By: J. Ellsworth Summers, Jr. & Armando Nozzolillo
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.