Bankruptcy Judge Tony M. Davis of Austin, Texas, wrote a practice manual with everything you need to know about valuing an auto under Section 506(a).
The chapter 13 debtor owned an SUV encumbered with a $12,800 lien. In his schedules, the debtor valued the SUV at $6,700. The lender filed a claim for the same amount but alleged that the value was almost $10,000.
Confirmation of the chapter 13 plan depended on having Judge Davis decide that the auto was worth not much more than the debtor’s claimed value of $6,700.
Judge Davis’ April 15 opinion synthesizes the law on burden of proof and persuasion. It also explains the hearsay exception allowing the court to take price reports into evidence without accompanying expert testimony attesting to the accuracy of the reports. Of most significance, the opinion pinpoints evidence that debtors and lenders must produce to prevail.
Because the lender had some evidence, but none on the pivotal issue, the debtor won.
Since the lender attached no exhibits to its claim justifying the claimed value of the SUV, Judge Davis said that the lender assumed the “ultimate burden” of proving its claim by “the preponderance of the evidence” because the debtor’s objection to the claim proffered the Edmunds dealer retail value for average condition at $5,900.
Because the lender had the burden of proving the amount of the claim, Judge Davis said it also had the burden of proving the value of the collateral. Since the debtor had produced the Edmunds report showing a lower value, the judge said the burden shifted to the lender to show a higher value.
Judge Davis interpreted Sections 502(a)(1)-(2) as requiring evidence of “the price for which a retail car dealer would agree to sell” the SUV on the filing date.
At trial, the lender introduced an NADA (National Automobile Dealers Association) report into evidence showing a clean retail value of about $9,700. The debtor testified at trial that the SUV was in good mechanical condition but had deep scratches and light damage to the fenders.
Relying on decisions by other courts, Judge Davis said that the NADA report “typically overstates the replacement value” and is an “idealized standard that is rarely met.” He said courts often use an NADA report as the “starting point before deducting the costs of repairs to determine value.”
Since the Edmunds report might understate replacement value, Judge Davis said the value would be somewhere between the NADA and Edmunds prices.
The lender came up short, Judge Davis said, because it introduced no evidence about the cost of reconditioning to justify reliance on the NADA price report. The debtor, in contrast, testified about scratches and fender damage, and his schedules swore to a value of $6,700. The meager evidence produced or not produced governed how Judge Davis would rule.
On the one hand, the lender had no evidence to carry its burden of proof showing the proper reduction from the NADA’s reported value. On the other hand, the debtor’s schedules and testimony about minor damage were consistent with the idea that the SUV was “worth a little more” than the Edmunds value of $5,900.
Although the debtor’s evidence was “weak” and got “weaker” on cross examination, Judge Davis said it was the “only basis” on which to pick a final value between the two reports. Consequently, the judge pegged the SUV’s value at $6,700, the amount proffered by the debtor.
Judge Davis was not critical of the lack of expert testimony, saying that “the expense of expert testimony will rarely (if ever) be justified to establish the value of a debtor’s personal vehicle under Section 506(a).”