On March 27, 2014, the Eleventh Circuit (the “Court”) issued a ruling, which will have a major impact on how Chapter 7 and 13 debtors are able to treat claims of secured creditors. The issue in In re Brown, 13-13013, 2014 WL 1245266 (11th Cir. 2014) was whether §506(a)(2)’s valuation standard, which requires use of the “replacement value” method of valuating personal property, applies when a Chapter 13 debtor surrenders collateral to a secured creditor in full or partial satisfaction of the secured creditor’s claim. The Eleventh Circuit held that the replacement value, and not the foreclosure value, of collateral being surrendered as part of a Chapter 13 Plan is the required valuation method.

In Brown, the Debtor purchased a 37-foot recreational vehicle and entered into a loan agreement secured by the same. Subsequently, the Debtor filed a Chapter 13 bankruptcy petition in the U.S. Bankruptcy Court, Middle District of Georgia (the “Bankruptcy Court”).  Santander Consumer USA, Inc., the secured creditor (“Santander”), filed a secured proof of claim in the amount of $36,587.53, which represented the outstanding balance due on the loan. The Debtor’s Chapter 13 Plan (the “Plan”) proposed to surrender the recreational vehicle to Santander in full satisfaction of Santander’s claim.

The Debtor argued that the Bankruptcy Court was required to apply the replacement value to determine Santander’s secured claim. Santander objected, arguing that, pursuant to the Supreme Court’s ruling in Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879 (1997), the Bankruptcy Court should apply the foreclosure value. The Bankruptcy Court overruled Santander’s objection. Santander appealed to the District Court, which affirmed the Bankruptcy Court’s ruling. The case then went up to the Eleventh Circuit.

Section 1325 of the Code provides debtors with three alternative ways to treat secured claims: (i) the secured creditor can accept the plan, (ii) the debtor can retain the collateral and make payments to the secured creditor, or (iii) the debtor can surrender the collateral to the secured creditor. Rash held that cases involving the second option, retaining collateral, required use of the replacement value, while cases where a debtor surrendered collateral required use of the foreclosure value.

In concluding that Rash was inapplicable, the Court found it illustrative that post-Rash, BAPCPA added §506(a)(2)[1], which specifically provides that the replacement value is to be applied when the debtor is an individual in a case under chapter 7 or 13. The Bankruptcy Court found that the replacement value of the recreational vehicle equaled the debt amount, and thus, confirmed the Plan.

The Brown decision will have a major impact on secured creditors going forward. Because replacement values are normally higher than foreclosure values, the Brown holding will likely raise the instances in which a secured creditor is forced to accept its collateral in full satisfaction of its claim. This in turn will place the burden of selling the collateral and recouping the debt amount on the secured creditor.

[1] “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. 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.” 11 U.S.C.A. § 506. (emphasis added)