 15

MISCELLANEOUS

Administrative Office of The United States

Courts, 1995 Annual Survey, Table F-2.............. 4

Administrative Office of The United States

Courts, 1996 Annual Survey, Table F-2.............. 4

H.R. 8200, 95th Cong., Ist Sess. (1977) ........... 10, 14

H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977),

reprinted in 1977 U.S.C.C.A.N. 5963 ............4.. 14

Publisher’s Note, N.A.D.A. Official Used Car

Guide, Eastern Edition, February, 1997.......... 2, 15

Ronald J. Mann, Explaining the Pattern of Secured

Credit, 110 Harv. L. Rev. 625 (1997).......... 4, 5, 17

S.2266, 95th Cong., 2nd Sess. (1978)................. 11

S. Rep. No. 989, 95th Cong., 2nd Sess. (1978),

reprinted in 1978 U.S.C.C.A.N. 5787 ............05. 11

Written Statement of American Banker's Association

et al. before the National Bankruptcy Review Com-

mission, December 17, 1996 .................. 4,5, 19

INTEREST OF AMICI CURIAE

NationsBank, N.A., NationsBank, N.A. (South),

NationsBank of Texas, N.A., Bank of America Texas, N.A.,

Bank of America National Trust and Savings Association,

BANC ONE CORPORATION and The Chase Manhattan

Bank USA, N.A. (collectively the “Banks”) hereby

respectfully file their brief amici curiae in this case. The

consent of the attorneys for the Petitioner and the

Respondent has been obtained.

The United States Court of Appeals for the Fifth

Circuit (the “Court of Appeals”), in an en banc opinion,

held that the value of a secured claim is limited to the

amount the secured creditor could realize from a hypo-

thetical sale of its collateral even when a Chapter 13

debtor proposes to retain such collateral for personal use.

Associates Commercial Corp. v. Rash (In re Rash), 90 F.3d

1036 (5th Cir. 1996) (the “Decision”). The interest of the

Banks in this case arises from the direct detrimental effect

the Decision has on the value of secured loans held by the

Banks. The Banks support the view expressed by the six

dissenting Circuit Judges in Rash that 11 U.S.C. § 506(a)

(1995) (all statutory references contained herein refer to

the United States Bankruptcy Code, Title 11, United

States Code) requires a bankruptcy court to value

retained collateral in a Chapter 13 case based on its

replacement rather than wholesale cost. If the decision

below is upheld, the value of virtually all claims secured

by personal property, including vehicles, in Chapter 13

cases will be based on wholesale values even when

debtors choose to retain and use such collateral during

and subsequent to their bankruptcy proceedings.

The extent of the detrimental effect of the Decision

on the Banks is best illustrated by the number and value

of their claims in Chapter 13 bankruptcy cases. Nations-

Bank, N.A., NationsBank N.A. (South) and NationsBank

Texas, N.A. (collectively “NationsBank”) were creditors

in 7,788 pending Chapter 13 bankruptcy cases as of

December 31, 1996.' Approximately 45% of these Chapter

13 cases .avolve personal property collateral that was

retained for use by debtors. The retail or replacement

value of the collateral being retained and used by the

debtors in these cases averaged $11,800.00 per case. Thus,

valued on a retail basis, the total approximate amount of

these secured claims was $41,350,000.00. Considering an

average difference of 20-25% between retail and whole-

sale values,? application of the valuation standard man-

dated by the Decision would have cost NationsBank

alone between $8,500,000.00 and $10,000,000.00 had that

standard been applied to all cases now pending.

! These statistics do not include the more than 6,000

consumer bankruptcies (Chapter 7 and Chapter 13) that were

transferred to NationsBank upon its acquisition of Boatmen’s

Bancshares, Inc. and its subsidiaries.

2 A review of recent editions of N.A.D.A. Official Used Car

Guide, a recognized industry publication used for valuing

automobiles, indicates that the wholesale or foreclosure value of

a vehicle is approximately 20-25% lower than its retail, or

replacement, value.

The Chase Manhattan Bank USA, N.A.’s indirect

automobile portfolio contains approximately $50 million

in bankruptcy claims; of these, approximately 23% are

asserted in Chapter 13 cases. The total amount of Chapter

13 autofinancing claims is approximately $20 million. In

addition to these claims, Texas Commerce Bank (a Chase

affiliate) had 889 new bankruptcy cases in 1996 involving

loans secured by automobiles with total claim amounts of

$11,848,860.00. Of the claims secured by automobiles, 383

were asserted in Chapter 13 cases. These Chapter 13

claims have a total balance of $5,428,816.00.4

Bank of America National Trust and Savings Associa-

tion and its subsidiaries (“Bank of America”) are cur-

rently in the same position as the Petitioner in at least

1,103 pending Chapter 13 cases. In each of these cases,

Bank of America’s claim is secured by an automobile that

has been retained by the debtor, and the claim (both the

secured and unsecured portions) is being paid through

the Chapter 13 reorganization plan. Those claims have a

total value of approximately $7.8 million. The total

amount of claims held by Bank of America in newly filed

3 The indirect automobile portfolio includes all retail

installment sales contracts secured by automobiles which have

been assigned to Chase Manhattan by automobile dealerships

from across the country.

* Together the Chase Manhattan indirect portfolio and the

Texas Commerce Bank portfolio account for most, but not all, of

the claims held by Chase's affiliates. For example, Chase

Financial Corporation holds claims secured by automobiles in

110 Chapter 13 cases. The total dollar amount of these claims is

unavailable.

consumer cases, excluding credit card debt, in 1996 was

at least $33.8 million.

The significance of the valuation standard applied in

the Decision will increase as the number of consumer

bankruptcy filings continues to rise. As tracked by the

Administrative Office of the United States Courts, Chap-

ter 13 filings across the country increased by 9% during

the twelve-month period ending September 30, 1995,

from the previous fiscal year. Administrative Office of

The United States Courts, 1995 Annual Survey, Table F-2.

During the following twelve months, Chapter 13 filings

increased another 23.9% to a record high of 336,615 fil-

ings. Administrative Office of The United States Courts,

1996 Annual Survey, Table F-2. Despite a generally

expanding economy and low unemployment, the number

of consumer filings has more than tripled since 1980.

Written Statement of American Banker's Association et al.

before the National Bankruptcy Review Commission, Decem-

ber 17, 1996 (hereinafter Statement to N.B.R.C.). The Banks

expect this trend to continue in 1997 and beyond; thus,

the impact of this Court’s decision on the value of

secured claims will be even more significant as the

number of personal bankruptcies rises.

Lenders determine the cost of credit based in part on

their estimate of costs or losses that will be caused by

future events. See Ronald J. Mann, Explaining the Pattern

of Secured Credit, 110 Harv. L. Rev. 625, 635, 637 n. 40

(1997). If the Decision is upheld, the Banks will face an

increase in such costs created by the change in the stan-

dard for valuation of secured claims. The losses which

will be incurred by the Banks and other consumer finance

companies will also affect customers seeking secured

credit. Lenders will likely adjust the price of all consumer

loans to account for the change in the potential losses

caused by bankruptcy filings. Id. Although not currently

quantifiable, bankruptcy losses of this magnitude will be

passed on to consumers in the form of higher interest

rates and decreased availability of credit. Statement to

N.B.R.C. Thus, the outcome of this case has direct and

substantial financial consequences for the Banks, other

entities providing secured credit, and the customers they

serve.

SUMMARY OF ARGUMENT

When construed as a whole, § 506(a) of the Bank-

ruptcy Code requires courts to value retained collateral

based on its replacement rather than wholesale value to

determine the amount of an allowed secured claim dur-

ing plan confirmation. Correctly construed, the first sen-

tence of this subsection describes what courts should

value in determining the amount of a secured claim and

the second directs how the valuation should be made.

The Court of Appeals erred by not viewing the subsection

as a whole and by limiting the value of a secured claim to

liquidation cost even when the debtor intends to retain

and use the creditor’s collateral.

Valuing a secured claim for the purposes of Chapter

13 plan confirmation based on a hypothetical sale by the

creditor is incorrect given the directive found in the sec-

ond sentence of § 506(a) to value the claim “in light of the

purpose of the valuation and of the proposed disposition

or use” of the collateral. This directive allows courts the

QQ eee

flexibility needed to value claims in the myriad of con-

texts that arise under the Bankruptcy Code. The Decision

will result in secured claims being valued at a liquidation

level regardless of the circumstances surrounding the

valuation. This result is contrary to the meaning and

purpose of § 506(a).

Limiting the standard of valuation to wholesale

values not only violates the dictates of § 506(a), but also

ignores important attributes of a secured creditor’s inter-

est in collateral. Liquidation of collateral is not the only

right to which secured creditors are entitled and does not

provide the only measure of a claim’s worth. Rather,

secured creditors realize the value of their lien through a

variety of means established by contract or state law. In

this case, ignoring the debtor’s election to retain the

collateral through the proceeding and after the conclu-

sion of the case fails to account for an important fact

bearing on the worth of the collateral securing the credi-

tor’s claim. The rule announced by the Court of Appeals

effectively transfers the difference between the wholesale

and replacement value to unsecured creditors at the

expense of the secured creditor and in derogation of the

valuation requirements of § 506(a).

ARGUMENT

I. THE COURT OF APPEALS FAILED TO CONSTRUE

§ 506(a) AS A WHOLE.

A. Both Sentences of § 506(a) Should Be Read

Together When Valuing Secured Claims.

When construed as a whole in the context of plan

confirmation, § 506(a) of the Bankruptcy Code compels

the valuation of retained collateral based on its replace-

ment rather than wholesale value. Section 506(a) provides

in relevant part:

An allowed claim of a creditor secured by a lien

on property in which the estate has an inter-

est... 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 inter-

est .. . 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 disposi-

tion 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.

11 U.S.C. § 506(a) (emphasis added). Correctly construed,

the first sentence of this subsection describes what courts

should value in determining the amount of a secured

claim and the second directs how the valuation should be

made. Taffi v. United States (In re Taffi), 96 F.3d 1190, 1192

(9th Cir. 1996) (overruling General Motors Acceptance Corp.

v. Mitchell (In re Mitchell), 954 F.2d 557 (9th Cir. 1992));

Rash, 90 F.3d at 1061 (Smith, J., dissenting); Metrobank v.

Trimble (In re Trimble), 50 F.3d 530, 531 (8th Cir. 1995);

Coker v. Sovran Equity Mortgage Co. (In re Coker), 973 F.2d

258, 260 (4th Cir. 1992); In re Chateaugay Corp., 154 B.R. 29,

33 (Bankr. S.D.N.Y. 1993). As stated by Judge Lifland in

Chateaugay, statutory construction “‘is a holistic

endeavor’. . . and it is necessary to examine § 506(a)’s

second sentence before reaching any conclusion with

respect to the meaning” of the first. 154 B.R. at 33 (quot-

ing United Sav. Ass'n v. Timbers of Inwood Forest Assocs.,

484 U.S. 365, 371 (1988)).

The Court of Appeals erred in concluding that the

first sentence of § 506(a) both describes what is being

valued and dictates how it should be valued. Rash, 90

F.3d at 1044-45. As acknowledged by the Decision, the

first sentence is broadly drafted to encompass the many

potential property interests encountered in bankruptcy

cases as weil as the fact that both senior and junior lien

holders’ secured claims are valued under its provisions.

Rash, 90 F.3d at 1043. Specifically, the use of the phrase

“creditor’s interest” in the first sentence is not meant to

limit how a secured claim should be valued, but instead

serves “to remind us that a lien is not co-extensive with

the property that it is a lien on.” In re Hoskins, 102 F.3d

311, 314 (7th Cir. 1996); see also Rash, 90 F.2d at 1061

(Smith, J. dissenting).

This Court has repeatedly stated that the first sen-

tence of this section simply means that the amount of the

secured claim is equal to the value of the creditor’s

collateral, without ever suggesting that it establishes a

standard for valuation as well. United Sav. Ass'n v. Timbers

of Inwood Forest Assocs., 484 U.S. 365, 372 (1988) (conclud-

ing that the phrase “value of such entity’s interest” found

-_—— ——

in § 361 means the value of a secured creditor’s collat-

eral); United States v. Ron Pair Enters., 489 U.S. 235, 239

(1989); Nobelman v. American Sav. Bank, 508 U.S. 324 (1993)

(allowed claim secured by a lien on debtor’s property “is

a secured claim to the extent of the value of [the] prop-

erty”); see also Dewsnup v. Timm, 502 U.S. 410 (1992)

(Scalia, J. dissenting). Indeed in Timbers, this Court elabo-

rated that the reference to the creditor’s interest in prop-

erty in the first sentence “obviously means his security

interest without taking account of his right to immediate

possession of the collateral on default.” 484 U.S. at 372.

Thus, this Court has stated that the first sentence of

§ 506(a) identifies what should be valued without manda-

ting how it should be valued.

The second sentence describes what factors must be

considered in valuing the secured portion of a claim and

when that valuation should occur. 11 U.S.C. § 506. The

factors identified by the second sentence are (1) the pur-

pose of the valuation and (2) the proposed use or disposi-

tion of the collateral. Id. When a debtor intends to retain

collateral subject to a security interest, the debtor cannot

reduce the value of a secured claim by approximating

costs of a hypothetical sale, nor can the debtor limit the

value of the secured claim to the price that could be

obtained in a hypothetical liquidation sale. Winthrop Old

Farm Nurseries, Inc. v. New Bedford Inst. for Sav. (In re

Winthrop Old Farm Nurseries, Inc.}, 50 F.3d 72, 75 (1st Cir.

1995) (valuing junior mortgage holder’s claim in Chapter

11); Taffi, 96 F.3d at 1192 (valuing IRS lien on real prop-

erty in Chapter 11); Huntington Nat'l Bank v. Pees (In re

McClurkin), 31 F.3d 401, 405 (6th Cir. 1994) (valuing junior

mortgage holder in Chapter 13); Brown & Co. Securities

Corp. v. Balbus (In re Balbus), 933 F.2d 246, 252 (4th

Cir. 1991) (valuing judgment lien encumbering real prop-

erty in Chapter 13).

Courts have consistently held that personal property

must be valued with reference to its actual use when

determining the amount of a creditor’s secured claim in

Chapter 13. Trimble, 50 F.3d at 531-32; In re Green, 151 B.R.

501, 506 (Bankr. D. Minn. 1993); In re Dews, 191 B.R. 86, 90

(Bankr. E.D. Va. 1995); In re Reynolds, 17 B.R. 489 (Bankr.

N.D. Ga. 1981) (each valuing automobiles in Chapter 13).

Cf. Taffi, 96 F.3d at 1193 (determining that automobiles

should be valued at fair market value but leaving deter-

mination of fair market value to the bankruptcy courts).

In the context of Chapter 13 cases involving automobiles,

these courts have reasoned that valuing the collateral

based on a hypothetical sale by the creditor is inconsis-

tent with the directive found in the second sentence to

value the claim “in light of the purpose of the valuation

and of the proposed disposition or use” of the collateral.

Trimble, 50 F.3d at 531-32; Green, 151 B.R. at 506; Dews, 191

B.R. at 90; Reynolds, 17 B.R. at 493. As stated by the

United States Court of Appeals for the Ninth Circuit in

Taffi, “when the proposed use of the property is contin-

ued retention by the debtor, the purpose of the valuation

is to determine how much the creditor will receive for the

debtor’s continued possession.” 96 F.3d at 1192.

This application of each sentence of § 506(a) allows

courts the flexibility in valuing collateral that was

intended by Congress.° Section 506(a) governs valuation

5 Section 506(a)’s second sentence was initially found only

in the Senate bill. Compare H.R. 8200, 95th Cong., 1st Sess. (1977)

of secured claims in numerous contexts in Chapters 7, 11,

12 and 13 of the Bankruptcy Code. 11 U.S.C. § 103. Courts

should not be forced to use a single valuation standard in

pursuit of the particular goals of each of those chapters.

See Hoskins, 102 F.3d at 314. In addition, within each

chapter, § 506(a) is employed to value secured claims for

multiple purposes. The standard employed for determin-

ing value must depend on why the valuation is being

made and the contemplated use of the collateral.© More-

over, § 506(a) governs the valuation of every kind of

collateral possessed by debtors in each of these chapters.

Its application is not restricted to real estate or auto-

mobiles; rather the section has been used to value boats,

aircraft, pension benefits and other tangible and intang-

ible personal property. See, e.g., In re Perkins, 134 B.R. 408,

411-12 (Bankr. E.D. Col. 1991); In re Fiberglass Indus., Inc.,

74 B.R. 738, 740 (Bankr. N.D.N.Y. 1987).

and S.2266, 95th Cong., 2nd Sess. (1978). The report

accompanying the Senate bill notes that “courts will have to

determine value on a case by case basis” and “|t]/hroughout the

bill, references to secured claims are only to the claim

determined to be secured under this subsection, and not to the

full amount of the creditor's claim.” S. Rep. No. 989, 95th Cong.,

2nd Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5854.

* For example, in comparing the value provided to

creditors under a reorganization plan with what would be

available in a Chapter 7 liquidation, courts have properly

valued estate assets at wholesale or quick sale prices and have

taken into account hypothetical trustee expenses and capital

gains taxes. See, e.g., In re Riveria, 116 B.R. 17 (Bankr. D. P.R.

1990); In re Young, 153 B.R. 886 (Bankr. D. Neb. 1993).

The wide variety of contexts in which bankruptcy

courts apply the section and the diverse types of property

valued demonstrate the importance of employing a stan-

dard based on the purpose of valuation and the proposed

use or disposition of the collateral. The interpretation of

§ 506(a) employed by the Court of Appeals fails to pro-

vide such flexibility. If collateral is valued at wholesale

cost when the debtor proposes to use the collateral

through the proceeding and subsequent to plan comple-

tion, then there is no context within which a fair market

value or replacement costs standard would ever be

appropriate.

The Court of Appeals’ reading of the statute leaves

courts with a single valuation standard regardless of the

circumstances. The section should be read as a whole so

that it may be sensibly applied in the broad variety of

contexts in which valuation arises under the Bankruptcy

Code. When valuing secured claims for the purposes of

plan confirmation under Chapter 13, those courts that

have considered the language of § 506(a) as a whole have

correctly concluded that valuation must be made in light

of the debtor’s intention to continue to use and enjoy the

collateral.

B. The Decision Deprives the Second Sentence of

Any Meaning and Ignores its Mandatory Lan-

guage.

The Court of Appeals held that in every case the first

sentence of § 506(a) requires a court to value only the

secured creditor’s right to repossess collateral and to

exercise its rights under state law with respect to the

collateral. Rash, 90 F.3d at 1044. The Court of Appeals

summarized its reasoning as follows:

Ultimately it is the creditor’s interest that is

being valued under § 506(a), and such evalua-

tion must account for the fact that the creditor's

interest is in the nature of the security interest,

giving the creditor the right to repossess and

sell the collateral and nothing more. Therefore,

the evaluation should start with what the credi-

tor could have realized by exercising that right.

Id. Unfortunately, the value of the collateral “in the hands

of the creditor” — regardless of its proposed use — is both

the beginning and ending of the Court of Appeals’ anal-

ysis.

The Court of Appeals’ interpretation of the first sen-

tence of § 506(a) renders the second sentence without

purpose. Wherever possible, statutes should be construed

so as to give effect to every part of the statute. Rake v.

Wade, 508 U.S. 464, 113 S. Ct. 2187 (1993) (superseded by

statute on other grounds). One provision should not sus-

pend or supersede another. Id. at __, 113 S. Ct. at 2192.

The meaning ascribed to the first sentence of § 506(a) by

the Court of Appeals violates this basic canon of statutory

construction and ignores the mandatory language of the

second sentence.

When valuation is undertaken in the context of plan

confirmation and the debtor proposes to retain and use

the collateral through the proceeding and following its

conclusion, the plain meaning of the second sentence

requires a court to value the collateral in light of that use.

Trimble, 50 F.3d at 532. Cf. In re Valenti, No. 95-5079, 1997

U.S. App. LEXIS 647, *10 (2d Cir. January 15, 1997)

(acknowledging that value of creditor’s allowed secured

claim must account for replacement cost of collateral).”

The use of the word “shall” generally means that the

congressional directive is mandatory rather than permis-

sive. Gutierrez de Martinez v. Lamagno, 115 S. Ct. 2227,

2235 n.9 (1995); Nantucket Investors II v. California Fed.

Bank (In re Indian Palms Assocs., Ltd.), 61 F.3d 197, 207 (3rd

Cir. 1995) (construing 11 U.S.C. § 362(d)). There is no

suggestion in the text or the legislative history that courts

may choose whether or not to consider these factors.®

Instead, bankruptcy courts must account for them in their

valuations.

Courts that value automobiles in light of their pro-

posed use by debtors have determined that a replacement

or retail valuation standard is appropriate. Trimble, 50

F.3d at 532. In the context of the cramdown of a plan

7 In Valenti, the Court of Appeals for the Second Circuit

upheld application of a local Northern District of New York rule

which fixes value of retained vehicles in Chapter 13 cases at the

average of wholesale and retail values absent contrary evidence

of the vehicle’s worth. While this is a convenient rule, it is not

the method of valuation required by Section 506(a).

5 A single valuation standard is inconsistent with the intent

evidenced by the legislative history of the first sentence alone.

Although the House bill did not contain the second sentence,

the comments to this subsection of House Bill 8200 nonetheless

stated: “’Value’ does not necessarily contemplate forced sale or

liquidation value of the collateral; nor does it always imply a

full going concern. Courts will have to determine value on a

case by case basis, taking into account the facts of each case and

the competing interests in each case.” H.R. Rep. No. 595, 95th

Cong., 1st Sess. (1977), reprinted in 1977 U.S.C.C.A.N. 5963, 6312.

under § 1325, “the purpose of the valuation is to deter-

mine the amount the undersecured creditor will be paid

for the debtor’s continued use and possession of the

vehicle which secured the debtor’s obligation. The value

of the creditor's interest in such cases is derived from the

stream of payments the collateral secures” rather than a

repossession and sale of the collateral. Green, 151 B.R. at

506. In Chapter 13 cases where the debtor proposes to

keep the collateral, the value of the secured creditor's

claim must be determined with reference to this use

rather than a hypothetical disposition that will not take

place under the plan. Dews, 191 B.R. at 90. A replacement

or retail standard for valuation is the correct measure of a

vehicle’s value in this context.? This standard accounts

for what a debtor would have to pay in the market place

for an automobile of the same model, age and condi-

tion.'° Section 506(a) requires courts to value secured

claims in light of the purpose of the valuation and the

proposed use of the collateral. In this case, the Court of

* Perhaps the most universally recognized source of

valuation for used automobiles is the N.A.D.A. Official Used

Car Guide. In re Marshall, 181 B.R. 599, 604 n.9 (Bankr. N.D. Ala.

1995). The N.A.D.A. Guide contains a “retail” value and a

“wholesale” value, which are based on those kinds of sales in

the region for which the Guide is published. Publisher’s Note,

N.A.D.A. Official Used Car Guide, Eastern Edition, February,

1997.

#0 All N.A.D.A. values (whether retail or wholesale)

assume the vehicle is clean. Id. An exceptionally clean vehicle or

one which bears a warranty or guarantee should bring a greater

price than the given value, while vehicles that must be re-

conditioned to be in salable condition will bring less than the

average value. Id.

Appeals erred by disregarding the proposed use of the

vehicle in its determination of the standard for valuing

the Petitioner’s secured claim.

Il. USE OF WHOLESALE VALUATION TRANSFERS

THE VALUE OF COLLATERAL FROM SECURED

TO UNSECURED CREDITORS.

Limiting the method of valuing collateral to a liq-

uidation price not only violates the dictates of § 506 but

also ignores important attributes of a secured creditor's

interest in collateral. Although a secured creditor has the

right under non-bankruptcy law to repossess and sell its

collateral upon default, this right “does not automatically

mean that the value of the lien is equivalent to the

amount the creditor would receive upon disposition of

the collateral in satisfaction of its lien.” Trimble, 50 F.3d at

531 (quoting Green, 151 B.R. at 505). Moreover, a creditor

can realize the value of its lien in several ways: by a

repossession and sale of the collateral, through receiving

a stream of payments on the obligation underlying the

security, or by agreeing to a consensual sale. In re Jones,

152 B.R. 155, 185 (Bankr. E.D. Mich. 1993) (methods other

than repossession do not require creditor to absorb costs

of a forced sale); Green, 151 B.R. at 505.1! By choosing to

11 Where residential real property serves as collateral, this

Court has recognized that the rights of a secured creditor

“include the right to repayment of the principal in monthly

installments over a fixed term at specified adjustable rates of

interest, the right to retain the lien until the debt is paid off, the

right to accelerate the loan upon default and to proceed against

petitioners’ residence by foreclosure and public sale, and the

retain the property, the debtor is acknowledging its value

to be greater than liquidation or wholesale price. In re

Penz, 102 B.R. 826, 828 (Bankr. E.D. Okla. 1989) (valuing

farm land in Chapter 12 proceeding). Similarly, the credi-

tor’s interest is “enhanced by the proposed continued use

of the property to help maintain employment and thereby

effectuate the debtors’ performance under the plan.”

Green, 151 B.R. at 505; Dews, 191 B.R. at 90. Cf. General

Motors Acceptance Corp. v. Mitchell (In re Mitchell), 954 F.2d

557, 561 (9th Cir. 1992) (Noonan, J., dissenting), overruled

by In re Taffi, 96 F.2d 1190 (9th Cir. 1996). In his dissent in

Mitchell, Judge Noonan noted, “[t]here is no better way of

arriving at its value ‘in the light of . . . its proposed use’

than to determine the cost of a similar car.” 954 F.2d at

561. The debtor’s decision to continue to use collateral for

his or her benefit necessarily affects the value of the

collateral to both debtor and creditor. See Mann, supra, at

646-648 (noting value of collateral’s use to debtor under-

lies creditor’s pre-loan perception of risks and costs). This

value cannot be ignored in determining the amount of the

lien holder’s secured claim for the purposes of plan con-

firmation.

In this case, ignoring the debtor’s election to retain

the collateral fails to account for a fact which bears on the

worth of the collateral securing the creditor’s claim and

on the worth of the secured claim itself. This Court has

right to bring an action to recover any deficiency remaining

after foreclosure.” Nobelman v. American Sav. Bank, 508 U.S. at

329.

previously recognized that real property sold at a fore-

closure sale cannot be valued in the same way as prop-

erty sold in the ordinary course. BFP, Inc. v. Resolution

Trust Corp., 511 U.S. 531 (1994) (properly conducted fore-

closure yields “reasonably equivalent value” for fore-

closed property). This Court concluded that property

“that must be sold within those strictures is simply worth

less.” Id. at 565 (emphasis in the original). The fact that

property is subject to forced sale, “like any other fact

bearing upon the property’s use or alienability, neces-

sarily affects its worth.” Id. at 571. In the context of

valuation pursuant to § 506(a), valuing retained collateral

as if it were being liquidated results in the same incon-

gruity as valuing foreclosed property as if it were being

sold on an open market.

Value is defined and determined “in a particular

situation from the purpose for which a valuation is being

made.” Group of Institutional Investors v. Chicago, M., St. P.

& P. R., 318 U.S. 523, 540 (1943) (valuing interest of equity

holders in railroad reorganization case). In a Chapter 13

reorganization, the use of an automobile is usually essen-

tial to the success of the completion of the plan. Marshall,

181 B.R. at 603; Reynolds, 17 B.R. at 493 (retaining vehicle

enables the debtors to avoid the necessity of replacement

transportation).

Even prior to the enactment of the current Bank-

ruptcy Code, courts recognized the unique importance of

a vehicle to the Chapter 13 debtor and thus to the

debtor’s creditors. In re Rutledge, 277 F. Supp. 933 (E.D.

Ark. 1967); In re Pizzolato, 268 F. Supp. 353 (W.D. Ark.

1967). In Pizzolato, the district court upheld the bank-

ruptcy referee’s decision to enjoin foreclosure of the

debtor’s vehicle because its use was necessary for the

“stability of the proposed plan and without it the plan

would collapse.” 268 F. Supp at 354; see also Rutledge, 277

F. Supp. at 935 (conditioning injunction on debtor imple-

menting repayment plan for full contract amount).

The Decision transfers this enhanced value of the

collateral to the debtor’s unsecured creditors in every

reorganization case without acknowledging the true

value of the creditor’s interest in the collateral.!2 Rash, 90

F.3d at 1064 (Smith, J. dissenting). The difference between

wholesale and retail price (or liquidation and fair market

value) is generally paid to unsecured creditors through

the reorganization plan because Chapter 13 requires a

debtor to commit his or her disposable income to the plan

for a period of three to five years." 11 U.S.C. §§ 1322,

1325. This transfer is not justified given that the use of the

collateral often makes the reorganization possible. Just as

increases in collateral value during the pendency of a

case accrue to the benefit of the secured creditor, a

secured claim should be valued at confirmation to allow

2 The losses borne by secured creditors as a result of this

transfer will be felt by non-bankrupt consumers as well. As

noted in the lending industry’s statement to the National

Bankruptcy Review Commission, bankruptcy losses mean

higher credit costs and lower credit availability to all customers.

Statement to N.B.R.C. at 2, 6 and 7.

'3 It is also possible for the debtor to realize this difference

by selling the collateral for greater than wholesale value

following plan confirmation. See Winthrop, 50 F.3d at 75.

the creditor full compensation for the value of its collat-

eral. See Dewsnup, 502 U.S. at 417 (increases in value of

collateral should benefit secured creditor rather than

unsecured creditors or debtor).

Allowing a debtor to value an automobile at a liq-

uidation or wholesale price when it will be used through-

out the debtor’s performance under his reorganization

plan and following the debtor’s discharge ignores the

value of that use to the debtor and his creditors. The

difference between the wholesale and replacement value

is effectively transferred to unsecured creditors and the

true value of the secured creditor’s collateral, as well as

that creditor’s contribution to the reorganization, goes

unrecognized.

CONCLUSION

For these reasons, the decision of the Court of

Appeals should be reversed.

Respectfully submitted this .vch day of February,

1997.

Joun H. Cutver III

Counsel for Amici Curiae

Of Counsel:

KENNEDY CovincTon Lospett & Hickman, L.L.P.

NationsBank Corporate Center

Suite 4200

100 N. Tryon Street

Charlotte, NC 28202-4006

Telephone: 704/331-7400

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.