In re Nance

Citations: 477 B.R. 638; 2012 WL 2373406Docket: No. 12-10271

Court: United States Bankruptcy Court, E.D. Louisiana; June 22, 2012; Us Bankruptcy; United States Bankruptcy Court

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The court addressed the debtors' objection to proof of claim #5 from Capital One Auto Finance during a hearing on May 16, 2012. The debtors, Rahmaan and Tricia Nance, filed a Chapter 13 petition on January 31, 2012, after Tricia purchased a 2007 Chevrolet Avalanche LT on April 11, 2009, entering into a Retail Installment Contract that granted a security interest in the vehicle, now held by Capital One. The central issue is the vehicle's valuation for the Nances’ Chapter 13 plan, which must comply with the “cram-down provision” since the vehicle was purchased over 910 days prior to the petition filing. The Nances propose a vehicle value of $19,137.50, while Capital One claims it is worth $21,400.00. The Nances' valuation method involved averaging the NADA Guide's Clean Trade-in and Clean Retail values for the vehicle, adjusting for high mileage. In contrast, Capital One's valuation started with the Clean Retail value, adding for optional equipment and deducting for mileage.

The court noted that various bankruptcy courts utilize the NADA Guide differently to determine retail value, ultimately deciding to adopt the Nances' averaging approach as the more suitable method for establishing presumptive retail value in this case. Under 11 U.S.C. § 1325(a)(5)(B)(ii), a debtor's plan must pay secured creditors at least the amount of their allowed secured claim, defined as the value of the creditor's interest in the property as per § 506(a)(1). The 2005 BAPCPA introduced § 506(a)(2), specifying that for personal property securing an allowed claim, the value must reflect the replacement value at the time of the petition without deductions for sale costs, with the retail price considering the property's age and condition.

Section 506(a)(2) codifies the Supreme Court's ruling in Associates Commercial Corp. v. Rash, establishing that the value for a creditor's allowed secured claim is the replacement value the debtor would need to pay to replace the property, rather than the foreclosure sale value or a midpoint value. The court clarified that replacement value may vary and is left to bankruptcy courts to determine on a case-by-case basis. However, the BAPCPA amendments specify that for personal property intended for personal or household use, replacement value is defined as retail value, factoring in the property's age and condition.

Currently, there is no consensus from the Fifth Circuit or other federal circuits on how to determine the retail value of personal-use vehicles under this section. Courts that utilize the NADA Guide have developed four primary approaches to establish this retail value. 

1. **First Approach**: Courts deduct a percentage from the NADA Clean Retail value to establish a presumptive retail value. For instance, a ten percent deduction is often cited to account for the condition of vehicles not being maintained to dealer standards.
   
2. **Second Approach**: Courts adopt the full NADA Clean Retail value as the presumptive value, placing the burden on the debtor to prove a need for reduction based on the vehicle’s condition or local market factors.

3. **Third Approach**: Courts accept NADA or Kelley Blue Book values but do not automatically rely on a specific guide value. Instead, they evaluate each case to determine the most appropriate guide value based on the vehicle's condition.

4. **Fourth Approach**: The chosen method by some courts involves averaging the NADA Clean Retail and Clean Trade-In values, a practice adopted before the BAPCPA amendments.

These varying methodologies reflect the ongoing efforts of bankruptcy courts to achieve consistency and fairness in valuing personal-use vehicles under 506(a)(2).

One court has validated the use of an averaging method for calculating retail value under 506(a)(2), while another has rejected it. The court in *In re Nice* supports the averaging method, noting that, despite the prohibition on deducting sale and marketing costs from retail price under the new 506(a)(2), deductions for warranties and reconditioning expenses that enhance a vehicle's value remain necessary. Conversely, *In re Eddins* interpreted the explicit language of 506(a)(2) as requiring the use of retail value, designating the NADA retail value as the presumptive standard, unless contested by interested parties. Two bankruptcy courts within the U.S. Fifth Circuit have proposed local rules to average NADA retail and trade-in values for vehicle valuation, and the Southern District of Texas bankruptcy court appears to use this method for 506(a)(2) calculations.

In determining the lien holder's principal amount, adequate protection payments are deducted from the vehicle's value if it is less than the lien, or applied to interest if greater. While the Northern District of Texas hasn't officially adopted the averaging method, it is anticipated to do so for calculating adequate protection payments and principal amounts due under 506(a)(2). This court aligns with *In re Scott*, advocating for a standardized approach to vehicle valuation to ensure consistency in applying 506(a)(2). Recognizing that a Chapter 13 debtor's vehicle is not dealer-reconditioned, it argues for discounting the Clean Retail price to reflect the vehicle's typical inferior condition, which may include minor mechanical defects and wear. The court rejects minimal deductions like high-mileage adjustments or small percentage reductions, asserting that averaging the NADA Clean Retail and Clean Trade-In values is the best method for determining presumptive retail value. This approach adequately discounts the Clean Retail value and aligns the court with other Fifth Circuit bankruptcy courts. Debtors and creditors retain the option to present evidence for higher or lower valuations. After averaging the Clean Retail and Trade-In values, any necessary adjustments for mileage and optional equipment should be applied.

The average value of the vehicle in question is determined to be $20,512.50, based on Clean Retail and Clean Trade-In values. The court accepts the debtors' high-mileage deduction of $1,375.00, reducing the average value to $19,137.50, after which an additional $225.00 is added for optional equipment, bringing the total to $19,362.50. The debtors did not contest the value for the optional equipment or provide evidence to the contrary. Although it is unclear if Capital One’s equipment valuation reflects Clean Trade-In or Clean Retail value, the court accepts it due to the absence of contradictory evidence. The vehicle's retail price and Capital One’s allowed secured claim are finalized at $19,362.50. The debtors’ various claims of the vehicle value show some inconsistency, with reported values ranging from $19,137.00 to $19,153.50. Ultimately, the court adopts the value of $19,137.50 from the debtors' memorandum. Capital One subsequently revised its claim from $22,040.00 to $19,137.50. The NADA definitions clarify vehicle conditions; a "clean" vehicle has no defects and needs no repairs, while an "average" vehicle is mechanically sound but may require servicing. The mileage discrepancies arise from Capital One's estimate of 89,574 miles versus the debtors' claim of 93,250 miles. Additionally, since the debtors purchased the vehicle over 910 days before filing for bankruptcy, the "hanging paragraph" of 11 U.S.C. 1325(a) does not apply.

The Fifth Circuit previously rejected the NADA trade-in value as a vehicle's valuation under § 506(a) in determining foreclosure value, favoring replacement value as per the Rash mandate, as established in In re Stembridge (394 F.3d 383, 2004). However, this decision predates the BAPCPA, limiting its relevance to current cases. Subsequent cases, like In re Mayland, have cited various precedents regarding vehicle valuation, noting different valuation methodologies and their applicability. Courts have varied in their approach, with some allowing the averaging method for vehicle valuation while others have specified depreciation rates. Notably, the Vermont bankruptcy court held that it is inappropriate to mandate a specific guide value universally but maintained a local rule for averaging. Furthermore, the use of valuation methods continues to evolve, particularly for vehicles purchased over 910 days before the bankruptcy petition, which are not subject to certain restrictions under § 1325(a). The document references multiple cases and guidelines that outline these valuation principles and methodologies.