Valuing a Secured Claim: Who Knew That Retail Price Could Be So Elusive

21st Mortgage Corp. v. Glenn (In re Glenn), 900 F.3d 187 (5th Cir. 2018) –

In valuing a mobile home for purposes of determining the amount of a secured claim for a chapter 13 plan, the bankruptcy court declined to include delivery and setup costs. The district court affirmed, and the mortgagee appealed to the Fifth Circuit.

The debtor purchased a used mobile home for the “base price” of ~$30,000. The base price apparently included $4, 000 for delivery and the costs of blocking, leveling, and anchoring the mobile home as required by state law. The mortgagee financed the purchase and retained a purchase money security interest securing a claim of ~$28,000.

Under section 506(a)(1) of the Bankruptcy Code the allowed claim of a creditor that is secured by a lien on property of the bankruptcy estate is a secured claim to the extent of the value of the creditor’s interest in the collateral and an unsecured claim for the deficiency. This section directs that value shall be determined in light of the valuation purpose and “the proposed disposition or use of such property.”

In addition, under section 506(a)(2) the value of personal property securing a claim in an individual’s chapter 7 or 13 case “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.” Further, in connection with property acquired for personal use, replacement value means “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.”

The debtor’s chapter 13 bankruptcy plan provided that she would retain the mobile home and pay the mortgagee the secured value plus 5% interest over the life of the plan. The dispute concerned whether the delivery and set up costs should be included in the valuation of the secured claim. The court noted that because the debtor chose to retain the mobile home, she would not again incur the delivery and set up costs.

In addition to the language of section 506, both the bankruptcy court and district court relied on a Supreme Court case (Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 138 L.Ed.2d 148 (1997)) that emphasized the statutory mandate to consider the proposed disposition or use of the property.

The mortgagee argued that since section 506(a)(2) requires determination of replacement value without deducting the cost of sale or marketing, delivery and setup costs should also be included. According to the mortgagee, replacement value should mean the price a retail merchant would charge for similar property, which in this case would necessarily include delivery and setup costs. It further argued that Rash did not apply since it was decided before section 506(a)(2) was added to the Bankruptcy Code.

Although the debtor did not submit a brief, the US trustee’s office supported the district court’s decision, arguing among other things that the retail price should be the price of the mobile home itself, and not all of the costs incurred in connection with the purchase.

The Fifth Circuit began with the plain text of section 506(a). It saw nothing that required applying section 506(a)(2) to the exclusion of section 506(a)(1), and nothing that prohibited considering the proposed disposition or use. Moreover, it noted that Rash emphasized that the proposed disposition or use was of “paramount importance to the valuation question.”

In Rash the Supreme Court held that when a debtor proposed to exercise the “cramdown” option and retain the creditor’s collateral in a chapter 13 plan, replacement value was appropriate. The court went on to say that the retail value should not include portions of the price reflecting value of items the debtor would not receive when retaining the property. For example, when retaining a vehicle, the value should not include items such as warranties, inventory storage, and reconditioning.

Given the language of section 506 and the Rash decision, the Fifth Circuit determined that it should use the replacement value for a mobile home that was already fixed in place, and thus would not need delivery or set up. It further concluded that the section 506(a)(2) requirement that sale and marketing costs be included did not extend to all tangential costs.

Accordingly, the court affirmed the lower court decision.

The Fifth Circuit went on to note that other courts have uniformly rejected including relocation and set up costs when determining value. That seems a little surprising. The mortgagee’s argument was plausible, and a rule of thumb is that usually one can find a bankruptcy decision to support almost any position.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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