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2662 Madison Rd.
Cincinnati, Ohio 45208
Email:
info@schuhgoldberglaw.com
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VALUE ISSUES UNDER BAPCPA

1. INAPPLICABILITY OF SEC. 506 TO “910 CAR CLAIMS” AND SECURED DEBTS INCURRED WITHIN 1 YEAR

The last paragraph of 1325(a):

“For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day[s] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in sec. 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consist of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.”

  1. The “910 car claim”
    1. creditor has a PMSI,
    2. debt incurred within 910 days of filing, and
    3. collateral is a motor vehicle acquired for personal use
      (note: sec. 506 will apply if the vehicle was acquired for business use)

  2. Secured debts incurred within 1 year
    Confusion exists over whether the secured debt must be a PMSI or not, depending upon how the statute is read.
    The argument is made that the debt must be a purchase money secured debt by reading the statute as follows:
    506 shall not apply
    • if the creditor has a PMSI,
    • debt incurred within 910 days, AND
      • collateral is a motor vehicle acquired for personal use OR
      • if collateral consists of any other thing of value, if debt was incurred during the 1-year period prior to filing
    The statute is read in this manner by Judge William Houston Brown is 2005 Bankruptcy Reform Legislation with Analysis, by Hon
    William Houston Brown and Lawrence R. Ahern III, 2005 Thomson West, p. 46

    The better reading of the statute is that the debt does not have to be secured by a purchase money security interest:
    506 shall not apply

    • if the creditor has a PMSI,
    • debt incurred within 910 days, and
    • collateral is a motor vehicle acquired for personal use OR
    • if collateral consists of any other things of value, if debt was incurred during 1 year
    The statute is read in this manner by Judge Eugene R. Wedoff - “Major Consumer Bankruptcy Effects of the 2005 Reform Legislation”, Eugene R. Wedoff, 6/2/2005, p. 18

2. THE SCOPE OF SEC. 506 WHEN IT IS APPLICABLE

Sec. 506 is captioned:

“§506. Determination of secured status”
The proposition is made that section 506 provides instruction for determining a “secured claim” ... not how to determine value of property generally.
If this is a correct statement of the law, then property which is secured by a lien has one standard of valuation governed by sec. 506, and unencumbered property, 910 car claims, and secured debts incurred within 1 year of filing have a different standard of valuation. [1]

3. THE NEW LANGUAGE OF SEC. 506(a)(2)

There are two new sentences in sec. 506(a)(2).

The 1st sentence is applicable to all encumbered property (other than 910 car claims and secured debts incurred within 1 year) in a Ch. 7 and Ch. 13 codifying the “replacement value” standard of In re Rash , 520 U.S. 953, 138 L.Ed.2d 148, 117 S.Ct. 1879 (1997) but most likely overruling footnote 6 of Rash.

[1] Under sec. 527(c)(3) you, the “debt relief agency”, are obliged to inform your client, the “assisted person”, on “how to value exempt property at replacement value as defined under sec. 506.” This language might suggest that sec. 506 has a greater scope than is suggested above but the language of sec. 527(c)(3) is directly in conflict with the exemption statute, sec. 522(a)(2) which states that ‘ “value” means fair market value as of the date of the filing” and there is no other statute in BAPCPA that says that exempt property is supposed to be valued at replacement value under sec. 506.

The 2nd sentence supplements the 1st sentence by providing a “retail” definition of replacement value when the property was “acquired for personal, family, or household purposes.”

Some persons are reading the two sentences of sec. 506(a)(2) as being mutually exclusive, i.e. the 1st sentence applies to business property and the 2nd sentence applies to “personal, family, or household” property but the better view and plain meaning is believed to be that the 1st sentence is applied to all and the 2nd sentence supplements the first when the property was acquired for personal, family or household purposes.

11 U.S.C. sec. 506(a)(2):

“(2) If the debtor is an individual in a case under Ch. 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. ”

  1. A. The 1st sentence of 506(a)(2):
    The 1st sentence is clearly a codification of the “replacement value” holding in In re Rash except for footnote 6 of that decision. Footnote 6 of Rash stated that if retail value were used to measure replacement value, there should be deducted therefrom “the value of items the debtor does not receive when he retains” the collateral, i.e. “items such as warranties, inventory storage and reconditioning.” Rash, supra, at 956, n.6.
    Are the “warranties, inventory storage and reconditioning” in Rash’s footnote 6 the same things as “costs of sale or marketing” in the 1st sentence of sec. 506(a)(2)?
    Creditors will argue that they are and that the language used in the1st sentence effectively requires retail value for all secured property claims governed by sec. 506. Debtors will argue that the “retail” value standard does not apply to business property.
  2. B. The 2nd sentence of 506(a)(2):
    If property is secured by a claim governed by sec. 506, clearly “retail” value becomes the standard definition of the replacement value to be used.

4. 3 VALUATION STANDARDS

There would appear to be 3 valuation standards in bankruptcy, depending upon:

  • whether the property is business property or for personal use
  • whether the claim is secured by a “910 car” or incurred within 1 year of bankruptcy

The 3 standards:

  1. Fair Market Value (“FMV”)
  2. Replacement Value, not necessarily defined by “retail value” (“Replacement”)
  3. Replacement Value defined as “retail” value (“Replacement/Retail”)
Valuation Standards Under BAPCPA Is 506 applicable? FMV, "Replacement" or "Replacement and retail" Authority
 
REAL ESTATE
Unencumbered No FMV Predicated on the proposition that sec. 506 only applies to value of property subject to a lien requiring determination of secured status. "Fair Market Value" is used 1) because it has traditionally been the acceptable value and 2) because it is so stated under sec. 522(a)(2)
Secured by a lien (date incurred is not a factor) Yes Replacement / Retail - but FMV for all practical purposes because its unique and there are no market guides 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" AND 506(a)(2) 2nd sentence - "replacement value" is further defined as 'the price a retail merchant would charge" ... considering "age and condition"
 
CARS
Unencumbered No FMV Predicated on the proposition that sec. 506 only applies to value of property subject to a lien requiring determination of secured status. "Fair Market Value" is used 1) because it has traditionally been the acceptable value and 2) because it is so stated under sec. 522(a)(2)
Secured by a lien, debt incurred more than 910 days prior to filing - business use Yes Replacement 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" - "retail" language in 506(a)(2) 2nd sentence not applicable because property was not acquired for "personal, family, or household purposes"
Secured by a lien, debt incurred more than 910 days prior to filing - personal use Yes Replacement / Retail 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" AND 506(a)(2) 2nd sentence - "replacement value" is further defined as 'the price a retail merchant would charge" ... considering "age and condition"
Secured by a PMSI lien, debt incurred within the 910 days prior to filing - personal use No FMV (THE VALUE IS NOT EQUAL TO THE DEBT) Last para. 1325(a); "Fair Market Value" is used 1) because it has traditionally been the acceptable value and 2) because it is so stated under sec. 522(a)(2); creditor's "allowed secured claim" will be the debt but sec. 506 has nothing to do with that
Secured by a PMSI lien, debt incurred within the 910 days prior to filing - business use Yes Replacement 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" - "retail" language in 506(a)(2) 2nd sentence not applicable because property was not acquired for "personal, family, or household purposes"
 
OTHER PROPERTY
Unencumbered No FMV Predicated on the proposition that sec. 506 only applies to value of property subject to a lien requiring determination of secured status. "Fair Market Value" is used 1) because it has traditionally been the acceptable value and 2) because it is so stated under sec. 522(a)(2)
Secured by a lien (PMSI or not), debt incurred within 1 year of filing No FMV (THE VALUE IS NOT EQUAL TO THE DEBT) Last para. 1325(a); "Fair Market Value" is used 1) because it has traditionally been the acceptable value and 2) because it is so stated under sec. 522(a)(2); creditor's "allowed secured claim" will be the debt but sec. 506 has nothing to do with that
Secured by a lien, debt incurred more than 1 year prior to filing - business use Yes Replacement 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" - "retail" language in 506(a)(2) 2nd sentence not applicable because property was not acquired for "personal, family, or household purposes"
Secured by a lien, debt incurred more than 1 year prior to filing - personal use Yes Replacement / Retail 506(a)(2) 1st sentence - "replacement value without deductions for costs of sale or marketing" AND 506(a)(2) 2nd sentence - "replacement value" is further defined as 'the price a retail merchant would charge" ... considering "age and condition"

5. USE OF KELLEY BLUE BOOK AND NADA AS MARKET GUIDES

In cases where we need to determine retail value (either because the “Replacement / Retail” standard applies or because the “Replacement” standard as interpreted to overrule Rash’s footnote 6 applies) we will still continue to use market guides as our valuation sources admissible into evidence as an exception to the hearsay rule. Fed.R.Evid. 803(17).

  1. Retail Value under NADA
    (http://www.nadaguides.com)
    Average Retail Value
    An average retail vehicle should be clean and without glaring defects. Tires and glass should be in good condition. The paint should match and have a good finish. The interior should have wear in relation to the age of the vehicle. Carpet and seat upholstery should be clean, and all power options should work. The mileage should be within the acceptable range for the model year.
    An Average Retail vehicle on a dealer lot may include a limited warranty or guarantee, and possibly a current safety and/or emission inspection (where applicable).
  2. Retail Value under KBB
    (http://www.kbb.com)


    3. BLUE BOOK SUGGESTED RETAIL VALUE
    The Kelley Blue Book Suggested Retail Value is representative of dealers' asking prices and is the starting point for negotiation between a consumer and a dealer. This Suggested Retail Value assumes that the vehicle has been fully reconditioned and has a clean title history. This value also takes into account the dealers' profit, costs for advertising, sales commissions and other costs of doing business. The final sale price will likely be less depending on the vehicle's actual condition, popularity, type of warranty offered and local market conditions.
    Vehicle Condition Rating
    Excellent (Selected)

    "Excellent" condition means that the vehicle looks new, is in excellent mechanical condition and needs no reconditioning. This vehicle has never had any paint or body work and is free of rust. The vehicle has a clean title history and will pass a smog and safety inspection. The engine compartment is clean, with no fluid leaks and is free of any wear or visible defects. The vehicle also has complete and verifiable service records. Less than 5% of all used vehicles fall into this category.
    * Ohio 01/16/2006
    Blue Book Retail Value Assumes Excellent Condition
    This 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.

  3. The Differences - bottom to top
    4. 2003 Toyota 4Runner Sport Utility 4D Ltd - Model BU17 2004 Ford F150 Super Cab 5/12 bed - Model W14
    $17,135 Kelley Blue Book - Trade-In - Fair $15,425 Kelley Blue Book - Trade-In - Fair
    $19,245 Kelley Blue Book - Trade-In - Good $17,430 Kelley Blue Book - Trade-In - Good
    $20,060 Kelley Blue Book - Private Party Value - Fair $18,550 Kelley Blue Book - Trade-In - Excellent
    $20,400 Kelley Blue Book - Trade-In - Excellent $18,610 Kelley Blue Book - Private Party Value - Fair
    $21,825 Kelley Blue Book - Private Party Value - Good $20,320 Kelley Blue Book - Private Party Value - Good
    $23,145 Kelley Blue Book - Private Party Value - Excellent $21,620 Kelley Blue Book - Private Party Value - Excellent
    $24,300 NADA - Trade-In - Assumed to be "clean" $22,800 NADA - Trade-In - Assumed to be "clean"
    $26,035 Kelley Blue Book - Suggested Retail - Excellent $24,830 Kelley Blue Book - Suggested Retail - Excellent
    $27,725 NADA - Retail - Assumed to be "clean" $26,150 NADA - Retail - Assumed to be "clean"

 

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