JAMES F. HOLDERMAN, Chief Judge.
Debtors Leonard Marsh and LunYe Marsh appeal from the judgment of the bankruptcy court in an adversary proceeding denying their attempt under 11 U.S.C. § 506(d) to "strip off" a junior lien on their residence held by the United States Department of Housing and Urban Development ("HUD"). The bankruptcy court's judgment was based on its determination that the Marshes' residence should be valued as of the date of bankruptcy plan confirmation. This court believes that determination was not correct in the circumstances of this case. Accordingly, the judgment of the bankruptcy court is reversed, and the case is remanded to the bankruptcy court for further proceedings consistent with this opinion.
The Marshes, who are husband and wife, filed for bankruptcy protection under Chapter 13 of the United States Bankruptcy Code on October 12, 2010. (Bankr.Dkt. No. 1.
On January 20, 2011, the Marshes filed an adversary complaint under Bankruptcy Rule 7001(2), which allows an adversary proceeding "to determine the validity, priority, or extent of a lien." (Adv.Dkt. No. 1.) The adversary complaint alleged that the fair market value of the Marshes' home at the time of the bankruptcy petition was $90,000, and that the home was
At trial, the Marshes presented evidence that the value of their home was $90,000 as of the petition date, October 12, 2010. (Adv. Dkt. No. 15, at 3.) The court held, however, that the value of the property must be determined "as of the effective date of the plan as required by 11 U.S.C. § 1325(a)(5)(B)(ii)." (Adv.Dkt. No. 21.) Because the Marshes had presented no evidence with respect to the value of the property at that date, the bankruptcy court held that they had not met their burden of establishing that the value of the property was insufficient to secure HUD's junior mortgage. (Id.) The bankruptcy court thus entered judgment in favor of HUD. (Adv.Dkt. No. 22.) On February 25, 2012, the bankruptcy court denied the Marshes' motion to alter or amend the judgment (Adv.Dkt. No. 29), and this appeal followed.
A federal district court reviews a bankruptcy court's factual findings for clear error, and reviews the bankruptcy court's legal conclusions de novo. Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D.Ill. 1995). The only issue here is purely legal: as of what time should the bankruptcy court value the Marshes' residence under 11 U.S.C. § 506? HUD defends the bankruptcy court's holding that the valuation should occur as of plan confirmation, while the Marshes contend that the valuation should occur as of the filing of the bankruptcy petition.
Section 506(a) provides that:
After the bifurcation of a claim into secured and unsecured portions under § 506(a), "to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." 11 U.S.C. § 506(d). For the purposes of this appeal,
The Supreme Court provided guidance on the valuation mechanism of § 506(a) in Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). The Court established there that § 506(a) does not require that the same valuation procedure be used in each case. Instead, as the second sentence of § 506(a) explains, the value "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property."
4 Collier on Bankruptcy ¶ 506.03[7]. It is important to note that this evaluation of context does not extend to "allowing use of different valuation standards based on the facts and circumstances of individual cases," but instead merely ensures that the proper valuation procedure will vary categorically depending on the role that the valuation inquiry plays in the bankruptcy process. Rash, 520 U.S. at 964 n. 5, 117 S.Ct. 1879.
In this case, the proposed disposition or use of the property does not provide any particular guidance about the time as of which the collateral should be valued. HUD contends that the Marshes' proposed use (the retention of the property for use as a residence) cannot begin until the modified Chapter 13 plan is confirmed, and that the court should determine the property's value as of the confirmation date. But the Marshes have been using the property as a residence both before the bankruptcy and throughout the bankruptcy proceedings, and the Marshes' plan calls for them to continue to use the property as a residence through plan confirmation and beyond. The proposed use of the property is thus consistent with valuation as of either the time of plan confirmation or the petition date.
It is more fruitful in this context to consider the purpose of the valuation in the bankruptcy process. The purpose of the valuation here is to resolve an adversary proceeding brought by the debtors under Bankruptcy Rule 7001(2) "to determine the validity, priority, or extent of" a junior lien on the debtors' residence that the debtors contend should be stripped off as wholly unsecured under § 506(d).
Of course, in this case the bankruptcy court "has been awaiting the outcome of th[e] adversary proceeding to determine the value of [HUD]'s claim" before proceeding with plan confirmation. (Bankr. Dkt. No. 57.) Accordingly, perhaps the bankruptcy court expected that plan confirmation would swiftly follow the resolution of the adversary proceeding, and that the value of the Marshes' residence at the time of the adversary proceeding would essentially match its value at plan confirmation. Plan confirmation will not always swiftly follow the resolution of an adversary proceeding, however, as there are a variety of matters that may delay a plan confirmation hearing. Accordingly, a bankruptcy court will be unable to provide a proper value of collateral as of the date of plan confirmation when the purpose of the valuation is the resolution of an adversary proceeding. Because the Supreme Court has instructed that the method of valuation under § 506(a) should be determined categorically, Rash, 520 U.S. at 964 n. 5, 117 S.Ct. 1879, that means that valuation cannot occur as of plan confirmation when the purpose of the valuation is to resolve an adversary proceeding.
Section 1325(a)(5)(B)(ii), on which the bankruptcy court based its holding (Adv. Dkt. No. 21), is not to the contrary. Section 1325(a)(5)(B)(ii) provides that, before confirmation, the bankruptcy court must ensure that the proposed plan provides that "the value, as of the effective date of the plan, of property to be distributed under the plan on account of [a secured] claim is not less than the allowed amount of such claim." The bankruptcy court held that the reference to "the effective date of the plan" required the court to value the secured claim (and thus also the collateral securing it) as of that date. That determination raises two problems. First, as mentioned above, the adversary proceeding here is distinct from plan confirmation, so § 1325, which provides requirements for plan confirmation, does not even apply. Secondly, the phrase "as of the effective date of the plan" in § 1325(a)(5)(B)(ii) modifies the value of the property to be distributed under the plan, not the allowed amount of the secured claim. Thus, § 1325(a)(5)(B)(ii) instructs the bankruptcy court to determine the net present value, as of the effective date of the plan, of all future payments to be made under the plan because of the secured claim, and to compare it to the allowed amount of the secured claim. It does not instruct the bankruptcy court about how to determine the allowed amount of the secured claim. Accordingly, § 1325(a)(5)(B)(ii) does not require valuation of collateral as of the date of plan confirmation even in confirmation hearings, and § 1325(a)(5)(B)(ii) does not require valuation of collateral as of the date of the plan confirmation in an adversary proceeding that occurs prior to plan confirmation.
There remains the possibility that the valuation of the collateral should occur as of the time of the final judgment resolving the adversary proceeding. The bankruptcy court did not indicate in its determinations that it considered that possibility, however, nor does HUD defend it in its
The court emphasizes the limited nature of this holding that, in the circumstances of this case, valuing collateral as of plan confirmation is not correct. This holding should apply only to proceedings in the same procedural posture as the case here: adversary proceedings brought by a debtor to strip off a junior lien on the debtor's residence under § 506(a) & (d) (proceedings the propriety of which is in some doubt, see supra notes 2 & 5). This court's holding in this case should not apply to the valuation of collateral in other contexts in the bankruptcy code, which may present other considerations.
For the reasons explained above, the judgment of the bankruptcy court is reversed and the case is remanded to the bankruptcy court for further proceedings consistent with this opinion.
