In re Brown: Replacement Value Applies Even When Debtor Surrenders Property


The recent Eleventh Circuit case of In re Brown, 746 F.3d 1236 (2014) held that 11 U.S.C. § 506(a)(2)'s replacement value standard applies even when a Chapter 7 or 13 debtor surrenders collateral under 11 U.S.C. § 1325(a)(5)(C). The Eleventh Circuit's decision in In re Brown has an important role in how personal property collateral will be valued in Chapter 7 and 13 cases in the Eleventh Circuit and thus its reasoning is important for creditors to understand.

The standard used in valuing collateral is vital for creditors because of its effect on determining what portion of a creditor's claim is secured or unsecured. Under § 1325(a)(5), a plan's treatment of an "allowed secured claim" can be confirmed if: the secured creditor accepts the plan, the debtor retains the collateral and makes payments to the creditor, or the debtor surrenders the collateral. 11 U.S.C. § 1325(a)(5)(A)-(C). The term "allowed secured claim" refers to § 506(a). See Associates Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997). Section 506(a)(1) bifurcates a secured creditor's allowed claim into secured and unsecured portions based on the underlying collateral's value and addresses how to determine value. A creditor's secured claim is equal to the judicially determined value of the collateral and its unsecured claim is equal to the amount of the debt that exceeds that judicially determined value. Because the standard used to value collateral has a major impact on the amount a creditor will receive from a debtor, it has been a source of major disagreement between debtors and creditors.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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