Elsa Mary Perez

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UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

In re Elsa Mary Perez, Case No. 04-08011-8W7
Chapter 7
Debtor.
/

MEMORANDUM DECISION ON DEBTOR'S
MOTION TO REDEEM COLLATERAL

In a case under chapter 7 in which the debtor is an
individual, the debtor has the right under section 722 of
the Bankruptcy Code to redeem exempt tangible personal
property from a lien by paying the holder of such lien the
amount of the allowed secured claim that is secured by such
lien. In this case, the Debtor, Elsa Mary Perez (“Debtor”),
proposes to redeem her automobile by paying its wholesale
value determined as of the date of the hearing on the
motion to redeem. The creditor that holds the lien, Ford
Motor Credit Company (“Ford Credit”), objects to the
Debtor’s proposed redemption, arguing that the vehicle
should be valued based on the fair market value as of the
date of the Debtor’s petition commencing her bankruptcy
case. For the reasons set forth below, the Court overrules
the creditor’s objection and concludes that the wholesale

value determined as of the date of the hearing on the

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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motion to redeem is the appropriate value for purposes of a
debtor’s redemption of personal property under section 722.

Conclusions of Law

The court has jurisdiction over this matter pursuant to 28
U.S.C. sections 157 and 1334. This is a core proceeding pursuant
to 28 U.S.C. section 157(b) (2) (A), (K), and (0).

A. Section 506 and Rash.

In order to redeem personal property from a lien, section
722 requires the debtor to pay to the secured creditor “the
amount of the allowed secured claim” secured by the lien. 11
U.S.C. § 722. Bankruptcy Code section 506 is the provision that
governs valuation of collateral securing claims against property
of the estate. In this regard, section 506(a) provides in
pertinent part:

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, and in conjunction with any hearing on
such disposition or use or on a plan affecting such
creditor’s interest.

11 U.S.C. § 506(a) (emphasis added).
Creditors often argue, as Ford Credit has done in this

case, that the Supreme Court’s holding in Associates Commercial

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Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed.2d 148
(1997), is directly applicable to redemptions under chapter 7
and mandates that valuations for purposes of section 722
redemptions be based on what the debtor would pay to obtain like
property for the same proposed use (the “replacement-value
Standard”). Rash, 520 U.S. at 955-56. While this Court agrees
that Rash is applicable to the manner in which bankruptcy courts
must apply section 506, the Court concludes that just as Rash
mandates the use of a replacement value in the context of cram
down under chapter 13 (the situation presented in Rash), Rash
mandates the use of a wholesale value’ in the context of
redemptions under chapter 7.

Nowhere in Rash does the Supreme Court hold that all
valuations under section 506 must be based on a replacement
value standard. Rather, Rash was decided entirely in the context
of a debtor’s exercise of the "cram down" option available ina
chapter 13 case under Bankruptcy Code section 1325(a) (5) (B).
Specifically, the Supreme Court in Rash held that “ .when a
debtor, over a secured creditor's objection, seeks to retain and
use the creditor's collateral in a Chapter 13 plan... § 506 (a)

directs application of the replacement-value standard...” as

+ For purposes of valuation of the Debtor’s automobile in this case, the Court
considers the terms “liquidation value,” “foreclosure-value,” and “wholesale
value,” to be synonymous and to represent the low end of the valuation
spectrum with “replacement value” or “fair market value” to represent the
high end of the automobile’s value.

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opposed to “what the secured creditor could obtain through
foreclosure sale of the property (the ‘foreclosure-value’
Standard)...” Rash, 520 U.S. at 955-56.

In Rash, the Supreme Court first analyzes section 506(a) in
isolation, and then analyzes its application to the specific
case before it. In this regard, the Supreme Court initially
notes that the words of the first sentence of section 506(a) --
"the creditor's interest in the estate's interest in such
property” -- “imparts no valuation standard: A direction simply
to consider the ‘value of such creditor's interest’ does not
expressly reveal how that interest is to be valued." Rash, 520
U.S. at 961. “The full first sentence of § 506(a), in short,
tells a court what it must evaluate, but it does not say more;
it is not enlightening on how to value collateral.” Id.

With respect to the balance of 506(a) contained in the
second sentence, the Supreme Court then explains: “The second
sentence of § 506(a) does speak to the how question. ‘Such
value,’ that sentence provides, ‘shall be determined in light of
the purpose of the valuation and of the proposed disposition or
use of such property.’” Id. As set forth by the Supreme Court in
Rash, the proposed “disposition or use” is of “paramount
importance to the valuation question.” Id. at 962. Given this
statutory direction, the Supreme Court then analyzes the

question of the standard for valuation in the context in which

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the Rash case arises - a chapter 13 debtor’s exercise of the
cram down option with respect to treatment of a secured claim.
Under this option, the debtor may keep the collateral over the
creditor's objection so long as the creditor is provided with
the equivalent of the present value of the collateral over the
life of the plan. 11 U.S.C. § 1325(a) (5) (B).

As a result, under the cram down option the creditor is
exposed to “double risks” in that the debtor keeps the
collateral under a court-imposed “crammed down” financing
arrangement. That is, the “debtor may again default and the
property may deteriorate from extended use.” Id. at 962-963. Use
of the replacement standard in such instances is mandated by
section 506 because it values “’the creditor’s interest in the
collateral in light of the proposed [repayment plan] reality: no
foreclosure sale and economic benefit for the debtor derived
from the collateral equal to ... its [replacement] value." Id.
(citing In re Winthrop Old Farm Nurseries, 50 F.3d 72, 75 (18*
Cir. 1995)). “That actual use, rather than a foreclosure sale
that will not take place, is the proper guide under a
prescription hinged to the property’s ‘disposition or use.’” Id.

As explained in Rash, the court-imposed payment terms
available to a debtor under the cram down provisions of chapter
13, “displaces a secured creditor’s state-law right to obtain

immediate foreclosure upon a debtor’s default.” Id. at 964. It

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is in this context that the Supreme Court recognizes that this
“disposition or use” by the debtor requires a valuation standard
based on replacement value of the collateral. Because the
secured creditor is receiving back neither the collateral nor
its proceeds, liquidation value is not relevant to the debtor’s
intended use or disposition in the context of a cram down under
chapter 13. Id. at 962-63.

B. A Chapter 7 Debtor’s Options under Section 521.

Bankruptcy Code section 521 sets forth the duties of a
debtor who seeks the benefit of a discharge under Chapter 7.
With respect to the trustee’s obligation to liquidate property
of the estate, the debtor is required to facilitate this process
by turning over to the trustee for purposes of liquidation any
property of the estate that has not been allowed as exempt. il
U.S.C. §§ 521(4) and 522(b). Section 521(3) deals separately
with the situation that arises where the debtor’s property is
subject to a lien -- typically the purchase-money financing
incurred when the property was purchased. The most common
example of this is the one before the Court in this case -- the
debt securing the debtor’s purchase of an automobile. Typically,
as is also the situation in this case, there is no equity in the
automobile, that is, the amount of the debt exceeds the value of
the automobile. Under such circumstances, the property is

allowed as exempt and is no longer property of the estate. In

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such cases, there is no obligation on the debtor’s part to turn
the automobile over to the trustee. However, the debtor still is
obligated under section 521 to deal with the secured creditor
holding the lien on the automobile.

Specifically, section 521 gives an individual debtor three
options with respect to property that is collateral for a
consumer loan where the property is exempt and not property of
the estate. These options are: (1) redemption under section 722,
(2) reaffirmation of the debt under section 524(c), or (3) to
Simply surrender the property to the secured creditor. See
Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512,
1516 (11°? Cir. 1993); In re Waters, 248 B.R. 916, 917-918
(Bankr. M.D. Fla. 2000). The circumstances of the debtor’s
financial situation and the value and nature of the personal
property typically dictate the debtor’s choices. In Central
Florida, the prevalent method of transportation is the
automobile. Accordingly, surrender of an automobile is not a
favored choice, occurring typically in the occasional case where
the debtor has recognized that the car payments are simply
beyond the budget of the debtor or, more often, where the debtor
has fallen hopelessly behind in the payments and has no means to
catch up.

While redemption under section 722 does leave a debtor with

the automobile, it is also rare that this option is exercised

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because it requires the debtor to pay cash equal to the value of
the automobile. Because the typical debtor has just filed for
bankruptcy and turned over all of the debtor’s non-exempt assets
to the trustee for liquidation, most debtors simply do not have
a ready source of cash to exercise the option of a redemption
under section 722.

In this Court’s experience, the most likely option to be
exercised by a chapter 7 debtor is retention of the automobile
under a reaffirmation agreement with the creditor. Secured
creditors actively seek such reaffirmation agreements, often
filing motions to compel the debtor to reaffirm their automobile
financing agreements. Similar to the cram down option of a
chapter 13, in agreeing to enter into a reaffirmation agreement,
the secured creditor assumes the “double risks” of further
default by the debtor and deterioration of the property from
extended use. Rash, 520 U.S. at 962-963. However, unlike the
Situation arising in a cram down under chapter 13, the full
amount of the indebtedness is reaffirmed and is not discharged
in bankruptcy. This leaves in place the financing that was
originally agreed to when the car was purchased. The advantage
to the debtor is retention of the automobile, albeit with no
discount as would be available under a chapter 13 cram down or

redemption under section 722.

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on Redemption under Section 722.

In this case, the Debtor has decided to exercise the option
to redeem her automobile under section 722 “from a sale to
enforce a lien in accordance with applicable law.” Fed. R.
Bankr. P. 6008 (“Redemption of Property from Lien or Sale”).
This Court must, therefore, determine the value of the
automobile in light of “the purpose of the valuation and of the
proposed disposition...” of the automobile, which in this case is
redemption under section 722. 11 U.S.C. § 506(a). More
specifically, is a redemption more similar to a cram down under
a chapter 13, making the replacement standard applicable, or is
it more similar to “what the secured creditor could obtain
through foreclosure,” making the “foreclosure-value” applicable?
Rash, 520 U.S. at 955-56.

It is clear to the Court from a reading of Rash that it was
the debtor’s use of the chapter 13 cram down provision, “..to
retain and use the creditor's collateral in a Chapter 13 plan...”
that resulted in the Supreme Court’s direction that the
replacement value standard be applied. Rash, 520 U.S. at 955-56.
It is through the chapter 13 cram down that the creditor is
exposed to “double risks” in that the debtor keeps the
collateral under a court imposed “crammed down” financing
arrangement. That is, the “debtor may again default and the

property may deteriorate from extended use.” Id. at 962-963.

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The situation in a redemption is the opposite from that
present in a chapter 13 cram down. In a redemption, there is no
exposure to the “double risks” of future default and further
deterioration of the collateral. “The true underpinning of Rash
is its focus on the ‘double risk’ of a debtor’s retention of
property in a Chapter 13 case and payment of the value of the
creditor’s allowed secured claim over time.” In re Smith, 313
B.R. 785 (Bankr. N.D. Ind. 2004). Rather, just as ina
foreclosure sale, the secured creditor realizes the foreclosure
value of the automobile.

In essence, a section 722 redemption is the functional
equivalent of a surrender of the automobile followed by a public
liquidation auction at which the debtor appears, bids at the
auction, and purchases the automobile for its liquidation value
as determined by the market place -- a foreclosure sale -- on
the date of the sale. To the advantage of the secured creditor,
section 722 avoids time and expense inherent in the foreclosure
process. These avoided expenses stem from the need ina
repossession to take the automobile into the possession of the
secured creditor who then incurs storage charges and auction
expenses. In re Weathington, 254 B.R. 895, 900 (6° Cir. B.A.P.
2000) (“... it is likely that when a debtor pays the creditor

the liquidation value of a vehicle to redeem it, the creditor

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may actually receive more money than if it had repossessed the
vehicle.”).

All of these expenses are avoided to the benefit of the
secured creditor when the court authorizes the debtor to redeem
the collateral. Functionally, in all other respects, the
redemption under section 722 parallels the process of
liquidating the collateral under Article 9 of the Uniform
Commercial Code. In re Weathington, 254 B.R. 895 (6'® Cir. BAP
2000) (“In contrast to the Chapter 13 cram down scenario
described in Rash, there is no distinction in the economic
consequences to the creditor between surrender and redemption in
Chapter 7.”).

Rash, therefore, mandates that the creditor’s interest in
the collateral be valued in light of the proposed redemption
reality: That is, the functional equivalent of a foreclosure
sale will take place, and that is the “proper guide” under a
prescription hinged to the property’s “disposition or use” for
purposes of valuation under section 722 redemption. Rash, 520
U.S. at 962-63. See also In re Tripplett, 256 B.R. 594, 598
(Bankr. N.D. Ill. 2000) (*...the impact of redemption is much
closer to surrender than to cram down, and Rash cannot
reasonably be read to mandate replacement value in the

redemption context.”).

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Of comfort to this Court in reaching this conclusion is the
apparent unanimity of all of the reported cases, which have
reached the same conclusion in applying the
“wholesale/liquidation-value standard” as the appropriate
standard for valuing collateral in Chapter 7 redemption cases.
See, e.g., In re Weathington, 254 B.R. 895 (6™ Cir. BAP 2000);
In re Smith, 313 B.R. 785 (Bankr. N.D. Ind. 2004); In re Neal,
2004 WL 2032319 (Bankr. N.D. Iowa 2004); In re Barse, 309 B.R.
109 (Bankr. W.D.N.Y. 2004); In re Bouzek, 311 B.R. 239 (Bankr.
E.D. Wis. 2004); In re Washington, 2003 WL 22119519 (Bankr. E.D.
Ark. 2003); In re Podnar, 307 B.R. 667 (Bankr. W.D. Mo. 2003);
In re Zell, 284 B.R. 569 (Bankr. D. Md. 2002); In re Ard, 280
B.R. 910 (Bankr. S.D. Ala. 2002); In re Dobler, 2002 WL 31342412
(Bankr. D.N.D. 2002); In re Ballard, 258 B.R. 707 (Bankr. W.D.
Tenn. 2001); In re Tripplett, 256 B.R. 594 (Bankr. N.D. Ill.
2000); In re Russell, 2000 WL 33673802 (Bankr. M.D.N.C. 2000).
See also 6 Lawrence P. King et al., Collier on Bankruptcy, |
1722.05, at 722-9 (15*® ed. rev. 2000) (interpreting § 722 to
require liquidation valuation of secured claims). In addition,
the only apparent decision to adopt the “replacement-value
standard” in the context of redemption was quickly reversed and
supplanted with the “wholesale/liquidation-value standard.” See

Smith v. Household Automotive Finance Corporation, 313 B.R. 267

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(N.D. Ill. 2004), reversing In re Smith, 307 B.R. 912 (Bankr.
N.D. Ill. 2004).

D. Legislative History of Section 722.

This Court’s conclusion that wholesale value is the
appropriate standard in the context of redemptions under section
722 does not depend on the legislative history of that section.
This Court is mindful that any exercise of statutory
interpretation begins first with the language of the statute in
question. Nat’l Coal Ass’n v. Chater, 81 F.3d 1077, 1081 (11°
Cir. 1996). As a general proposition, a court should not resort
to legislative history when statutory text is clear. Midrash
Sephardi, Inc. v. Town of Surfside, 366 F.3d 1214, 1226 (11°?
Cir. 2004). It is only when a statue is vague or ambiguous that
“other interpretative tools may be used, including an
examination of the act’s purpose and of its legislative
history.” U.S. v. Pringle, 350 F.3d 1172, 1180 n. 11 (11°? Cir.
2003).

While this Court views sections 506 and 722 in light of
Rash not to require a resort to legislative history, a number of
courts have viewed these statutory provisions as “not clearly
and explicitly” setting forth the property valuation method,
making legislative history an appropriate area of inquiry. See,
e.g., In re Weathington, 254 B.R. at 900. It is noteworthy that

the cases that have reviewed the pertinent legislative history

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have concluded that it clearly supports the “wholesale/
liquidation value standard,” as opposed to the “replacement
value standard.”

As indicated in the Congressional Statement to the
Bankruptcy Code, it was the House version of section 722 that
was used rather than the version contained in the companion bill
passed by the Senate. Editor’s Comment, Norton Bankruptcy Law
and Practice 2d., Bankruptcy Code and Related Legislative
History (Thompson West 2003), at 821. It is significant that the
Senate version adopted a markedly different approach to
redemption under section 722. The primary differences between
the two versions were: (i) under the Senate version, redemption
was not available when the debt was purchase-money debt (the
situation in the great majority of cases in current practice),
and (ii) the Senate version would have required the debtor to
pay an amount equal to the greater of the fair market value of
the goods or the amount of the total outstanding balance. Id.

The House version, which was adopted and is now contained
in section 722, takes an entirely different approach. As
described in the legislative history that accompanied the House
version, “The provision amounts to a right of first refusal for
the debtor in consumer goods that might otherwise be
repossessed.” H.R. Rep. No. 95-595 (“House Report”) (1977), at

380-381. It creates a power of redemption in the debtor to

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counter the threat of foreclosure used by secured creditors to
obtain a reaffirmation of a debt. House Report, at 127-128.

But for this power of redemption, the secured creditor
would be able to deprive a debtor of even the most insignificant
household effects even though the items have little if any
realizable market value. Id. “However, the goods do have a high
replacement cost, and thus the creditor is able to use the
threat of repossession, rarely carried out, to extract more than
he would be able to if he did foreclose or repossess.” Id. This
right of redemption as embodied in the House version “amounts to
a right of first refusal on a foreclosure sale of the property
involved.” Id. Applied to a case such as this one, it allows the
Debtor to retain a necessary item of property, an automobile,
and “avoid high replacement costs.” Id. The secured creditor,
under such circumstances, is still not prevented “from obtaining
what he is entitled to under the terms of the contract” that
being the right to receive the proceeds from liquidation in the
form of a cash payment from the debtor as determined by the
court. Id.

It is clear, therefore, that a review of the pertinent
“legislative history clearly demonstrates the Congressional
intent that in the redemption context, a creditor should be paid
the same amount that it would have been paid if the property

were repossessed and sold.” In re Weathington, 254 B.R. 895,

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900. Accordingly, as the cases reviewing this legislative
history point out, the use of the “replacement-value standard”
would circumvent the clear intent Congress had when enacting
section 722 and undermine the proposed purpose of the
legislation to “avoid high replacement costs.” Id. See also In
re Podnar, 307 B.R. 667, 671 (Bankr. W.D. Mo. 2003); In re
Tripplett, 256 B.R. at 598.

E. Effective Date of Valuation.

Having determined that the wholesale method is the
appropriate method for valuing collateral pursuant to section
722, the Court turns to the second area in which Ford Credit and
the Debtor disagree as to the applicable standard: What date
should control for purposes of valuation of the collateral? Ford
Credit argues for the earlier date of the date of the petition
commencing this chapter 7 case. The Debtor argues for the later
date of the hearing on the contested redemption motion.

An analysis of this issue must be done in light of how a
chapter 7 works in the context of a secured creditor’s rights
with respect to its collateral. Upon commencement of the
chapter 7 case, all of the debtor’s property becomes property of
the bankruptcy estate. 11 U.S.C. § 541. Any act to enforce a
lien against property of the estate is stayed. 11 U.S.C. §

362 (a) (4). The secured creditor may seek relief from the

automatic stay to proceed to repossess and foreclose on its

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collateral. While such motions are heard quickly by the
bankruptcy court, generally within 30-60 days of their filing,
further delays are inherent in the process of foreclosure and
liquidation resulting from the steps that a secured creditor
must take under applicable non-bankruptcy law to realize on its
collateral.

Given the time-consuming sequence of events, valuing the
collateral as of the date of the petition puts Ford Credit ina
better position than if the Debtor had elected not to redeem but
to have surrendered the collateral. If that had occurred, Ford
Credit would have had to repossess the vehicle after obtaining
relief from stay. As noted by the court in Podnar, “a creditor’s
repossession and sale of collateral is also attendant with delay
in liquidating the property.” In re Podnar, 307 B.R. at 673.
Valuing the property as of the date of the petition “would
always place the secured creditor in a better position than it
would be if it were allowed to repossess in the ordinary course
of events. Matter of Pierce, 5 B.R. 346, 347 (Bankr. Neb. 1980).
“Valuation at the time of the hearing, therefore, reflects a
more realistic approach.” Van Holt v. Commerce Bank of Bolivar
(In re Van Holt); 28 B.R. 577, 578 (Bankr. W.D. Mo. 1983). See
also In re Henderson, 235 B.R. 425, 428 (Bankr. C.D. Ill.
1999); In re Lopez, 224 B.R. 439, 444 (Bankr. C.D. Ca. 1998);

In re King, 75 B.R. 287, 290 (Bankr. S.D. Ohio 1987).

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F. Conclusion.

It is clear to the Court, that when viewed in light of the
plain wording of the relevant Bankruptcy Code sections, 506 and
722, the guidance provided by the Supreme Court in Rash, and the
overwhelming consistency in the case law, that the wholesale
value determined as of the date of the hearing on the motion to
redeem is the appropriate value for purposes of a debtor’s
redemption of personal property under section 722.

A separate order shall be entered consistent with this
opinion.

JAN - 3 2005

DONE AND ORDERED in Tampa, Florida, on

Mithal 4 }
Honorable Michael G. Williamson
United States Bankruptcy Judge

Copies to:

Debtor:

Elsa Mary Perez

1467 Grove Circle Court
Clearwater, FL 33755-2019

Counsel for Ford Motor Credit Company:
Larry M. Foyle, Esq.
Brad W. Hissing, Esq.
Kass, Shuler, Solomon, Spector,
Foyle & Singer, P.A.
P.O. Box 800
Tampa, FL 33601-0800

F: \WORDWILL\CASES\Perez\722 Opinion v7.doc

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