In Re Peter Gordon Balbus, Debtor. Brown and Company Securities Corporation v. Peter Gordon Balbus

County Arlington seized mobile was filing and the of this BALBUS, Department

Police In re Peter Gordon Debtor. delay an unreasonable constitutes action BROWN AND COMPANY SECURITIES right of his to due amounting to a violation CORPORATION, Plaintiff-Appellant, delay in unreasonable institut- process. An proceeding constitute ing a forfeiture v. process requiring of due a violation BALBUS, Peter Gordon v. return of the United States Defendant-Appellee. Eight Fifty Hundred and Eight Thousand ($8,850) Dollars in United States Curren- No. 90-2067. 564-65, 2005, 555, 103 S.Ct. cy, U.S. Appeals, States United Court (1983). 2012, 76 L.Ed.2d 143 determin- Fourth Circuit. government brought ing time, proceeding within a reasonable courts Argued Feb. 1991. following to consider the factors: are May Decided 1991. “length delay, delay, the reason for right, assertion of his [claimant’s] As Amended June prejudice to the at Id. [claimant].” at 2012. S.Ct. factors, Considering these con we delay

clude that the was not unreasonable.

Although alleged Turner the administrative

forfeiture was void because of his lack of

notice, challenge Turner does not

government reasonably believed properly

Corvette had been forfeited in the impres

administrative action. Under the already

sion that the automobile had been

forfeited, government had no reason to judicial proceedings

initiate until Turner validity

challenged the of the administra government proceeded

tive forfeiture. delay

to file this action without once Turn challenge. delay

er made his was as

much to Turner’s attributable decision to asserting right

defer his to return of the

vehicle until after the conclusion of the proceedings government.

state as to the

Additionally, prejudice Turner suffered no delay.

from While under other circum delay might

stances a of 16 months consti delay,

tute an we find unreasonable Turn right process

er’s to due was not violated. prop-

We conclude that the district court

erly granted summary judgment to the

government affirm.

AFFIRMED.

247 ical costs sale should not be deducted and, therefore, denied Brown’s motion. The United States District Court for the Eastern Virginia District of affirmed the ruling of the Bankruptcy Court. This ap- peal followed. We find no error in the district court’s ruling hereby and affirm. I On January 1989, Balbus filed a vol- untary petition pursuant for relief Chap- to ter title United States Code. Brown is a secured creditor possessing judgment against Balbus; lien filed a timely Brown Power, Strawn, Thomas C. Winston & proof of claim. D.C., Washington, (Michael argued J. Chapter Lichtenstein, 13 Melrod, Allen is Rugg, only S. Red- available to debt Gartlan, ors who P.C., & have Washington, D.C., noncontingent, man liquidated, brief), unsecured totalling for debts plaintiff-appellant. $100,- less than 000 and noncontingent, liquidated, secured Robert Glenn Mayer, Mayer, Robert G. debts totalling $350,000. less than 11 P.C., Fairfax, Va., for defendant-appellee. 109(e). U.S.C. In determining $100,000 Balbus has less than in unsecured ERVIN, Before Judge, Chief debts 109(e), under 11 U.S.C. the court MURNAGHAN, Judge, Circuit and must add amount of unsecured debt MULLEN, United Judge States District and the by amount which secured creditors for the Western District of North are undersecured. 11 506(a).2 See U.S.C. § Carolina, sitting by designation. Balbus filed schedules of assets and lia- ERVIN, Judge: Chief bilities, listing $324,050.73 secured debts of and $57,968.73. unsecured debts of Balbus (“Balbus”) Peter Gordon Balbus filed a listed piece of property one real and some voluntary petition Chapter for relief under personalty security as for secured Bankruptcy petition Code. This parties agree debts. The that the unad- was challenged by one of Balbus’ secured justed fair market value of the real creditors, Brown Company and Securities ty $282,500, is and the fair market value of (“Brown”). Corporation Brown asserted $4,500. personalty is Fair market val- sale should be ue of $287,000, the collateral thus totals when calculating deducted the value Bal- $37,050.73 leaving of the secured claims bus’ real property providing security $37,050.73 Adding undersecured. of un- his secured debt. If the costs were deduct- $57,968.73 debt to the dersecured listed ed, Balbus eligible would not be for relief $95,- unsecured debt results in a total of Chapter 13, under title United States debt, 019.46 unsecured falls which within 109(e).1 Code. See U.S.C. § $100,000 109(e). limit in 11 U.S.C. § Brown filed a motion to dismiss or to con- Chapter vert Balbus’ filing Chapter 7. or, Brown a motion filed dismiss Bankruptcy Court found hypothet- alternative, a motion to convert Balbus’ 109(e) provides 1. pertinent part: 11 U.S.C. § An claim of a allowed creditor secured Only owes, regular an individual with lien on income that estate has an filing interest, petition, on the date subject or that to setoff under noncontingent, liquidated, title, unsecured debts of section 553 of this is an ... unsecured $100,000 noncontingent, than liqui- less dated, claim extent that the value of such $350,000, secured debts of less than ... subject interest or the creditor’s amount so chapter be a debtor under 13 of this title. setoff less than the amount of such allowed claim. provides U.S.C. pertinent part: filing Chapter filing, to a thus allowed claim. Such value shall be deter- Chapter proceed right of Balbus to mined challenging argues and of 13. Brown

under use of such security represented by conjunc- Balbus’ amount of any hearing tion disposition with on such be reduced real should plan affecting or use or on a such credi- hypothetical costs of sale of of the amount tor’s interest. figure Brown uses a for property. 6% sale, reducing the dollar the costs 506(a) added). (emphasis 11 U.S.C. We § property real which is amount of Balbus’ interpretation review the of a statute de As a result security for his secured debt. 745, Malody, novo. In re 102 B.R. 747 reduction, asserts that the of this Brown (Bankr. Cir.1989). 9th in the secured claims are undersecured Bankruptcy courts confronted with how $54,000.73, $37,- rather than the amount of interpret 506(a) “valuation” in when a § $54,000.73 Adding 050.73 stated above. proposes keep debtor the secured collat- $57,968.73 to the listed undersecured debt eral conflicting have reached results. in a unse- of unsecured debt results total Assoc., 798, Liberty re 222 105 B.R. 802 $111,969.46, cured which exceeds debt (Bankr.E.D.Pa.1989); Usry, In re 106 B.R. 109(e). $100,000 limit of 11 U.S.C. § 759, (Bankr.M.D.Ga.1989). 760 The contro- Bankruptcy versy determined that largely conflicting The Court stems from the language of sale should not be the above underlined sentences 506(a). 791, fair market value deducted from the In Boring, 91 B.R. § (Bankr.S.D. 1988); property. Because the Claeys, real Ohio deducted, (Bankr.D.N.D.1987). the total amount costs were not 990-91 statutory Bankruptcy was under the of unsecured debt Court for the District of North limit. the court denied Brown’s Dakota set aout discussion of the conflict- 506(a) and motion to ing language motion to dismiss convert. which is often this determination to the appealed Claeys, Brown cited. See 990-91. The explained: District Court for the East- United States Virginia. The ern District of District Court Whether a valuation is made without re- Bankruptcy the decision of the affirmed gard potential liquidation costs of Thereafter, Court. the District Court de- depends, seems, upon emphasis it motion for nied Brown’s reconsideration. given to the first and second sentences of appeal followed. This 506(a). sentence, section pro- The first

viding that the claim is secured to the II extent of the the creditor’s inter- property, suggests est in the that since it case, In order resolve this we being the creditor’s interest 506(a) interpret Bankruptcy must itself, valued and not the collateral it Code in fact that Balbus in any should not make difference whether keep tends to his real rather than is retaining 506(a) provides: sell it. Section Yet, of the second sentence An allowed claim of a creditor secured suggests or a lien in which the estate has use of the collateral itself must be con- interest, subject that is or to setoff sidered determining when that value. title, under section 553 of this ais se- Id. cured claim to extent of the value of such creditor’s interest hypo- estate’s Some courts have determined that interest or to the extent thetical costs of sale should be deducted setoff, subject though of the amount as the even the debtor intends to retain be, Smith, case and is an unsecured claim the 92 B.R. See (Bankr.S.D.Ohio1988); to the extent that the value of such credi- Claeys, subject tor’s interest or amount so to B.R. at 992. have determined that Others setoff is than less the amount of such costs should not be deduct- re Courtright, See In ed. 57 B.R. courts focus on the first sen- Farms, In re Bellman (Bankr.D.Or.1986); 506(a): tence of § Inc., (Bankr.D.S.D. 86 B.R. fact that the first [T]he sentence refer- 1988). ences “the creditor’s the es- tate’s interest in such property” legislative history of causes indi- these courts to conclude that cates that should be done valuation ad hoc must be calculated from the approach vantage and that no fixed is correct: point of the creditor and what the credi- “Value” does not necessarily contem- tor’s interest would be if liqui- worth plate forced sale liquidation value of dation necessary. costs, were Sale they collateral; always imply nor does it reason, would, in liquidation, be deducted going full concern value. Courts will from the what creditor would receive for to case-by- have determine value on a the property. basis, taking case into account the facts competing of each case the Assoc., In re 222 Liberty interests 798, 105 B.R. 803 in the case. (Bankr.E.D.Pa.1989) (rejecting this view holding hypothetical that costs should 595, H.R.Rep. Cong., No. 95th 1st 356 Sess. deducted). not be The Bankruptcy Court (1977), reprinted in Cong. 1978 U.S.Code in the Southern District of Ohio further 5787, & Admin.News 6312. The Senate explained this view that proper empha- the Report further duty clarifies the the of sis is on the creditor’s interest rather than determining court in valuation: the proposed debtor’s use of the collateral: While courts will have to determine value The distinction to be is drawn between case-by-ease basis, on a the subsection the of the property and the value makes it clear that valuation is to be of the creditor’s interest in such proper- determined in of light the ty. The latter value is the one that is valuation and statutorily-mandated under of § subject use of the the Bankruptcy Code to be used in deter- 989, S.Rep. 68, No. Cong., 95th 1st Sess. mining the secured status of a creditor in reprinted in Cong. 1978 U.S.Code & Ad- bankruptcy case. 5787, min.News Ward, 710, (Bankr.S.D. 13 B.R. 712 noted, As we have one line of has cases 1981). Ohio determined that proposes when a debtor The Ward hypothetical held that collateral, retain the secured hypotheti- costs of in sale the amount of should 10% cal costs of sale should be deducted in be in determining deducted the value of the order to determine the valuation of the Id. Richardson, See also In re creditor’s interest in the collateral. The (Bankr.S.D.Ohio 82 B.R. 1987) (re- 873 adopting courts viewpoint this focus on ducing fair market value of the 506(a). first sentence of See re In § Smith, ty by hypothetical sale); 10% of (Bankr.S.D.Ohio 92 B.R. costs 290 Smith, 92 B.R. 1988) (concluding at 291 (“[Bjecause that creditor’s inter- it 10% hypothetical est in costs of sale deduction was interest in property estate’s proper). Other valued, which courts have held that must be it appropriate amount of deduct costs of costs of sale to regardless sale be deducted equal a debtor intends should be retain and costs a prop- use the erty.”) (emphasis creditor would incur “in original); disposing prop- in Boring, (“Most erty B.R. in commercially at 795 recognize courts reasonable manner.” that Claeys, Davis, proposed 992; the debtor’s re retention and use of (Bankr.D.Me.1981). collateral does not emasculate the fact that it is in the first instance the creditor’s While the Southern District Ohio and in the collateral that must val- be bankruptcy other courts determined that ued.”) (emphasis original). hypothetical costs of sale should be deduct- ed, Bankruptcy Court growing Eastern “a re- number have courts District Pennsylvania explained jected reasoning, the view line of this and have re- (sec. property” 506(a)) rendering sale costs the instant to deduct

fused plan unless debtor’s is for the debtors’ retention and use. case a 506 calculation selling on contemplates the debtors cannot eat with Assoc., Liberty market.” open and run with the the hounds hares. refuse to deduct 803. Courts B.R. at Seeking property, they retention of the emphasize the second liquidation values to cannot insist be 506(a), which dictates sentence paid to the creditor installments. be made “analysis should At Id. at 367. issue Crockett was use of the collateral.” intended Debtor’s whether the court should use wholesale or (Bankr.M.D. 106 B.R. Usry, determining retail value valuation of Ga.1989). property consisting the secured of automo- for the District of Bankruptcy Court biles. explanation of the view Oregon set out bankruptcy Several recent cases have costs should not be de- agreed holdings with the in Courtright and following discussion: ducted Gerhardt, 88 B.R. Crockett. See 506(a)] sentence of were If the [first (Bankr.S.D.Ohio 1987) (“This 151, 15354 that the value must to mean interpreted opinion par- Court is of the that when the which the creditor at the amount be fixed actually contemplating ties are not the sale foreclosure, then the receive would property, then of the costs of sale is to be pro- of the statute which last sentence analysis.”); excluded from the valuation shall be determined that the value vides (“This Usry, 106 B.R. at 761-62 court purpose the valua- light of the of agrees analysis Courtright with the of the disposition proposed or and of tion hypothetical court” and holds that costs property, surplus- would be use of deducted.); should not be In re Bellman interpretation would mean age. Such Farms, Inc., 1016, (Bankr.D. B.R. 86 1019 always should be fixed at the value S.D.1988) (“[I]f pos- remains in the creditor would re- the amount which collateral, hypothetical session of the these regardless of the upon foreclosure ceive should not be deducted from val- pro- the valuation and of the purpose of collateral.”). ue of the property. use of disposition or posed depend upon would not whether The test case, In this the district court determined intended to release the the debtor hypothetical that the costs should not be intended, ty instead retain and use or deducted, ruling large part in basing its appropriate It is not upon Supreme dicta in the recent Court ignore give no effect to the court to Savings decision in v. Tim- United Ass’n language of the last sentence of the Associates, Ltd., bers Inwood Forest of statute. 365, 626, 484 U.S. 108 S.Ct. 98 L.Ed.2d 740 495, (Bankr. B.R. Courtright, 497 (1988). required the to de- Timbers Court D.Or.1986). Courtright The court conclud- termine whether unsecured creditors are ed that when the debtor intends to retain money interest on their under 11 entitled to the court should not use the 362(d)(1) delay because of the in U.S.C. § in deduct costs of sale deter- foreclosing on their collateral caused mining the valuation of the Id. 368, bankruptcy stay. the automatic Id. at Bankruptcy The Court for the Northern 108 S.Ct. at 628. order to make this agreed determination, interpret District of Illinois with the Court- the Court had to holding right its Matter property” “interest as found of Crockett, (Bankr.N.D.Ill.1980). 3 B.R. 365 362(d)(1). The Court looked at the “inter- § There, explained: the court con- property” phrase est in used other for assist- Bankruptcy texts in the Code plan Under a secured 371, at of claim ance. at 108 S.Ct. 630. One regard should be valued with due Id. the use of the to the those other contexts was value of the to the estate. 506(a). The wrote: phrase or use of Court “[T]he § In subsection “interest property” obviously (a) ^[506] the creditor’s means limits. (Bankr.E.D.Va.1980). Congress compro- Ballard, security taking his interest without ac- mised on dollar limitations between the right count of posses- his to immediate Senate version and the House version. If sion collateral on default.... The hypothetical costs were deducted under phrase “value such creditor’s inter- 506(a), then these limitations § set out in est” in means “the value § 109(e) could be manipulated according § collateral.” the amount costs deter- (emphasis Id. at S.Ct. at add- mined to be reasonable. ability This ed). The Court concluded “interest in manipulate 109(e) the limits of on which § 362(d)(1) property” under did not include § Congress compromised runs contrary to during pendency of the auto- purpose of setting specific dollar limita- stay. matic Id. tions. That purpose “permit was to Bankruptcy The Court in this case proprietor, small sole for whom a chapter upon seized the above from Tim 11 reorganization is too pro- cumbersome a and determined bers that “the better view cedure, proceed chapter under 13.” is that the secured creditor’s interest H.R.Rep. No. 95th Cong., 1st Sess. 320 506(a) purposes be valued for without (1977), reprinted in Cong. 1978 U.S.Code superimposing a foreclosure or other sale & Admin.News purpose disposition collateral where a the valuation in this case is to determine reasonably is not offing.” 109(e) Balbus met the require- Bankruptcy thus Court determined ments, weighs and this in favor of consist- costs of sale would interpretation ent of the dollar limitations not be deducted in this case. The District 109(e). Therefore, of val- affirmed Court this determination. We supports uation the view that agree with the by result reached the Bank costs should not be deducted from the val- ruptcy Court and affirmed the District ue of the Court. looking addition to purpose at the If accept we were to hypo- the view that valuation, the the second sentence of thetical costs should be deducted in this 506(a) directs us to look at the “proposed § case, we reading would be the second sen- disposition or property use of” the at issue. 506(a) tence of out of the statute. “In § 506(a). Indeed, 11 U.S.C. the construing a Senate Re- obliged statute are give § we effect, possible, port if requirement. underscores that every Congress word See used.” S.Rep. Reiter v. Corp., Cong., Sonotone No. U.S. 95th 1st Sess. 330, 339, 2326, 2331, 99 S.Ct. 60 L.Ed.2d reprinted in 1978 Cong. U.S.Code & Ad- (1979). The second sentence in Here, min.News proposed 506(a) requires that we determine the § disposition use or property of the real light value “in of the purpose of the valua- plans that Balbus to continue to live his proposed tion and of the disposition or use house and not sell it. Courts which have property.” 506(a). of such 11 U.S.C. § focused property on the intended use of the case,

In this have purpose generally of the held valuation that when is to determine whether Balbus’ unsecured property, hypothetical retains the costs $100,000 debts are less than the limit set should not be Courtright, deducted. See 109(e). are, out in 11 they U.S.C. If then § 497; Assoc., 222 Liberty properly Chapter Balbus filed a 13 claim. 803; Usry, B.R. at 106 B.R. at 761. Those not, If then was not available to which courts hold that 109(e). Balbus. See U.S.C. § generally should be deducted do so fo- cusing 506(a), on the first sentence of 109(e) The limitations set out § were § virtually ignoring proposed reached as a compromise result debtor’s be- tween the higher disposition require- Senate bill had collateral limits and the House bill which had 506(a). lower ments of the second sentence § disposition of the proposed my what brothers “grow- characterize as a that Balbus not ing jurisdictions case is will sell his number” this endorsing the this disposition factor indicates

house. distinction and disallowing the hypo- is no need to subtract the that there deduction when the debtor intends to retain they just of sale as are that— the thetical costs

hypothetical. indicates, As the split generally authorities tends per- to follow a

Ill ceived tension between the first and second The second sentence of 11 U.S.C. 506(a). sentences of section In arguing in 506(a) requires that we determine the § may, now, favor of what up to be called the “in value of a creditor's interest of general rule, begins by Brown & Co. focus- purpose of the valuation of the ing on the of the first sentence— disposition proposed proper or use of such “the value of creditor’s interest in the [the] ty.” ignore We find that we cannot estate’s property” as- [the] —in direction of that sentence and thus cannot serting that because purpose of the follow those courts which have chosen to valuation is to determine the amount of 506(a). focus on the first sentence of security that exists for the benefit of se- case, valuation, this to de creditors, cured logical- interest cannot termine whether the dollar limits of 11 ly exceed the amount a creditor would real- 109(e) exceeded, have been U.S.C. coun attempted ize if he liquidate the credi- sels that costs should not be words, tor’s interest. In other gross deducted. Balbus intends to continue liv value, the undiminished fair market value house, ing in his so the of the real property, represent does not property also hypothet counsels that value, net the dollar amount which would ical costs should not be Finally, deducted. be available to a secured creditor were he dicta Timbers indicates that ever to look to the property for satisfaction interpretation proper held, of his claim. As one court “The dis- collateral, is the value of the not tinction to be drawn is between the value of the collateral hypo value minus the and the value of the credi- Timbers, thetical costs of sale. See 484 tor’s interest property.... This 372, 108 U.S. at S.Ct. at 630. Each of these latter properly takes into account supports the factors view that the district costs of justifies sale and a factor in 10% properly court refused hypotheti to deduct determining the cash amount by realizable cal costs of sale from the value of Balbus’ a lien Ward, creditor in real estate.” In Re property. we hold that the dis (Bankr.S.D.Ohio 13 B.R. 1981). ruling error, trict court’s was not in and we position Brown & Co.’s supported by affirm. impressive an array authority from AFFIRMED. courts, bankruptcy courts, district one bankruptcy appellate panel, and commenta- MURNAGHAN, Judge, Circuit tors. Malody, (9th See In re 102 B.R. 745 dissenting: Cir.B.A.P.1989); Smith, In re 92 B.R. 287 that, (Bankr.S.D.Ohio Brown & Co. has pur- asserted for 1988); In Claeys, poses 506(a), of 11 U.S.C. the fair (Bankr.D.N.D.1987); market B.R. 985 In re Rich- value of the property ardson, debtor’s real (Bankr.S.D.Ohio should 1987); 82 B.R. 872 reduced, cases, be by all Cook, an amount (Bankr.D.Utah In re 38 B.R. 870 equal to the 1984); costs of Parr, (Bankr.N.D. sale of In re 30 B.R. 276 property. majority’s Ala.1983); quarrel Nort, with In re Van 9 B.R. 218 the proposition so stated is that (Bankr.E.D.Mich.1981); Klein, the reduc- tion place should take only if the (Bankr.E.D.N.Y.1981); debtor B.R. 657 intends dispose Jones, to of the (Bankr.E.D.Va.1980); That 5 B.R. 736 see quarrel pits favoring general authorities a Queenan, also J. Standards Valuation for rule of the against deduction in all cases Security Interests in (1987); 29-33 generally “emerging. Com.LJ. see majority” of authorities is nei- ther, Fortang Mayer, hand, Valuation in Bank- nor, one emerging on the (1985). other, ruptcy, 32 U.C.L.A. L.Rev. 1061 majority. a All of those authorities for the stand Four of the cases cited the majority proposition that the value to which se- value the collateral at its fair market value cured creditor look to satisfy obli- and decline to deduct hypothetical closing gation independent is owed debtor costs only when the debtor intends to re- of the intentions of the regarding debtor property tain the property and the is a (sale retention) disposition “going concern” or will be used to produce ty. If the debtor intends to retain the income essential reorganization to the plan. property yet the creditor decides to look to Usry, 762; 106 B.R. at Fiberglass Indus- debt, satisfy tries, to namely, 742; Ranch, Robinson interest,” 608; Crockett, “creditor’s creditor will at 3 B.R. at 367. Be- (in foreclose perfect and will receive cause there mar- is no evidence in the record ket) the market suggesting fair value of the that Balbus intends to produce less the costs of income property, foreclosure. from the those are cases inapposite, yet the majority has not ad- disagrees, The majority suggesting that dressed the distinction. if the property, intends to retain the Bellman Farms and costs of sale Crouch exactly engage are analysis question, no of the hypothetical. The then majority merely citing as that — to cases in 506(a)’s jurisdictions. other serts that section discus- reference sion of nothing “creditor’s interest” takes Gerhardt entirely on an dictum; more than meaning different if we focus our cites not a attention single case or other authority in upon section, reaching the second sentence of the conclusion, its a conclusion reads, which is also a which “Such value shall be deter minority position in the Southern District mined of the valua of Ohio. Courtright makes a at- feeble proposed tion and of the disposition or use tempt discussing at the tension between of such and in conjunction with the first and second sentences of section any hearing disposition on such or use or 506(a) by stating, plan affecting on a such creditor’s inter goes est.” The then section [the on to assert reads jurisdictions “to the extent of the such comprising the “de creditor’s interest in veloping majority” the estate’s interest have looked that lan appears guage ruling property”] care problem where the of sale estate’s interest will not be deducted from the value less than full ownership such as collateral where where the debtor intends only debtors’ own retain the undivided Usry, See In re [sic] If (Bankr.M.D.Ga.1989); the Penz, re [lan- In guage] interpreted were to mean (Bankr.E.D.Ok.1989); 102 B.R. 826 that the In re value Farms, be fixed at the (Bankr.D.S. Bellman must amount which 86 B.R. 1016 D.1988); foreclosure, the Gerhardt, creditor would receive on In re 88 B.R. 151 then (Bankr.S.D.Ohio the last 1987); sentence of the Crouch, statute In re provides that the value (Bankr.W.D.Va.1987); B.R. 364 shall be In re Rob Ranch, Inc., determined the (Bankr.D. inson 75 B.R. 606 Mont.1987); proposed disposi- and of the Fiberglass Industries, Inc., tion or use of the (Bankr.N.D.N.Y.1987); would be B.R. 738 mere (Bankr.D.Ore. surplusage. Courtright, 57 B.R. 495 1986); Crockett, (Bankr.N. 3 B.R. 365 57 B.R. at 497. D.Ill.1980). One conclude from the line of cases

Yet a thorough review of all of the “emerging majority” by my cases cited by cited majority in support posi- of its brothers the courts involved that construed tion only leads me 506(a) conclude that by placing emphasis section their on value of to the and debtor bankruptcy or the eventual circum- “disposition thus on the and use” repossession, stances a secured credi- found the section’s second sentence. tor, in order to obtain its collat- Assocs., Liberty

See In re 222 eral, 105 B.R. will have to sell it and incur ex- (Bankr.E.D.Pa.1989) (citing Smith penses so doing. creditor, No Claeys fully-reasoned as most “[t]he indeed not even the debtor itself could the cases in which including calculations obtain full market value without some respective hypothetical deductions of the reduction expenses. for sale made,” sales costs is but holding that “the 81 B.R. at 991-92 (citing Queenan, J. Stan debtor’s intention is the cornerstone of the dards Valuation Security Interests as calculation reflected in both sentences of Chapter 11, Com.L.J. 29-37 506(a)”). course, Of argument can (1987)). The Claeys court then went on to that be made inordinate focus provide compelling a construction of the statute’s second simply sentence renders second 506(a), sentence of section compel the first sentence “mere surplusage,” and ling goes because it beyond far any of the no closer divining moves us Congress’ cases cited in demonstrat (Likewise, intent. attention to the first ing meaning can given be to the whole equal with force sentence could be said to of the section without having to focus on render the second surplus- sentence “mere either of parts its at the expense of the age.”) other: addition, a review of the cases which emphasis placed upon to be the con- Brown in support Co. cites & of its position cept of “disposition” “use” or demonstrates is a there fatal flaw in ty placed should not be in the context of the underlying premise of the majority’s collateral retention via a reading of the second sentence of section reorganization plan, but ought rather 506(a): majority assumes pur- focus aon use or disposition of collateral pose of the valuation to be performed un- that is either destructive or unanticipated der the section is to measure value of in the sense that it would increase the the collateral to the debtor. That premise risk of loss to the creditors’ interest in is simply not correct. The second sentence the collateral. Illustrative of such use in commences with the value,” words “Such 12 treatment might context be inevitably a back reference to the “credi- post-confirmation proposal to use a tor’s interest.” The sentence concludes combine for custom work previ- where requirement awith that attention should be ously it had been used seasonally to har- paid to “such creditor’s interest.” vest the crop. debtor’s own view, then, The better one consistent Id. at 992. Smith, See also value,” with the words “such may be found (“[Bjecause 290-91 it is the creditor’s in- Smith, in Claeys, and Malody. After con- terest the estate’s interest in property sidering the reasoning relied upon by the which valued, be must it is appropriate to majority in Courtright, Crockett, and In re deduct regardless sale of whether Frost, (D.Kan.1985), 47 B.R. 961 the court a debtor intends to retain and prop- use the stated, Claeys erty under a plan of reorganization”). Claeys provides The fact that a full meaning debtor intends to retain second sentence of collateral does not section consistent with emasculate (and fact it the first that is in the first sentence’s the instance the whole sec- tion’s) emphasis creditor’s interest collateral “creditor’s inter- that est,” disposing must be valued. majority’s claim that emphasis on the creditor’s interest “reads the second sentence of 506(a) out statute.” Balbus, at One 251. commentator suggested has that any other meaningless construction is be- Equally compellingis the reasoning to be cause regardless of of circumstance found Malody, a case decided Bankruptcy Appellate Ninth Circuit’s Texas v. Timbers Inwood Forest As of Ltd., Malody concerned valuation under Panel.3 socs. 484 U.S. 108 S.Ct. 506(a) (1988). in the context whether the L.Ed.2d 740 section As noted in Liberty Assocs., provisions “cram-down” of 11 U.S.C. 1325(a)(5)(B) were satisfied for (Bankr.E. Balbus case B.R. 767 [104 The issue reorganization. before D.Va.1989)], tack, taking another relies given value to be

court was heavily on There, dictum [Timbers']. the collateral—an automobile—should be harmonizing phrase “value of such proceeds a the wholesale value or the entity’s 361(1) interest” in 11 U.S.C. § commercially reasonable sale. There it phrases with similar elsewhere in the creditor, seeking Code, was the to maximize its the Court observed that “[t]he collateral, argued phrase interest in the who that ‘value of such creditor’s interest’ 506(a) means ‘the the second sentence of section had to value of the collat- ” eral,’ without interpreted mandating allowances for the be as credi- opportunity tor’s “lost costs.” upon the reten- based collateral’s intended tion and use the debtor. 105 B.R. at 803. I majority’s find the re- problematic. liance on that dictum Malody panel rejected argument, holding that, is purposes Timbers for citing reasoning holding three lines of adequate protection, an undersecured credi- commercially that the reasonable costs of tor is not post-petition entitled to sale had to enter into the valuation calcu- on its collateral stay while the automatic is lus: in effect. As the court below acknowl- 1. protect of valuation is to edged, did Timbers not focus on the issue by assuring a claimant secured from loss of whether costs of sale it money that will receive as much under should be taken into account in a valuation plan as it if would receive it were Here, course, of collateral. at issue is permitted to sell the in a vehicles com- Brown & Co.’s secured interest and not its manner; mercially reasonable post-petition entitlement to interest. The replacement 2. proper value is the issue Timbers leaves unanswered is how to valuing means of the collateral when the make an initial determination of the value collateral essential to the effectuation interest, of a precisely secured creditor’s reorganization plan; of the debtor’s appeal the issue on here. replacement 3. ignores the inher- agree I with Brown & Co.’s assertion risk a lender undertakes when it ent bankruptcy court below read out loan; namely, makes the if that the debt- of context the sentence in Timbers might or defaults the lender re- have to appears equate “value of such creditor’s possess the collateral and sell it at a interest” with “value of the collateral.” In likely value most less than its retail val- fact, literally, if read the statement is de- ue. monstrably false because the creditor’s in- view, my 102 B.R. at 749. In the clear must, minimum, equal terest at a the value weight authority supports ruling, a any placed upon of the collateral less liens facts, of the instant interpretation it. A far more reasonable of sale must be included in calculat- dictum, given holding, Timbers ing the extent to which the claims on the that “the value of such creditor’s interest” property in question real are secured. in collateral cannot exceed the “value of my quite complete. Yet task is not the collateral” include and therefore cannot view, adopting emerging opportunity pos- the creditor’s lost to take event, Supreme relies on dictum found in the any session of the Savings figure Court’s decision in United Ass’n Timbers dictum into the fails Circuit, appeal judges by designation. Appeals In the Ninth a deci- from who sit from bankruptcy sion of be taken to a bankruptcy appellate panel decision of the are bankruptcy appellate district court or to the panel. Appeals. taken to the Ninth Circuit Court of panel consists of three Article I or not the question whether debtor intends the collateral.

to retain adopt “general

We should rule” so in Claeys.

cogently articulated Because otherwise, chosen to I has do

respectfully dissent. CORPORATION,

ZAPATA HAYNIE Aet Casualty Surety Company,

na &

Petitioners,

v. BARNARD, II, Director,

George G. Office Compensation Programs,

of Workers’ Labor, Department

United States Re

spondents.

No. 90-2135. Appeals,

United States Court of

Fourth Circuit.

Argued March 1991. May

Decided

Case Details

Case Name: In Re Peter Gordon Balbus, Debtor. Brown and Company Securities Corporation v. Peter Gordon Balbus

Court Name: Court of Appeals for the Fourth Circuit

Date Published: Jun 4, 1991

Citation: 933 F.2d 246

Docket Number: 90-2067

Court Abbreviation: 4th Cir.