954
Syllabus
isolation, the phrase imparts no valuation standard. The first sentence, read as a whole, instructs that a secured creditor's claim is to be divided into secured and unsecured portions. The sentence tells a court what it must evaluate, but it is not enlightening on how to value collateral. Section 506(a)'s second sentence, however, speaks to the how question, providing that "[s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property." By deriving a foreclosure-value standard from § 506(a)'s first sentence, the Fifth Circuit rendered inconsequential the sentence that expressly addresses how "value shall be determined." The "proposed disposition or use" of the collateral is of paramount importance to the valuation question. Such "disposition or use" turns on which alternative the debtor chooses when a secured creditor refuses to accept the debtor's Chapter 13 plan—in one case the collateral will be surrendered to the creditor, and in the other, the collateral will be retained and used by the debtor. Applying a foreclosure-value standard attributes no significance to the different consequences of the debtor's choice. A replacement-value standard, on the other hand, distinguishes retention from surrender and renders meaningful the key statutory words "disposition or use." Surrender and retention are not equivalent acts. When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds. If a debtor keeps the property and continues to use it, the creditor obtains at once neither the property nor its value, and is exposed to double risks against which the Code affords incomplete protection: The debtor may again default and the property may deteriorate from extended use. Of prime significance, the replacement-value standard accurately gauges the debtor's "use" of the property. The debtor in this case elected to use the collateral to generate an income stream. That actual use, rather than a fore-closure sale that will not take place, is the proper guide under a prescription hinged to the property's "disposition or use." Pp. 960-963. (b) The Fifth Circuit considered the replacement-value standard disrespectful of Texas law, which permits the secured creditor to sell the collateral, thereby obtaining only its net foreclosure. In allowing Chapter 13 debtors to retain and use collateral over the objection of secured creditors, however, the Bankruptcy Code has reshaped debtor and creditor rights in marked departure from state law. It no more disrupts state law to make "disposition or use" the guide for valuation than to authorize the rearrangement of rights the cram down power entails. There is also no warrant in the Code for a valuation standard that uses the midpoint between foreclosure and replacement values. Pp. 964-965. 90 F. 3d 1036, reversed and remanded.
Page: Index Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 NextLast modified: October 4, 2007