United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
December 20, 2004
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
__________________________ Clerk
No. 03-11143
__________________________
In the Matter of: DAWN M. STEMBRIDGE
Debtor
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CHASE MANHATTAN BANK USA NA,
Appellant - Cross - Appellee,
versus
DAWN M. STEMBRIDGE,
Appellee - Cross - Appellant.
___________________________________________________
Appeals from the United States District Court
For the Northern District of Texas
___________________________________________________
Before DEMOSS, DENNIS, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
Creditor appeals from the bankruptcy court’s valuation of creditor’s secured collateral for the
purposes of confirming debtor’s cram-down plan. The bankruptcy court ruled that the value of the
collateral would be the greater of two values, one premised on the collateral’s foreclosure value as
of the petition date, and the other based o n the replacement value determined as of the plan
1
confirmation date. Because we hold that the bankruptcy court erred in its valuation, we reverse and
remand.
I.
On August 13, 1999, Dawn Stembridge (“Stembridge”) entered into a contract with King
Charles Hillard Ford to purchase a 1999 Ford F-150 StyleSide SuperCab with a V-8 engine (“the
Truck”). The total debt incurred by Stembridge under the contract was $32,244.03 (after a $1,000
down payment) to be paid in monthly installments of $414.69 beginning on Septem ber 12, 1999.
Chase Manhattan Bank USA (“Chase”) underwrote the purchase of the Truck, on which it owns a
properly-perfected lien.
On August 22, 2001, Stembridge filed for Chapter 13 bankruptcy relief. At that time,
Stembridge owed to Chase a balance of $22,946.57. On September 10, 2001, Stembridge filed a
preliminary plan that valued the Truck at $9,540.00—the Truck’s foreclosure value at the time. On
the same day, Stembridge filed an Authorization for Pre-Confirmation Disbursement (“APD”),
through which Stembridge was t o pay Chase $119.25 per month as adequate protection for the
Truck.1
Under Stembridge’s proposed plan, she was to keep the Truck over Chase’s objection under
the code’s so-called “cram-down” provision.2 See 11 U.S.C. § 1325(a)(5). Chase challenged the
proposed plan, arguing that Chase’s secured claim equaled the replacement value of the Truck, an
1
Under the Northern District of Texas’s General Order 98-4, the monthly payments were
calculated at 1.25% of the asset value. The $119.25 monthly payments were calculated from the
$9,540 foreclosure value of the Truck.
2
This provision of the code allows a debtor to retain and use secured collateral post-
confirmation. It is termed “cram-down” because the debtor may keep the collateral over the
creditor’s objection.
2
amount greater than the foreclosure value. Chase contended that the value should be determined as
of the petition filing date which, given the depreciation of the Truck, is an amount more than the
value determined as of the confirmation date. Chase also argued that the APD payments it received
were deficient because they were based on the Truck’s foreclosure value, and not the replacement
value.
The bankruptcy court ruled that Chase was entitled to the greater of two amounts: the
replacement value calculated at the time of plan confirmation (November 2002), or the “Trade
Value,” an amount premised on the foreclosure value of the Truck, determined as of the date that
adequate protection was first provided (September 2001).3 It concluded that the Trade Value was
greater ($12,825.00); subtracting the previously remitted APD payments ($1,311.75), the bankruptcy
court determined that in order to be confirmed, the plan needed to provide Chase the present value
of $11,513.25. The court also rejected Chase’s argument that the APD payments constituted
inadequat e pro tection for its depreciating collateral, holding that any deficiency was captured by
Chase’s secured claim. The district court affirmed the rulings of the bankruptcy court, and Chase
timely filed this appeal.
II.
In reviewing the ruling of a bankruptcy court, we use the same standard of review as the
district court. See, e.g., In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003). “Valuation is a mixed
question of law and fact, the factual premises being subject to review on a clearly erroneous standard,
and the legal conclusion being subject to de novo review.” In re T-H New Orleans Ltd. Partnership,
3
The bankruptcy court used the N.A.D.A. Official Used Car Guide Trade Value to
calculated the Trade Value. To determine the replacement value, the bankruptcy court averaged
the Used Car Guide with the Kelley Blue Book Private Party Value.
3
116 F.3d 790, 799 (5th Cir. 1997) (citing In re Clark Pipe & Supply Co., Inc., 893 F.2d 693, 697–98
(5th Cir. 1990)).
III.
Chase challenges two of the bankruptcy court’s rulings. The first is the court’s determination
that the Truck should be valued at the greater of two amounts: either the replacement value
determined as of November 2002 (the confirmation date), or the foreclosure value as of September
2001 (the date when the APD payments were authorized). In analyzing this holding, we are faced
with the following novel question: when should a bankruptcy court determine the value of a secured
claim for the confirmation of a plan under the code’s cram-down provision. Second, Chase
challenges the sufficiency of the APD payments, arguing that it has a § 507(b) priority claim for the
deficiency. We discuss each in turn.
A.
In order to value the amount of a creditor’s secured claim, § 506(a) states that the “value [of
an allowed secured claim] shall be determined in light of the purpose of the valuation and of the
proposed disposition or use of such property.” 11 U.S.C. § 506(a); see also Assocs. Commercial
Corp. v. Rash, 520 U.S. 953, 961 (1997). Valuation under § 506(a) thus differs depending on the
purpose and circumstances for which it is undertaken. In Rash, the Supreme Court held that, with
respect to confirmation of a cram-down under § 1325(a), § 506(a) requires a replacement-value
standard for determining the amount of an allowed secured claim for depreciating assets. Rash, 520
U.S. at 962. Only that value, the Court held, gave significance to the “purpose of the valuation” and
the “proposed disposition or use” of the property. Id. In doing so, the Court explicitly held that §
506(a) does not allow for a foreclosure value standard: “Applying a foreclosure-value standard when
4
the cram down option is invoked attributes no significance to the different consequences of the
debtor’s choice to surrender the property or retain it.” Id. Where, as here, the collateral is being
retained by the debtor for purposes of confirming a § 1325(a) cram-down plan, a foreclosure standard
is inappropriate. Id.
In valuing Chase’s secured claim at the initiation of APD payments, the bankruptcy court used
the Trade Value. In doing so, the bankruptcy court erred. The problem is not with the Trade Value
as such; bankruptcy courts have wide discretion in determining the replacement value. Rash, 520
U.S. at 963 n.6. Had the bankruptcy court determined that the replacement value was best captured
by the Trade Value, we would find no error. However, the bankruptcy court explicitly premised the
Trade Value on the foreclosure value of the vehicle, contrary to Rash’s holding. We see no
principled distinction, and Stembridge fails to propose any, between this case and Rash.4 The purpose
of this valuation, as in Rash, is for plan confirmation under § 1325(a). Because Rash’s holding
applies, we hold that the bankruptcy court erred in disregarding it.5
4
The only potential distinguishing feature is that a period of over a year elapsed between
the filing and the confirmation, whereas in Rash the filing and confirmation were
contemporaneous. This, however, is irrelevant to the disposition of the property post-
confirmation; even if one argues that as of the petition’s filing it is unclear whether the debtor will
ultimately retain the property, and thus it is possible that a foreclosure may take place, in this case
Stembridge retained the Truck throughout the pendency of bankruptcy. See Rash, 520 U.S. at
963 (“[T]he actual use, rather than the foreclosure sale that will not take place”—or in this
scenario, did not take place—“is the proper guide under a prescription hinged on the property’s
‘disposition or use.’”).
5
Although the bankruptcy court used the Trade Value to determine the extent of adequate
protection payments at the filing of the petition, Rash interprets § 506(a) with respect to cram-
downs only. Therefore, our holding does not extend to the bankruptcy court’s use of the Trade
Value to set the APD.
5
The bankruptcy court also ruled that the replacement value, determined as of the confirmation
date, is a possible benchmark for valuation of the Truck. The question with respect to this ruling is,
at what point in time should a secured asset be valued for the confirmation of a cram-down plan?6
This was not specifically addressed in Rash. We first note that the language of the cram-down
provision implies that the value should not be determined as of the confirmation date. Section
1325(a) states that “the value, as of the effective date of the plan, of property to be distributed . . .
is not less than the allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii). Because the value
of the secured creditor’s claim to be disbursed is as of the confirmation date—the “effective date of
the plan”—then by defining the allowed claim also as of the confirmation date, the words “is not less
than the allowed amount of such claim” become superfluous. Moreover, the code does not dictate
a valuation at some point between filing and confirmation. If the code provides for neither the
confirmation date nor some intermediate time before that date as the proper date for valuation, then
the value of the creditor’s interest must be determined vis-à-vis the amount of its interest at the
institution of the bankruptcy proceedings—i.e., the filing date.
The code’s scheme of protecting the value of an asset against depreciation from the date of
the filing provides support for this approach. The automatic stay is instituted at the filing of the
petition. See id. at § 362(a). It is at that point that the protection of secured creditors’ assets begins
with the provision of adequate protection: section 362 connects the continuation of the automatic stay
to the provision of adequate protection, which may be provided by “requiring the trustee to make a
6
We note that in many, if not most, cases involving a cram-down, the plan is confirmed
along with, or shortly thereafter, the filing of the original petition. Appellant’s counsel at oral
argument stated that many of the districts in this Circuit confirm plans concurrently with the filing
of the petition. In such cases, this valuation will pose little problem, as the filing and confirmation
dates will be roughly the same.
6
cash payment or periodic cash payments . . . to the extent that the stay under section 362 . . . results
in a decrease in the value of such entity’s interest in such property.” Id. at § 361(1) (em phasis
added). Therefore, the code specifically ensures the protection of a secured creditor’s assets against
any decrease in value from the beginning of the automatic stay, and, because the stay is instituted the
moment the petition is filed, the protection from depreciation also begins at that moment. This is the
tradeoff the automatic stay creates for creditors and debtors: creditors are prevented from seizing
their secured assets in order to provide debtors with “breathing room” to reorganize; in return, the
creditors’ present value is preserved throughout the reorganization through adequate protection (and
priority of its claim). It follows that this protection extends to the debtor’s proposed plan itself.
A later valuation date would eviscerate value of the secured creditor’s claim for a depreciating
asset—for each day after the filing, the value of the collateral decreases, and the deficiency is neither
captured through adequate protection nor, under the bankruptcy court’s test, the confirmation plan
itself. Moreover, the bankruptcy court’s order can result in an extra penalty to the creditor.
Adequate protection, properly defined, is the amount of an asset’s decrease in value from the petition
date. See, e.g., United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365,
370 (1988). Under the bankruptcy court’s formulation, adequate protection may sometimes be
deducted from the value of the replacement value as of the confirmation date. That value, however,
already reflects the amount of depreciat ion that the capital suffered from the petition date. By
deducting adequate protection from this amount, the bankruptcy court’s test may serve as a double
penalty upon the creditor with no warrant under the bankruptcy code.
Summarizing our analysis, the code entitles the secured creditor to the present value of its
claim at the institution of the automatic stay. Therefore, to the extent that the bankruptcy court based
7
the value of the Truck on its value as of the confirmation date, i t erred. We hold that in order to
confirm a plan under §1325(a), the value of the collateral should be determined as of the filing of the
petition, and that the plan should provide the replacement value less any adequate protection
payments already paid.7
B.
Chase also contends that the APD payments that Stembridge provided, namely the $119.25
monthly remittances, were insufficient because they were based on the Truck’s foreclosure value.
Chase argues that it is owed a § 507(b) priority claim for that alleged deficiency. Although a different
valuation standard may be necessary under § 506(a) for adequate protection payments, see 11 U.S.C.
§ 506(a); In re Stark, 311 B.R. 750, 756 (N.D. Ill. 2004), because we hold that Chase is entitled to
the replacement value as of the petition date, an amount that necessarily includes any deficiency in
adequate protection payments, we need not address this question.
IV.
Because the bankruptcy court erred in valuing the Truck, we REVERSE its decision and
REMAND the case to the bankruptcy court to determine the amount of Chase’s claim using the
replacement value of the Truck at the time of the filing.
7
This approach has already been adopted by at least one bankruptcy court in this Circuit.
See In re Longbine, 256 B.R. 470, 475 (S.D. Tex. 2000).
8