It is often said that variety is the spice of life. Well, it may be that there is too much spice in the judicial recipe for the debtor's redemption of an automobile pursuant to §722 of the Code. Statutory interpretation by the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, has resulted in three different methods of determining value in a §722 redemption proceeding: average trade in value, replacement value and the mid-point between wholesale and retail value. In two of these cases, the court rejected the standard adopted in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997).

Average Trade-in Value

In re Tripplett, 256 B.R. 594 (Bankr. N.D. Ill. 2000), involved a chapter 7 debtor who proposed to redeem a vehicle for a value set at the midpoint between NADA retail and NADA wholesale price. The objecting creditor asked for full value of the contract or at least the full replacement or retail value of the vehicle. The court began its analysis with §722, which says:

An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under §522 of this title or has been abandoned under §544 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien.

In determining that the definition of "allowed secured claim" meant a bifurcated claim under §506(a), the court concluded, relying on legislative history and other case law, that the debtor had to pay the creditor the value of the collateral, not the balance due on the contract, in order to redeem. Undeterred, the creditor asserted that Rash required the debtor to pay "replacement" or retail value to redeem.

Stating that Rash was not controlling because it involved a chapter 13 cramdown rather than a chapter 7 redemption, the court found that legislative history indicates the liquidation value (citing Triad Fin. Corp. v. Weathington (In re Weathington), 254 B.R. 895, 899 (6th Cir. BAP 2000) (collecting authorities) and 6 Lawrence P. King et al., Collier on Bankruptcy ¶1722.05 at 722-9 (15th ed. rev. 2000)). The court held that the debtor's proposal to pay an amount greater than "the average trade-in" was sufficient to satisfy the "allowed secured claim.

Replacement Value

Unwilling to ignore the precedent set out in Rash, the court in In re Smith, 307 B.R. 912 (Bankr. N.D. Ill. 2004), held that replacement value applies in the context of a chapter 7 redemption. In this case, the debtor proposed to redeem the vehicle by paying the creditor the wholesale value.

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The uncertainty resulting from these opinions certainly makes life for those debtors who want to keep a car rather difficult.

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Beginning its analysis with the reference that §722 does not set forth a valuation standard, the court stated that such a determination is made under §506(a), which says:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to a setoff under §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. 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 (emphasis provided) (citing Associates Commercial v. Rash, defining replacement value as "the price a willing buyer in the debtor's trade, business or situation would pay to obtain like property from a willing seller.")

Id. at 960. The court found that other language in Rash clearly rejected any different valuation standard under §506(a) under different circumstances:

As our reading of §506(a) makes plain, we also reject a ruleless approach allowing use of different valuation standards based on the facts and circumstances of individual cases. Cf. In re Valenti, 105 F.3d 55, 62-63 (2nd Cir. 1997) (permissible for bankruptcy courts to determine valuation standard case by case). Rash, Id. at 964.

The court in In re Smith cited more than 12 other decisions that declined to apply Rash to redemptions in chapter 7 and concluded that those decisions were wrong in failing to follow that authoritative ruling. The Smith court stated that Rash did not in any way limit the ruling to chapter 13 cramdown cases.

As we comprehend §506(a), the proposed disposition or use of the collateral is of paramount importance to the valuation question...the replacement value standard accurately gauges the debtor's use of property.

Rash at 962. The court found it inappropriate to consult legislative history to "second guess the Supreme Court" and concluded that there was no flexibility in the law to allow for a different valuation standard in chapter 7 cases without making a distinction between use and redemption and payoff. Smith at 919, 920, 307 B.R. 912.

Mid-point Between Wholesale and Retail Value

The case of In re Stark, No. 03 B 44701 (Bankr. N.D. Ill. July 8, 2004), concludes the valuation trilogy in Illinois by solidly staking out the middle ground previously suggested by the National Bankruptcy Review Commission. The debtor in this case scheduled a vehicle with a value of $20,000, scheduled the secured creditor's claim against the vehicle at $38,000 and sought to redeem the vehicle for $14,500. The creditor responded that the replacement value standard applied. The NADA adjusted retail value was $18,850.

Finding that redemption value was determined under §§722 and 506(a), the court declined to follow either In re Tripplett or In re Smith, saying: "The valuation issue cannot be resolved by resorting to either the statutory text of §722 or its relevant legislative history." Stark at 755, 311 B.R. 750. The court found no binding precedent. Stark at 755, 311 B.R. 705. Instead, the court adopted the rationale of In re Hoskins, 102 F.3d 311, 312 (7th Cir. 1996), in accepting a mid-point valuation range between wholesale and retail value. The court indicated that this pragmatic approach, based on what parties to these valuation disputes usually negotiated, had a distinct utilitarian advantage. Stark at 757, 311 B.R. 750.

What Is a Redemption Lender to Do?

The uncertainty resulting from these opinions certainly makes life for those debtors who want to keep a car rather difficult. The effect of the Supreme Court ruling is not clear to the lower courts. Perhaps that does not matter if market forces determine the redemption value. There is a redemption lender on the scene who has laid out its standards for loaning money to a redeeming creditor. See http://www.722redemption.com. The standards do not include looking to any of the above decisions, but in every instance, the lender must decide whether the anticipated loan is a good credit decision based on set lending parameters. The result may be that vehicles will be redeemed for the value that will be obtained upon credit in spite of judicial disagreement.