Retail Value in Consumer Bankruptcy

MY ATTORNEY SAID RETAIL VALUE APPLIES, RIGHT?

The value of collateral in bankruptcy has always been a point of contention. The new bankruptcy law, known as BAPCPA, became effective October 17, 2005, and sought to clarify this issue. One of the creditor friendly provisions of BAPCPA was contained in 506(a)(2) of the Bankruptcy Code, concerning A value and provides:

If the debtor is an individual in a case under chapter 7 or 13, such value [for] personal property [i.e., an automobile] shall be determined based on the replacement valueYas of the date of the filing of [bankruptcy] without deduction for costs of sale or marketing. Replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property [at the time of filing].

To date, most secured creditors have forced a capitulation by debtors simply by producing a NADA valuation report of the unit. The “retail” value in the report has sufficed for all but the most stubborn debtor’s counsel. A recent case, In Re De Anda-Ramirez, 359 B.R. 794 (10th Cir. BAP 2007), has clouded this previously clear issue.

The De Anda-Ramirez Court noted that various appellate courts have long used KBB or NADA valuations as a starting point for vehicle valuation. The core of the disagreement was determining the appropriate KBB value to assign to the unit.

The debtors claimed a KBB “private party” value applied while the credit union argued KBB retail applied. The Court looked to KBB definitions and observed that “retail” value meant the unit had received the cosmetic and mechanical reconditioning necessary to qualify the unit as “excellent.” KBB further defined “excellent” as applying to fewer than 5% of all used vehicles. The Court notedthat other than both containing the word “retail,” the Code and KBB definitions “have little in common.” The Court further found that the Code’s adjustment for “age and condition” further removed the bankruptcy definition from a strict equivalent to KBB retail.

The credit union made a mistake, and was punished for it, by presenting no evidence of retail value or “excellent” condition. In fact, the credit union presented no evidence at all. The only evidence before the lower court was the debtors’ statement in the plan that the unit was worth a less than retail and had almost twice the normal mileage for a car that age. The De Anda-Ramirez Court, in affirming the bankruptcy decision in favor of the debtors, noted that it was not making a determination of a proper valuation standard going forward. The Court was merely ruling that retail value was not appropriate in this case.

Several recommendations can be made to auto finance clients:

• Be aware that the NADA or KBB retail report may be a means to an end, not an end.
• When valuation is a concern [chapter 13 plan or redemption], promptly seek an inspection of the unit. Have the debtor bring the unit by a branch so your representative can check the mileage and testify that he or she has seen the vehicle.
• Seek a formal appraisal if the amount, and unit, so warrant under the circumstances.