The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge
MEMORANDUM, OPINION AND ORDER
The appellants and debtors, Robert and Maritza Feliciano, have
appealed a ruling of the bankruptcy court denying their
uncontested motion to redeem a vehicle under 11 U.S.C. § 722. For
the reasons set forth below, we reverse the bankruptcy court's
order denying the debtor's motion for redemption and remand the
case for further consideration in accord with this opinion.
Appellants filed a motion to redeem a 1996 Pontiac Grand Am
("vehicle") from Nationwide Acceptance Corporation ("creditor")
under 11 U.S.C. § 722 for the amount of $2,345.00. The amount was
based on the value provided by a vehicle condition report
prepared using the Kelly Blue Book. The uncontested motion was
first presented on February 26, 2004 and was continued to March
16, 2004 under the bankruptcy court's request that the appellants
(1) verify the motion was served on the creditor at the address
for service of process filed with the Illinois Secretary of
State; (2) verify the creditor had filed a claim in the case; and
(3) provide evidence of retail value.
On March 16, 2004, the appellants informed the bankruptcy court
that the creditor had been properly served and had not filed a
proof of claim. After reading definitions of various values from trade publications, the court continued the matter to
March 23, 2004 and directed appellants' counsel to submit further
evidence of the vehicle's liquidation value.
On March 23, 2004, the bankruptcy court issued an oral judgment
denying the debtor's redemption motion because (1) the evidence
of value presented as an exhibit to the redemption motion a
vehicle condition report based on the Kelly Blue Book trade-in
value was inadmissible hearsay, and (2) the Supreme Court's
decision in Associates Commercial Corp. v. Rash, 520 U.S. 953
(1997), mandates that collateral be redeemed for its retail or
replacement value. On March 30, 2004, appellants filed their
notice of appeal with this Court.
Under 11 U.S.C. § 722, Chapter 7 debtors are entitled to a
right of redemption:
An individual debtor may . . . redeem tangible
personal property intended primarily for personal,
family, or household use, from a lien securing a
dischargeable consumer debt . . . by paying the
holder of such a lien the amount of the allowed
secured claim. . . .
The amount to be paid by the debtor to the lien holder "shall be
determined in light of the purpose of the valuation and of the
proposed disposition or use of such property. . . ."
11 U.S.C. § 506(a). In this case, the appellants are seeking to redeem their
1996 Pontiac Grand Am for personal use.
In the event a Chapter 7 debtor does not seek to redeem the
collateral, as the appellants here do, and the property is
surrendered and the creditor is left with the option of selling
the vehicle at auction and recouping its foreclosure or
liquidation value. The appellants in this case argue that they
should have to pay only the liquidation value of the vehicle, as
that is the price the creditor would receive if the debtors opted
to surrender the collateral.
The bankruptcy court, however, disagreed and held that the
Supreme Court's decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997),
mandates that collateral be redeemed for its retail or
replacement value. In Rash, the Court analyzed the valuation
language under 11 U.S.C. § 506(a) for purposes of determining the
value a debtor must pay to a secured creditor when exercising the
so-called cram down provision of Chapter 13.
11 U.S.C. § 1325(a)(5)(B); Rash, 520 U.S. at 962. The cram down provision
is different than the redemption provision under Chapter 7. Under
the cram down provision, the debtor may keep the collateral over
the creditor's objection and pay the creditor, over the life of
the plan, the equivalent of the present value of the property.
Id. Under this option, the creditor does not receive possession
of the collateral, nor does it receive the value of the property
immediately. Instead, the debtor makes installment payments to
the creditor, subjecting the creditor to the risk of the
collateral depreciating over the life of the installment payments
and to the risk the debtor may default.
To compensate for the creditor's risks under the cram down
provision, the Supreme Court in Rash concluded that the
appropriate value to assign collateral in the Chapter 13 context
is the replacement value, which it defined as the "amount a
willing buyer in the debtor's trade, business, or situation would
pay a willing seller to obtain property of like age and
condition." Rash, 520 U.S. at 960. The Court concluded that the
replacement value, as opposed to the foreclosure or liquidation
value (the net value a creditor could realize through a
foreclosure sale), distinguishes the Chapter 13 debtor's
retention of the collateral from the surrender of the collateral
over the installment period and "renders meaningful the key words
`disposition or use'" under 11 U.S.C. § 506(a). Id. at 962. The
creditor, in other words, receives a premium for the risks
associated with debtor's exercising of its Chapter 13 rights.
We believe the Court's holding in Rash, however, is limited
to the context of the debtor exercising its rights under Chapter 13. The Court's use of
language was confined to the cram down context: "In sum, under §
506(a), the value of property retained because the debtor has
exercised the § 1325(a)(5)(B) `cram down' option is the cost the
debtor would incur to obtain a like asset for the same `proposed
use.'" Rash, 520 U.S. 963. We agree with courts that have held
that, if the Supreme Court intended for its interpretation of §
506(a) to apply to other provisions of the Bankruptcy Code, it
would not have included the limiting clause "because the debtor
has exercised the § 1325(a)(5)(B) `cram down' option." Smith v.
Household Automotive Finance Corp., 313 B.R. 267, 269 (N.D. Ill.
2004). "[T]he Court, consistent with § 506(a)'s requirement that
valuation be determined `in light of the purpose of the
valuation,' limited its holding to Chapter 13's cram down
As § 506(a) sets forth, valuation is to be determined "in light
of the purpose of the valuation and of the proposed disposition
or use of such property." Bankruptcy courts that have issued
written opinions on this subject have focused on the same
economic distinctions the Court outlined in Rash. See Smith,
313 B.R. at 269; In re Weathington, 254 B.R. 895, 901 (6th Cir.
BAP 2000); In re Tripplett, 256 B.R. 594, 598 (N.D. Ill. 2000).
Unlike the Chapter 13 cram down provision, the creditor under the
redemption provision of Chapter 7 is free to liquidate the
property and obtain immediate payment. The creditor does not have
to wait for installment payments and suffer the risks of
depreciation and default. We thus agree with the majority view
that liquidation (not the higher retail or replacement value) is
the appropriate value to assign collateral in the context of a
Chapter 7 motion for redemption. In re Tripplett,
256 B.R. at 598 ("[T]here appear to be no reported decisions adopting
replacement cost for valuing secured claims in the context of
redemption, while numerous decisions have adopted the liquidation standard.").
In addition, the legislative history of 11 U.S.C. § 722
supports this view. "This [redemption] right allows the debtor to
retain his necessary property and avoid high replacement costs,
and does not prevent the creditor from obtaining what he is
entitled to under the terms of his contract." H.R. Rep. No.
95-595 at 122 (1977) reprinted in U.S.C.C.A.N. 5963. One
bankruptcy court has concluded that Congress "intended to place
the creditor in the same position it would have been in had the
property not been redeemed and the creditor had repossessed and
caused a sale of such property." In re Donley, 217 B.R. ...