Christopher Challis

Law & Valuation
Professor Palmiter
Spring, 1999

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In 1997, the Supreme Court, in Associated Commercial Corp. v. Rash, created a rule for determining the proper valuation technique involving a debtor’s retention of collateral under a Chapter 13 “cram down” provision.  In this case, the arguments centered on how a truck that had been used as collateral was to be valued under a Chapter 13 bankruptcy under the “cram down” provision.  The bankrupt argued for a value that was approximately what would be realized after foreclosure and sale of the truck, while the assignee of the note argued that the value was the value of the outstanding debt.  The Supreme Court took the case to resolve conflict over the language regarding valuation in the cram down provision.  The Supreme Court held that valuation should be at the cost that the debtor would incur to obtain a like asset for the same proposed use, or replacement value theory.

  1. How is property used as collateral to be valued under a Chapter 13 “cram down” provision?
  2. Does using replacement value for Chapter 13 cram down bankruptcies affect other forms of bankruptcy?

  1. According to the Supreme Court, the replacement value method is more appropriate than either the foreclosure
  value method or the mid point valuation method.
  2. It may affect Chapter 11 bankruptcies, in that they are more complex and different types of property may
  require different types of valuation.

 A secured creditor has two rights under a bankruptcy proceeding, adequate protection of his interest and a right to payment of the total value of his interest, both subject to the Bankruptcy Code.  Under Chapter 13, a debtor can either surrender the property to the creditor, keep it if the creditor so agrees, or retain the property through cram down.  Under the latter, the debtor must create a plan to pay the creditor the present value of the claim, leaving the creditor’s lien intact.  The property must be valued in order to determine how much the creditor is to be paid. However, the language in the cram down statue, 11 U.S.C. § 506(a), has created confusion in determining the method of valuation.

 There are three main methods used for valuation in such a situation.  The first is foreclosure value, which is the price received through sale after foreclosure, which would give the creditor the same rights that were possessed before the bankruptcy.  It has been argued that this provides too little protection for the creditor.  The second method is mid point valuation.  This would be the difference between what the debtor would have to pay to replace the collateral and what the creditor would receive through sale after foreclosure.  This was to provide predictability and uniformity.   The third method is the replacement value, which was the method adopted by the Supreme Court.  This has been used because then the debtor has to pay the creditor the amount that it would take to replace the property in order to be able to retain the property.  Otherwise, by paying the foreclosure value, which would be less than the replacement value, the debtor would receive a windfall.  This protects the creditor more than the other methods, in that it compensates the creditor for taking the risk of a second default and the further depreciation of the property.

 The last method was chosen by the Supreme Court in that it fits the language of the entirety of the statute, whereas the foreclosure value method relies solely on the first sentence and the mid point method relies on no language within the statute.  The dissent argued that foreclosure value would be more consistent with the overall statutory scheme for all forms of bankruptcy.  Thus, one question is how using replacement value for Chapter 13 cram down bankruptcies will affect other types of bankruptcies.  Under Chapter 11, there may be difficulties, as different types of property may need to be valued in different ways.


To those who seek to value property in a legal proceeding of any context, Judge Jerome Frank offered some daunting insight: "Value is not a single purpose word. [People] have all but driven themselves mad in an effort to definitize its meaning."(1) While lawyers become comfortable with questions having two defensible answers from their very first semester of law school, it can be perplexing for a lawyer to understand how a tangible item's value cannot be readily ascertained with a definite sales price and depreciation table or after-market book such as the N.A.D.A. Blue Book. Perhaps no area of the law deals with the issue of valuation so often or in some many varied contexts as bankruptcy.

In 1997 the Supreme Court took Judge Frank's challenge to determine the proper valuation technique involving a debtor's retention of collateral under a Chapter 13 "cram down" provision. While the Court provided a clearer rule for Chapter 13, many scholars contend it was not the proper standard. A similar problem, and perhaps more complex, is how the Supreme Court's ruling will affect the numerous other valuation contexts in other bankruptcy proceedings, such as businesses under Chapter 11.

Associated Commercial Corp. v. Rash(2)

A. Facts

In 1989 Elray Rash purchased a new Kenworth tractor trailer for $73,700.(3) After a down payment, Rash financed the remainder of the purchase price for 60 months; the truck was secured as collateral.(4) The seller then assigned the note to Associated Commercial Corporation (ACC).(5) In March of 1992, the time at which Rash filed for bankruptcy under Chapter 13, the outstanding balance on the truck was $41,171.(6) Rash filed a plan under 11 U.S.C. § 1325(a)(5)(B), commonly labeled the "cram down" provision.(7) Rash's plan made provisions for 58 monthly payments to ACC, at a present value of $28,500; on the other hand, ACC argued the present value of the truck was $41,171, the total value of the outstanding debt.(8)

The Bankruptcy Court held for Rash, valuing the truck at the net amount ACC would have realized upon foreclosure and sale of the truck: $31,875.(9) The U.S. District Court for the Eastern District of Texas affirmed; subsequently, the Fifth Circuit reversed the Bankruptcy Court's holding.(10) However, following a rehearing en banc by the Fifth Circuit, the court chose to affirm the lower courts' holdings for Rash.(11) Important to the appeals court was the language of 11 U.S.C. § 506(a) in determining how to value collateral in a Chapter 13 cram down.(12)

B. Supreme Court's Holding

Justice Ginsberg, writing for the Supreme Court, later reversed the Fifth Circuit's ruling.(13) According to the Court, property retained under a § 1325(a)(5)(B) cram down should be valued at the cost the debtor would incur to obtain a like asset for the same "proposed…use."(14) This decision was founded upon a reading of § 506(a); but unlike the Fifth Circuit, which relied on the first sentence, Justice Ginsberg relied on the second sentence in determining the proper valuation standard.(15) The result reached by the Court was to determine the value of the Kenworth using a replacement-value theory.


A secured creditor has two vital rights under a bankruptcy proceeding. First, a secured creditor is entitled to adequate protection of its interest.(16) Second, the secured creditor has a right to payment, by the debtor, of the total value of the creditor's interest in the collateral.(17) By what methods a creditor is protected and what happens to the creditor's right to continue to receive payment following a debtor's bankruptcy are, of course, primary subjects of the Bankruptcy Code.(18)

A. Bankruptcy Code and "Cram Down"

Under Chapter 13, a debtor has three options in reorganizing his outstanding debt: surrender the property to the creditor; keep the property if the secured creditor agrees; or retain the property via cram down.(19) When the debtor chooses the cram down option, the debtor's plan must pay the creditor the present value of the claim and leave the creditor's lien on the property intact.(20) Section 1325(a)(5)(B), the cram down provision, requires the plan to "provide[] that the holder of such claim retain the lien securing such claim; and 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...."(21)The purpose of collateral valuation in a Chapter 13 cram down is to determine how much the debtor must pay the secured creditor under the debtor's plan.(22) Section 506(a) contains the pertinent language for determining the value of the property to be distributed and is the object of the dispute over proper valuation methods.(23)

B. Circuit Court Interpretations

Justice Louis Brandeis summed up the dilemma circuit courts would face decades later in determining the proper valuation method: "Value is a word of many meanings."(24)

1. Foreclosure Value

Courts that have adopted the foreclosure valuation, such as the Fifth Circuit in the Rash case, have often relied on the reality of a debtor-creditor situation in determining the proper valuation technique. For example, in the case of a vehicle, the secured creditor will usually dispose of the collateral in a foreclosure by selling it to a retail dealer or sending it to an auction.(25) Giving the creditor the foreclosure value simply entitles the creditor rights equal to what it possessed prior to the bankruptcy.

As statutory support for this position, courts have relied on the first sentence of § 506(a).(26) The Fifth Circuit interpreted the language to require courts to value the creditor's interest to the extent of the debtor's interest in the collateral.(27) Next, according to the Fifth Circuit in Rash, "the valuation…must account for the fact that the creditor's interest is in the nature of a security interest, giving the creditor the right to repossess and sell the collateral and nothing more. Therefore, the valuation should start with what the creditor could realize by exercising that right."(28)

An important aspect of the debate over valuation methods is the extent of proper protection to provide for creditors.(29) Advocates against foreclosure valuation maintain that such valuation techniques leave the creditor under protected.(30) Courts in favor of foreclosure value respond that "lenders and sellers build the risk…of bankruptcy into the interest rates they charge, the prices at which they sell, and the transaction costs that they charge."(31)

2. Mid Point Valuation

A frequently cited case in support of the mid-point theory of valuation is the Seventh Circuit's 1996 decision In re Hoskins.(32) There the Seventh Circuit "rested on the "economics of the situation" only after concluding that the statute suggests no particular valuation method."(33) The importance of a simple rule of valuation to satisfy the court's predilection for predictability and uniformity was a vital factor in choosing the mid-point theory of valuation.(34)

Like the Fifth Circuit, the Hoskins court looked at the reality of what transpires during a bankruptcy absent a cram down. In such cases, the creditor would repossess and sell the car, getting what the Seventh Circuit supposed would be a relatively low value for the collateral.(35) Meanwhile, the debtor would have to replace the collateral, such as a car, at a much higher price.(36) To the reasoning of the Seventh Circuit, any value of the collateral between these two extreme numbers would be a benefit to both parties.(37) In order to impose some indicia of predictability, the court in Hoskins simply split the difference evenly.(38)

3. Replacement Value

With five circuits--and now the Supreme Court--adopting it, the replacement value theory is the most widely accepted method of valuing collateral in a cram down.(39) This group of cases relies primarily on the second sentence of § 506(a). The key phrase of the second sentence is: "proposed disposition or use."(40) Based on this reading, what use the debtor makes of the property affects what type of valuation method the court should choose. This requires the debtor, if he is to keep the property via cram down, to pay retail--or fair market value--to the creditor, based on what the debtor would pay if he had to replace the collateral.(41) Otherwise, if the debtor only had to pay foreclosure value, the debtor would receive a windfall by forcing the cram down. Also in support, courts reason that using foreclosure value renders the language of the second sentence meaningless.(42)

Somewhat different from the other theories, replacement value courts have examined the reality of the cram down itself, not just bankruptcy as a whole. Because a debtor in a cram down retains the property, the creditor's collateral remains subject to potential rapid depreciation and creditor also runs the risk of the debtor defaulting again. As the Fifth Circuit's dissent noted, creditors' rights in a cram down "are not being delayed; rather they are being extinguished and replaced forever…with lesser rights."(43) Therefore, the focus of a valuation in the cram down context should be on the amount needed to compensate the creditor for the loss of these rights.(44) Both the foreclosure theory and the replacement theory recognize that the replacement value theory gives more money to the creditor than it would otherwise be entitled to under a normal bankruptcy proceeding; the difference being the former labels it 'windfall' while the latter justifies it as compensation for lost rights.


Though replacement value theory has just been explored Justice Ginsberg's opinion in the Rash case bears some fleshing out.

A. The Supreme Court's Interpretation: Rash

1. Majority Opinion

According to the Supreme Court, the first sentence of § 506(a) "impart[s] no valuation standard."(45) The first sentence, rather, only provides a court instruction on what collateral is to be valued; contrary to the Fifth Circuit's reading, it does not give a court instruction on how to value property.(46) Rather, it is the second sentence, specifically the phrase "proposed disposition…or use" which drives the valuation function.(47)

Justice Ginsberg held that choosing to dispose of the property or continuing to use the property dispensed with the logic of using a foreclosure valuation.(48) It would be inappropriate, Justice Ginsberg reasoned, to give Rash the windfall of valuing the property at the lower foreclosure level when he is actually receiving more benefit that he otherwise would under a normal bankruptcy proceeding.(49) The second prong of the argument focuses on the risk, substantially increased, ACC would face by Rash retaining the truck.(50) Combining these two arguments, the Supreme Court determined that the only proper way to value a debtor's property in a Chapter 13 cram down was to ensure the creditor's position would not be substantially changed whether the debtor chose a cram down or to forfeit the property to the creditor.(51) The only method in which the creditor would be indifferent, would be by valuing the amount the debtor would have to pay the creditor at the replacement value of the property.(52)

2. Dissenting Opinion

A well reasoned counter-argument to the Court's holding was Justice Stevens' dissent in Rash.(53) Following a similar analytical path through both sentences of § 506(a), Justice Stevens focused on the phrase "such value shall be determined in light of the purpose of the valuation...."(54) Under Stevens' reading, the purpose of the second sentence was to instruct a court to "put the creditor in the same shoes as if he were able to exercise his lien and foreclosure."(55) Therefore, the proper valuation, according to Justice Stevens, is the foreclosure value approach.

B. Impact of Rash on Other Valuation Contexts

Central to Justice Stevens' dissenting argument was the application of § 506(a) to the various bankruptcy code chapters.(56) Stevens points out that § 506(a) is something of a "utility provision that operates in many different contexts."(57) Following Judge Easterbrook's concurring opinion in In re Hoskins, Stevens notes that "a foreclosure-value standard is also consistent with the large statutory scheme by keeping the respective recoveries of secured and unsecured creditors the same throughout the various bankruptcy chapters."(58) The Rash opinion put a substantial amount of emphasis on protection of creditors in a cram down situation. Using replacement-value, the amount of the debtor's payments are to keep pace with the depreciation rate of the collateral, so that if the debtor defaults again, the creditor will be in no worse a position.(59) A significant remaining question, then, is how Rash affects other types of bankruptcy proceedings.

The concern for protection of creditors holds true for cram downs and valuation under Chapter 11 as well as under Chapter 13. In fact, protection concerns under Chapter 11 are more complex; there is typically a longer period between submission and confirmation of the plan, and the collateral in Chapter 11 is usually worth much more when used in conjunction with a business.(60) Collier's answer to Rash on the protection issue is to value property according to the hypothetical sale method, i.e., a sale by the creditor plus a deduction of the costs of sale.(61) While this technique is designed to adequately protect the creditor, Collier admits that this approach collapses the "use or disposition" question of Rash with the question of "purpose."(62)

Determining the value of business collateral at a "price a willing buyer in the debtor's trade, business, or situation would pay a willing seller to obtain property of like age and condition"(63) raises problems in the Chapter 11 context. Prior to Rash, Chapter 11 valuation usually utilized a "going concern" value.(64) Where the collateral is inventory, for example, often the value of the inventory over historical costs may actually increase as inventory is sold and accounts are generated by the business.(65) This "difference[] in context might lead the Supreme Court to follow the "going concern" approach when valuing collateral for purposes of Chapter 11 cram down.(66)


At least in terms of collateral in chapter 13 cram down situations, the Supreme Court's decision in Rash has attempted to narrow the definition of value to what a debtor could purchase like-property as replacement. However the language employed by the Court leaves some question as to the proper factors to include in determining replacement value. What is apparent from the opinion is that creditors are to be protected by the courts through a higher valuation of the collateral. Unfortunately the Court's opinion leaves unanswered why such protection is necessary, since creditors nearly always come to the bargaining table with a debtor in a stronger position. Also unfortunate is the short shrift the Court gives to the other two well-reasoned approaches to valuation outside of the bare textual argument it employs, based on a text which is universally thought of as ambiguous at best.

Perhaps most troubling in the wake of Rash, is the questionable application of the decision to other bankruptcy proceedings. In interpreting a utility provision of the Bankruptcy Code, such as §506(a), the Supreme Court made little effort to discuss how it's interpretation will affect valuation in other circumstances. In a variety of business contexts where the collateral at issue is not subject to any noticeable depreciation, the rationale for the Court's replacement value theory is not relevant.

Unfortunately, following the Supreme Court's decision in Associates Commercial Corporation v. Rash, 'value' remains a word with many meanings.

1.  See Kathryn R. Heidt and Jeffrey R. Waxman, Supreme Court's Rash Decision Fails to Stratch the Valuation Itch, 53 Bus. Law. 1345, 1347 (1998)(quoting Andrews v. Commissioner, 135 F.2d 314, 317 (2d Cir. 1943)(citations omitted)).
2.  117 S.Ct. 1879 (1997).
3.  See id. at 1882.
4.  See id.
5.  See id.
6.  See id.
7.  See id. at 1882-83. For an explanation of the cram down plan, see infra notes 18-21 and accompanying text.
8.  See Rash, 117 1883.
9.  See id.
10.  Associates Comm. Corp. v. Rash, 31 F.3d 325 (1994).
11.  Associates Comm. Corp. v. Rash, 90 F.3d 1036 (1996).
12.  See id. at 1044.
13.  See Associates Comm. Corp., 117 S.Ct. at 1879.
14.  See id. at 1886.
15.  See id. at 1885-86.
16. See Note, Toward a Midpoint Valuation Standard in Cram Down: Ointment for the Rash Decision, 83 Cornell L.Rev., 1821, 1824 (1998).
17. See id.
18. For example: if a debtor sells collateral, on which he has a $100 mortgage, or lien, for $100, the creditor is entitled to the entire payment. However, if the debtor sells the secured collateral for $50, the secured creditor is still entitled to payment in full of $100; but the remaining $50 not received in payment becomes an unsecured claim.
19. See 11 U.S.C § 1325(a)(5)(A)-(C); see also Heidt, supra note 1, at 1350.
20. See § 1325(a)(5)(B); see also Heidt, supra note 1, at 1350.
21. § 1325(a)(5)(B)(i)-(ii).
22. See § 1322(a) (requiring the plan to "provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title...."); see also, Jean Braucher, Getting It for You Wholesale: Making Sense of Bankruptcy Valuation of Collateral After Rash, 102 Dick. L.Rev. 763, 773 (1998).
23. § 506(a). Because of the courts' focus on § 506(a), the text bears recounting here:

An allowed claim of a creditor secured by a lien on property…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 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 rights.
See id.
24. See Heidt, supra note 1, at 1345 (quoting Southwestern Bell Tel. Co. v. Public Serv. Comm'n, 262 U.S. 276, 310 (1923)(Brandeis, J., dissenting)).
25. See Note, supra note 16, at 1831-32.
26. See, e.g., Associates Comm. Corp. v. Rash, 90 F.3d 1036, 1044 (1996).
27. See § 506(a).
28. See Associates Comm. Corp., 90 F.3d at 1044.
29. Another argument between foreclosure value and replacement value theories is whether the costs of sale should be included in the cram down plan's valuation. The line of cases using the retail value (replacement value cases) have held that hypothetical costs of sale should not be deducted from the retail value. See Heidt, supra note 1, at 1352. Meanwhile, cases relying on the first sentence of § 506(a) maintain that the proper value for the creditor should focus on what the creditor would have actually received for the property, following sale. See id. Thus, foreclosure value cases would deduct the hypothetical costs of sale in determining the payment to the creditor.
30. See Note, supra note 16, at 1836.
31. See id. Further, creditors and sellers may protect themselves by requiring larger down payments from buyers.
32. 102 F.3d 311 (7th Cir. 1996).
33. See Associates Comm. Corp., 117 S.Ct. 1879, 1886 (citing Hoskins, 102 F.3d at 316).
34. See In re Hoskins, at 314.
35. See id.
36. See id.
37. Id.
38. Id.
39. See Melissa A. Weber, A Valuation Standard That Is Difficult to Swallow: Interpreting § 506(a) of the Bankruptcy in Associates Commercial Corp. v. Rash, 117 S.Ct. 1879 (1997), 20 Harv. J.L. & Pub. Pol'y 921 (1997). The various cases include: Taffi v. United States, 96 F.3d 1190 (9th Cir. 1996)(en banc); In re Winthrop Old Farm Nurseries, 50 F.3d 72 (1st Cir. 1995); Metrobank v. Trimble, 50 F.3d 530 (8th Cir. 1995); Huntington Nat'l Bank v. Pees, 31 F.3d 401 (6th Cir. 1994); Coker v. Sovran Equity Mortgage Corp., 973 F.2d 258 (4th Cir. 1992).
40. 11 U.S.C. § 506(a).
41. See Heidt, supra note 1, at 1351.
42. See id.
43. See Associates Comm. Corp. v. Rash, 90 F.3d 1036, 1044 (1996).
44. See Note, supra note 16, at 1841-42.
45. See Associates Comm. Corp. v. Rash, 117 S.Ct. 1879, 1884 (1997).
46. See id.; see also Weber, supra note 39, at 924.
47. See Associates Comm. Corp., 117 S.Ct. at 1885; see also Weber, supra note 39, at 924.
48. See Associates Comm. Corp., 117 S.Ct. at 1885.
49. See id.
50. See id.
51. See id.
52. The Supreme Court also addressed the mid-point approach to valuation of the Seventh Circuit. See id. at 1886. Though the Court agreed that "a simple rule of valuation is needed" for such situations, the Court believed that the replacement value approach it found in § 506(a) was less complex than the mid-point's "make two valuations, then split the difference" approach. See id.
53. See id. at 1887 (Stevens, J., dissenting).
54. See id. (quoting § 506(a)).
55. See id. at 1887.
56. See id.
57. See id.
58. See id.
59. See Braucher, supra note 21, at 787.
60. See id. at 787-88.
61. 4 Collier on Bankruptcy P 506.03(7)(d), at 61 (Lawrence P. King ed., 15th ed. 1997).
62. See Braucher, supra note 21, at 789 (citing Collier, at 60).
63. See id. at 781.
64. See id. at 788.
65. See id.
66. See id. at 789.