Opinion
Case No. 04-19828.
June 13, 2005
ORDER SUSTAINING CONFIRMATION OBJECTION BY MACK COMMERCIAL FINANCE
This matter is before the Court on the Objection By Mack Commercial Finance To Confirmation ("Objection") (Doc. 16). An evidentiary hearing on the Objection was held on April 26, 2005.
By its Objection, Mack Commercial Finance ("Mack") disputes the Debtors' valuation of its secured claim pursuant to 11 U.S.C. § 1325(a)(5). Mack filed a proof of claim for $67,226.25. Mack's claim is secured by a 2002 Mack dump truck, model CV713. In their plan and schedules, the Debtors value the dump truck at $50,000. Mack disagrees, taking the position that its claim is fully secured because the Debtors would have had to pay at least $67,226.25 on the petition date to purchase another 2002 Mack CV713 of the same condition.
LAW
The standard for valuing property under § 1325(a)(5) is set forth in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997). In Rash, the Supreme Court concluded that the value of collateral, for purposes of "cram down" under § 1325(a)(5), is the replacement value or "the price a willing buyer in the debtor's trade, business, or situation would pay to obtain like property from a willing seller." Id. at 960. Put another way, replacement value is "the cost the debtor would incur to obtain a like asset for the same `proposed . . . use.'" Id. at 965.
ANALYSIS
What this case boils down to is a classic battle of the experts. Mack relies upon the opinion testimony of Kevin Miller ("Miller"), a remarketing manager for Mack. The Debtors rely upon the opinion testimony of E. Pike Levine ("Levine"), president of the American Research and Appraisal Center, Inc. The parties stipulate that Miller and Levine both qualify as experts pursuant to Fed.R.Evid. 702 and that the vehicle should be valued as of the petition date, December 8, 2004. For the reasons set forth below, the Court finds the opinion of Miller to be more persuasive than that of Levine.
1. The Miller Valuation
As a remarketing manager, Miller routinely values and sells Mack's "off-lease" and repossessed truck inventory to wholesale customers on a monthly basis. Miller credibly testified that during 2004 and the first quarter of 2005 he sold thirty-two Mack CV713 trucks.
Pursuant to Rash, the ultimate issue for determining the present value of property a debtor wishes to cram down is how much the debtor would have to pay to obtain the same property in the exact same condition. In the instant case, this is likely somewhere between wholesale and retail because the Debtors do not have access to the wholesale market and the typical retail sale is preceded by reconditioning of the vehicle. See Rash, 520 U.S. at 965 n. 6 (if retail value best reflects replacement value in a particular case, the retail value must be discounted for items like reconditioning that the debtor does not acquire through retention under § 1325(a)(5)(B)). Miller provided two methods to arrive at this figure: (1) wholesale, as is, plus retail profit margin; and (2) retail less retail repairs.
Wholesale, As Is, Plus Retail Profit Margin. Miller testified that he could sell the vehicle to a wholesaler, as is, for between $66,000 and $70,000. He further testified that retailers typically add $6,000 to $10,000 to the wholesale price, apart from the cost of reconditioning, as a profit margin. Lastly, Miller noted during testimony that retail sales in Ohio typically suffer a 3% to 4% decline in the winter months. From this information, one could reasonably conclude that the retail value of the truck in December of 2004, absent reconditioning, would have been between $69,120 and $77,600. Retail Less Retail Repairs. Miller was also of the opinion that the retail value of the vehicle was $85,000. After performing an inspection of the vehicle, Miller believed that $7,525 in repairs were necessary to sell the vehicle in the retail market. The Court sees only one problem with this repair estimate. The parties agree that the vehicle should be valued as of the filing date. The record reflects that the vehicle, as of the filing date, sustained collision damage in the amount of $4,000. Miller did not include this expense in his cost of repairs because the collision damage had been repaired when he inspected the vehicle on the date of the hearing. Accordingly, Miller's repair estimate should be increased from $7,525 to $11,525 to reflect the collision damage that existed on the filing date. Given this information, the retail value of the truck in December of 2004, absent reconditioning, would have been between $70,536 and $71,270.75.
The range provided by Miller can be calculated as follows. For the low end of the range: $66,000 (minimum wholesale without reconditioning) + $6,000 (minimum retail markup apart from reconditioning costs) × .96 (to reflect 4% drop in retail sales prices during winter) = $69,120. For the high end of the range: $70,000 (maximum wholesale without reconditioning) + $10,000 (maximum retail markup apart from reconditioning costs) × .97 (to reflect 3% drop in retail sales prices during winter) = $77,600.
Adding to his credibility, Miller testified that he thought the N.A.D.A. retail value of $91,000 was "a bit high" given that dealers only report their best sales to N.A.D.A.
The only evidence in the record regarding the collision damage is contained in Levine's report. Levine assessed the cost of repair to be $4,000. Mack did not rebut this evidence.
The range provided by Miller can be calculated as follows. For the low end of the range: $85,000 (retail value) — $11,525 (cost of repairs necessary for retail sale) × .96 (to reflect 4% drop in retail sales prices during winter) = $70,536. For the high end of the range: $85,000 (retail value) — $11,525 (cost of repairs necessary for retail sale) × .97 (to reflect 3% drop in retail sales prices during winter) = $71,270.75.
2. The Levine Valuation
Although Levine's credentials are impressive, his method of assessing the vehicle's condition and value was not. Accordingly, the Court accorded less weight to the testimony offered by Levine than it did for Miller.
Method of Assessing Condition of the Vehicle. Levine admitted that his assessment of the vehicle's condition was based, in large part, upon the input of Mr. Slater as opposed to his own evaluation.
Q: Did you notice anything that might have been wrong with the vehicle or that needed repair?
A: There are a number of things that Mr. Slater brought to my attention which I in turn put down on the sheet, stating exactly what he told me. And that's what I based part of my appraisal on.
He further acknowledged that his report omitted a number of maintenance needs that Miller identified.
Q: Your report didn't even consider a number of repairs that Mr. Miller pointed out in his testimony?
A: That's correct.
Not only did Levine omit certain maintenance needs but he also included some items that were not legitimate maintenance needs.
A: There were a couple of items we missed and a couple of items we shouldn't have put in.
Levine concluded that the vehicle was in "poor to fair condition." This is consistent with Mr. Slater's testimony that the vehicle is in "below average condition." The Court notes, however, that this testimony from Levine and Mr. Slater directly contradicts the Debtors' assertion on Schedule D that the vehicle is "in good condition."
Method of Retail Valuation. In Levine's opinion, the replacement value of the vehicle is $47,500. To arrive at this figure, he started with a retail valuation and then subtracted various items from the same. Given that Levine's entire analysis flows from his retail valuation, it is critical that this number is accurate. The Court is not persuaded that it is.
Levine concluded that the retail value of the vehicle was $80,000. Although this number is only $5,000 less than the retail valuation of Miller, Levine's method of calculating this figure is not as impressive. Levine's retail value is based upon four "comparable" sales. When asked where he obtained his comparable sales data, Levine could not articulate his sources.
Q: If I wanted to confirm the information that you've made your retail sales calculations on, where on the computer would I go to get this information?
A: It's in there. I don't know how I got it. But it's in there.
Even if Levine's sales data is verifiable, it is questionable whether the vehicles are "comparable." Comparable #1 is a tandem axle vehicle with a fourteen foot box. The Debtors' vehicle is a quad axle with a nineteen foot box. Comparables #2 and #3 have sixteen foot boxes and no reference to whether they are quad axle vehicles. Comparable #4 is a quad axle, but we know nothing else about the vehicle. The Debtors' vehicle had 154,000 miles as of the filing date. We know nothing about the mileage of any of Levine's comparables. In sum, the Court is persuaded by Miller's opinion that Levine's comparables, to the extent that we know anything about them, are "really not a comparison at all."
Method of Replacement Valuation. Using his retail valuation as a starting point, Levine made deductions for repairs to arrive at a "market value." From there, Levine made further deductions to arrive at his opinion of replacement value. However, Levine defined "market value" as the retail value of the vehicle "as is." As noted above, this Court believes that replacement value, in this case, is best reflected by the retail value of the vehicle without reconditioning. Accordingly, Levine's "market value" is what the Court considers to be the replacement value of the vehicle. Interestingly, if Levine's market value analysis is applied (i.e. replacement value being equal to retail value less the cost of repairs) along with a $5,000 upward adjustment to reflect the more credible retail value of $85,000 expressed by Miller, then Levine would arrive at a market/replacement value range of $65,736 to $66,420.75. Method of Assessing Cost of Repairs. Applying Levine's market value as the replacement value, the primary distinction between the two appraisals is the estimated cost of repairs. Having to choose between the two, the Court finds Miller's assessment of repair costs to be more persuasive than Levine's. Miller is a truck mechanic who has full ASE certification in light and heavy trucks. He also has an engineering degree in truck application. He testified with impressive precision concerning the unit cost of parts and the corresponding labor charges. Levine, on the other hand, deferred to Mr. Slater for his assessment of repair costs.
Levine's computation would be as follows. For the low end of the range: $85,000 (retail value) — $16,525 (cost of repairs necessary for retail sale) × .96 (to reflect 4% drop in retail sales prices during winter) = $65,736 market/replacement value. For the high end of the range: $85,000 (retail value) — $16,525 (cost of repairs necessary for retail sale) × .97 (to reflect 3% drop in retail sales prices during winter) = $66,420.75.
Even after adjusting Miller's repair costs to reflect the collision damage, Miller's estimate is $11,525 and Levine's estimate is $16,525.
Q: Did you get any estimates from anybody as to the cost of any of the repairs that you itemized?
A: No sir.
Q: How did you come up with the number?
A: Mr. Slater.
CONCLUSION
Based on the expert witness testimony and exhibits admitted in the proceedings, the Court finds Miller's valuation to be more credible and well-supported by the totality of the evidence. Even if the Court were to use the lowest replacement valuation derived from Miller's testimony, that being $69,120, Mack's claim of $67,226.25 would have to be treated as fully secured under § 1325(a)(5) before the Debtors' plan could be confirmed. Accordingly, the Objection is hereby SUSTAINED. IT IS SO ORDERED.