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Class 5 Bankruptcy, Spring, 2000 Secured Claims Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/[email protected] Copyright © 2005-09 Randal C. Picker. All

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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.

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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.

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Example

Numbers Total Debt: $20,000 Collateral Value: $5,000 Secured Claim: $5,000 Unsecured Claim: $15,000

Language Called “bifurcation” of the claim

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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.

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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

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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.

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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

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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

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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

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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;

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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;

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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;

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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

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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

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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.

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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.

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How Should We Value the Truck?

Foreclosure Value? Replacement Value Something in Between?

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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.”

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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?

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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

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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?

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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

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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

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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

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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?

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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, ???

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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)?

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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

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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

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Unsecured Claim First

Scalia Keep value up to amount of allowed secured

claim Turnover balance to the estate