Also known as: replacement values · replacement cost
Written by attorneys — see sources 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.
On October 2, 1998, petitioners Lee and Amy Till purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 downpayment and financed the balance through a retail installment contract assigned to respondent SCS Credit Corporation, creating an initial indebtedness of $8,285.24 at 21% interest over 136 weeks secured by a purchase money security interest in the truck. On October 25, 1999, the Tills filed a joint Chapter 13 petition while in default on payments to SCS. At filing, SCS's outstanding claim was $4,894.89, but the parties agreed the truck was worth only $4,000, limiting the secured claim to that amount with the $894.89 balance treated as unsecured; the filing stayed collection activity by the IRS, respondent, three other holders of secured claims, and unidentified unsecured creditors while creating a bankruptcy estate that included the truck. The Tills proposed a three-year plan assigning $740 of monthly wages to the trustee for distribution in priority order to administrative costs, the IRS priority claim, secured claims, and unsecured claims, with 9.5% interest on SCS's secured claim calculated by adding a 1.5% risk adjustment to the national prime rate of approximately 8%. SCS objected and sought 21% interest, presenting expert testimony that it and other subprime lenders uniformly charged that rate on loans to borrowers with poor credit; petitioners countered with an economics professor's testimony that 9.5% was reasonable given court supervision and plan feasibility, and the bankruptcy trustee supported the formula rate as easily ascertainable and market-tied, leading the bankruptcy court to overrule the objection and confirm the plan. The District Court reversed under Seventh Circuit precedent requiring the rate the creditor could obtain by foreclosing, selling the collateral, and reinvesting in equivalent loans, setting the rate at 21%. The Seventh Circuit endorsed a presumptive contract rate approach using the 21% prebankruptcy rate as a starting point subject to rebuttal by either party and remanded for further proceedings. The Supreme Court granted certiorari.
View caseReplacement 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…