Why secured claims matter
 Because they get paid first!!
 Out of the value of their “collateral”
Problem 6.1
 Assets:
 $80K home /
 subject to 2 mortgages (One $70K, Two 15K) / exemption claim of $15K
 $10K Pontiac /
 subject to security interest (GMAC $7K) / exemption claim of $3K
 $5K Volvo
 $15K household goods & furnishings /
 subject to exemption claim $15K
 $15K bank account
 Debts:
 $70K Bank One (secured by 1st mortgage on home)
 $15K Bank Two (secured by 2nd mortgage on home)
 $7K GMAC (secured by security interest in Pontiac)
 $20K Bush
 $10K Gore
 $5K Bubba
Answer 6.1
1st, secured claims & exemptions:
 House ($80K):
 70K – Bank One 1st mortgage
 10K – Bank Two 2nd mortgage

Balance of $5k for Bank Two is unsecured
 $15K exemption claim worthless (consensual mortgages beat)
 Pontiac ($10K):
 7K – GMAC security interest
 3K - DR (exempt)
 Household goods & furnishings ($15K)
 15K – all to Dr (exempt)
6.1, cont.
2nd, Balance of estate divided pro rata among unsecured
creditors
 Unencumbered, nonexempt assets (total $20K):
 $5K Volvo
 $15K bank account
 Unsecured creditors (total $40K)
 $5K Bank Two deficiency (15 -10)
 $20K Bush
 $10K Gore
 $5K Bubba
 Thus Trustee distributes $20K in assets to $40K unsec debts
 So each unsecured creditor gets 50% (1/2) on their claim
definition
 What is a “secured” claim?
 See 506(a)(1):
 Allowed claim of a creditor
 Either


Secured by a lien on estate property
Or subject to setoff under 553
3 questions
 1. does a secured claim exist at all, and if so, to what
extent?
 2. what is the substantive entitlement of secured
creditor?
 3. by what procedural means enforce those
substantive rights?
st
1
Q: existence and extent
 4 steps:
 1. is the underlying claim “allowed”?
 2. is there a valid lien or setoff right under
nonbankruptcy law?
 3. can bankruptcy trustee avoid the lien? (see chapter 9)
 4. what is the value of the secured claim?
Allowed?
 Secured creditor must have its underlying claim
“allowed” – by filing a proof of claim, as we discussed
in ch. 5 – if it wants to get paid IN the bankruptcy case
itself
 However, does not have to do so – can stand aloof from
bankruptcy case, and lien, unless avoided, will ride
through the bankruptcy case and be enforceable after
bankruptcy against the collateral
 See Long v. Bullard, 117 U.S. 617 (1886)
Underlying law controls
 Bankruptcy law does not create secured claims
 Look to the underlying law (e.g., state law) to see
whether the creditor has a “lien” or a “setoff” right
 Bankruptcy law then says how that secured claim will
be enforced vis-à-vis everyone else
Different sorts of secured claims
 1. “security interest” 101(51)
 All consensual liens, including Article 9 security
interests and real estate mortgages
 2. “judicial lien” 101(36)
 Execution liens, etc
 3. “statutory lien” 101(53)
 Example = mechanics liens
 4. right of “setoff” 553(a)
Avoiding powers?
 Trustee in bankruptcy might be able to “avoid” or set
aside a lien
 Will discuss in chapter 9
 Most common:
 1. “strong-arm” clause, 544(a)

If not perfected at time bankruptcy case filed
 2. preference, 547

If got lien in 90 days before bankruptcy to secured a
preexisting debt
How much is secured claim?
 3 steps:
 1. Estate’s interest in the collateral

E.g., does the estate have the entire interest in the collateral, or
does it perhaps share, for ex. as a joint tenant?
 2. Secured creditor’s interest in the estate’s interest

E.g., 1st lien? 2nd lien?
 3. value of the collateral

Will discuss in Part B. – Rash, 506(a)(1) & 506(a)(2), plus
special rule in chapter 13
Problem 6.2(a) “allowed secured claim”
 Facts:
 Collateral value = $10K
 Creditor’s claim = $14K
 No other liens on collateral
 Answer:
 Secured = $10K (collateral value)
 Unsecured = $4k (deficiency) – see 506(a)(1)
6.2(b)
 Facts:
 Collateral value = $10K
 1st lien = $6K
 Creditor, 2nd lien = $14K
 Answer:
 Secured = $4k (collateral 10 – 1st lien 6)
 Unsecured = $10K
6.2(c)
 Facts:
 Collateral value = $10K
 Debtor owned as tenant in common with sister
 Creditor claim = $14K
 Answer:
 Secured = $5K (the extent of estate’s interest – ½ of 10)
 Unsecured = $9K
6.2(d)
 Facts:
 Collateral value = $20K
 Creditor’s claim = $14K, plus 10% per annum interest
 How much after one year in chapter 11?
 Answer:
 $15,400 secured


$14K principal
$1,400 postpetition interest under 506(b)
6.2(e)
 Facts:
 Same facts as (d) (e.g., collateral = $20K, creditor
principal claim at date of bankruptcy = $14k, plan
confirmation one year into case)
 Except instead of consensual interest, the 10% interest
rate is based on a state statutory judgment rate
 Answer:
 Same as (d) -- $15,400 -- $14K principal + $1,400
postpetition interest under 506(b) since oversecured
 Supreme Court so held in Ron Pair
6.2(f)
 Facts:
 Collateral value = $15k
 Creditor claim petition date = $14k
 10% interest
 One year in chapter 11 – how much is secured claim?
 Answer:
 $15K


$14K principal
$1K postpetition interest – up to the collateral value, 506(b),
but then disallow postpet. interest 502(b)(2)
6.2(g)
 Facts:
 Dr -> Cr $14K on loan
 Cr -> Dr $10K in checking account
 Answer:
 Secured = $10K – amount subject to setoff right (the
balance in checking account)

In effect the Cr can treat the checking account balance as
“collateral”
 Unsecured = $4K
Substantive entitlement
 A holder of an allowed secured claim is entitled to
receive in bankruptcy the value of their collateral
interest
 This is both as a matter of constitutional law and
bankruptcy policy
 Was tested in a series of Depression-era cases
Procedural means?
 Holder of an allowed secured claim is NOT, however,
entitled to insist in bankruptcy on being able to
capture their substantive entitlement via the same
procedural means they’d be able to use outside of
bankruptcy
 May be blocked from doing the repo / foreclosure
game
 Because the estate’s interest may dictate otherwise
 As long as we can preserve the secured creditor’s
substantive right to the value of its collateral interest
“adequate protection”
 Essence of the bankruptcy mechanism for
implementing the secured creditor’s substantive rights
is via the concept of adequate protection
 Basic idea is to preserve the secured cr’s value during
the pendency of the bankruptcy case
 Will discuss in more detail in chapter 7
 Adequate protection
 described in 361
 Utilized in numerous sections (362(d)(1), stay relief;
363(e), use of property; 364(d), postpetition credit)
Ways secured creditor might get paid
 1. Relief from stay, 362(d), go ahead with foreclosure
 2. collateral abandoned to sec cr, 554(a)
 3. collateral sold by Trustee, 363, proceeds paid sec cr
 4. paid under reorg plan – lump sum or over time
 5. agrees to reaffirmation, 524(c), Dr keeps collateral
and pays sec cr over time
 6. indiv dr redeems collateral, 722 – pays off in lump
sum – only available for consumer personal property
 7. trustee returns collateral to sec cr, 725, also reorgs
“debtor’s choice” – Problem 6.3
 Facts:
 Dr bought Pontiac Grand Am, $16K loan Creditor, sec int
 May 1, 2006 Dr files ch 7
 Owes $8K principal
 Dr not in default on payments
 Car has value $10K
 Loan agreement: (1) bk filing = default; (2) acceleration
on default
 Dr files “statement of intention” (521(a)(2)(A)) – keep car,
stay current – but NOT redeem or reaffirm –can Dr do that?
6.3(a)
 Dr claims her entire interest in Car as exempt. Now
what?
 1st – Estate has no interest any more – entire value of
car is either subject to secured claim or is exempt
 So the trustee won’t administer (likely will abandon) –
just a matter as between the Dr and the Cr
6.3(a), cont.
 Dr vs Cr – does Dr have option to neither redeem nor
reaffirm, and just keep making payments? This
unlisted “option” was called “ride through” or
“reinstatement”
 Note that if Dr can do this, she has the power to
convert Cr’s loan into a non-recourse loan, b/c the
underlying personal liability of Dr will be discharged
 Only the Cr’s right against the collateral survives bk
 But if ends up with deficiency claim post-bk, too bad!
 Prior to 2005, courts were evenly divided
2005 amendments
 In 2005, Congress amended several sections to try to make
clear that Dr did NOT have the option to just remain
current – either had to redeem, reaffirm, or surrender the
collateral to sec cr
 See:
 521(a)(2) – (A) must file stmt intention w/in 30 days, if
keeping must redeem or reaffirm, & (B) then perform
intention within 30 days after 1st meeting crs

Also 521(a)(6) – 45 day period (after Cr meeting) if PMSI, stay
terminates, property no longer in estate
 362(h)(1) – stay terminates with regard to collateral if Dr
doesn’t either (A) file stmt intention or (B) perform it
 521(d) – validates bk default clauses if Dr not comply
Answer 6.3(a)
 Stay terminated 362(h)(1)(A) on May 31, when Dr did
not file complying stmt intention under 521(a)(2)(A)
 After stay terminates, what rights does Cr have vs Dr?
 Dr argue – you still can’t foreclose under state law b/c I
am not in default – making my payments
 Cr wins – points to bk default clause



Even though usually such “ipso facto” clauses are invalidated
in bk, in this particular situation they are allowed – 521(d)
And once have a default, Cr may invoke acceleration clause
Cr also might have an “insecurity” clause to declare default
 And would be “insecure” b/c Dr no longer has any personal
liability, after gets bk discharge
Practical note
 Even though Cr now clearly has the right to insist on
Dr redeeming or reaffirming, failing which Cr will get
stay terminated and be able to foreclose, in the real
world Cr might well be willing to keep taking Dr’s
payments and let Dr keep the car, as long as the Dr
stays current
6.3(b)
 Same facts, except Dr not claim as exempt
 What does this change? Now the bankruptcy estate DOES
have an interest – the $2K in equity in the car (remember,
car worth 10, Cr’s claim = 8)
 So estate doesn’t want Cr to just foreclose – may lose equity
 Now the Trustee can move (within the 30-day period) to
keep the stay in effect, even though DR didn’t file
complying stmt of intention – see 362(h)(2), 521(a)(6)
 Will have to provide adequate protection to Cr
6.3(c)
 Same facts, except now Dr DOES state intention to
reaffirm & keep the car -- BUT Cr refuses to agree to
reaffirmation
 Dueling statutes?
 362(h)(1)(B): for Dr – says stay not terminate if Dr fails
to perform intention b/c Cr refused to agree to reaffirm
Vs
 521(a)(6): for Cr? – says stay terminates, property not in
estate “if the debtor fails to so act” and no exception for
Dr’s failure to act b/c Cr wouldn’t agree to reaffirm
What if “Dr wins” controls?
 Under 6.3(c), even if say that 362(h)(1)(B) controls, so
stay does not terminate, not clear where that leaves the
parties as a practical matter
 For sure Cr is stayed from foreclosing (unless can
persuade bk ct to lift the stay)
 But don’t have a reaffirmation either, b/c that requires
the Cr to agree
 So is there de facto a “reinstatement” option?
Who knows??
Value of collateral
 One of the most important issues on a bankruptcy
case is to value collateral
 Sec cr’s basic substantive entitlement is to receive the
value of their collateral
 In many instances the bk ct has to determine what that
value is. Examples:


Reorg case, Dr’s plan is to keep collateral, wants to “cram
down” sec cr – how much pay?
Ch. 7, Dr wants to “redeem” 722 – buying off collateral – how
much?
506(a)(1)
 1st sentence:
 secured claim “to the extent of the value of such
creditor’s interest” in the estate’s interest in the
collateral
 2nd sentence:
 “such value shall be determined in light of the purpose
of the valuation and of the proposed disposition or
use of such property.”
Which sentence controls?
 Is the valuation decision controlled by:
 The 1st sentence, which focuses on the creditor’s interest
Or
 The 2nd sentence, which focuses on the debtor’s
proposed disposition or use?
When would it make a difference?
Rash
 Drs (Elray & Jean Rash) had financed a tractor truck





that Elray used in his business
Filed chapter 13
Drs wanted to keep the truck
Under 1325(a)(5)(B), can “cram down” (i.e., keep the
truck even if cr doesn’t like it) the sec cr (Associates) if
pay Cr the amount of the “allowed secured claim”, plus
interest
Replacement cost of similar truck = $41K
Foreclosure value = $31K
st
1
sentence?
 If focus on the Cr’s interest, argue should only have to
pay the $31K foreclosure value
 Because that is all that the Cr itself could realize on the
collateral
 If Dr chose instead simply to surrender the collateral to
the Cr (another option, see 1325(a)(5)(C)), then
indisputably there’s no way Cr could get more than $31K
nd
2
sentence?
 But if focus instead on the 2nd sentence, and say the
“proposed disposition or use” is that the Drs will be
keeping the collateral, then argue that they should
have to pay replacement value, b/c the “use” is that
they’re getting a truck
 And that would cost them $41K
“bilateral monopoly” or “chicken”
 Thus, we have a situation where the collateral is worth
up to $41K to the Drs if they get to keep it, but only
$31K to the Cr if they give it back
 “Bilateral monopoly”:
 Cr can make Dr pay up to $41K if Dr wants to keep it
 But Dr can stick Cr with just $31k if return it
 Like the old game of “chicken”
 Given the economic reality, pre-Rash the 7th Circuit
held (per Posner) that the midpoint was the correct
value
 Makes sense given the bargaining dynamic
Rash holding
 2nd sentence rules: key is the proposed disposition or
use – and where Drs plan to retain the collateral, they
have to pay the replacement value
But “retention” ≠ “purchasing”
 BUT that does not mean, as it turns out, that the
Rashes will necessarily have to pay the full $41K
replacement value. Why not?
 The “proposed use” is that Drs retain the truck
 when Dr retains a truck, they are not getting the same
value package as they would if they went out into the
market and purchased a truck
 No warranties from seller
 Not reconditioned
 Not have to pay seller’s marketing costs
example
 assume a simple hypothetical: applying Rash, what is the




“value” of a 2005 Honda Accord EX 4-door sedan with
40,000 miles in excellent condition, standardly configured?
according to the reputable “Kelley Blue Book” website, this
same car has three different possible “values”:
(1) a “suggested retail value” of $17,485, see
http://www.kbb.com/KBB/UsedCars/PricingReport/2005_
Honda_Accord_859_Retail_Excellent_Sedan.aspx?Mileage
=40000&PriceTypePath=Private%20Party&SelectionHistor
y=859|29356|61821|0|0| ;
(2) a “private party value” of $15,050; and
(3) a “trade-in” value of $13,105.
Example, cont.
 The NADA guide suggests a “clean retail” price of
$17,300, and an average trade-in of $13,850. See
http://www.nadaguides.com/usedcars.aspx?LI=1-21-15013-0-00&l=1&w=21&p=1&f=5014&m=1195&d=582&y=2005&c=1
6&vi=55630&da=-1&mi=40000
Meaning of “retail” value?
 Kelley: “Suggested Retail Value assumes that the
vehicle has been fully reconditioned and has a clean
title history. This value also takes into account the
dealers' profit, costs for advertising, sales commissions
and other costs of doing business.” See
http://www.kbb.com/KBB/PopUps/Definition.aspx?C
ontentUniqueName=KBBWebContent61&ParentView=UsedCarsPricingReport&PriceType=R
etail&VehicleClass=UsedCar
“private party value”?
 “Kelley Blue Book Private Party Value is the amount a buyer
can expect to pay when buying a used car from a private
party. The Private Party Value assumes the vehicle is sold
"As Is" and carries no warranty (other than any remaining
factory warranty). The final sale price may vary depending
on the vehicle's actual condition and local market
conditions. This value may also be used to derive Fair
Market Value for insurance and vehicle donation purposes.”
 http://www.kbb.com/kbb/PopUps/Definition.aspx?Conten
tUniqueName=KBBWebContent60&ParentView=UsedCarsPricingReport&PriceType=Privat
e+Party&VehicleClass=UsedCar
Trade-in?
 “Kelley Blue Book Trade-In Value is the amount consumers
can expect to receive from a dealer for a trade-in vehicle,
assuming an accurate appraisal of the vehicle's condition,
mileage and features. This value will likely be less than the
Private Party Value because the reselling dealer incurs the
cost of safety inspections, reconditioning and other costs of
doing business.”
 http://www.kbb.com/kbb/PopUps/Definition.aspx?Conten
tUniqueName=KBBWebContent59&ParentView=UsedCarsPricingReport&PriceType=Trade
-In&VehicleClass=UsedCar
Rash footnote 6
 SCOTUS recognized the reality that “replacement” value
did not necessarily mean full retail value. In a critical
footnote 6, the Court limited its holding:
 “…Whether replacement value is the equivalent of retail
value, wholesale value, or some other value will depend on
the type of debtor and the nature of the property. We note,
however, that replacement value, in this context, should not
include certain items. For example, where the proper
measure of the replacement value of a vehicle is its retail
value, an adjustment to that value may be necessary: A
creditor should not receive portions of the retail price, if any,
that reflect the value of items the debtor does not receive
when he retains his vehicle, items such as warranties,
inventory storage, and reconditioning.” (emphasis added)
Applying footnote 6?
 If consider footnote 6 in conjunction with the different
explanations in KBB, recognize that a Dr who is simply
retaining collateral (like the Rashes) would NOT pay the
“retail value,” nor would they pay “trade-in,” Looks like
“private party value” might actually be pretty close
 Real world: post-Rash, courts (and parties in their
agreements), just split the difference between retail and
wholesale!
 So post-Rash cramdown would have had them pay $36K
 Just where Posner said it should
 And this reflects bargaining reality of “chicken” game
2005 amendments
 In BAPCPA, sec cr lobby got some amendments through
partially overrule Rash footnote 6:
 1. 506(a)(2) – apply if:
 personal property,
 Individual debtor
 Chapter 7 or chapter 13
 2. valuation rule (1st sentence 506(a)(2)): use replacement
value, as of petition date, and no deductions for costs of sale
or marketing


Thus partially overrules footnote 6
But does NOT kick out other n. 6 deductions –e.g., warranties,
reconditioning
nd
2
sentence 506(a)(2)
 In addition, if not only a case involving (i) personal
property, (ii) individual debtor, &(iii) chapter 7 or 13,
but ALSO is consumer collateral (“acquired for
personal, family, or household purposes”), have
different (higher) valuation:
 “replacement value shall mean the price a retail
merchant would charge for property of that kind,
considering the age and condition of the property”
 i.e., now have FULL RETAIL, with no fn. 6 deductions
Summary of valuation standards
 1. 2nd sentence, 506(a)(2): full retail
 Individual Dr; personal property; ch 7/13; consumer purposes
 2. 1st sentence, 506(a)(2): replacement value, no
deduction costs sale or marketing; e.g., retail minus
warranties, reconditioning, storage costs
 Same as 2nd sentence, except business, not personal, use
 3. 506(a)(1) (Rash): replacement value, with all
footnote 6 deductions
 Apply if have ANY of: corporate /pship Dr; chapter 11;
real property
And special no strip down rule
 Finally, in chapter 13, if Dr buys a motor vehicle for her
personal use within 910 days of bankruptcy and Cr has
a PMSI, must pay the full amount of the debt
 i.e., no ‘strip down” at all
Problem 6.4
 Facts:
 May 1, 2004 Dr buys Chevy Suburban for family use,
finances with PMSI to Creditor
 May 1, 2006 Dr files chapter 7
 Debt = $18K
 Foreclosure value = $12,000
 Full retail price = $15,000


Costs of sale and marketing = $500
Warranties, reconditioning = $1,000
6.4(a)
 How much would Dr have to pay to redeem under 722?
 Apply 2nd sentence 506(a)(2):
 Individual Dr
 Personal property
 Chapter 7
 Property acquired for personal use
So must pay full retail of $15,000, no deductions
6.4(e)
 Same facts as (a) (chapter 7 case, Dr wants to redeem),
except bought for business use
 Now Dr can’t redeem under 722 at all – only if bought
for personal, family, or household purposes
6.4(b)
 Same facts as (a), except Dr files chapter 13, and wants to
retain the car
 Apply “hanging paragraph” following 1325(a)(5):
 Motor vehicle
 910 days of bankruptcy (here, two years)
 PMSI
 Acquired for Dr’s personal use
Dr must pay the full debt ($18,000)
- says “506 shall not apply” – and that is where bifurcate
undersecured claim
6.4(c)
 Same as (b), except Dr files chapter 13 December 1,
2006 (and remember purchased car May 1, 2004)
 So now hanging paragraph’s “no strip down” rule n/a,
since > 910 days (= 944 days)
So back to 2nd sentence of 506(a)(2)
So pay full retail value of $15K
(note that Creditor will then have a $3K unsecured claim)
6.4(d)
 Same as (b) (e.g., chapter 13, filed two years after
purchased) except purchased for use in business
 Again, hanging paragraph n/a, b/c only if personal use
 So, go to 506, and apply (a)(2) (individual dr, chapter 13,
personal property)
 BUT not 2nd sentence, b/c = business use
 Thus 1st sentence 506(a)(2) applies
Pay $14,000 – retail (15K), not deduct costs sale, but by
inference CAN deduct $1,000 warranties & reconditioning
6.4(f)
 Same facts as (b), except Dr filed chapter 11
 Now 506(a)(2) not apply, b/c must be a ch 7 or 13 case
 So back in 506(a)(1) and Rash, with note 6
 What pay? Retail ($15,000) minus warranties &
reconditioning ($1,000) and possibly minus costs of sale
($500) = $13,500
 Which is exactly where we’d be if just split the difference
between foreclosure and retail!