Opinion
Bankruptcy No. 02-30016
June 20, 2002
MEMORANDUM AND ORDER
The matter before the Court is the Debtors' motion to redeem personal property, filed April 1, 2002. Pursuant to 11 U.S.C. § 722, the Debtors, James A. Dobler and Tamara A. Dobler, seek to redeem two diamond rings from a secured creditor, Rosey, LLC. Tamara Dobler rented an apartment from Rosey, a company engaged in the building and rental of apartments.
The sole issue in this case is determination of the appropriate standard for valuation of an asset for redemption purposes under 11 U.S.C. § 722. The Debtors argue that liquidation value is appropriate and seek to redeem the rings for said value. Rosey objects, arguing that the appropriate standard is fair market value.
The matter was heard on May 14, 2002.
FACTUAL BACKGROUND
In March 2001, Tamara Dobler rented an apartment unit from Rosey. Kuljit Grewal, the general manager for Rosey, testified at the hearing on the matter that Tamara Dobler paid rent for the month of March but then failed to pay any additional rent, even though she continued living in the apartment until June 9, 2001.
When Tamara Dobler was two months in arrearage on rent, she offered Rosey two diamond rings as collateral. One of the rings was a woman's wedding set, and the other was a woman's diamond fashion ring. Tamara Dobler provided documentation evidencing that the rings were insured for more than $4,000.00. (Grewal accepted the rings as collateral against the debt owed, and Rosey is presently in possession of the rings.
On January 7, 2002, the Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code. The Debtors' Schedule D lists the amount of Rosey's secured claim as $1,835.00.
At the hearing on the matter, Brian Peterson, a local jewelry store owner and certified gemologist, testified. He explained and distinguished the different values used in the jewelry industry, and he provided appraisals for the rings under each value. As Peterson was the only expert to testify, there is no conflicting evidence in this case. Rather, both parties rely on Peterson's testimony, disputing the appropriate valuation standard to be used but not the credibility of the evidence.
The first value Peterson discussed was what he called "cash value." He explained that cash value is the immediate cash sale amount he would pay for these particular rings. Per his testimony and the appraisals admitted into evidence, the cash value of the wedding set and the fashion ring are $168.38 and $614.23, respectively. Peterson stated that the method he uses for determining cash value of diamond jewelry is to ascertain the quality of the diamonds to the extent possible without removing them from their settings, and then assigning them a value of one-half the wholesale value of reasonably equivalent diamonds.
Peterson next testified as to the approximate wholesale value of the rings, which represents the price of new jewelry paid by jewelers to wholesalers. The wholesale value of the fashion ring is approximately $1,400.00-1,500.00, and the wholesale value of the wedding set is approximately $538.00.
The next value Peterson discussed was retail value, which he explained is the value that is determined for insurance purposes. Per his testimony and the appraisals admitted into evidence, the retail value of the wedding set is $1,230.00, and the retail value of the fashion ring is $3,800.00.
Peterson described two additional ways of disposing of jewelry: private sale by the owner to another person, and sale to a pawn shop. According to Peterson, the only practical way to sell jewelry to another individual through a private sale is to run an advertisement in a newspaper, and this method of sale is available only if the seller does not need to sell the jewelry immediately. Peterson estimated that such a private sale would fetch fifty to eighty percent of the retail value of the rings. On the other hand, a seller who sells jewelry to a pawn shop will probably receive between five and ten cents on the retail-value dollar,
Finally, Peterson stated that if these particular rings — in their used condition — were in his store, he would attempt to sell the wedding set for $600.00 and the fashion ring for $1,800.00. if the rings did not sell within six months, he might remove the diamonds from their sets and try to sell them individually.
DISCUSSION
The parties do not dispute that the rings are tangible personal property upon which Rosey has a lien. Further, the Debtors' basis for the redemption of the rings is unchallenged. The dispute in this case centers upon the appropriate standard to be used for valuing the collateral, the rings. The Debtors argue that liquidation value is the appropriate standard and assert that the cash values testified to by Peterson represent the liquidation value. Rosey objects, arguing that the appropriate standard is fair market value. Rosey asserts that the fair market value is the amount the Debtors could receive if they pursued a commercially reasonable private sale of the rings without time constraints, i.e., between fifty and eighty percent of the retail value, per Peterson's testimony. Because this range, even at its lowest end, exceeds the debt owed, Rosey suggests the Debtors may redeem the rings by paying the amount of the secured debt, $1,835.00, plus interest at eight percent per annum.
Section 722 of the Bankruptcy Code provides:
An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien.
11 U.S.C. § 722; see also Fed.R.Bankr. p. 6008 (on motion of a debtor, the court may authorize the redemption of property from a lien in accordance with applicable law).
Although section 722 is facially silent as to the mechanics of redemption, it provides some guidance as to how to value a redemption claim. It allows redemption of an "allowed secured claim, " which is defined in section 506(a):
An allowed claim of a creditor secured by a lien on property in which the estate has an interest. . . 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. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
In Triad Fin'l Corp. v. Weathington, (In re Weathington), 254 B.R. 895 (B.A.P. 6th Cir. 2000), the Bankruptcy Appellate Panel for the Sixth Circuit held that the appropriate valuation standard for purposes of section 722 redemption is the liquidation, or wholesale, value of the collateral. Weathington. 254 B.R. 895, 900. In reaching this conclusion, the BAP provided a thorough analysis of the United States Supreme Court decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), which involved valuation in a Chapter 13 cramdown. Weathington. 254 B.R. at 898-99. In Rash, the Supreme Court held that "pursuant to § 506(a), the value of property retained when the debtor utilizes the cramdown provision if 1325(a)(5)(b) is `the cost that the debtor would incur to obtain a like asset for the same proposed. . . use.'" Weathington 254 B.R. at 898 (quoting Rash 520 U.S. at 965). The court in Weathington determined the rationale of Rash was useful but not binding because Rash dealt with the issue of valuation in the context of a Chapter 13 cramdown rather than in the context of a Chapter 7 redemption, stating:
After Rash, the bankruptcy court decisions addressing the valuation of collateral in the context of a Chapter 7 redemption have recognized that the use and disposition of collateral in the Chapter 7 redemption context is quite different from the Chapter 13 cramdown context. These decisions have thus determined that the replacement value is not an appropriate valuation standard. Rather, these cases conclude that the creditor's allowed claim in these circumstances should be determined by the liquidation value, the amount that the creditor would receive if the creditor repossessed and sold the collateral in the manner most beneficial to the creditor.
Weathington. 254 at B.R. 899 (citing In re Henderson 235 B.R. 425 (Bankr. C.D. Ill. 1999); In re Dunbar. 234 B.R. 895 (Bankr. ED. Tenn. 1999); In re Williams. 224 B.R. 873 (Bankr. S.D. Ohio 1998); In re Donley, 217 B.R. 1004 (Bankr. S.D. Ohio 1998)). The court noted that the terms "liquidation" and "wholesale" were used interchangeably, referring to both terms as the expected recovery by the secured creditor upon repossession and sale by auction or other wholesale means. Weathington, 254 at 899 n. 1.
In reaching its decision, the court in Weathington found the rationale in Donley particularly persuasive, stating:
A determination of value is made on the basis of the proposed use and disposition of the collateral, as Rash holds. Appreciating the economic realities, Donley recognized that the disposition is different when a debtor redeems property in Chapter 7 by paying off the creditor, as opposed to the disposition in Chapter 13 in which a debtor continues making payments to the creditor over time and the creditor incurs the dual risks of both loss of payment and loss of value as the collateral deteriorates over time. In contrast to the Chapter 13 cramdown scenario described in Rash there is no distinction in the economic consequences to the creditor between surrender and redemption in Chapter 7.
Weathington. 254 BR. at 900.
Based on the foregoing analysis, this Court concludes that in the context of a section 722 redemption, the appropriate valuation standard is the liquidation/wholesale value. Thus, by definition consistent with the cases discussed, Rosey's allowed secured interest in the rings is valued by a standard which measures how much Rosey would receive if the redemption did not occur and it were forced to sell the rings in the most beneficial manner.
Although this standard is fairly straightforward in theory, it becomes somewhat problematic upon application in the instant case because Peterson's testimony does not provide an appraisal value fitting neatly into this standard. Using labels alone, it would seem that Peterson's testimony as to the approximate wholesale value — the price of new jewelry paid by jewelers to wholesalers — of the rings would be the appropriate measure. Peterson testified that the wholesale value of the fashion ring is approximately $1,400.00-1,500.00, and the wholesale value of the wedding set is approximately $538.00. As a result, the total wholesale value of the rings, as testified to by Peterson, is between $1,938.00 and $2,038.00.
However, labels are not conclusive. Valuation of security in the bankruptcy context within the meaning of section 506(a) is a flexible concept, and courts are called upon to determine value on a case-by-case basis in light of the purpose of the valuation and the proposed disposition or use of the subject property. In re Penick, 170 B.R. 914, 917 (Bankr. W.D. Mich.).
The issue is somewhat muddled because the liquidation/wholesale valuation standard adopted by the Court measures, by definition, the amount a creditor would receive if the redemption did not occur and it were forced to sell the rings in the manner most beneficial to the creditor. As a practical matter, Rosey is not in business of selling jewelry, and it would not be reasonable to expect that Rosey could receive retail value for the rings. Rather, the most Rosey could reasonably expect to recover is the private sale value testified to by Peterson. Peterson appraised the value of the rings through private sale to be fifty to eighty percent of retail value. Using these percentages, the private sale value of the fashion ring is between $1,900.00 and $3,040.00, and the private sale value of the wedding set is between $615.00 and $984.00. Therefore, the total private sale value of the rings is between $2,515.00 and $4,024.00.
Fifty percent of $3,800.00.
Eighty percent of $3,800.00.
Fifty percent of $1,230.00.
Eighty percent of $1,230.00.
The amount of Rosey's claim is $1, 825.00, which is less than the lower end of the valuation range under either the liquidation/wholesale valuation or the private sale valuation. Consequently, regardless which of the two valuation methods is used, Rosey's claim is secured in its entirety under section 506(a). Notwithstanding, the distinction between the values is significant, albeit particularly to subsequent cases. To reiterate, the label used on a valuation is not determinative of the valuation's applicability or propriety. Instead, the appropriate standard for valuation of an asset for redemption purposes under 11 U.S.C. § 722 is the amount a creditor would receive if the redemption did not occur and it were forced to sell the collateral in the manner most beneficial to the creditor.
CONCLUSION
Based on the foregoing, the Debtors' motion to redeem personal property pursuant to section 722 is GRANTED. The Debtors may redeem the rings from the lien securing Rosey's claim by tendering $1,835.00 to Rosey within thirty (30) days of the service of this order.
SO ORDERED.