Summary:
In a “Dirt for Debt” Plan, the Chapter 11 Debtor’s proposed to surrender real property to Gateway. The Bankruptcy Court held that the proper basis for valuation for such tender was the fair market value standard, where Gateway had urged a liquidation value.
On appeal, the District Court held that while 11 U.S.C. § 506(a)(1) mandates use of the fair market or “replacement” value where the Debtor intends to retain the collateral for its own use, the same is not true where the Debtor intends to surrender the property. In such circumstance, “[w]here a plan shifts to the creditor the burden to sell, and hence the risk of loss or potential for gain”, the court should take into “account the loss of income a creditor may encounter prior to the sale or liquidation of the property” and also whether the potential for loss is greater. Accordingly, “valuation must be approached conservatively.”
Commentary:
This case also undercuts the position commonly asserted by Trustees that Debtors must value, for exemption purposes and the best interests of creditors test, property at the replacement value.
For a copy of the opinion, please see:
Gateway Bank & Trust v. Clarendon Holdings- Valuation for Surrendered Property in Dirt for Debt Plans.pdf
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