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