OPINION ON DEBTOR’S MOTION TO REDUCE PROOF OF CLAIM
At issue here is the valuation of an automobile owned by the debtor, Ethel Y. Maddox. Chrysler Financial Corporation holds a security interest in the vehicle, and is un-dersecured. The purpose of the valuation is to determine the amount of Chrysler’s allowed secured claim that will be paid through debtor’s Chapter 13 cram down plan.
FACTS
Debtor, Ethel Y. Maddox, filed a petition for relief under Chapter 13 of the Bankruptcy Code on October 19,1995. Debtor owns a 1994 Dodge Caravan, financed by Chrysler Financial Corporation. 1 In her Chapter 13 plan, debtor proposes to reduce Chrysler’s secured claim to $11,875, the N.A.D.A. 2 wholesale value, and to pay the claim over 60 months, with interest at the contract rate.
*764 Chrysler’s proof of claim, as amended, asserts a secured claim in the amount of $14,325.00, representing the vehicle’s retail valuation, payable with interest over the life of the plan. 3 The unsecured portion of Chrysler’s claim is $4,635.44. Debtor’s plan provides for a zero dividend to unsecured creditors.
Chrysler objects to confirmation of debt- or’s plan. Debtor objects to Chrysler’s proof of claim, seeking by motion to reduce the secured claim to the average trade-in or wholesale value of the vehicle.
DISCUSSION
The parties appear to agree on various issues, including the applicability of the contract interest rate of 10.60% for present value purposes, 4 the valuation of the automobile as of the petition date, 5 and the use of the N.A.D.A. Used Car Guide as an appropriate reference for valuation. According to the parties, the only issue to be resolved in this case is the appropriate valuation column to be utilized from the N.A.D.A. Used Car Guide.
I
In a Chapter 13 proceeding, the court must confirm a plan, even over the objection of a secured creditor, if the plan provides that the secured creditor will retain its lien, and “the value, as of the effective date of the plan, of property to be distributed under the plan on account of such [secured] claim is not less than the allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii).
6
See, e.g. General Motors Acceptance Corp. v. Jones,
The allowed amount of the creditor’s secured claim is determined by reference to section 506(a), which provides:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 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 pro *765 posed 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).
See Nobelman v. American Sav. Bank,
Section 506(a) does not fix the measurement of “value.” Rather, we are instructed that the value of the collateral must be determined “in fight of the purpose of the valuation” and in fight of “the proposed disposition or use of such property.” 11 U.S.C. § 506(a). “ “Value’ does not necessarily contemplate forced sale or liquidation value of the collateral; nor does it always imply a fall going concern value. Courts ... have to determine value on a case-by-case basis, taking into account the facts of each case and the competing interests in the ease.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 356 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6312.
Case law on the appropriate method of vehicle valuation in a Chapter 13 cram down plan appears to be divided into three groups: those favoring use of the wholesale value, those favoring use of the retail value, and those using an average of the retail and wholesale values. 7
I. Wholesale Valuation:
In
In re Mitchell,
The
Mitchell
court recognized that use of the wholesale value as a rule of practice would be affected by case-by-case variables in a cram down situation, as where use of the collateral is particularly beneficial or detrimental to its value.
Id.
Citing
United Savings Ass’n v. Timbers of Inwood Forest
As
socs. Ltd.,
Other courts which have utilized the wholesale value include:
In re Malody,
2. Retail Valuation:
The Fifth Circuit in
In re Rash,
The
Rash
court noted that valuation cases construing § 506(a) have generally focused upon either the first sentence or the second sentence of the section. Describing
In re Mitchell
as a first sentence case, the court opined that “ ‘[i]f the first sentence of § 506(a) were interpreted to mean that the value must be fixed at the amount which the creditor would receive on foreclosure, then the last sentence of the statute which provides that the value should be determined in light of the purpose of the valuation and of the proposed disposition or use of the property, would be surplusage.’”
Id.
at 329 (quoting
In re Courtright,
As to the first sentence of § 506(a), establishing the creditor’s secured claim “to the extent of the value of such creditor’s interest in the estate’s interest in such property,” the court concluded that “[t]he ‘estate’s interest in the property5 is the ownership and possession of the vehicle by the debtor, and thus the creditor’s interest is derivatively defined by the value of the debtor’s interest in the property.”
Other courts holding that retail value is the proper measurement for purposes of determining the allowed amount of an underse-cured creditor’s secured claim in a Chapter 13 case include:
In re Trimble,
3. Average of Wholesale and Retail Values:
Some courts have averaged the retail and wholesale values to establish the cram down value of the vehicle, reasoning that the wholesale value alone ignores the creditor’s risks and the retail value alone forces the debtor to pay more than the creditor could have received after repossession and immediate sale.
In re Stauffer,
II
In attempting to synthesize the various reflections on the proper valuation standard to utilize in a Chapter 13 cram down, we underscore that any reading of § 506(a) must give effect to every provision of the statute, and must avoid rendering any part of the statute inoperative.
In re Madison,
The first sentence of section 506(a) provides that the allowed claim of a creditor is a secured claim “to the extent of the value of such creditor’s interest in the estate’s interest in such property.” In
Rash,
this language was read to mean that “the creditor’s interest is derivatively defined by the value of the debtor’s interest in the property.”
the “estate’s interest” language is designed to prompt a determination of “whether the estate actually has an interest in the collateral,” and to prompt an examination of the nature of the estate’s interest in the collateral. See 3 Lawrence P. King, Collier on Bankruptcy para. 506.04, at 506-17 to -19 (15th ed. 1994) ... Thus, the key purpose of the “in the estate’s interest” language is to point out that the value of the estate’s interest may differ from the value of the collateral.
To determine the value of the creditor’s interest in the collateral, we must determine, as a starting point, the nature of the estate’s interest in the collateral. In this *768 respect, the Rash formulation that the creditor’s interest is “derivatively defined” by the value of the debtor’s interest in property is consistent. However, the “critical focus of the valuation question” is not the debtor’s interest. Rather, the focus is on the measurement of the creditor’s interest in ascertaining the amount of its allowed secured claim. “Thus, § 506(a) clearly requires us to determine the value of the collateral from the creditor’s perspective, and the panel opinion’s valuation [in Rash] of the retained asset based on the debtor’s perspective is misplaced.” Id.
The second sentence of § 506(a) requires us to determine value “in light of the purpose of the valuation.” The purpose of the valuation here is to determine whether debtor’s plan, providing for payment of the wholesale value of the vehicle plus interest over the life of the plan, may be confirmed under § 1325(a). Under § 1325(a)(5), in the absence of a secured creditor’s consent, the two alternatives for treatment of an allowed secured claim, presented as equivalent methods of protecting the secured creditor’s interest, include retention by the secured creditor of its lien and payment of present value over the life of the plan, or return of the collateral to the secured creditor. Therefore, “[t]he purpose of determining the present value of the collateral, and thus the secured claim, is to see to it that the creditor will receive as much money under the plan, per § 1325(a)(5)(B), as the creditor would receive were it permitted to sell the collateral in a commercially reasonable manner.” Id. at 688.
The second sentence also requires us to consider the “proposed disposition or use of such property.” The Rash decision and its progeny emphasize the debtor’s intention, in plans such as the one presented here, to retain the collateral, opining that the purpose of the valuation is to determine the amount an undersecured creditor will be paid for the continued possession and use of the collateral by the debtor, not to determine what the creditor would receive if it had to repossess and sell the collateral. However, debtor’s retention and use of the collateral is relevant only to the extent that such continued use impacts upon the value of the creditor’s interest in the collateral.
In other words, disposition or use is considered because of the effect it could have on the intrinsic value of the collateral, and thus on the value of the property by which the debt is secured. To the extent the property is used for its intended purpose and is properly insured and maintained, the debtor’s use of the property, under a Chapter 13 plan, should not affect its valuation. The debtor’s use of the property should be a consideration only to the extent that it represents an increased risk to the creditor’s security.
Id. at 688-89.
For instance, as suggested in
Mitchell,
debtor’s use of the collateral may impact on valuation where such use is “particularly beneficial,” i.e., where the collateral is more profitable in debtor’s hands than otherwise, or “particularly detrimental”, as where the debtor uses the collateral 24 hours a day and causes rapid depreciation.
Ill
Our reading of § 1325(a)(5)(B) and § 506(a) finds support in additional sources. In
United Savings Ass’n of Texas v. Timbers of Inwood Forrest Assocs., Ltd.,
In subsection (a) of this provision the creditor’s “interest in property” obviously means his security interest without taking account of his right to immediate possession of the collateral on default. If the latter were included, the “value of such creditor’s interest” would increase, and the proportions of the claim that are secured and unsecured would alter, as the stay continues — since the value of the entitlement to use the collateral from the date of bankruptcy would rise with the passage of time. No one suggests this was intended. The phrase “value of such creditor’s interest” in § 506(a) means “the value of the collateral.”
The Court appears to reject the concept that a debtor’s use of collateral from the date of the filing of a bankruptcy petition should cause the value of a creditor’s interest to increase. Rather, the excerpt implies that “the value of such creditor’s interest” means the value of the creditor’s interest “as if the collateral were collateral in the hands of the creditor.”
In re Mitchell,
The decision of the Third Circuit in
General Motors Acceptance Corp. v. Jones,
§ 1325(a)(5) (B) (ii) ... seeks to put the secured creditor in an economic position equivalent to the one it would have occupied had it received the allowed secured amount immediately, thus terminating the relationship between the creditor and the debtor.
The Jones court recognized that under a Chapter 13 cram down plan, a secured creditor is required to forego not only its right to repossession and disposition of the collateral, but also the use of the funds generated from that disposition during the term of the plan. For the purpose of determining the appropriate interest rate to compensate the secured creditor for this loss, the coerced loan theory addresses the latter, not by presupposing a new sale to the debtor for the value of the car to the debtor, but by recognizing that the creditor is actually forced to extend new credit to the debtor in the amount that the creditor would have realized had there been an opportunity to repossess and liquidate the collateral. The rate of interest the creditor would charge for a new loan of similar character, amount and duration best protects the creditor’s interest over the life of the plan. The amount of the “loan” is the value of the money to the creditor, not what the debtor would pay to obtain the loan or to obtain the same vehicle in the retail market.
The natural extension of the conceptual framework of
Jones,
under § 1325(a)(5)(B), to place the creditor in the same position as it would have been had it been able to repossess the collateral at the time of the bankruptcy filing, is to assign the N.A.D.A.
*770
wholesale value to the vehicle for cram down purposes, barring an evidentiary showing that another value is more appropriate under the facts of a particular case. It is generally recognized that the wholesale price best approximates what the creditor would obtain if the creditor were to make a commercially reasonable disposition of the collateral.
In re Mitchell,
As a policy matter, we recognize that commercial lenders incorporate in each transaction the inherent risk of default, repossession, and disposition of collateral at less than retail value. “[A]llowing a secured claim in an amount greater than the creditor’s potential recovery on repossession and sale is granting the creditor more protection than that for which it bargained.”
In re Rash,
Since when have creditors in bankruptcy (or outside) credited debtors with “retail value” when a car is repossessed or surrendered? Lenders and sellers build the risk of default and the risk of bankruptcy into the interest rates they charge, the prices at which they sell, and the transaction costs that they charge. To allow sellers and financiers to recover the retail or replacement cost of personal property in Chapter 13 cases is to twice compensate for the risk of nonpayment. Lienholders in Chapter 13 cases are already guaranteed “present value” at confirmation under § 1325(a)(5)(B)(ii). Chapter 13 is supposed to be a rehabilitative chapter, favored by Congress over other forms of consumer bankruptcy. This purpose is lost entirely in the Fifth Circuit’s analysis of §§ 506(a) and 1325(a)(5).
KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, “Methods of Valuation” § 5.48 at 5-134 as amended (2d Ed.1994 and 1995 Supp.).
In sum, to determine the amount of the creditor’s secured claim, we view the issue of vehicle valuation from the creditor’s perspective. The purpose of the valuation is to place the creditor in approximately the same position it would have occupied had it been able to exercise its right to repossess the collateral absent the bankruptcy filing. As a rule of practice, we conclude that the wholesale value will control as the appropriate measurement for vehicle valuation. Upon appropriate evidentiary showing, however, this measurement of value may be adjusted in a particular case. For instance, a creditor may show that upon repossession and sale, it can achieve a greater return than the wholesale value for the vehicle as indicated in the N.A.D.A. book, or that the debtor’s anticipated use of the vehicle will be particularly beneficial or detrimental to the value of the vehicle.
The parties in this case are offered the opportunity to present evidence to modify the final valuation at the wholesale value.
Notes
. The original secured party, Chrysler Credit Corporation, was succeeded by merger with Chrysler Financial Corporation.
. Eastern Edition National Auto Dealers' Association Used Car Guide for October 1995.
. The parties agreed at oral argument that the service warranty contracted for by the debtor, at a cost of $537.50, does not constitute a part of Chrysler’s secured claim. Debtor will subsequently determine whether she will assume the contract. If so, she will make provision for it in her plan.
See In re Mitchell,
. See,
General Motors Acceptance Corp. v. Iones,
. Although neither party presents the issue, we note that a question may be raised regarding the correct date of valuation of collateral for purposes of a Chapter 13 plan.
See Rake v. Wade,
.Section 1325(a)(5) provides:
(a) Except as provided in subsection (b), the court shall confirm a plan if—
(5) with respect to each allowed secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) 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; or
(C) the debtor surrenders the properly securing such claim to such holder.
11 U.S.C.§ 1325(a)(5).
.
See also Barash v. Public Finance Corp.,
.
See also In re Winthrop Old Farm Nurseries, Inc.,