It was 1997 before that question was resolved by the Supreme Court in Associates v. Rash, nearly 20 years after enactment of the Bankruptcy Code.
Mr. Rash bought a $73,000 Kenworth tractor truck for freight hauling, pledging the truck for the balance of the purchase price. When he and his wife filed Chapter 13, they proposed to pay $28,000, the amount they calculated the lender would net if it repoed the truck and sold it. The creditor claimed it was entitled to $41,000, the amount its expert testified the debtors’ would spend to replace the truck.
At issue was how to apply 1325(a):
“An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . 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 . . . .” 11 U.S.C. § 506(a).
The tension in the positions came down to whether you view “value” as the net amount that the creditor would receive upon exercise of its rights in the collateral, or whether the fact that the debtor was going to keep and use the collateral mandated valuation from the perspective of what a like truck would cost.
The decision was 8-1. Read the case and see how it came out.
More newbie Summer reading
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