Western District of Texas Bankruptcy Judge Tony Davis has written a very helpful opinion on valuing a truck in a chapter 13 case. The ten page opinion is packed with extensive footnotes as well as practical guidelines. In the end, the valuation issue depended on burden of proof and the relatively weak evidence offered by the debtor prevailed. In re Solis, No. 15-11181 (Bankr. W.D. Tex. 4/15/16). The opinion can be found here .
Joseph Solis wanted to keep his 2008 Ford Explorer XLT as part of his chapter 13 plan. Ally had filed a proof of claim for $12,771.32 with a claimed value of $9,925.00. While the claim contained all of the proper contractual and lien documents, it did not include evidence of value. The Debtor objected to the claim asserting that the truck was only worth $6,371.25. The Debtor's objection included a printout from the NADA guide. Because the vehicle was purchased more than 910 days before bankruptcy, the Debtor could cram down the secured claim. In this small chapter 13 case, the $3,200 difference in value was enough to make the plan fail.
At the hearing, the Debtor introduced a printout from Edmonds.com as well as photos of the truck. The debtor testified about the condition of the truck which had deep scratches and light damage to the fenders but was mechanically sound. Ally introduced the NADA guide that the Debtor had attached to its objection. Both parties consented to introduction of the valuation guides. Ally favored the NADA Clean Retail Value of $9,475. The Debtor argued for the Edmonds Dealer Retail Value in average condition of $5,947.
In a detailed footnote, the Court discussed Federal Rule of Evidence 803(17) which is the exception to the hearsay rule for market quotations. The Court noted that the NADA and Edmonds guides would be admissible with testimony from an industry expert and might be admissible even without it. Opinion, p. 3, n.4. It didn't matter in this case because the parties consented to admission of the valuation guides. However, these authorities are useful in the rare case where the parties don't agree.
Evaluating the Values
Under 11 U.S.C. Section 506(a), valuation depends on the purpose for the valuation. Here, the debtor wanted to keep the truck so the relevant inquiry is what would it cost the debtor to acquire another vehicle in the same condition, which is known as replacement value. Thus, the Court had to figure out how to get from the NADA and Edmonds guides to replacement value.
According to the NADA website, a vehicle in "Clean" condition "has no mechanical defects, only minor exterior surface scratching, and minimal interior wear."
Courts have noted that the NADA Clean Retail value typically overstates the replacement value of a debtor’s vehicle. The NADA Clean Retail value is an idealized standard that is rarely met by used vehicles before they are reconditioned. Often, courts use the NADA Clean Retail price as the starting point before deducting the cost of repairs to determine value.
Opinion, p. 7.
The Edmonds "Average" value “[m]ay have a few mechanical and/or cosmetic problems and may require a considerable amount of reconditioning.”
Based on the testimony about the vehicle's condition, the Court found that the vehicle fell somewhere between NADA Clean Retail and Edmonds Average value. The Court noted that courts have applied several methodologies for reconciling these value standards.
Often, courts use the NADA Clean Retail price as the starting point before deducting the cost of repairs to determine value. Others take a standard set percentage off the NADA value as the starting point. And one bankruptcy court in the Fifth Circuit held that averaging the Clean Retail and Clean Trade-in NADA values best approximated replacement value
Opinion, pp. 7-8.
Having set out all of these principles, the case came down to the burden of proof.
The context here is an objection to claim. Generally, a proof of claim is prima facie evidence of the validity and the amount of the claim. However, if a party in interest objects and provides evidence that is at least as probative as that offered by the proof of claim, the burden shifts to the claimant. The ultimate burden is then on the claimant to prove its claim by the preponderance of the evidence.
Opinion, p. 5. Thus, the initial burden fell to the debtor to produce evidence "at least as probative as that offered by the proof of claim." In this case, the proof of claim did not contain any evidence of value which made it easier for the debtor to meet its initial burden. According to the court: "Where the proof of claim makes an unsupported assertion, an unsupported assertion in response is 'at least equal in probative force' to the evidence in the proof of claim." Opinion, p. 6.
Thus, the burden fell to the creditor. However, the creditor had merely introduced the NADA value, which did not reflect replacement value.
Given the deep scratches and fender damage to the Debtor’s SUV, the NADA Clean Retail value plainly overstates the replacement value of the Debtor’s SUV. There is no evidence in the record regarding the costs of reconditioning from which the Court could determine its value based on the NADA price report. And the record is also insufficient to determine a percentage reduction in the NADA Clean Retail or to adopt the average of the NADA Clean Retail and Clean Trade-in prices.Opinion, p. 8. Meanwhile, the debtor had introduced some evidence of value.
The Court finds that the replacement value of the Debtor’s SUV is somewhere between the NADA price and the Edmunds price. Ally did not carry its burden in that it provided no evidence to support an appropriate discount from the NADA Clean Retail value. The Debtor, on the other hand, did swear to a value of $6,731, which is consistent with the idea that a vehicle with no mechanical and a few cosmetic defects should be worth a little more than the Edmunds Average value. Although the value that the Debtor asserted in his schedules is weak evidence, and was rendered even weaker when the Debtor was cross-examined, it is the only basis the Court has to determine where between the NADA and Edmunds prices replacement value falls. And even if the Court construed the Debtor’s testimony on cross examination as a rejection of the value the Debtor asserted in his schedules, the result would be the same. Ally had the burden of proving a higher value than the $6,731 alleged in the objection to claim, and did not meet that burden.Opinion, pp. 8-9.
Having spent a lot of time thinking about how to value a truck, the Court concluded with a strong hint that the bar might want to propose a local rule or standing order for determining valuation:
The Court recognizes that the expense of expert testimony will rarely (if ever) be justified to establish the value of a debtor’s personal vehicle under section 506(a). A local rule or standing order instituting a simple and uniform approach to establish the presumptive value of a debtor’s vehicle may be justified if sought by the bar.25 In the absence of such a rule, courts need to be sensitive to the practical constraints on the manner in which disputes are tried.
Opinion, pp. 9-10. Footnote 25 stated:
Some bankruptcy courts have done this. E.g., Bankr. Vt. LBR 3012-1(b), http://www.vtb.uscourts.gov/sites/vtb/files/Local_Rules_2012.pdf (“As a starting point, the valuation of motor vehicle collateral will be presumed to be the midpoint between the National Automobile Dealers Association average trade-in value and clean retail value unless: (1) the parties agree to a different value; (2) the debtor or secured creditor presents an appraisal undisputed by the other party; or (3) the value is fixed by the Court as a result of an evidentiary hearing held specifically to determine the value of the particular vehicle”); Bankr. E.D. Mo. LBR 3015-2, http://www.moeb.uscourts.gov/pdfs/local_rules/2015/2015_Local_Rules.pdf (“Absent evidence to the contrary, for purposes of 11 U.S.C. § 506, the Court’s Vehicle Valuation Policy shall be 97% of the National Automobile Dealers Association (NADA) (Central Edition) retail value at the time of filing the petition.”).
This is a very practical suggestion that the bar should act on. However, in the absence of a local rule or standing order, this opinion contains a wealth of valuable content in a relatively short opinion.