Redemption Value Is Hard to Put a Judicial Finger On

It is often said that variety is the spice of life. Well, it may be that there is too much spice
in the judicial recipe for the debtor's redemption of an automobile
pursuant to §722 of the Code. Statutory interpretation by the U.S.
Bankruptcy Court for the Northern District of Illinois, Eastern Division,
has resulted in three different methods of determining value in a §722
redemption proceeding: average trade in value, replacement value and the
mid-point between wholesale and retail value. In two of these cases, the
court rejected the standard adopted in <i>Associates
Commercial Corp. v. Rash,</i> 520 U.S. 953
(1997).

</p><h4>Average Trade-in Value</h4>

<p><i>In re Tripplett,</i> 256
B.R. 594 (Bankr. N.D. Ill. 2000), involved a chapter 7 debtor who proposed
to redeem a vehicle for a value set at the midpoint between NADA retail
and NADA wholesale price. The objecting creditor asked for full value of
the contract or at least the full replacement or retail value of the
vehicle. The court began its analysis with §722, which says:

</p><blockquote>
An individual debtor may, whether or not the debtor
has waived the right to redeem under this section, redeem tangible personal
property intended primarily for personal, family or household use, from a
lien securing a dischargeable consumer debt, if such property is exempted
under §522 of this title or has been abandoned under §544 of this
title, by paying the holder of such lien the amount of the allowed secured
claim of such holder that is secured by such lien.
</blockquote>

<p>In determining that the definition of "allowed
secured claim" meant a bifurcated claim under §506(a), the court
concluded, relying on legislative history and other case law, that the
debtor had to pay the creditor the value of the collateral, not the balance
due on the contract, in order to redeem. Undeterred, the creditor asserted
that <i>Rash</i> required
the debtor to pay "replacement" or retail value to redeem.

</p><p>Stating that <i>Rash</i> was not controlling because it involved a chapter 13
cramdown rather than a chapter 7 redemption, the court found that
legislative history indicates the liquidation value (<i>citing Triad Fin. Corp. v. Weathington (In re Weathington),</i> 254 B.R. 895, 899 (6th Cir. BAP 2000) (collecting
authorities) and <i>6 Lawrence P. King et al., Collier on Bankruptcy</i> ¶1722.05 at 722-9
(15th ed. rev. 2000)). The court held that the debtor's proposal to
pay an amount greater than "the average trade-in" was
sufficient to satisfy the "allowed secured claim.

</p><h4>Replacement Value</h4>

<p>Unwilling to ignore the precedent set out in <i>Rash,</i> the court in <i>In re Smith,</i> 307 B.R. 912
(Bankr. N.D. Ill. 2004), held that replacement value applies in the context
of a chapter 7 redemption. In this case, the debtor proposed to redeem the
vehicle by paying the creditor the wholesale value.

</p><blockquote><blockquote>
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<big><i><center>
The uncertainty resulting from these opinions certainly makes life for those debtors who want to keep a car rather difficult.
</center></i></big>
<hr>
</blockquote></blockquote>

<p>Beginning its analysis with the reference that
§722 does not set forth a valuation standard, the court stated that
such a determination is made under §506(a), which says:

</p><blockquote>

An allowed claim of a creditor secured by a lien on
property in which the estate has an interest, or that is subject to a
setoff under §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. <i>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</i> (emphasis provided) (<i>citing Associates Commercial v. Rash,</i> defining replacement value as "the price a willing buyer in the
debtor's trade, business or situation would pay to obtain like
property from a willing seller.")
</blockquote>

<i>Id.</i> at 960. The court
found that other language in <i>Rash</i> clearly rejected any different valuation standard under
§506(a) under different circumstances:

<blockquote>
As our reading of §506(a) makes plain, we also
reject a ruleless approach allowing use of different valuation standards
based on the facts and circumstances of individual cases. <i>Cf. In re Valenti,</i> 105 F.3d 55,
62-63 (2nd Cir. 1997) (permissible for bankruptcy courts to determine
valuation standard case by case). <i>Rash, Id.</i> at 964.

</blockquote>

<p>The court in <i>In re Smith</i> cited more than 12 other decisions that declined to apply <i>Rash</i> to redemptions in chapter 7
and concluded that those decisions were wrong in failing to follow that
authoritative ruling. The <i>Smith</i> court stated that <i>Rash</i> did not in any way limit the ruling to chapter 13 cramdown
cases.

</p><blockquote>
As we comprehend §506(a), the proposed
disposition or use of the collateral is of paramount importance to the
valuation question...the replacement value standard accurately gauges the
debtor's use of property.

</blockquote>

<i>Rash</i> at 962. The court
found it inappropriate to consult legislative history to "second
guess the Supreme Court" and concluded that there was no flexibility
in the law to allow for a different valuation standard in chapter 7 cases
without making a distinction between use and redemption and payoff. <i>Smith</i> at 919, 920, 307 B.R.
912.

<h4>Mid-point Between Wholesale and Retail Value</h4>

<p>The case of <i>In re Stark,</i> No. 03 B 44701 (Bankr. N.D. Ill. July 8, 2004), concludes the valuation trilogy
in Illinois by solidly staking out the middle ground previously suggested
by the National Bankruptcy Review Commission. The debtor in this case
scheduled a vehicle with a value of $20,000, scheduled the secured
creditor's claim against the vehicle at $38,000 and sought to redeem
the vehicle for $14,500. The creditor responded that the replacement value
standard applied. The NADA adjusted retail value was $18,850.

</p><p>Finding that redemption value was determined under
§§722 and 506(a), the court declined to follow either <i>In re Tripplett</i> or <i>In re Smith,</i> saying: "The
valuation issue cannot be resolved by resorting to either the statutory
text of §722 or its relevant legislative history." <i>Stark</i> at 755, 311 B.R. 750. The
court found no binding precedent. <i>Stark</i> at 755, 311 B.R. 705. Instead, the court adopted the
rationale of <i>In re Hoskins,</i> 102 F.3d 311, 312 (7th Cir. 1996), in accepting a mid-point valuation range between wholesale
and retail value. The court indicated that this pragmatic approach, based
on what parties to these valuation disputes usually negotiated, had a
distinct utilitarian advantage. <i>Stark</i> at 757, 311 B.R. 750.

</p><h4>What Is a Redemption Lender to Do?</h4>

<p>The uncertainty resulting from these opinions
certainly makes life for those debtors who want to keep a car rather
difficult. The effect of the Supreme Court ruling is not clear to the lower
courts. Perhaps that does not matter if market forces determine the
redemption value. There is a redemption lender on the scene who has laid
out its standards for loaning money to a redeeming creditor. <i>See</i> <a href="http://www.722redemption.com">http://www.722redemption.com</a&gt;. The standards
do not include looking to any of the above decisions, but in every
instance, the lender must decide whether the anticipated loan is a good
credit decision based on set lending parameters. The result may be that
vehicles will be redeemed for the value that will be obtained upon credit
in spite of judicial disagreement.

</p>