1. 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.

2. October 4, 2015Copyright © 2005-09 Randal C. Picker2 506 n Determination of secured status u (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.

3. October 4, 2015Copyright © 2005-09 Randal C. Picker3 506(a)(1) (Cont.) u 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.

4. October 4, 2015Copyright © 2005-09 Randal C. Picker4 Example n Numbers u Total Debt: $20,000 u Collateral Value: $5,000 u Secured Claim: $5,000 u Unsecured Claim: $15,000 n Language u Called “bifurcation” of the claim

5. October 4, 2015Copyright © 2005-09 Randal C. Picker5 506(b) n Determination of secured status (cont.) u (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.

6. October 4, 2015Copyright © 2005-09 Randal C. Picker6 Example n Total Debt: $20,000 n Collateral Value: $25,000 n Secured Claim: $20,000 n “Cushion”: $5,000 n SP can get in bankruptcy case up to $5,000 in interest and fees

7. October 4, 2015Copyright © 2005-09 Randal C. Picker7 506(c) n Determination of secured status (cont.) u (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.

8. October 4, 2015Copyright © 2005-09 Randal C. Picker8 506(c) Example n Collateral Value: $25,000 n Trustee Expenses of Preserving Collateral: $1000 n Benefit to Secured Party: $200 n Trustee can recover $200 from collateral, leaving value of $24,800

9. October 4, 2015Copyright © 2005-09 Randal C. Picker9 Rash: Determining Value under Sec. 506(a) n Purchase of Truck u 3/30/89: $73,700 new u Financed price less downpayment, with 60 monthly payments u Seller assigned paper and SI to Associates n Default u 3/18/92: Filed for bankruptcy u Owed ACC $41,171

10. October 4, 2015Copyright © 2005-09 Randal C. Picker10 Rash n Valuation Testimony u Rashes: ACC could foreclose and get $31,875 u ACC: Rashes would have to pay $41,000 to buy this truck in the marketplace n Plan u Keep truck u Pay ACC over 58 months PV of $28,500

11. October 4, 2015Copyright © 2005-09 Randal C. Picker11 Old Sec. 1325(a)(5) n (a) Except as provided in subsection (b), the court shall confirm a plan if – u (5) with respect to each allowed secured claim provided for by the plan – w (A) the holder of such claim has accepted the plan;

12. October 4, 2015Copyright © 2005-09 Randal C. Picker12 Old Sec. 1325(a)(5) Cont. w (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 w (C) the debtor surrenders the property securing such claim to such holder;

13. October 4, 2015Copyright © 2005-09 Randal C. Picker13 New Sec. 1325(a)(5) n (a) Except as provided in subsection (b), the court shall confirm a plan if – u (5) with respect to each allowed secured claim provided for by the plan – w (A) the holder of such claim has accepted the plan;

14. October 4, 2015Copyright © 2005-09 Randal C. Picker14 New Sec. 1325(a)(5) Cont. w (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

15. New Sec. 1325(a)(5) Cont. u (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 u (iii) if— w (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 October 4, 2015Copyright © 2005-09 Randal C. Picker15

16. New Sec. 1325(a)(5) Cont. w (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 u (C) the debtor surrenders the property securing such claim to such holder October 4, 2015Copyright © 2005-09 Randal C. Picker16

17. New Hanging Paragraph n The Text u 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. October 4, 2015Copyright © 2005-09 Randal C. Picker17

18. Definition of Motor Vehicle n 49 USC 30102(a)(6) u “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. October 4, 2015Copyright © 2005-09 Randal C. Picker18

19. October 4, 2015Copyright © 2005-09 Randal C. Picker19 How Should We Value the Truck? n Foreclosure Value? n Replacement Value n Something in Between?

20. October 4, 2015Copyright © 2005-09 Randal C. Picker20 Court’s Standard n The Rule u “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.”

21. October 4, 2015Copyright © 2005-09 Randal C. Picker21 Footnote 6 n 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.

22. October 4, 2015Copyright © 2005-09 Randal C. Picker22 Footnote 6 n 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.

23. October 4, 2015Copyright © 2005-09 Randal C. Picker23 Footnote 6 n 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.

24. October 4, 2015Copyright © 2005-09 Randal C. Picker24 Footnote 6 n 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.

25. New 506(a)(2) n Added in Sec. 327, Fair Valuation of Collateral, in the 2005 Act n 506(a)(2) u 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. October 4, 2015Copyright © 2005-09 Randal C. Picker25

26. New 506(a)(2) (Cont.) u 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. October 4, 2015Copyright © 2005-09 Randal C. Picker26

27. October 4, 2015Copyright © 2005-09 Randal C. Picker27 506(d) n Determination of secured status (cont.) u (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 - w (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or w (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.

28. October 4, 2015Copyright © 2005-09 Randal C. Picker28 Simple Example n Hypo u Allowed Claim of $1000 u B Ct values collateral at $600 u 506(a) bifurcation gives $600 secured claim, $400 unsecured claim u Trustee abandons property to secured creditor, who sells at foreclosure sale for $700

29. October 4, 2015Copyright © 2005-09 Randal C. Picker29 Simple Example n What happens? u Blackmun: Secured party keeps $700 and files unsecured claim for $300 u Scalia: ??? w Strip-down lien to $600 based on valuation? w Keep $600 and return $100 to estate to be divided among unsecured creditors pro rata?

30. October 4, 2015Copyright © 2005-09 Randal C. Picker30 Flip the Sequence n Hypo u Allowed Claim of $1000 u B Ct values collateral at $600 u 506(a) bifurcation gives $600 secured claim, $400 unsecured claim u Trustee distributes 25 cents on the dollar to unsecured creditors, so $100 to the creditor on the unsecured claim

31. October 4, 2015Copyright © 2005-09 Randal C. Picker31 Flip the Sequence u Trustee abandons property to secured creditor, who sells at foreclosure sale for $700 n What happens? u Blackmun: Secured party keeps $700 u Scalia: ??? w Strip-down lien to $600 based on valuation? w Keep $600 and return $100 to estate to be divided among unsecured creditors pro rata?

32. October 4, 2015Copyright © 2005-09 Randal C. Picker32 Why Another Example? n How does 506(d) operate in Blackmun’s world? u The point of the next example is to consider disallowance and lien stripping

33. October 4, 2015Copyright © 2005-09 Randal C. Picker33 Second Example n Zero Coupon Bond u Bond has a face amount of $1000 but pays no interest; due in one year u At time of sale of bond, bond sells for $900 u In effect, the $100 difference represents implicit interest on the $900 loan

34. October 4, 2015Copyright © 2005-09 Randal C. Picker34 Second Example n Debtor Bankruptcy u Debtor files for bankruptcy next day u Under 502(b)(2), the $100 should be disallowed as unmatured interest u So we have a $900 allowed claim and a $100 disallowed claim

35. October 4, 2015Copyright © 2005-09 Randal C. Picker35 Second Example n Introduce Security Interest u Suppose that the bond is secured by a piece of equipment u B Ct assigns $500 value to collateral n What does 506(a) do here? n What does 506(d) do here?

36. October 4, 2015Copyright © 2005-09 Randal C. Picker36 Bifurcation Analysis n Separating Claims under Sec. 506(a) u Secured Claim: $500 u Unsecured Claim: $400 n Next Step u If debtor keeps the property, see Rash u If debtor doesn’t keep the property, ???

37. October 4, 2015Copyright © 2005-09 Randal C. Picker37 Sequencing Again n If resolve secured claim first u Blackmun: w As before: asserts balance of owed allowed claim as unsecured claim in the case u Scalia: w Treat judicial valuation as final or allow reconsideration under 502(j)?

38. October 4, 2015Copyright © 2005-09 Randal C. Picker38 Unsecured Claim First n The Unsecured Claim u Assume paid 25 cents on the dollar, so $100 distribution on unsecured claim n The Secured Claim u Trustee in Ch 7 case will turnover property under Sec 554 or 725 u Secured creditor will conduct foreclosure sale

39. October 4, 2015Copyright © 2005-09 Randal C. Picker39 Unsecured Claim First u Possible Realizations: $400, $700, $850 n What happens? u Blackmun: w 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

40. October 4, 2015Copyright © 2005-09 Randal C. Picker40 Unsecured Claim First u Scalia w Keep value up to amount of allowed secured claim w Turnover balance to the estate