Class 5 Bankruptcy, Spring, 2000 Secured Claims 11/7/2018 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/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Example Numbers Total Debt: $20,000 Collateral Value: $5,000 Secured Claim: $5,000 Unsecured Claim: $15,000 Language Called “bifurcation” of the claim November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Rash: Determining Value under Sec. 506(a) 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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; November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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; November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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; November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Definition of Motor Vehicle 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

How Should We Value the Truck? 11/7/2018 How Should We Value the Truck? Foreclosure Value? Replacement Value Something in Between? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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.” November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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. November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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, ??? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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)? November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 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 November 7, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/7/2018 Unsecured Claim First Scalia Keep value up to amount of allowed secured claim Turnover balance to the estate November 7, 2018 Copyright © 2005-09 Randal C. Picker