Class 5
Bankruptcy, Spring, 2000
Secured Claims
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/r-picker@uchicago.edu
Copyright © 2005-09 Randal C. Picker. All Rights
506

Determination of secured status
 (a)(1)
An allowed claim of a creditor secured by a
lien on property in which the estate has an interest,
or that is subject to setoff under section 553 of this
title, is a secured claim to the extent of the value of
such creditor’s interest in the estate’s interest in such
property, or to the extent of the amount subject to
setoff, as the case may be, and is an unsecured
claim to the extent that the value of such creditor’s
interest or the amount so subject to setoff is less
than the amount of such allowed claim.
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506(a)(1) (Cont.)
Such
value 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.
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Example

Numbers
Total
Debt: $20,000
Collateral Value: $5,000
Secured Claim: $5,000
Unsecured Claim: $15,000

Language
Called
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“bifurcation” of the claim
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506(b)

Determination of secured status (cont.)
(b)
To the extent that an allowed secured
claim is secured by property the value of
which, after any recovery under subsection
(c) of this section, is greater than the
amount of such claim, there shall be
allowed to the holder of such claim, interest
on such claim, and any reasonable fees,
costs, or charges provided for under the
agreement or State statue under which
such claim arose.
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Example





Total Debt: $20,000
Collateral Value: $25,000
Secured Claim: $20,000
“Cushion”: $5,000
SP can get in bankruptcy case up to $5,000
in interest and fees
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506(c)

Determination of secured status (cont.)
(c)
The trustee may recover from property
securing an allowed secured claim the
reasonable, necessary costs and expenses
of preserving, or disposing of, such property
to the extent of any benefit to the holder of
such claim, including the payment of all ad
valorem property taxes with respect to the
property.
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506(c) Example




Collateral Value: $25,000
Trustee Expenses of Preserving Collateral:
$1000
Benefit to Secured Party: $200
Trustee can recover $200 from collateral,
leaving value of $24,800
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Rash: Determining Value
under Sec. 506(a)

Purchase of Truck
3/30/89:
$73,700 new
Financed price less downpayment, with 60
monthly payments
Seller assigned paper and SI to Associates

Default
3/18/92:
Filed for bankruptcy
Owed ACC $41,171
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Rash

Valuation Testimony
Rashes:
ACC could foreclose and get
$31,875
ACC: Rashes would have to pay $41,000 to
buy this truck in the marketplace

Plan
Keep
truck
Pay ACC over 58 months PV of $28,500
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Old Sec. 1325(a)(5)

(a) Except as provided in subsection (b),
the court shall confirm a plan if –
(5)
with respect to each allowed secured
claim provided for by the plan –

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(A) the holder of such claim has accepted
the plan;
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Old Sec. 1325(a)(5) Cont.

(B)
• (i) the plan provides that the holder of such claim
retain the lien securing such claim; and
• (ii) the value, as of the effective date of the plan,
of property to be distributed under the plan on
account of such claim is not less than the
allowed amount of such claim; or

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(C) the debtor surrenders the property
securing such claim to such holder;
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New Sec. 1325(a)(5)

(a) Except as provided in subsection (b),
the court shall confirm a plan if –
(5)
with respect to each allowed secured
claim provided for by the plan –

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(A) the holder of such claim has accepted
the plan;
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New Sec. 1325(a)(5) Cont.

(B)(i) the plan provides that—
• (I) the holder of such claim retain the lien
securing such claim until the earlier of—
– (aa) the payment of the underlying debt determined
under nonbankruptcy law; or; and
– (bb) discharge under section 1328; and;
• (II) if the case under this chapter is dismissed or
converted without completion of the plan, such
lien shall also be retained by such holder to the
extent recognized by applicable nonbankruptcy
law
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New Sec. 1325(a)(5) Cont.
(ii)
the value, as of the effective date of the
plan, of property to be distributed under the
plan on account of such claim is not less
than the allowed amount of such claim; and
(iii) if—

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(I) property to be distributed pursuant to this
subsection is in the form of periodic
payments, such payments shall be in equal
monthly amounts; and
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New Sec. 1325(a)(5) Cont.

(II) the holder of the claim is secured by
personal property, the amount of such
payments shall not be less than an amount
sufficient to provide to the holder of such
claim adequate protection during the period
of the plan; or
(C)
the debtor surrenders the property
securing such claim to such holder
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New Hanging Paragraph

The Text
 For
purposes of paragraph (5), section 506 shall not
apply to a claim described in that paragraph if the
creditor has a purchase money security interest
securing the debt that is the subject of the claim, the
debt was incurred within the 910-day preceding the
date of the filing of the petition, and the collateral for
that debt consists of a motor vehicle (as defined in
section 30102 of title 49) acquired for the personal use
of the debtor, or if collateral for that debt consists of
any other thing of value, if the debt was incurred during
the 1-year period preceding that filing.
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Definition of Motor Vehicle

49 USC 30102(a)(6)
“motor
vehicle” means a vehicle driven or
drawn by mechanical power and
manufactured primarily for use on public
streets, roads, and highways, but does not
include a vehicle operated only on a rail
line.
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How Should We Value the
Truck?



Foreclosure Value?
Replacement Value
Something in Between?
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Court’s Standard

The Rule
“In
such a ‘cram down’ case, we hold, the
value of the property (and thus the amount
of the secured claim under section 506(a))
is the price a willing buyer in the debtor’s
trade or business, or situation would pay to
obtain like property from a willing seller.”
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Footnote 6

Our recognition that the replacement-value
standard, not the foreclosure-value
standard, governs in cram down cases
leaves to bankruptcy courts, as triers of
fact, identification of the best way of
ascertaining replacement value on the
basis of the evidence presented.
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Footnote 6

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.
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Footnote 6

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.
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Footnote 6

Nor should the creditor gain from
modifications to the property—e.g., the
addition of accessories to a vehicle—to
which a creditor’s lien would not extend
under state law.
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New 506(a)(2)


Added in Sec. 327, Fair Valuation of
Collateral, in the 2005 Act
506(a)(2)
If
the debtor is an individual in a case under
chapter 7 or 13, such value with respect to
personal property securing an allowed claim
shall be determined based on the
replacement value of such property as of
the date of the filing of the petition without
deduction forCopyright
costs
of sale or marketing. 25
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© 2005-09 Randal C. Picker
New 506(a)(2) (Cont.)
With
respect to property acquired for
personal, family, or household purposes,
replacement value shall mean the price a
retail merchant would charge for property of
that kind considering the age and condition
of the property at the time value is
determined.
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506(d)

Determination of secured status (cont.)

(d) To the extent that a lien secures a claim
against the debtor that is not an allowed secured
claim, such lien is void, unless 

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(1) such claim was disallowed only under section
502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due
only to the failure of any entity to file a proof of such
claim under section 501 of this title.
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Simple Example

Hypo
Allowed
Claim of $1000
B Ct values collateral at $600
506(a) bifurcation gives $600 secured
claim, $400 unsecured claim
Trustee abandons property to secured
creditor, who sells at foreclosure sale for
$700
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Simple Example

What happens?
Blackmun:
Secured party keeps $700 and
files unsecured claim for $300
Scalia: ???
Strip-down lien to $600 based on valuation?
 Keep $600 and return $100 to estate to be
divided among unsecured creditors pro
rata?

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Flip the Sequence

Hypo
Allowed
Claim of $1000
B Ct values collateral at $600
506(a) bifurcation gives $600 secured
claim, $400 unsecured claim
Trustee distributes 25 cents on the dollar to
unsecured creditors, so $100 to the creditor
on the unsecured claim
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Flip the Sequence
 Trustee
abandons property to secured creditor,
who sells at foreclosure sale for $700

What happens?
 Blackmun:
Secured party keeps $700
 Scalia: ???


March 18, 2016
Strip-down lien to $600 based on valuation?
Keep $600 and return $100 to estate to be divided
among unsecured creditors pro rata?
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Why Another Example?

How does 506(d) operate in Blackmun’s
world?
The
point of the next example is to consider
disallowance and lien stripping
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Second Example

Zero Coupon Bond
Bond
has a face amount of $1000 but pays
no interest; due in one year
At time of sale of bond, bond sells for $900
In effect, the $100 difference represents
implicit interest on the $900 loan
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Second Example

Debtor Bankruptcy
Debtor
files for bankruptcy next day
Under 502(b)(2), the $100 should be
disallowed as unmatured interest
So we have a $900 allowed claim and a
$100 disallowed claim
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Second Example

Introduce Security Interest
Suppose
that the bond is secured by a
piece of equipment
B Ct assigns $500 value to collateral


What does 506(a) do here?
What does 506(d) do here?
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Bifurcation Analysis

Separating Claims under Sec. 506(a)
Secured
Claim: $500
Unsecured Claim: $400

Next Step
If
debtor keeps the property, see Rash
If debtor doesn’t keep the property, ???
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Sequencing Again

If resolve secured claim first
Blackmun:

As before: asserts balance of owed allowed
claim as unsecured claim in the case
Scalia:

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Treat judicial valuation as final or allow
reconsideration under 502(j)?
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Unsecured Claim First

The Unsecured Claim
Assume
paid 25 cents on the dollar, so
$100 distribution on unsecured claim

The Secured Claim
Trustee
in Ch 7 case will turnover property
under Sec 554 or 725
Secured creditor will conduct foreclosure
sale
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Unsecured Claim First
Possible

Realizations: $400, $700, $850
What happens?
Blackmun:

Keep full value up to receiving total of $900
(full allowed amount of claim)
• So keep all of $400 and $700, turnover $50 from
$850
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Unsecured Claim First
Scalia
Keep value up to amount of allowed secured
claim
 Turnover balance to the estate

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