United States: Presumption Of Filed Claim's Validity And Amount Does Not Apply In Proceeding To Determine Secured Amount Of Claim

Last Updated: September 26 2019
Article by Mark Douglas and Paul M. Green
Most Read Contributor in United States, September 2019

The Bankruptcy Code creates a rebuttable presumption that a proof of claim is prima facie evidence of the claim's validity and amount. Courts disagree, however, over whether that presumption also applies in a proceeding to determine the secured amount of the creditor's claim. The U.S. Bankruptcy Court for the Eastern District of California weighed in on this issue in In re Bassett, 2019 WL 993302 (Bankr. E.D. Cal. Feb. 26, 2019). The court broadened the divide in the debate by holding that the presumption that a filed claim is valid does not create a presumption that the claim is secured to the extent specified in a proof of claim.

The Presumption of Validity

Section 502 of the Bankruptcy Code sets forth procedures to govern the allowance or disallowance of a "claim or interest" in a bankruptcy case. Section 502(a) provides that a claim or interest, proof of which is filed with the court, "is deemed allowed," unless a party in interest objects. See Trustees of Operating Engineers Local 324 Pension Fund v. Bourdow Contracting Inc., 919 F.3d 368 (6th Cir. 2019) (the validity and amount of a "deemed allowed" claim under section 502(a) can be binding in subsequent litigation between the same parties or their privies). Under section 502(b), the bankruptcy court is obligated to resolve any objection in accordance with delineated criteria by ruling to allow or disallow the claim (in whole or in part).

Rule 3001(f) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") provides that "[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." Thus, any party objecting to the claim has the burden of introducing evidence sufficient to rebut the presumption of validity. See generally Collier on Bankruptcy ¶ 3001.09[2] (16th ed. 2019).

Determining the Amount of a Secured Claim

The extent to which a claim is secured or unsecured is determined in accordance with section 506(a) of the Bankruptcy Code. Section 506(a)(1) provides that a claim is "a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim." The provision goes on to mandate that "[s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property."

Section 506(a)(2) governs the valuation of personal property securing a claim in a chapter 7 or chapter 13 case involving an individual debtor. The value of such property "shall be determined based on the replacement value of such property," which is defined as "the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined."

Bankruptcy Rule 3012 establishes a procedure for asking the bankruptcy court to determine the amount of a secured claim under section 506(a).

Disagreement Among the Courts

Courts disagree as to whether the evidentiary presumption created by Bankruptcy Rule 3001(f) applies to the value of collateral stated in a proof of claim for the purpose of valuing the secured amount of a creditor's claim under section 506(a). For example, in In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012), the U.S. Court of Appeals for the Third Circuit concluded that the presumption of validity given to a proof of claim filed in a chapter 11 case applies to the value of the secured creditor's collateral set forth in the proof of claim, and that the evidentiary presumption applies when the collateral is valued under section 506(a) and Bankruptcy Rule 3012. Accord EvaBank v. Baxter, 278 B.R. 867, 879 (N.D. Ala. 2002); In re Sandrin, 536 B.R. 309, 315 (Bankr. D. Colo. 2015); In re Vidal, 2013 WL 441605, at *4 (Bankr. D. Del. Feb. 5, 2013); In re Serda, 395 B.R. 450, 454 (Bankr. E.D. Cal. 2008); In re Roberts, 210 B.R. 325, 328 (Bankr. N.D. Iowa 1997).

Other courts have concluded otherwise, ruling that, because the claims allowance process under section 502(a) and Bankruptcy Rule 3001(f) is distinct from the claims bifurcation and valuation process under section 506(a) and Rule 3012, the presumption created by Bankruptcy Rule 3001(f) is not implicated in determining whether a claim is secured or unsecured under section 506(a). See, e.g., In re Morales, 520 B.R. 544, 550 (Bankr. W.D. Tex. 2014); In re Ball, 2004 WL 909441, at *3 (Bankr. W.D. Va. Mar. 10, 2004); In re Duggins, 263 B.R. 233, 238 (Bankr. C.D. Ill. 2001); In re Hudson, 260 B.R. 421, 436 (Bankr. W.D. Mich. 2001); see also In re Alewelt, 520 B.R. 704 (Bankr. C.D. Ill. 2014) (the evidentiary presumption of claim validity that arises upon the proper filing of a proof of claim does not extend to the priority status of the claim).

Bassett

In Bassett, the bankruptcy court jointly considered motions in four separate chapter 13 cases to value the debtors' motor vehicles for the purpose of determining the respective amounts of the creditors' secured claims under section 506(a) and Bankruptcy Rule 3012. In connection with those motions, the court examined:

[whether] the evidentiary presumption of Bankruptcy Rule 3001(f) appl[ies] to the value of the collateral stated in the secured creditor's proof of claim[], and if so, [whether] that evidentiary presumption of value carr[ies] forward and appl[ies] to a motion to value the secured creditor's collateral brought under § 506(a) and Bankruptcy Rule 3012.

Noting that the issues "appear[] to be a matter of some debate," the bankruptcy court ruled that the evidentiary presumption of a claim's validity does not extend to the value of the collateral for the purpose of determining the secured amount of the claim. According to the bankruptcy court, courts that have ruled to the contrary "appear to conflate, and therefore do not recognize, the distinction between the claims allowance process under § 502(a) and Bankruptcy Rule 3001(f) and the claims bifurcation and valuation process under § 506(a) and Bankruptcy Rule 3012."

These processes, the bankruptcy court wrote, "are separate and distinct." It explained that the former establishes the existence of a debt and an entitlement to payment, whereas the latter determines how the established debt is to be paid and treated under the Bankruptcy Code. The court accordingly held that the evidentiary presumption of Bankruptcy Rule 3001(f) does not apply to a motion to value collateral under section 506(a) "because that presumption is limited to the claims allowance process and within that process applies only to the 'validity' and unbifurcated claim 'amount' as stated in the plain language of the rule."

According to the bankruptcy court, this approach: (i) preserves the court's fact-finding function in the valuation process; (ii) avoids delays in the plan confirmation process in cases where a proof of claim is not timely (or is never) filed; and (iii) eliminates the possibility that a secured creditor might attempt to extract more from a debtor based on an unrealistic value of the collateral.

Outlook

Valuation is a critical and indispensable part of the bankruptcy process. How collateral and other estate assets are valued will determine a wide range of issues, from a secured creditor's right to adequate protection, postpetition interest, or relief from the automatic stay to a proposed chapter 11 plan's satisfaction of the "best interests" test or whether a "cram-down" plan can be confirmed despite the objections of dissenting creditors. Bassett and other court rulings addressing the valuation of secured claims illustrate the importance of developing an adequate evidentiary record to support or refute a proposed valuation.

Interestingly, Bassett involved the valuation of motor vehicles in chapter 13 cases. Thus, regardless of any values ascribed to the vehicles in the secured creditors' proofs of claim, section 506(a)(2) mandates that the vehicles in that context—"personal property"—be valued by the court at replacement value. This statutory mandate would appear to override any presumption of value arguably conferred by Bankruptcy Rule 3001(f) in all events, but the court did not discuss the issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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