Article Title: Chapter 13 Bankruptcy: Determining the Appropriate Fair Market Value
| Publication year | 2002 |
| Pages | 05-0 |
| Citation | Vol. 2002 No. 05 Pg. 05-0 |
05-0 (2002). Article Title: Chapter 13 Bankruptcy: Determining the Appropriate Fair Market Value
May, 2002
Article Title: Chapter 13 Bankruptcy: Determining the
Appropriate Fair Market Value
Author: Jason F. Barnes
Article Type
Articles
Article
The greatest struggle between a debtor and a secured creditor
in bankruptcy is determining the appropriate fair market
value of collateral. At best, this struggle is quickly
remedied at the meeting of the creditors, or through
stipulation, where both sides come to an agreement on the
fair market value of the collateral. At worst, both sides end
up before the bankruptcy court, putting forth evidence. In
such cases, the debtor risks the court either granting the
creditor's motion for "relief from the automatic
stay" or ultimately denying the debtor's plan for
reorganization. The creditor risks court costs and more
attorney fees, both of which add to the loss if the judge
decides in the debtor's favor
Background
When bankruptcy is filed, § 362(a) of the Bankruptcy
Code ("Code") stays most actions by creditors
against the debtor or the estate, including "any act to
collect, assess, or recover a claim... that arose before the
commencement of the case." §362(a)(6). The
creditor, however, can file a proof of claim stating what it
believes are the unsecured, unsecured priority, and secured
portions of the total amount owing "as of the date of
the filing of the petition." Bankr. Rule
("Rule") 3002(c) and Code §§ 501(a)
502(b), 506(a), and 507. A creditor has a secured claim to
the extent of the value of bankruptcy estate's interest
in the collateral. Any claim amount above that value is
unsecured. Code § 506.
The debtor asserts what he or she believes are the unsecured,
unsecured priority, and secured portions of the
creditors' claims in the plan for reorganization. Code
§ 1322. A conflict arises when the creditor's claim
amounts do not comport with the debtor's plan amounts.
If the debtor and creditor are unable to stipulate to the
secured amount and interest rate, the Code provides three
avenues for resolution: the debtor may surrender the
collateral, thereby satisfying the secured portion the
creditor is seeking (§ 1325(a) (5)(C)); the court may
deny confirmation of the debtor's plan and dismiss the
case (§ 1307(c)(5)); or, the debtor can invoke the
"cram down" power of Code § 1325(a)(5)(B), and
thereby keep the property over the creditor's objection.
This last option requires the debtor to ask the court to
determine the value of the collateral (§ 502(b)) and to
confirm the bankruptcy plan as it stands.
In Chapter 13 cases, when the court is asked to determine the
appropriate value, some courts require the parties to appear.
Other courts, however, allow a Chapter 13 debtor to file a
motion to confirm the plan by consent and resolve the
differences of opinion without having to attend a court
hearing. The Utah Bankruptcy Court allows this procedure in
Standing Order #3, ¦ 9.
To obtain confirmation by consent in Utah, the debtor files a
motion entitled "Motion to Confirm Plan by Consent,
Objection to Claims, and Motion for Allowance of Attorney
Fees" and sends a copy to the trustee and all the
creditors. The motion must list the secured claims that were
filed with the court and contrast those amounts with the
debtor's plan amounts. The motion must also contain a
notice that written objections to confirmation must be filed
with the clerk within 30 days of the confirmation hearing or
the court may confirm the plan as it stands. After the 30
days, if no objections are filed, the debtor can impose his
or her asserted values and interest rates on the secured
creditors if the court confirms the debtor's plan. (Code
§ 1327(a)). However, when the debtor's and
creditor's interests concerning value of the collateral
are polarized, the parties usually end up before the court,
asking it to decide which amount is right.
The debtor has many reasons to minimize the secured portion
of the creditor's claim. The main reason is to reduce the
debtor's payments under the plan. The debtor may not
reduce the secured portion of the creditor's claim, like
she can with unsecured non-priority claims. (Code §
1325(a)(5)(B))1. "Thus, a Chapter 13 plan can modify
contract terms such as the time, method and amount of
installment payments, and may modify the contract right to
accelerate the debt, to repossess, and to sell the
collateral...,"2 but it must maintain the value of the
secured claim. Therefore, it is in the debtor's best
interest to ensure that the creditor's claim does not
overstate the secured amount.
Another reason the debtor wants the creditor's secured
claim lower is that once the secured portion of the debt is
paid, the creditor must relinquish any title to the
collateral, even though an unsecured portion of that
creditor's claim remains to be paid under the plan.3
Thus, the smaller the secured claim, the sooner the debtor is
entitled to receive title to the collateral.
The creditor on the other hand would like to see a higher
secured claim. First, any debt above the secured portion of
the creditor's claim will be classified as unsecured and
thus be subject to a "cram down." Second, the
larger the secured claim, the more interest the creditor will
receive à which in turn helps compensate for the length of
time the debt will be tied up in bankruptcy. In addition, if
the fair market value of the collateral is greater than the
total amount owing (i.e. an over-secured claim), then the
debtor cannot "cram down" the interest rate to the
market rate, and must pay a higher rate of interest
(generally the contract rate of interest) on the
creditor's entire claim.4 The creditor will also be able
to seek post-petition attorney fees and costs, and
post-petition interest. Code § 506(b). Thus, oversecured
creditors receive more of the bankruptcy estate than do
undersecured creditors.
The creditor wants the secured amount to be higher because
secured claims are generally paid off before unsecured
claims. The more the creditor's claim is secured, the
faster the creditor will receive its money.
Thus, for opposing reasons, the creditor and the debtor will
frequently battle over the appropriate value of the
collateral, and the appropriate method of determining that
value.
Fair Market Value Analysis Determining the Value: An
Example
Consider the unsecured and secured portions of a
creditor's $30,000 claim in Chapter 13 if the collateral
is a 3/4 ton, 2000 Ford F-250, XLT, super duty crew cab with
a long bed, custom wheels, CD player, four leather captains
chairs, tinted windows, having only 5,000 miles, and in
excellent condition. The N.A.D.A. car guidebook may say that
average retail is $25,525 and that trade-in value is $22,575.
Kelly blue book may say that average retail is $27,980 and
average trade-in is $23,465. Further, the same truck may be
for sale at a local dealer for $31,000, and local classified
ads may advertise several similar trucks for sale by private
parties for $25,000 to $35,000. How is fair market value
determined?
General Rules
Code § 506(a) provides the starting point for valuing
collateral. It states that a claim:
...
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