Section 506(a)(1) of the Bankruptcy Code provides common-sense instruction that the allowed amount of a secured claim is equal to the value of the collateral securing the claim and that a claim is unsecured to the extent the claim exceeds such collateral value. The section goes on to provide that the value of collateral ”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.” However, the Bankruptcy Code fails to prescribe the date on which the value of collateral should be determined, except that Section 506(a)(2) provides that in a chapter 7 or 13 case, the value of personal property securing an allowed claim shall be determined as of the date the bankruptcy petition was filed. Just what date applies can have profound economic consequences since the determination of over or under collateralization affects the entitlement of secured creditors to attorneys’ fees, costs and charges, as well as interest on the claim under section 506(b) of the Bankruptcy Code.
As a consequence, courts continue to debate the proper date for valuing a secured creditor’s collateral. The latest decision in this regard is In re SW Boston Hotel Venture, LLC, 748 F.3d (1st Cir. Apr. 11, 2014). Two schools of thought prevail. Those courts adopting the “single valuation” approach hold that “the determination of oversecurity for section 506(b) purposes always occurs at a fixed point in time (generally either the petition date or the confirmation date).” Id. at 405. Others adopting the “flexible” approach hold that the bankruptcy court has “discretion to determine the appropriate measuring date based on the circumstances of the case.” Id.
In SW Boston Hotel Venture, the First Circuit adopted the “flexible” approach because, it reasoned, the fact that Congress included a date for valuation of a specific sort of property in a specific set of circumstances in section 506(a)(2), without mandating particular determination dates in subsection (a) (1), “suggests that it intended flexibility under” the latter. Moreover, the court thought the “flexible” approach permits bankruptcy courts to adopt “in each case the valuation method that is fairest given the prevailing circumstances.” Id. at 407. The court also thought that the “single valuation” approach can produce a result that “hinges more on fortuity than reality” such as where the value of collateral increases the day after the petition date or the day before confirmation. Indeed, in SW Boston Hotel Venture, at the commencement of the chapter 11, the secured lender sought relief from the stay to foreclose arguing it was undersecured; however, less than a year later, as a consequence of post-petition cash collateral payments to the lender and improvements to the property, the value of the lender’s collateral, as evidenced by a proposed sale, exceeded the value of the lender’s claim.
SW Boston Hotel Venture reminds us that valuation should not be regarded as a static condition but rather, a dynamic variable, and that all affected constituencies are well-advised to take the prospect of future changes in collateral value into consideration when formulating bankruptcy strategies and, most importantly, in determining when to deploy such strategies.