In a major victory for factory financing subsidiaries and other lenders, the U.S. Supreme Court has ruled that debtors who reorganize under Chapter 13 of the U.S. Bankruptcy Code must repay market value rather than the lower wholesale value to keep their vehicles.
'It's huge for the finance companies,' said Rudolph Meola, an Albany, N.Y., lawyer who represents General Motors Acceptance Corp., Ford Motor Credit Co. and other automotive lenders and banks. 'It's the single most important bankruptcy issue for auto finance companies - more than interest rates.
'On a day-to-day basis, it means millions of dollars for credit companies,' Meola said.
For creditors, the difference on some vehicles may be thousands of dollars. The Supreme Court case decided June 16 involved a $9,000 spread between the market value and wholesale value of a tractor-trailer at the time the owner filed for bankruptcy, according to Ray Blackwood, a Houston lawyer for the creditor in the case. In other situations - such as a relatively inexpensive car that is several years old - the spread between wholesale value and market or replacement value would be much less.
Blackwood said about 300,000 Chapter 13 bankruptcy reorganizations started in 1996 alone. 'A record number of Chapter 13s (are) being filed,' he said. 'Almost every one involves one if not more vehicles.'
CRAM DOWN OPTION
The legal dispute involves the so-called 'cram down' option that allows a debtor to keep secured collateral over the creditor's objections. The creditor retains the lien, and the debtor must make payments during the reorganization plan that total the value of the collateral at the time the petition is filed.
The Supreme Court case focused on Elray Rash, a Texas trucker who bought a $73,300 Kenworth tractor and trailer in 1989 for his freight-hauling business. Rash made a down payment, and the balance was covered by a five-year installment loan. The seller assigned the loan and lien to Associates Commercial Corp.
Rash and his wife filed for Chapter 13 bankruptcy protection in 1992, when the loan balance was $41,171. They proposed to keep the truck and repay Associates over 58 months. Associates objected and unsuccessfully sought court permission to repossess the truck.
At a Bankruptcy Court hearing, Associates offered evidence that the retail cost of a similar truck at the time was about $41,000. But the Rashes contended its value was only $31,875, the amount Associates would get through foreclosure and sale of the truck.
A bankruptcy judge and the 5th U.S. Circuit Court of Appeals in New Orleans agreed with the Rashes and said they should pay Associates only $31,875.
The Supreme Court disagreed by an 8-1 vote.
FAIRER TO CREDITORS
Using a market-based replacement value standard - what it would cost the debtor to replace a vehicle - is fairer to creditors than wholesale value, Justice Ruth Bader Ginsburg wrote in the majority opinion.
'When a debtor surrenders the property, a creditor obtains it immediately and is free to sell it and reinvest the proceeds,' she said, noting that Associates 'sought that very advantage' through foreclosure, but was rebuffed by the bankruptcy judge.
'If a debtor keeps the property and continues to use it, the creditor obtains at once neither the property nor its value and is exposed to double risks: The debtor may again default and the property may deteriorate from extended use,' she said.