Replacement Value Governs Value of Surrendered Vehicle

Posted by NCBRC - April 9, 2014

Under section 506(a)(2), replacement value rather than foreclosure value is the proper measure of property securing an allowed claim where the debtor plans to surrender the property under section 1325(a)(5)(C). Santander Consumer USA v. Brown, No. 13-13013, — F.3d —-, 2014 WL 1245266  (11th Cir. March 27, 2014). Santander, the owner of the loan agreement, filed a claim for $36,587.53 secured by the debtor’s RV. In his chapter 13 plan, the debtor proposed to surrender the vehicle in full satisfaction of the claim. The issue was whether the value of the RV should be determined by its replacement value, defined in section 506(a)(2) as “price a retail merchant would charge for property of that kind considering the age and condition of the property,” as argued by the debtor, or whether it should be determined by its foreclosure value, as argued by the creditor. The bankruptcy court found that replacement value was the appropriate measure and confirmed Brown’s plan. The district court affirmed.

On appeal, Santander argued that the valuation of section 506(a)(2) does not apply when a debtor proposes to surrender the property under section 1325(a)(5)(C). Santander argued that under Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879 (1997), surrender implicates section 506(a)(1)’s “disposition and use” consideration when valuing property and that replacement value is used to determine value in a retention case, but foreclosure value is the appropriate standard in a surrender case.

Rash represents the flipside of this action. There, the debtor sought to retain the vehicle and he argued that it should be valued at foreclosure value which was less than its replacement value. The Supreme Court found that the “disposition and use” language of section 506(a) suggested that the valuation of the property at issue should depend upon the debtor’s intended use of the property, i.e. surrender or retention. It found that “when a debtor, over a secured creditor’s objection, seeks to retain and use the creditor’s collateral in a Chapter 13 plan . . . [w]e hold that §506(a) directs application of the replacement-value standard.” Rash, 520 U.S. at 955-56.

The Eleventh Circuit acknowledged that some courts have concluded that Congress enacted section 506(a)(2) in the 2005 amendments to codify the holding in Rash by explicitly providing that where the debtor is an individual in chapter 7 or chapter 13, replacement value applies to personal property securing an allowed claim. Although the Rash Court made a distinction between retention and surrender of the property, the statute does not. Rather, the Eleventh Circuit found, under rules of statutory interpretation, the specific provision in section 506(a)(2) relating to chapter 7 and 13 cases, rather than the more general valuing provision in section 506(a)(1), is controlling without regard to intended disposition of the property. Santander’s contention that section 506(a)(2) only applies to cases where the debtor retains the property would read a limitation into the statute that Congress did not place there.

As a practical matter, the court found that section 506(a)(2)’s valuation of property would not mean that all secured debts could be satisfied by surrender. Only that portion that is secured would be satisfied and the remainder would be treated as an unsecured claim. The fact that the court’s interpretation of section 506 could eliminate a creditor’s state law right to recover any deficiency after sale of secured property does not help the creditor as, where there is a conflict between bankruptcy law and state rights, bankruptcy law prevails.

Brown opinion 11th 2014

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