Also known as: replacement values · replacement cost
Written by attorneys · grounded in primary & secondary sources — see below
The cost a party must incur to obtain a substitute for converted or destroyed property. For commodities of fluctuating value customarily traded on an exchange, the measure is the highest price within a reasonable period during which replacement could occur.
Roger Ramirez, a commodities broker, had 500 barrels of crude oil converted by Radiance Media when the company wrongfully took possession during a market spike. The oil traded on a public exchange with daily price swings. Roger waited two weeks to repurchase equivalent barrels at the peak price reached during that window. The court awarded damages based on that peak replacement cost rather than the lower price on the conversion date.
Rebecca Ross filed a Chapter 13 plan proposing to keep her secured pickup truck rather than surrender it. The creditor argued for foreclosure value while Rebecca contended a lower figure should apply. The court fixed the secured claim at replacement value, the price Rebecca would pay a willing seller for a comparable used truck in her situation. This amount became the baseline for the plan's cramdown payments.
Select any source to read its text and confirm it supports the definition.
Replacement value is the price a debtor in the same trade or situation would pay a willing seller for like property when retaining the collateral. Foreclosure value is the lower amount a creditor would realize at a forced sale. Courts use replacement value when the debtor's plan proposes retention because that matches the proposed use under section 506(a).
The highest price applies only to commodities of fluctuating value traded on an exchange to which traders customarily resort. The period must be reasonable for the claimant to locate and purchase a substitute. This measure prevents undercompensation when prices rise quickly after conversion.
Replacement value focuses on the cost of like property in the debtor's situation. Courts may exclude nonstandard upgrades if they are not part of comparable market items.
No. When the plan proposes retention, the statute requires valuation based on the debtor's proposed use. That directs courts to replacement cost rather than foreclosure proceeds, producing a higher secured claim that the debtor must pay in full to cram down.
…a particular method of valuing collateral. A plan may pose little risk even though the difference between foreclosure and replacement values is substantial, or great risk even though the valuation difference is small. For example, if a plan proposes immediate cash payment to the secured creditor, he is entitled to the higher…