ARTHUR B. FEDERMAN, Chief Judge.
As announced in open court at the close of the hearing held on May 8, 2014, in Springfield, Missouri, the claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial ("Daimler") is ALLOWED as a secured claim in the amount of $1,425,309.40. The remainder of Daimler's claim is unsecured, in the amount of $819,183.48 less the proceeds received by Daimler from a commercially reasonable sale of the eleven vehicles previously surrendered by Debtor, and still in Daimler's possession.
Section 506(a)(1) of the Bankruptcy Code provides generally that a creditor's claim is secured to the extent of the value of its collateral. The statute then provides that "[s]uch 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."
At the outset of the case, Daimler held a security interest in 99 vehicles being operated by the Debtor or its lessee drivers, as well as the proceeds of such collateral, and was owed $6,966,162.82.
In the course of the case, all but 23 of such vehicles have been surrendered by the Debtor to Daimler. Liquidation of such vehicles has reduced the total debt. In addition, the Debtor has made adequate protection payments in the total amount of $1,577,488.01. Such adequate protection payments serve to reduce the total debt owed, before any determination is made as to how much of that debt is secured.
Pursuant to § 506(a), the issue here is the value of Daimler's remaining collateral.
In his well-reasoned opinion in In re Civic Partners Sioux City LLC,
While the Debtor has argued here that the agreed value for adequate protection purposes is somehow binding on Daimler in determining value for confirmation purposes, or should be used as a starting point in valuing the collateral now, such arguments are contrary to the statute, its legislative history, and the caselaw interpreting it. I turn then to the proper basis for valuing Daimler's collateral at this point in the case, for the purpose of determining whether the Plan filed by the Debtor is confirmable.
The Supreme Court has held that in valuing a claim secured by personal property for plan confirmation purposes, where the debtor intends to retain possession of the property, the appropriate valuation standard is replacement value.
The most reliable evidence offered of replacement cost was the NADA retail values which, as stipulated by the parties, would be $1,373,400.00. Such total is based on a per vehicle retail value of $62,100 for the bulk of the remaining vehicles, which are 2010 Freightliners.
Each party offered various alternative valuations. Daimler argued for a valuation of $85,000 for the 2010 Freightliners, based on the fact that Debtor had entered into lease/purchase agreements with various drivers and that, as to one of such agreements, the total stream of payments over a period of three years came to approximately $85,000. But this argument ignores the time value of money and the possibility that it will not be paid by the drivers, and no evidence was offered as to the effect such factors might have on value.
The Debtor, by contrast, argues for lower values based on the auction prices Daimler received for approximately 65 vehicles it sold after the Debtor surrendered them, and the sale of another three vehicles by the Debtor. But the auctions at which Daimler sold such vehicles are only open to dealers, not retail customers, and the prices do not reflect the costs needed to refurbish such vehicles for resale. And the Debtor's sample of three sales is too small to be reliable.
In Rash, the Court held that "a simple rule of valuation is needed to serve the interests of predictability and uniformity."
Debtor's counsel seemed to argue at the close of the hearing that such value could not be correct because the agreed value for adequate protection payments per vehicle, less the adequate protection payments made, would come to a much lower number per vehicle. But, as stated, the issue is not what the parties agreed on as to value at the beginning of the case, or whether the adequate protection payments made accurately reflect a decline in the value of the vehicles over the course of the case. The issue instead is what the Debtor would have to pay to replace these vehicles at this time. As stated, the most reliable evidence on that issue was NADA retail. Therefore, I hold their replacement cost to be $1,373,400.
Daimler's loan documents also gave it a security interest in proceeds of its collateral. Thus, the next question is whether the value of its secured claim should be increased by proceeds generated post-bankruptcy from the use of the trucks on which it held a security interest.
Section 552(b) of the Bankruptcy Code provides, as relevant here, that if the debtor and a creditor entered into a security agreement before the filing of the bankruptcy petition, and if the security interest extends to proceeds, products, offspring, or profits of the collateral, then such security interest continues in any proceeds, products, offspring, or profits generated post-petition. Daimler's security interest here did cover proceeds from the use of Daimler's trucks.
The Debtor argued that because the Agreed Adequate Protection Order did not specifically provide that proceeds attributable to Daimler's trucks be segregated, and that the security interest continued in such funds, then the security interest was lost. That argument is contrary to
However, the parties agreed that Debtor is now operating 92 vehicles, of which just 23, or 25% of them, are Daimler vehicles. Therefore, in the absence of any evidence to the contrary, I hold that Daimler's security interest has been increased by 25% of the total amount of funds in the Debtor's accounts, or $51,909.40, as proceeds of its vehicles.
Accordingly, I hold that for plan confirmation purposes, Daimler holds a secured claim in the total amount of $1,425,309.40. The remainder of its claim is unsecured. The Debtor's Objection to the Claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial is, therefore, SUSTAINED, IN PART.
IT IS SO ORDERED.
Debtor O & S Trucking, Inc. requests that I reconsider my ruling on its objection to the claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial ("Daimler") and determining the amount of Daimler's claim. Creditors People's Capital and Leasing Corp. and Metropolitan National Bank each filed Amicus Briefs in support of the Debtor's position, and Ozark Mountain Energy, Inc., and Navistar Financial Corporation joined the amici. For the reasons that follow, the Debtor's Motion for Reconsideration is DENIED.
The Debtor's Motion for Reconsideration requests that I alter or amend the Order on its objection to Daimler's claim under Rule 59(e).
"Bankruptcy Rule 9023 allows reconsideration of the correctness and merits of the initial order."
While relief under Rule 9023 is an extraordinary remedy, it is appropriate in "circumstances in which the moving party has set forth facts or law of a `strongly convincing nature' that indicate that the court's prior ruling should be reversed."
While I fully agree with the Debtor's statement of the standard, I find that the Debtor has not met it. The Debtor seeks reconsideration of two findings in the ruling on Daimler's claim, namely, the manner of application of the adequate protection payments to the claim, and the inclusion of post-petition proceeds being held in the Debtor's account as part of Daimler's secured claim. Both of these issues turn on the question of whether Daimler's security interest in the proceeds from its collateral continued postpetition.
Preliminarily, in connection with confirming a debtor's Plan, a court must determine the value of a secured creditor's claim. Section 506(a) of the Bankruptcy Code provides that a claim is secured to the extent of the value of the creditor's collateral:
The Eighth Circuit has held that an initial valuation of collateral for adequate protection purposes is not res judicata in determining the value of collateral for plan confirmation
This bankruptcy case was filed May 30, 2012. Prior to then, Daimler held a security interest not only in the trucks it had financed, but also in any driver lease payments and other proceeds generated by the Debtor from use of such trucks.
The Bankruptcy Code provides that, absent a court order to the contrary, such pre-bankruptcy security interests remain in effect as to such proceeds subsequent to the bankruptcy filing. Section 363 of the Bankruptcy Code defines cash collateral to include "cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property...."
On June 14, 2012, approximately two weeks after the case was filed, Daimler filed a Motion for Adequate Protection or, in the Alternative, to Prohibit Use of Cash Collateral, and Grant Relief from the Stay.
The Agreed Adequate Protection Order
The Debtor also in effect argues that in the Agreed Adequate Protection Order, Daimler agreed to waive its security interest in the lease payments and other proceeds.
Debtor argues that it has cited to "copious and compelling" case law in support of its position that the lien on rents need not be considered.
As I stated previously, because Daimler has a security interest in the trucks' proceeds, I find the analysis in In re Civic Partners Sioux City, LLC to be applicable and well-reasoned. "Under § 506, `a secured creditor's claim is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral.'"
As stated, an initial valuation of collateral for adequate protection purposes is not res judicata in determining value of the collateral for plan confirmation purposes.
Here, the parties stipulated that amount of Daimler's allowed claim as of the petition date was $6,966,162.82. That claim was secured by at least 99 trucks. After giving postpetition credits for returned vehicles, adequate protection payments, and certain other credits, the parties stipulated that the Debtor owed Daimler, as of May 5, 2014, the total sum of $2,244,492.88. At the time of the hearing, this sum was secured by 23 remaining trucks and their proceeds.
I found that the value of the physical truck component of Daimler's collateral at the time of the hearing was $1,373,400. As stated, the Debtor does not seek reconsideration of that finding. Rather, the Debtor and joining creditors assert that number must be reduced by the postpetition adequate protection payments because such adequate protection payments were intended only to protect Daimler from loss of value of the trucks through their usage over time. Again, this would be correct if Daimler's security interest was limited to the trucks themselves. However, this position disregards Daimler's security interest in the proceeds of the trucks which continued postpetition as the lease payments came in. As the Court in Civic Partners described it, the post-petition lease payments increased Daimler's total secured claim when they were paid to the Debtor, and then dropped the value of the secured claim back down when the lease payments were paid over to Daimler as adequate protection.
As the Court in Civic Partners did, I recognize there is a split of authority on this issue,
The Debtor argued — and appears to continue to argue — that because the Agreed Adequate Protection Order did not specifically provide that proceeds attributable to Daimler's trucks be segregated, and that the security interest continued in such funds, then the security interest in the proceeds was lost. However, as I stated previously, that argument is contrary to § 552(b), which expressly continues the lien in effect. None of the cases cited by the Debtor and joining creditors holds that § 552(b) is nullified when a creditor who agrees to the use of cash collateral does not require segregation of proceeds and expressly preserve its lien. Rather, the purpose of segregation and an express reservation of a lien in the segregated funds is to prevent the very kind of accounting problems that arose in this case. Namely, while the Debtor was arguing that Daimler's secured claim should not be increased by the driver lease payments, Daimler argued that its secured claim was increased to the full extent the Debtor received funds from the use of its trucks post-petition, and should then be reduced only by the amount of adequate protection payments made. As explained previously, however, that analysis ignores the expenses the Debtor incurred in order to generate that new income each month, which is why lenders with liens in cash collateral typically require debtors to adhere to a budget for the use of the cash collateral. In addition, by agreeing to accept a specific dollar amount as adequate protection (as opposed to requiring the Debtor to pay over all proceeds), Daimler did, in effect, agree to the Debtor's spending any proceeds which exceeded the adequate protection payments.
While I agree that this analysis was made far more complicated because Daimler did not require segregation, a budget, and an express preservation of its lien in the driver lease payments, the failure to do so did not nullify § 552(b) or wipe out Daimler's lien in proceeds. The Debtor's and joining creditors' request for reconsideration of that conclusion is denied.
Next, the Debtor asserts that I should not have included in Daimler's secured claim any of the proceeds (driver lease payments) currently being held in the Debtor's accounts. But for the same reasons stated above, I find that § 552(b) preserved Daimler's lien in the driver lease payments, including those held in the Debtor's bank accounts. Based on the only evidence offered, I find the amount so secured to be $51,909.40. Since there is no other evidence on that point, there is no basis to reconsider that finding.
ACCORDINGLY, the Debtor's Motion for Reconsideration of the Order on its objection to Daimler's claim is DENIED.
IT IS SO ORDERED.
