Class 5Bankruptcy, Spring, 2000
Secured Claims
Randal C. PickerLeffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 2
506
Determination of secured status (a)(1) An allowed claim of a creditor secured by a
lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 3
506(a)(1) (Cont.)
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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 4
Example
Numbers Total Debt: $20,000 Collateral Value: $5,000 Secured Claim: $5,000 Unsecured Claim: $15,000
Language Called “bifurcation” of the claim
April 19, 2023 Copyright © 2005-09 Randal C. Picker 5
506(b) Determination of secured status (cont.)
(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statue under which such claim arose.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 6
Example
Total Debt: $20,000 Collateral Value: $25,000 Secured Claim: $20,000 “Cushion”: $5,000 SP can get in bankruptcy case up to
$5,000 in interest and fees
April 19, 2023 Copyright © 2005-09 Randal C. Picker 7
506(c)
Determination of secured status (cont.) (c) The trustee may recover from property
securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 8
506(c) Example
Collateral Value: $25,000 Trustee Expenses of Preserving Collateral:
$1000 Benefit to Secured Party: $200 Trustee can recover $200 from collateral,
leaving value of $24,800
April 19, 2023 Copyright © 2005-09 Randal C. Picker 9
Rash: Determining Value under Sec. 506(a)
Purchase of Truck 3/30/89: $73,700 new Financed price less downpayment, with 60
monthly payments Seller assigned paper and SI to Associates
Default 3/18/92: Filed for bankruptcy Owed ACC $41,171
April 19, 2023 Copyright © 2005-09 Randal C. Picker 10
Rash
Valuation Testimony Rashes: ACC could foreclose and get
$31,875 ACC: Rashes would have to pay $41,000 to
buy this truck in the marketplace Plan
Keep truck Pay ACC over 58 months PV of $28,500
April 19, 2023 Copyright © 2005-09 Randal C. Picker 11
Old Sec. 1325(a)(5)
(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;
April 19, 2023 Copyright © 2005-09 Randal C. Picker 12
Old Sec. 1325(a)(5) Cont.
(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
(C) the debtor surrenders the property securing such claim to such holder;
April 19, 2023 Copyright © 2005-09 Randal C. Picker 13
New Sec. 1325(a)(5)
(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;
April 19, 2023 Copyright © 2005-09 Randal C. Picker 14
New Sec. 1325(a)(5) Cont.
(B)(i) the plan provides that—• (I) the holder of such claim retain the lien
securing such claim until the earlier of—– (aa) the payment of the underlying debt determined
under nonbankruptcy law; or; and– (bb) discharge under section 1328; and;
• (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law
New Sec. 1325(a)(5) Cont.
(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; and
(iii) if— (I) property to be distributed pursuant to this
subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and
April 19, 2023 Copyright © 2005-09 Randal C. Picker 15
New Sec. 1325(a)(5) Cont.
(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or
(C) the debtor surrenders the property securing such claim to such holder
April 19, 2023 Copyright © 2005-09 Randal C. Picker 16
New Hanging Paragraph
The Text 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 preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 17
Definition of Motor Vehicle
49 USC 30102(a)(6) “motor vehicle” means a vehicle driven or
drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 18
April 19, 2023 Copyright © 2005-09 Randal C. Picker 19
How Should We Value the Truck?
Foreclosure Value? Replacement Value Something in Between?
April 19, 2023 Copyright © 2005-09 Randal C. Picker 20
Court’s Standard
The Rule “In such a ‘cram down’ case, we hold, the
value of the property (and thus the amount of the secured claim under section 506(a)) is the price a willing buyer in the debtor’s trade or business, or situation would pay to obtain like property from a willing seller.”
April 19, 2023 Copyright © 2005-09 Randal C. Picker 21
Footnote 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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 22
Footnote 6
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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 23
Footnote 6
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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 24
Footnote 6
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.
New 506(a)(2)
Added in Sec. 327, Fair Valuation of Collateral, in the 2005 Act
506(a)(2) If the debtor is an individual in a case under chapter
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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 25
New 506(a)(2) (Cont.)
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.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 26
April 19, 2023 Copyright © 2005-09 Randal C. Picker 27
506(d)
Determination of secured status (cont.) (d) To the extent that a lien secures a claim
against the debtor that is not an allowed secured claim, such lien is void, unless -
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
April 19, 2023 Copyright © 2005-09 Randal C. Picker 28
Simple Example
Hypo Allowed Claim of $1000 B Ct values collateral at $600 506(a) bifurcation gives $600 secured
claim, $400 unsecured claim Trustee abandons property to secured
creditor, who sells at foreclosure sale for $700
April 19, 2023 Copyright © 2005-09 Randal C. Picker 29
Simple Example
What happens? Blackmun: Secured party keeps $700 and
files unsecured claim for $300 Scalia: ???
Strip-down lien to $600 based on valuation? Keep $600 and return $100 to estate to be
divided among unsecured creditors pro rata?
April 19, 2023 Copyright © 2005-09 Randal C. Picker 30
Flip the Sequence
Hypo Allowed Claim of $1000 B Ct values collateral at $600 506(a) bifurcation gives $600 secured
claim, $400 unsecured claim Trustee distributes 25 cents on the dollar to
unsecured creditors, so $100 to the creditor on the unsecured claim
April 19, 2023 Copyright © 2005-09 Randal C. Picker 31
Flip the Sequence
Trustee abandons property to secured creditor, who sells at foreclosure sale for $700
What happens? Blackmun: Secured party keeps $700 Scalia: ???
Strip-down lien to $600 based on valuation? Keep $600 and return $100 to estate to be divided
among unsecured creditors pro rata?
April 19, 2023 Copyright © 2005-09 Randal C. Picker 32
Why Another Example?
How does 506(d) operate in Blackmun’s world? The point of the next example is to consider
disallowance and lien stripping
April 19, 2023 Copyright © 2005-09 Randal C. Picker 33
Second Example
Zero Coupon Bond Bond has a face amount of $1000 but pays
no interest; due in one year At time of sale of bond, bond sells for $900 In effect, the $100 difference represents
implicit interest on the $900 loan
April 19, 2023 Copyright © 2005-09 Randal C. Picker 34
Second Example
Debtor Bankruptcy Debtor files for bankruptcy next day Under 502(b)(2), the $100 should be
disallowed as unmatured interest So we have a $900 allowed claim and a
$100 disallowed claim
April 19, 2023 Copyright © 2005-09 Randal C. Picker 35
Second Example
Introduce Security Interest Suppose that the bond is secured by a
piece of equipment B Ct assigns $500 value to collateral
What does 506(a) do here? What does 506(d) do here?
April 19, 2023 Copyright © 2005-09 Randal C. Picker 36
Bifurcation Analysis
Separating Claims under Sec. 506(a) Secured Claim: $500 Unsecured Claim: $400
Next Step If debtor keeps the property, see Rash If debtor doesn’t keep the property, ???
April 19, 2023 Copyright © 2005-09 Randal C. Picker 37
Sequencing Again
If resolve secured claim first Blackmun:
As before: asserts balance of owed allowed claim as unsecured claim in the case
Scalia: Treat judicial valuation as final or allow
reconsideration under 502(j)?
April 19, 2023 Copyright © 2005-09 Randal C. Picker 38
Unsecured Claim First
The Unsecured Claim Assume paid 25 cents on the dollar, so
$100 distribution on unsecured claim The Secured Claim
Trustee in Ch 7 case will turnover property under Sec 554 or 725
Secured creditor will conduct foreclosure sale
April 19, 2023 Copyright © 2005-09 Randal C. Picker 39
Unsecured Claim First
Possible Realizations: $400, $700, $850 What happens?
Blackmun: Keep full value up to receiving total of $900
(full allowed amount of claim)• So keep all of $400 and $700, turnover $50 from
$850