PBCBA BAR BULLETINS pbcba_bulletin_May 2019 | Page 9

BANKRUPTCY C o r n e r
How Valuable is the Value Secured Creditors
Assign to Collateral in a Proof of Claim?
JASON S. RIGOLI
Federal Rule of Bankruptcy Procedure
3001(f) creates an evidentiary presumption
as to the “validity and amount” of a claim
filed in accordance with the rules. The
rules require secured creditors to file a
proof of claim to participate in distributions
in a bankruptcy case. Fed. R. Bankr. P.
3002(a). Within the proof of claim to be
filed, Section 9 asks whether the claim is
fully or partially secured and the value of
the property that is used as collateral. If the
secured creditor believes it is undersecured
and wants to participate in distributions to
unsecured creditors, the secured creditor
must identify the value of the property
and amount of the unsecured portion of its
claim or it may waive a right to participate
in a distribution on that unsecured portion.
See Fed. R. Bankr. P. 3002(c); In re Jackson,
482 B.R. 659 (Bankr. S.D.Fla. 2012). If a party
in interest disagrees with the valuation of
the secured creditor’s proof of claim, it can
seek valuation of the collateral under 11
U.S.C. § 506(a).
In a proceeding under The question is
whether the value of the collateral listed by
the secured creditor on its proof of claim is
afforded the same evidentiary presumption
when collateral is being valued under §
506(a) and Fed. R. Bankr. P. 3012? A recent
opinion out of the Eastern District of
California answered that question in the
negative. In re Bassett , Case No. 18-25410,
2019 WL 993302 (Bankr. E.D.Cal. Feb. 26,
2019).
The Bassett Court distinguishes the “claims
allowance process under [11 U.S.C.] § 502(a)
and [Fed. R. Bankr. P.] 3001(f)” from the
“claims bifurcation and valuation process
under [11 U.S.C.] § 506(a) and [Fed. R. Bankr.
P.] 3012. “ Bassett , at *4. Stating that the
earlier “establishes the existence of the
debt and an entitlement to payment,” while
the latter “determines how the established
debt is to be paid and treated under the
Bankruptcy Code.” Ibid. The court goes on
to give three points to support its position
for not giving the evidentiary presumption
to the value of collateral in bifurcation
and valuation proceeding: (i) “it preserves
the court’s fact-finding function”; (ii) ”not
mechanically applying [Fed. R. Bankr. P.]
3001(f) … avoids delays in the confirmation
process for at least two reasons: (1) the
debtor is not put in a position of waiting
for a proof of claim to be filed before filing
a motion to value; and (2) conversely, the
absence of a proof of claim may motivate
the debtor to value the collateral before a
proof of claim is filed so that once valued
the amount of the allowed secured claim
remains unaffected even if the later-filed
proof of claim asserts a higher value”; and
(iii) the separate process view eliminates
the possibility that a secured creditor may
attempt to extract more from a debtor based
on an unrealistic value or otherwise coerce
a debtor to pay a secured claim based on an
unrealistic value of the collateral under a
threat of filing an artificially-inflated proof
of claim.” Id . at *4-5.
Contrary to Bassett the Third Circuit found
the evidentiary presumption does apply
where collateral is being valued and the
movant bears the initial burden to establish
with sufficient evidence that the proof of
claim overvalues the collateral, shifting the
burden to the creditor to demonstrate the
value of the collateral by a preponderance of
the evidence. In re Heritage Highgate, Inc .,
679 F.3d 132, 140 (3d Cir. 2012). Accord, In re
Roberts, 210 B.R. 325 (Bankr. N.D. Iowa 1997)
and EvaBank v. Baxter, 276 B.R. 867 (N.D.
Ala. 2002) (involving a post-confirmation
evidentiary hearing of a vehicle in a Chapter
13 case in which the vehicle's value stated
on the secured creditor's proof of claim
and the Black Book valuation presented by
the creditor at the hearing were weighed
against the debtor's declaration of value
which suffered substantial defects making
it a nullity).
There is no binding precedent in this
Circuit on which approach to the burden
of proof applies in valuation proceedings
under § 506(a) or whether the value set
forth in a proof of claim is entitled to the
evidentiary presumption in Fed. R. Bankr.
P. 3001(f). The Heritage Highgate analysis
makes more sense to me. The distinction
made between the “claims allowance
process” and “bifurcation and valuation
PBCBA BAR BULLETIN
9
process” may not be as clearly divisible
as the Basset court wants it to be. Fed. R.
Bank. 3012(b) recognizes that a request to
value can be made by a claim objection and
as stated earlier a secured creditor who
does not timely and properly file a proof of
claim may waive its right to participate in
the bankruptcy case. So, for example, in a
Chapter 13, where a creditor files a proof of
claim as fully secured with no reservation
of right as to any unsecured claim, and
the debtor objects and seeks to value the
collateral under 506(a), the claim could be
disallowed in its entirety if the value of the
collateral turned out to be zero.
Notwithstanding which approach is
ultimately taken both the secured party and
objecting party should be prepared to fully
support their respective positions as to
the value of the collateral with competent,
admissible evidence.
This article submitted by Jason S. Rigoli,
Esq., Furr Cohen, 2255 Glades Road,
Suite 301E, Boca Raton, FL 33431, jrigoli@
furrcohen.com
NCS 17th Annual
Jurist of the Year
Thursday, May 16th, 2019
5:30 PM - 8:00 PM
Ruth's Chris Steak House
North Palm Beach