When a secured creditor makes the election under Section 1111(b) to have its claim treated as secured under a plan, the Fifth Circuit held that the court is not compelled to use either the filing date or the plan’s effective date as the time for valuing the collateral.
Instead, Circuit Judge Priscilla R. Owen held in her March 29 opinion that courts “have the flexibility to select the valuation date so long as the bankruptcy court takes into account the purpose of the valuation and the proposed use or disposition of the collateral at issue.”
The secured creditor was appealing adverse decisions in the two lower courts. In the circuit court, other creditors contended that the filing date was the required valuation date, in view of In re Stembridge, 394 F.3d 383 (5th Cir. 2004), where the Fifth Circuit held in a chapter 13 case that collateral must be valued on the filing date with regard to confirmation under Section 1325.
Although Judge Owen conceded that “some language” in Stembridge could be interpreted to be applicable in cramdown under any chapter of the Bankruptcy Code, she said the holding in that case was limited to chapter 13 plan confirmations. In any event, she said, “We decline to extend the per se valuation date of Stembridge to chapter 11 cramdowns.”
The Bankruptcy Code does not prescribe the valuation date for chapter 11, Judge Owen said. However, Section 506(a)(1) says that the value of a secured claim “shall be determined in light of the purpose of the valuation and the proposed disposition or use of such property.”
Section 1129(b)(2)(A)(i)(II) is also instructive. As part of the fair and equitable test, that section says that the secured creditor must receive payments totaling the allowed amount of the claim, “of a value, as of the effective date of the plan.”
The language in Section 1129(b)(2)(A)(i)(II) “is not superfluous,” Judge Owens said. It sets a floor but “does not provide any guidance as to how the initial valuation should be made. That is left to Section 506.”
Given that neither the Code nor precedent required adoption of any per se rule, Judge Owens said that her circuit would “would continue to follow the flexible approach to valuation timing that allows the bankruptcy court to take into account developments of the proceedings, as the value of collateral may vary dramatically based on its proposed use under any given plan.”
Although the bankruptcy court ostensibly used the proper flexible-timing approach, Judge Owen reversed because the lower court subtracted value from the valuation based on a debt that would never be paid.