LOCATION: New York State Capitol
DOCKET NO.: 96-454
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Fifth Circuit
CITATION: 520 US 953 (1997)
ARGUED: Apr 16, 1997
DECIDED: Jun 16, 1997
Carter G. Phillips - Argued the cause for the petitioner
John J. Durkay - Argued the cause for the respondents
Kent L. Jones - Department of Justice, on behalf of the United States, as amicus curiae, supporting the petitioner
Facts of the case
In 1992, Elray Rash filed a repayment plan under Chapter 13 of the Bankruptcy Code. Associates Commercial Corporation (ACC) was listed in the bankruptcy petition as a creditor holding a secured claim because it held a valid loan and lien on Rash's tractor truck. Ultimately to gain confirmation of his Chapter 13 plan and retain the truck, Rash invoked the "cram-down" provision of the Code. The cram-down provision allows a debtor to keep collateral over the objection of the creditor and requires the debtor to provide the creditor with payments that will total the present value of the collateral. At an evidentiary hearing, ACC maintained, under the "replacement-value" standard, that Rash would have to pay approximately $41,000 for a similar truck. Under the "foreclosure-value" standard, Rash maintained that the proper valuation was the net amount ACC would realize upon foreclosure and sale of the collateral, or approximately $31,875. The Bankruptcy Court adopted Rash's valuation figure and approved the plan. The District Court and the Court of Appeals affirmed.
Is the value of collateral, under the "cram-down" provision of the Bankruptcy Code, section 1325(a)(5)(B), determined by the "foreclosure-value" standard, or what a secured creditor could obtain through a foreclosure sale of the property?
Media for Associates Commercial Corp. v. RashAudio Transcription for Oral Argument - April 16, 1997 in Associates Commercial Corp. v. Rash
Audio Transcription for Opinion Announcement - June 16, 1997 in Associates Commercial Corp. v. Rash
No. 96-454, Associates Commercial Corporation versus Rash will be announced by Justice Ginsburg.
We resolve in this case a dispute concerning the proper application of Section 506(a) of the Bankruptcy Code when a bankrupt debtor has exercised an option called “cram down” for which Chapter 13 of the Code provides.
Specifically, when a debtor over a secured creditor's objection seeks to retain and use the creditor's collateral in a Chapter 13 plan is the value of the collateral to be determined by what the secured creditor could obtain through foreclosure sale of the property, the foreclosure value standard, what the debtor would have paid for comparable property, the replacement value standard, or the midpoint between these two measurements?
We hold that Section 506(a) directs application of the replacement value standard.
Petitioner, Associates Commercial Corporation, I will call the corporation ACC, holds a loan and lien on a tractor truck purchased by respondent, Elray Rash, for use in his freight hauling business.
When Rash filed a Chapter 13 petition, he invoked the Code's cram down option, proposing to retain the truck for use in his business and to pay ACC an amount equal to the present value of the truck.
ACC objected to the value, Rash had assigned to the truck.
ACC preferred to repossess the truck, an option the Code did not give to it.
The Fifth Circuit held that the value of the truck was its foreclosure value, the net amount ACC would obtain, if it repossessed and sold the truck.
We reverse the decision of the Fifth Circuit and hold that the value of the property retained in a Chapter 13 cram down is the cost the debtor would incur to obtain a like asset for the same proposed use.
The key sentence in Section 506(a) provides such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.
In a Chapter 13 proceeding, a debtor may either surrender the collateral to the creditor or retain it under the cram down power.
From the standpoint of the creditor, as well as the debtor, surrender on the one hand and retention on the other, are not equivalent acts.
The foreclosure value standard, the value we reject, attaches no significance to the different consequences or risks attending the debtor's surrender and retention of the collateral.
The replacement value standard, the standard we hold the statute requires accurately gauges the debtor's use of the property, that actual use rather than a foreclosure sale that will not take place is the proper guide under a statutory provision hinged to the property's disposition or use.
Similarly, evaluation that settles on the midpoint between foreclosure value and replacement value does not accord with the code's reference to disposition or use.
Justice Scalia joins all but footnote 4 of this opinion.
Justice Stevens has filed a dissenting opinion.