ASSOCIATES COMMERCIAL CORP. v. RASH

Print this transcript Transcript: 

Argument of Carter G. Phillips

Chief Justice Rehnquist: We'll hear argument next in No. 96-454, Associates Commercial Corporation v. Elray Rash.

Spectators are admonished not to speak until you get outside of the courtroom.

The Court remains in session.

Mr. Phillips.

Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court:

The issue in this case is whether the value of collateral that a Chapter 13 debtor proposes to retain and use should be determined by what the secured creditor could obtain if it foreclosed on that property and sold it, or by what the debtor would have to pay in order to acquire a comparable property.

Our argument is that Section 506(a) of the Bankruptcy Code declares that the value of the property should vary, depending on whether it is proposed to be used or proposed to be disposed of, and that a hypothetical disclosure value is insufficient and ignores the language of the statute.

Accordingly, the Court of Appeals erred when it undervalued the secured interest of the Petitioner in this case.

This is a Chapter 13 case in which the Respondents proposed a plan that would permit them to keep a tractor trailer truck, which served as collateral for a debt owed to the Petitioner.

At the time of the bankruptcy, the Petitioner was owed approximately... well, not approximately... was owed $41,171, and it had perfected a lien on the... under State law.

Petitioner sought, under Section 362, to lift the automatic stay and to repossess the truck.

Respondents objected, sought to keep the truck as necessary for their reorganization, and asked the court to value the truck at $28,500.

They proposed to pay that amount, plus interest, and then to strip the lien from the... from the Petitioner.

Both sides offered expert testimony on the value of the truck.

The Respondents' expert valued it at retail, at $42,500.

Our expert valued it at $41,000.

And the... the Respondents' expert also valued it at wholesale, at $31,875, which he got to by discounting by 25 percent the retail value.

And all of these numbers were derived, essentially, from standard industry bluebooks.

The Bankruptcy Court, the District Court and the Court of Appeals all concluded that, under these circumstances, they had to decide the question as a matter of law, which is the proper method of valuation, wholesale or retail.

In doing so, they quite properly turned to Section 506(a) of the Code.

Unfortunately, they misconstrued that provision.

506(a) has two sentences.

The first sentence tells you what you value.

And as this Court held in Timbers, that phrase simply tells you that you value the creditor's collateral.

The first sentence says nothing about how you value the collateral.

The second sentence, which is reproduced on page 3 of the Petitioner's brief, says that the way you value collateral is that you... is that you value... shall be determined in light of the proposed disposition or use of such property.

Now, the Court is fond of observing, generally speaking, that--

Unknown Speaker: You left out part of the sentence, though, I think, didn't you, Mr. Phillips?

Mr. Phillips: --I'm sorry, Your Honor?

Unknown Speaker: You left out part of the sentence.

Mr. Phillips: That's true.

You're supposed to do it in light of the purposes of the valuation and--

Unknown Speaker: Is it... or of the... or, and of the proposed disposition.

Mr. Phillips: --Right.

Unknown Speaker: Right.

Mr. Phillips: Right.

I'm sorry.

Unknown Speaker: Yes.

Mr. Phillips: I will reread it: shall be determined in light of the proposed disposition or use of the property.

Suggesting, as we... as we say--

Unknown Speaker: No, in light of the purpose of the valuation and of proposed disposition.

Mr. Phillips: --That's correct, Your Honor.

Although there is no dispute between the parties about the purpose of the valuation, so I... I skipped over that.

Unknown Speaker: What was the purpose of the valuation?

Mr. Phillips: Well, the purpose of the valuation here was to decide the full extent of our... of our collateral, for purposes of deciding how much money should be paid as part of... as part of the Chapter 13 reorganization.

And there's no dispute over that.

Unknown Speaker: Now, I suppose, if the higher value had been placed on it, that the reorganization might not have occurred... at least that's what Respondents say.

They couldn't have made the payments.

And then your client would have had to take a truck back and sell it, presumably at wholesale value.

Mr. Phillips: That... that is correct, Your Honor.

But we would have been perfectly happy with that, because that's what we proposed in the first instance.

But it's not at all clear, and it's simply speculation as to whether or not this Chapter 13 reorganization would have succeeded or not.

Unknown Speaker: Well, in any event, the thing proceeded, and Respondents made payments for 5 years, and presumably have completed this thing.

Now, if you prevail, what's going to happen on remand?

Mr. Phillips: Well, what the Respondent said in opposition to the stay in the Bankruptcy Court was that they remain on the hook to pay back Associates for the amount of money that's owed.

And it's approximately $7,000... is the difference between what they paid and what we think they should have paid.

So--

Unknown Speaker: Now, there are no warranties, I guess, left on the truck as far as the debtor is concerned at this point... I mean at the point they kept the truck.

Does that have to be taken into consideration in setting a value?

Mr. Phillips: --Well, the appraiser can... ordinarily, I think the appraiser would take into consideration what is on the truck.

I mean what you're being asked to do is to replace the truck that that particular--

Unknown Speaker: Yeah, and it might... it might not be straight blue book wholesale value.

Mr. Phillips: --Right.

But then the appraiser could... could adjust it, to take into account precisely what's on the truck.

Just as if, for some reason, there was something very special that he put on the truck that he paid for that wasn't part of the secured interest.

I don't think that we would get the higher value of that, as we say in the brief.

You know, you would look at it as a truck to replace, essentially, what the secured interest is, what is the collateral.

Unknown Speaker: Well, just on this preliminary point, there was some payment to be made to the unsecured creditors I think a few years down the line, was there not?

Mr. Phillips: Yes, there was money paid to unsecured creditors.

Unknown Speaker: All right.

So... so if the replacement value had been granted, maybe this is just a question between the secured and unsecured creditors, not between the debtor and the secured creditors?

Mr. Phillips: Generally speaking, that is going to be the case.

Is this... the question is whether or not the unsecureds get anything--

Unknown Speaker: Well, then--

--Sorry.

No, that's okay.

Were you finished?

Or if it would be the case, and I think it would be.

The words "wholesale" and "retail" don't appear in this statute.

So I take it Congress wanted to leave it up to the bankruptcy judge, pretty much.

And why wouldn't the bankruptcy judge be sensible in saying, well, the value includes whatever will be disputed between the unsecured and secured creditors?

But, as in this case, if you value it at 41,000, and then he can't even go into the... Chapter 13 because he just doesn't have that money, that couldn't possibly be the value.

There's no theory on which that would be the value, because if you value it at that, there won't be a Chapter 13 reorganization.

Mr. Phillips: --Well, but--

Unknown Speaker: So we cut back the value in order to make certain he gets into the reorganization, he puts in his disposable income that you get the amount insofar as it's in dispute between the creditors.

Now, that kind of result seems fair.

And it would be very case specific.

Mr. Phillips: --Well, no, that kind of result seems to undo the statute.

Chapter 13 is not--

Unknown Speaker: It doesn't say.

Mr. Phillips: --essentially, a right that all debtors have.

They have a choice between Chapter 7 and Chapter 13.

And if their debts are... are too great to allow them to reorganize under Chapter 13, then they have to put up with... under... with Chapter 7.

Unknown Speaker: But how could the... the value for purposes of a Chapter 13 reorganization, insofar as that exceeds what your client would get in a liquidation, couldn't... it's nonexistent if there isn't going to be a Chapter 13 reorganization.

Mr. Phillips: But... but it seems to me that you... you... you have to look at the language of the statute.

And Section 506(a) says look at the proposed disposition or the proposed use.

Now, if... if he cannot use it and successfully come out of Chapter 13, then he is required to go under Chapter 7.

And you don't avoid the Chapter 7 problem by--

Unknown Speaker: In other words, you... you don't agree that... that a secured interest is not a secured interest if... if its existence would prevent Chapter 13?

Mr. Phillips: --Exactly.

Exactly.

Unknown Speaker: That sounds reasonable to me, too.

Mr. Phillips: Thank you, Your Honor.

Unknown Speaker: Isn't it also relevant, Mr. Phillips, that... and... the Chapter 13 proposal was not that your client get the security back at whatever value, but that the security remain in the hands of the debtor and continue to depreciate?

Mr. Phillips: That's... that's... that's exactly right, Mr. Chief Justice.

And... and the point I was starting to move toward, which is the rule of construction, that the Fifth Circuit relied upon and that I think, really, is where they made the fundamental error in this case, is by saying that the State law rights that are implicated here favor requiring us to show by clear and unambiguous language that our interpretation of the statute is the correct one--

Unknown Speaker: Mr. Phillips, may I... may I ask you about the Fifth Circuit, because I thought that the main point for Judge King was based on the Federal statute as much... well, more than the State law point that you were about to deal with.

She looked to 1325, and she said, now there are two things the debtor can do in this situation.

And one is surrender the collateral.

Give it back to the creditor.

And then it would have what's been called wholesale value.

The other thing is leave it with the debtor and value it.

The question that she put was, why should there be different results whether which of those two routes the creditor who doesn't want to go along with the reorganization... which... which route that is... is picked by the debtor.

Mr. Phillips: --Right.

And the answer to that is twofold.

One is that the language suggests... proposed disposition or proposed use... which suggests that there are different methods of valuation.

And second of all, there's no reason to assume equivalence between what you do if you give up the property and what you do when you retain the property and use it as part of a successful reorganization.

There's clearly a difference in the valuation.

Both parties agree on that.

And the only question is who should get the benefit of the difference in the valuation.

If you use always a hypothetical foreclosure value, then... then... then there's... you never have any advantages.

Unknown Speaker: But I thought the question was putting... what... what rationale would the legislature have for having two different... one much more favorable to the secured creditor?

And I thought that that was the point.

Wouldn't one logically expect, in the balance between the secured and unsecured, either of those routes to yield the same end result?

Mr. Phillips: Well, again, I don't think so.

And the reason is, in part, the Congress envisioned that there would be negotiations between the parties on these kinds of issues.

And you can only negotiate if you have some kind of differential in the valuations.

And if you use the same hypothetical foreclosure valuation, you'll always end up with the same number.

Which means there is no basis for negotiation between the debtor and the creditor in any particular case.

And it seems clearly... and there's nothing in anything that supports the notion that going along on the disposed use... I mean going along with the proposed use, as opposed to proposed disposition, is meant to get you to the same value.

It doesn't.

The assumption is, is that it will create more value, because it's going to be used.

Unknown Speaker: If... if that is your... your theory, if we adopt that theory, then would it be an abuse of discretion or a violation of the statute for a judge... a bankruptcy judge to adopt Judge Posner's solution, which is just split the difference?

Mr. Phillips: Yeah, it would be a violation of the statute, because, again, the statute tells you to look at the proposed use or proposed disposition, and... and Judge Posner's analysis does neither of those things.

It does an amalgam of the two.

And so, therefore, it has no statutory basis.

It's much like the rule that the Court condemned in BFP, the 70 percent rule, that said if you deviate by 70 percent.

I mean it's a good rule and it might make good policy and Congress might want to adopt it, but there's nothing in the statute that... that remotely supports it.

Unknown Speaker: But, in particular--

--Go on.

No, please.

Go.

In particular cases that might be a sensible thing for... for the... for the judge to do, I take it.

The judge might very well say, well, you know, I don't know whether they buy it for a dollar more than the foreclosure value or a dollar less than retail.

And the evidence is unclear.

So the only fair thing for me to do in this particular case is to split the difference.

I... I take it you're not ruling out that possibility in individual cases, or are you?

Mr. Phillips: Well, I'd have to see the particular case.

It seems to me that if the evidence in the record is that there are two very distinct appraisal values and they are supported by solid testimony, it seems to me you'd probably be obliged to take one rather than the other, rather than split the difference.

Unknown Speaker: Well, one party says, well... we... we can reasonably hypothesize three bidders at the foreclosure for the... for the disposal of the... of the property, and there's a fight about that.

There might be cases in which the court could say, look, I... I... I can't calibrate these probabilities, and the only sensible thing to do is to say it's somewhere in the middle.

You don't rule out that?

Mr. Phillips: I don't rule that out.

The important part about that, though, to keep in mind is, is that's not the difference between the hypothetical foreclosure value and the use value.

What I'm looking at... what you're talking about are two different use values and trying to resolve those by splitting the difference.

Unknown Speaker: But your argument is you simply cannot construe the statute, as a matter of law, to require that median figure?

Mr. Phillips: That's correct.

Unknown Speaker: That's your understanding?

Mr. Phillips: Yes.

Unknown Speaker: Mr. Phillips, let me ask, while I do not agree with Justice Breyer's suggestion that the valuation should be whatever it takes to enable the 13 to proceed, there is some textual basis for... for saying that.

What meaning do you give to the... to the other portion?

You say both parties agree as to what the purpose of the valuation was.

But... but what... what is the meaning of that: Such value shall be determined... we're discussing here... in light of the proposed disposition or use?

But it also says: in light of the purpose of the valuation.

What... what does that mean?

Mr. Phillips: Well, there are lots of different situations which--

Unknown Speaker: And a lot of different purposes.

Why would its valuation be different for one purpose rather than another?

I'm not sure.

Mr. Phillips: --Well, it depends on--

Unknown Speaker: Give me an example of... of--

Mr. Phillips: --Of a situation where that--

Unknown Speaker: --in which the purpose would... would... would produce a different valuation.

Mr. Phillips: --Well, my guess is it might make a difference whether or not you are trying to decide whether the outstanding debt puts you into Chapter 13 in the first place, because there are limits on how much debt you can carry into Chapter 13.

So you might value that differently.

Unknown Speaker: Now, why... why should that affect the valuation you give?

Mr. Phillips: Well, if Congress had made clear... and... and I'm speculating here, because I don't know the answer to this... but if Congress indicated a preference at the edges to have more cases into Chapter 13, where it's close, you might, under those circumstances, attempt to value the outstanding debt in a way that would make it, you know, less in order to bring them into Chapter 13.

Unknown Speaker: Okay.

But you don't think Congress has indicated any preference for Section... for Chapter 13?

Mr. Phillips: Not... not with the language "proposed disposition or use".

I think what Congress has clearly indicated is that if you have a proposed use, then you should value it from the perspective of what the debtor would pay in order to be able to acquire that exact same property and to use it.

And... and I think it's important... I want to go back to the rule of construction, because I think it's vital to the... the proper outcome of this case.

We're dealing with a situation here where the Court of Appeals said that the problem is... is that your rights under State law are measured by foreclosure value.

Now, our rights are not measured by the foreclosure value.

Our rights are measured by the lien.

And the lien, it protects us all the way through to the actual payment.

It's supposed to protect the stream of payments.

That's the vital element of what our State rights are.

And to come in here--

Unknown Speaker: Yes, but it only gives that protection to the extent that there... the value of the lien can be realized through sale of the collateral.

Mr. Phillips: --No, that's not true, Your Honor.

I mean it is true that you have a remedy to sell the collateral, but that's not the end of your right.

You're still entitled to a judgment for the amount of the debt that's outstanding.

And that's how your State law right is defined.

And that really is the mistake that the Court of Appeals made.

We have a much broader State law right, which ought to be valued here.

And this Court said both Radford and in--

Unknown Speaker: I'm really puzzled by that.

Because if you proceeded under State law, you'd get what the other side says you should have.

Mr. Phillips: --No, no.

I--

Unknown Speaker: You would foreclose, you'd sell the it and you would get the wholesale value.

Mr. Phillips: --And I'd still be entitled to the difference between what the... the--

Unknown Speaker: The deficiency.

Mr. Phillips: --the under amount and the amount of the actual debt.

Unknown Speaker: Yeah, but you still are here as a general creditor, aren't you?

Mr. Phillips: Well, I understand that.

But we're not... we're not--

Unknown Speaker: Which is all you'd be under State law.

Mr. Phillips: --But we're not distributing it under those circumstances.

That's the point.

Unknown Speaker: No.

But under State law, if you had a $50,000 debt, secured by collateral worth 40,000, you'd foreclose, you'd get your 40,000, and you'd be a general creditor for the 10,000.

Mr. Phillips: No.

--but that's if I'm in bankruptcy.

Under State law, I'd... I'd foreclose and I'd go and ask him--

Unknown Speaker: You would be under State law, too.

Mr. Phillips: --ask him for the extra money--

Unknown Speaker: Yeah, but here--

Mr. Phillips: --and I'd go against the other assets.

Unknown Speaker: --Here you don't... you don't get to have your security back.

It's still in the hands of the debtor.

Mr. Phillips: Exactly.

Unknown Speaker: And all you're getting is... is periodic payments.

Mr. Phillips: Exactly.

And that is precisely what the Court said in Radford.

You don't expect Congress to do... unless it does it expressly.

And Congress clearly didn't do it expressly here.

Unknown Speaker: Yeah, but you're getting the periodic payment.

Is it not true, though, that you do have the status of a general creditor as to the difference?

Mr. Phillips: As to the difference, that's correct.

Unknown Speaker: Yeah, okay.

Mr. Phillips: I'd like to reserve the balance of my time.

Unknown Speaker: Very well, Mr. Phillips.

Mr. Jones.

Argument of Kent L. Jones

Mr. Jones: Mr. Chief Justice, and may it please the Court:

The common sense... the history of the statute, in this Court's opinion in Whiting Pools, all reflect that when collateral is retained for the use of the debtor, it has a going concern or fair market value that exceeds its liquidation value and that enhances the value of the secured claim.

This additional value--

Unknown Speaker: Mr. Kent, could you... could you explain to me, then, what Judge Easterbrook meant, because you just made this common sense proposition.

This is quoted in the appendix to the petition for cert at 30-31... it's something the Fifth Circuit seemed to rely on... that there was no real difference between these two values when you take out of the so-called retail value the things that don't relate to the object itself.

Mr. Jones: --Well, Judge Easterbrook, in that part of his opinion, in the, what, Hansen case, I believe, was... was thinking--

Unknown Speaker: Samson against Alton Bank.

Mr. Jones: --Ah, okay.

Judge... that's a different opinion than the one I was referring to.

What Judge Easterbrook may have been referring to is the difference between cost, replacement cost, and value.

Replacement cost could include items that would not need to be spent if the item were to be replaced from the own inventory, if you will, of the debtor.

But that doesn't have... that cost doesn't relate to the value of the asset.

The value of the asset is dependent upon what... is dependent upon what the use... what use can be made of it.

And a debtor can't reasonably say that the value of the asset in his possession has a different value than it would in the possession of anyone else who used the same sort of property.

Congress used an objective term, "value".

And value in that sense is what--

Unknown Speaker: May I, just before... you're talking about replacement... market value rather than replacement cost?

Mr. Jones: --Replacement cost is... is a term that can be used to describe value in the sense that value is what a willing buyer would pay a willing seller to... for the right to use the same property.

That's the way the Court defined it in the BFP case.

And there's something important in BFP that really is--

Unknown Speaker: In your submission, is that the same or different from replacement cost?

Mr. Jones: --Well, replacement cost is normally what a willing buyer would pay a willing--

Unknown Speaker: You can't answer it yes or no, our favorite thing to lawyers?

Mr. Jones: --Well, I would say it's the same, but I--

Unknown Speaker: It's the same, okay.

Mr. Jones: --But I... but... but it depends on who is paying it.

I mean if you use the objective concept of the willing buyer and the willing seller, it's the same.

Yes.

BFP makes the point that the difference between a liquidation value and a fair market value is that fair market value is realized if an ample opportunity is given to realize the full value of the collateral.

That's exactly what a Chapter 11 and Chapter 13 reorganization do.

They give the debtor the opportunity, the ample opportunities, the Court said in BFP, to realize the full value of the collateral.

Now, that is the value... the difference between the fair market value and the liquidation value, that premium or surplus, whatever you want to call it, is the heart of the reorganization concept.

Unknown Speaker: But, in a sense, the security owner ought to be able to get the same amount of money, if... if it took its time and sold the property.

Mr. Jones: Congress didn't... didn't write the statute that way.

And... and... and nor does--

Unknown Speaker: In theory--

Mr. Jones: --as a practical matter--

Unknown Speaker: --As a practical matter, it seems to me they might be pretty close together.

Mr. Jones: --What... what Section 506(a) does, by distinguishing between disposition and use, distinguishes between a liquidation and a reorganization.

And in a reorganization, what Congress had in mind was that there would be this surplus value created.

It's... it's like Pareto optimality.

Everyone, debtor and creditor alike, are going to be made better off.

And no one is going to be made worse off than they would be in a liquidation.

The provisions of Sections 1325 and 1129 that... that invoke this valuation process make clear that Congress didn't intend a liquidation value to apply when collateral is retained by the debtor.

There is a little bit of text here, but I've got to go through it.

1325(a)(5) and 1129(b)(2) both provide that the debtor can retain the collateral in a reorganization if it pays the allowed amount of the secured claim as determined under Section 506.

Sections 1325(a)(4) and 1129(a)(7), by contrast, say that an unsecured creditor is only guaranteed to get, in a reorganization, what he would get if the property had been liquidated.

So Congress clearly distinguished between the treatment of a security... secured claim and an unsecured claim in reorganizations.

What the Court of Appeals did in this case was to say, we're going to give them exactly the same train, we're going to... treatment... we're going to abolish the distinction, because a secured creditor, like an unsecured creditor, will only receive the liquidation value of the asset... what he would have gotten if there had been a liquidation.

That result plainly violates a fundamental principle of statutory interpretation, because it nullifies the careful distinctions that Congress made between secured and unsecured claims in these reorganization cases.

Section 506(a) itself, of course, specifies that this value is to be determined based upon the proposed disposition and use of the property.

Unknown Speaker: Yes.

And what... do you have any notion as to what the other thing, in... in light of the purpose of the valuation... do you have any notion--

Mr. Jones: Well, an example of a... of a different purpose for the valuation would be to... when a creditor wants adequate protection for the use... for the temporary use of the asset during the period before... during... for example, before a liquidation or at some point during the process of the reorganization.

361--

Unknown Speaker: --Well, why would you give it a different valuation for that purpose than you would for--

Mr. Jones: --Well, it's not some... it's not necessarily the... I'm no... I can't answer, in the abstract, that there would be a different valuation for that.

It's just that you would want to know what the purpose of the valuation was.

Because, in 361, when you're determining whether... what you're supposed to decide is whether the collateral is diminishing in value by its use during the reorganization procedures.

And so, in deciding how much it's diminishing in value, I suppose you... the purpose would be to focus on that.

Whereas here, the purpose is to determine what is the value to be realized from the use of the collateral... what would a willing buyer pay a willing seller for the right.

Unknown Speaker: --You're always going to have a possible difference in valuation.

If you simply take something out and sell it at forced sale as opposed to, say, renting it for a couple of years and... with an assured tenant, there is going to be a difference in valuation.

Mr. Jones: Absolutely.

And... and in Whiting Pools, this Court noted that Congress fully understood that you... that... that the... in a reorganization, when the debtor is allowed to retain the collateral, that the... the value would be greater than what I think the Court said it would be if they scrapped it, if they sold it at a foreclosure sale.

And in BFP, as I've already mentioned, the Court explained that the difference... well, I didn't mention this... I meant to... that in BFP--

Unknown Speaker: You were about to.

[Laughter]

Somebody interrupted you--

Mr. Jones: --In 10 minutes--

Unknown Speaker: --just as I'm doing now, right?

[Laughter]

Mr. Jones: --It's just kind of all blends together.

That in BFP, the Court explained the difference between a liquidation value and a fair market value... well, I did say this... is the... is that you have an ample opportunity to make the... to make... to realize the full value of the collateral.

That is what reorganizations give you.

They give you that ample opportunity to get that value.

And the value that you've gotten is the value that is referred to in 506(a).

Unknown Speaker: Is... is it possible that... accepting for argument's sake all your arguments... that it's better to give this money to the secured creditor, basically, than the unsecured?

Still, doesn't what he's argued in his red brief at least set a ceiling on what you can... I mean, in other words, if it's impossible for the person to go into reorganization--

Mr. Jones: Right.

Unknown Speaker: --unless you lop off some of this surplus... well, then, I don't see how you could value the secured interest at an amount that includes what we've just seen is lopped off?

Mr. Jones: The only reason we're... the only purpose of the valuation involved in this case is if he does qualify for a 13, if there is a surplus that will be realized.

Sometimes debtors can't--

Unknown Speaker: But he said, I think, that he couldn't qualify if he had to... if he had to--

Mr. Jones: --Sometimes debtors' business situation is such that they cannot... they cannot generate the surplus.

They cannot... don't forget, 1325(a)(5)(B) will require that debtor to pay the value of this collateral if he's going to use it.

And Chapter 13 is only available if a debtor can meet that requirement.

And a debtor who can't meet that requirement, because, for example, his business roots might... might... might not recognize the income available from such an asset, is a... is a debtor who may not qualify under Chapter 13.

Congress did not mean to let anyone qualify.

They were very severe about the requirements.

Unknown Speaker: --Of course, they would not open-end that valuation based on anything that will let the man qualify.

But what if the condition is that he would qualify as long as he provides the creditor with as much as the creditor would realize if the creditor foreclosed?

Mr. Jones: Well, that's exactly what he has to give unsecured creditors.

That's what he has to make sure unsecured creditors get.

And that was the point I was making earlier.

1325(a)(5) says that for a secured creditor, he's got to give them the allowed amount of the allowed secured claim as determined under Section 506.

By doing that, Congress meant clearly to provide a different result for the secured creditor than the unsecured creditor.

But what the Court did here was to treat them identically.

And that deprived the words of the statute of any plausible meaning.

Unknown Speaker: Thank you, Mr. Jones.

Mr. Jones: Thank you.

Unknown Speaker: Mr. Durkay, we'll hear from you.

Argument of John J. Durkay

Mr. Durkay: Mr. Chief Justice, and may it please the Court:

The issue before the Court today is the value of a truck.

And the context is this: Instead of allowing the secured creditor to take back the truck and put it on the market to sell, the debtor is going to be allowed to retain the truck and use it in his business.

If I can make one comment, Chief Justice Rehnquist, about that that came up in one of your statements of concern earlier.

Remember, the secured... the debtor is not just going to retain the collateral.

He's going to do a lot more than that.

He's going to be required, under the system to pay interest.

He's going to be required to answer to the strongest collection agent in the country, the Chapter 13 trustee.

The minute he's late there's going to be a motion to dismiss the bankruptcy.

He's got to maintain full insurance at all times.

Unknown Speaker: But he does run the risk of seeing the collateral depreciate in value very sharply, does he not?

Mr. Durkay: The secured creditor can insist that that depreciation never be faster than the amount of payments.

That's not 506.

That's 362.

And adequate protection would apply in a Chapter 13 plan.

Unknown Speaker: Well--

Mr. Durkay: This was, remember, not only a 502 hearing, but it was also a motion to stay.

Unknown Speaker: --Yeah, but none of the parties can fully anticipate what the bluebook on this particular truck is going to say 5 years from now.

Mr. Durkay: Correct.

Correct.

Finally, of course, he has to promise to preserve and maintain the collateral.

You know, your point is well taken in this sense.

But, remember, nobody knows what property is going to be worth in the future.

That's part of what we're doing.

We're trying to find out.

Now, one of the things we do to try and find out is we go to people that know.

I'd like to raise another question, I think, that's been raised already in argument, that there were two experts here.

If you read in the transcript on page 90, at the end of the hearing, the bankruptcy judge said there's only been one expert in this case.

One of the problems with the whole posturing of the case to this point in time, from the point of view of understanding where it's coming from, is in order to make sure that the Rashes were going to win their hearing and get a good confirmal plan, Mr. Baron and I made a tactical decision that we weren't going to come in and try to prove a forced sale or foreclosure sale or any of that.

We brought an appraiser in, who testified as to fair market value.

The fair market value of this truck is $31,875.

And the judge, listening to the testimony, totally rejected the so-called testimony of... brought by the Associates.

The witness from the Associates had never seen the truck.

He admitted it.

He didn't even know what color it was.

Unknown Speaker: Never seen any truck or he hadn't seen this truck?

Mr. Durkay: That truck.

Well, you know, the Uniform Standards of Professional Appraiser Practice is a guide here.

It's--

Unknown Speaker: Well, but you're indicating by your tactical... your strategic decision that you made that you could have asked for foreclosure value?

Mr. Durkay: --The Fifth Circuit says we could have.

Unknown Speaker: Well, that--

Mr. Durkay: That's their opinion.

We didn't--

Unknown Speaker: --But you didn't... in other words, you didn't even try that in the... in the... in the trial court.

That would have been your right under this theory of the case?

Mr. Durkay: --Right.

And... and the reason was tactical.

We wanted to win.

We... we took a... we gave the number, 31,875--

Unknown Speaker: Well, was it... was it error, then, for the judge to find the value that he did?

Mr. Durkay: --No, the judge--

Unknown Speaker: I mean, your view of the case, he should have said, no, no, it's foreclosure value.

Mr. Durkay: --No... well, it... it's at least foreclosure value.

That was the issue.

Unknown Speaker: Well, so far as it's more than that... let's suppose it's... suppose, in the hands of your client, this is going to earn enough money so that he has plenty of money to... to pay what he owes, or much of it, why should the extra amount, up to the retail value or the replacement value, go to unsecured creditors rather than the person who had the foresight to take a secured interest in the truck?

Mr. Durkay: I think--

Unknown Speaker: That's the part that's worrying me the most.

Mr. Durkay: --I think what 506 says, if I can get directly to that, is that the Associates is entitled to be as well off as if they had taken the truck back and sold it.

They're not entitled to be better off.

Unknown Speaker: Well, they're... if they took the truck back, it just says that's one of their options... C, I think.

Mr. Durkay: Correct.

Unknown Speaker: Well, they might use it themselves.

They might look around for a long time.

They might... who knows what they might do.

And these things are always... all we know is they want to take it back.

Mr. Durkay: Correct.

Unknown Speaker: And so if they want to take it back, they must think they're better off.

And... otherwise they wouldn't want to.

Mr. Durkay: And that's the argument they used about Mr. Rash, saying, if I want to keep the truck, the truck has to be worth more value.

That... that truck is still the same truck.

It doesn't increase or decrease in value because somebody does or doesn't want to retain it or not retain.

It's the same truck.

Unknown Speaker: Well, I didn't mean to get sidetracked.

Because my question really was, why not... why not give the extra amount, above the 31... suppose it turns out to be 38 or whatever it is... why shouldn't that go to the truck owner rather than the unsecured creditors?

I understand that maybe your client should be... shouldn't... if the money isn't there for him to go into 13, that seems like a separate argument.

But the unsecured versus the secured?

Mr. Durkay: Because that additional money isn't just being generated by the truck.

It's also being generated by Mr. Rash driving the truck.

You know, I heard a--

Unknown Speaker: Well, but--

Mr. Durkay: --I'm sorry.

Unknown Speaker: --it... it sets up a... a queer scheme for... for Chapter 13.

You... you... you're telling the unsecured creditors... you... you don't... you don't tell them, you're not going to get any more out of Chapter 13 than what you get if you... if you demanded all of your money right now.

We're going to give you an incentive to let the guy continue to do business.

You... you may get more.

But you're not telling that to the secured creditors.

You're insisting that the court-secured creditors get nothing more, as secured creditors, than they would have gotten by foreclosing immediately and taking the truck away.

Leaving them no incentive, no benefit from the Chapter 13, although you give the benefit to the unsecured creditors.

Mr. Durkay: We... we guaranteed to them in the process that they're at least going to get their liquidation value.

And then we allow them to participate as an unsecured creditors.

Unknown Speaker: But you--

Mr. Durkay: And that's a fair balancing.

Unknown Speaker: --But you don't say that to the unsecured creditors.

You don't tell them, you're not going to get any more out of this than what... what you would have gotten if you... if you closed down the business today.

Why should you... why should you say that to the secured creditor?

Mr. Durkay: I think, in the bottom line, what reorganization is all about is trying to create value, as opposed to Chapter 7, which is liquidation, close the door, let's see what we've got.

The way you measure whether or not a reorganization is a good reorganization is you measure it against the standard of what would happen in a 7.

If we're going to have a 7, what are the results?

That's what is the so-called liquidation analysis, the Chapter 7 analysis.

All right.

Now, if its reorganization is able to do better than that, okay, it probably should go forward.

That's the goal, to do better than the straight liquidation.

In this case, there are a lot of parties that are then going to look to that additional amount of money.

The Rashes get to live on some of the money that they make, within the bounds of the disposable income test.

The Chapter 13 trustee in the system gets some compensation.

At the point in time when you begin to distribute this extra value, this extra value is almost totally attributable to the fact that an individual made a commitment to go to work in this context, in this system.

He did that because he wanted to pay his bills.

That should be shared among the creditors on a fair basis.

Unknown Speaker: So is the unsecured creditors' additional income that they... that they derive from letting this person stay in business.

And you say, you know, that's the deal, by letting him stay in business, you get more than you otherwise would.

Mr. Durkay: Correct.

Unknown Speaker: That's the whole purpose of it.

Now, why do you give that incentive to the unsecured creditors but not give it to the secured creditor?

Mr. Durkay: I think Congress said this is how it's going to work.

Unknown Speaker: It would seem to me Congress wants to preserve the security and... and wanted to give the secured creditor a benefit in Chapter 13, just as it gives to unsecured creditors a benefit.

But you're not giving him any... any benefit as a secured creditor.

You're... you're treating him as though the whole thing came to an end, then, although... although you don't treat the unsecured creditors that way.

Mr. Durkay: Well, I guess my simple answer, Justice Scalia, is I don't... I understand that, but I don't find any... anything in 506 that says that one of the things you take a look at is a... a premium or a kicker to the secured, for the privilege of allowing this to happen.

The secured has to allow it to happen.

Unknown Speaker: Mr. Durkay, can I interrupt, just to be sure?

I may not understand it right.

But I thought that the... to the extent that the secured creditor does not realize on the collateral, he's an unsecured creditor.

Mr. Durkay: Correct.

Unknown Speaker: So doesn't he get the same participation in whatever the surplus available for general creditors is as any other general creditor?

Mr. Durkay: Exactly.

Unknown Speaker: So he has the same motivation as the general creditors?

Mr. Durkay: And... and this creditor did a couple of thousand dollars better than if they had taken the truck and sold it.

I mean that's... that's the fair principle.

Let... let me advance this one step further, in connection with the split--

Unknown Speaker: But... but his... but his secured status is not at all recognized as giving... as being given any preference.

Mr. Durkay: --It doesn't have a preference, but it has its own source of payment stream.

It has the payment to--

Unknown Speaker: Well, I meant... I meant preference in the sense of in... of incentive to go forward with reorganization.

Mr. Durkay: --I guess--

Unknown Speaker: It's rather odd that the secured creditors are the one class that... that are not treated any better.

Mr. Durkay: --As a creditor, they are treated better.

Their collateral isn't treated better.

They get the same good deal that any unsecured creditor gets to participate in the fruits of the successful reorganization.

And, frankly, a secured creditor's incentive is exactly that.

Now, a secured creditor can still say, even though I made $2,000 more, I don't want to do this, because I don't want to have to fool with this, among all these cases.

But that's what Congress said, no, you do have to.

That's the difference--

Unknown Speaker: Are... are there other cases which are not maybe quite so close as the one involving a truck?

Suppose there's a business where the secured property is all... is all fixed, is machinery, a small business like a laundromat or something.

Mr. Durkay: --Correct.

Unknown Speaker: And the... the foreclosure value of this... of this is... when it's taken out is very, very low, because the machinery is ripped out and sold for almost scrap.

It doesn't seem fair that... that that should be the sole value, if the option... the alternative is to keep this business as a going business, where the... where, in place, the machinery is worth much, much more.

I think this case is a little distorted because we have a truck and we're all used to the idea of bluebook values and so forth.

Mr. Durkay: Well, in... in the case you give, again, if the laundromat operates, it's going to raise revenue for the... the secureds, generally, including the unsecured.

That's why, really, part of the scheme is the bifurcation of claim.

The secured creditor comes in, it's undersecured, and they get two claims.

They have the status as secured creditor... that's defined one way... then--

Unknown Speaker: My point was that the range of values is much more dramatic.

Mr. Durkay: --Correct.

Let me... let me address that issue specifically, and Justice Breyer's comments about the discretion of the bankruptcy judge.

There are three key words in 506 that you can't lose sight of.

Those three key words are "in light of".

What 506 requires the... the judge to do is to put the valuation in a context.

It used to be... this was a very common practice in the Southern District... when you first file a bankruptcy, you'd go in and you'd value everything, sight unseen, to see what kind of hand you got dealt.

Then you'd start to work your reorganization theory based on the fixed values that were set down.

That's not how you do it.

What 506 says, when you conduct a valuation, put it in context.

Why are you getting this valuation?

What do you plan to do with the property?

What are you contemplating?

What are the res judicata effects?

What are the collateral estoppel effects?

What's this going to mean in the real world of this bankruptcy?

But it says "in light of".

It says put it in a context.

There's no mandatory language there.

There's... the judge has... has eminent discretion in connection with this factfinding process to come up with what you're really asking him to do, which is the common sense answer, in context.

Unknown Speaker: Well, but the... the judge surely doesn't just pick a number out of the air.

Mr. Durkay: No.

Unknown Speaker: Doesn't he listen to witnesses as to--

Mr. Durkay: Correct.

Unknown Speaker: --let's... supposing this... this weren't a truck, which is perhaps something we all figure we might have an idea of what it's worth.

Suppose it's a big apartment building or something like that.

Mr. Durkay: Correct.

Yeah.

Unknown Speaker: Certainly the judge would listen to witnesses, would he not?

Mr. Durkay: Absolutely.

And he... one of the things he would do is he'd make sure that those witnesses, those appraisers, knew why the valuation was being conducted--

Unknown Speaker: And--

Mr. Durkay: --what was the hearing all about.

Unknown Speaker: --And don't you think all of the appraisers would agree that if there had to be a forced sale in 30 days, the value would be less than if they were allowed a year to find a buyer?

Mr. Durkay: Absolutely.

Justice Rehnquist, the formulation I propose, which is the net proceeds to the secured creditor on repossession and liquidation of collateral, doesn't require that you have to consider a forced sale.

I... I don't see why you can't allow the secured creditor the luxury of coming in and saying, I would do better than that.

In fact, at the trial, that was exactly the Associates' position.

They said, you shouldn't hang us with wholesale because we can get retail when we sell our collateral.

The only problem was their witness said they couldn't.

He said he saw 15 sales and nobody showed up at 12 at... of them and he just said that was company policy.

A secured creditor ought to be able to come in and say, if I hold this property.

In fact, there's a very simple way to do this.

I mean what the secured creditor does is he comes in with a buyer with a commitment.

That's good... that's how a trustee would do it.

He wouldn't say, I think it's worth this, I think it's worth that.

He'd go find a buyer that's willing to sign up to that.

To... to take a good example... and the reason why the United States is here... and there's some real problems, I think, with the presence of the United States in this case and the posture they're taking.

Of course, they're here because of the Taffi case.

The Taffi case--

Unknown Speaker: The... the what case?

Mr. Durkay: --The Taffi case.

In... in the Taffi case, In re Taffi, which is the Ninth Circuit case that... that has come here in connection with this, there was a stipulation presented that the home had a fair market value of 300 and a forced sale value of 250.

And the... and the first and second liens were 233,000, and the question then was, what was the value of the IRS claim.

Well, in the first place, as a practical matter, you're not going to find an appraiser... you're not going to find an appraiser willing, to give any value to that third lien.

That's so far back in the train, that caboose just doesn't have value.

To give, in the stipulation, any value at all to the IRS was very generous.

But, secondly, and more importantly, in the real world of bankruptcy, the general way that would be handled is if you're a third lien and you really think there is equity in that collateral, you write a check to the first and second and take the first position.

This isn't a... a formula or a mathematics.

This is real business in the real world.

Unknown Speaker: But in... in that context, assuming, which I do think this statute is really opaque on this question, you can make excellent arguments on both sides.

So... so if you think what Justice Kennedy said, which is that in many businesses, perhaps small businesses, the creditor doesn't really expect to repossess and sell?

Mr. Durkay: Correct.

Unknown Speaker: He... this repossession is a threat?

Mr. Durkay: Correct.

Unknown Speaker: And... and he wants to get the money out of the person?

Mr. Durkay: Correct.

Unknown Speaker: And that's... that's the whole thing.

You're going to lose your refrigerator or whatever.

That's a threat.

It's not because it... so... so if that's what... how he's thinking, then I come back to the possible interpretation that... that he should be able to get the money out of the debtor if there is the money to be gotten and it would otherwise go to a different creditor.

That's where I keep coming up against... I don't know why... what would be wrong with that part.

Mr. Durkay: Justice Breyer, otherwise what you do is you create a waste.

Unknown Speaker: Where is the waste?

Mr. Durkay: If you hypothesize an asset, that's the extra value from reorganizing.

And under the Petitioner's theory, you have to give that extra value to the Petitioner, which means the 13 never happens, which means that value--

Unknown Speaker: Well, you see, that's why I say, at that part... at that part, if it's a question between you and the... you and the creditor.

That's a different question.

Mr. Durkay: --Correct.

Unknown Speaker: And... and that's why I raise what may be the dead horse, but... but I don't want to keep flogging it, but--

Mr. Durkay: No, I... I totally agree with--

Unknown Speaker: --that... that it would set a ceiling... it would set a ceiling on the ground that there is no... you know, that the value would be what you would have gotten in the liquidation, plus any amount that would otherwise go to the unsecured creditors, up to the retail value.

Mr. Durkay: --If--

Unknown Speaker: It seems to me, Mr. Durkay, that in agreeing with all of this, you understate the position of the... of the secured creditor.

It isn't just that he has the... the power to get back the distress value of... of what he's able to yank, but he is able to say to the... to the businessman, you pay me what you owe me or I'm going to close your business down by taking away the washing machines or whatever you have that's essential for your business.

So the businessman says, well, I'll pay you first, because you can close me down entirely.

Now, you're setting up a Chapter 13, which deprives him of that benefit of being able to close the... the business down.

And yet, at the same time, you're telling this... this debtor that he doesn't have to pay him what he would have been able to... to extract from him had there not been a Chapter 13.

Mr. Durkay: --Justice Scalia, I totally agree with you in the way you frame your hypothetical.

What puzzles me is what you've said is what I've said all along, which is the only reason that the Associates wants this extra value is to have leverage and power in the transaction.

And the one thing the United States Congress said was, we're not going to play a power game.

The bankruptcy court is going to hand out assets fairly.

And we're not going to accommodate the leverage, the power, the authority, or the transaction.

That's gone.

Unknown Speaker: Well, they say... they say they're not going to let the... they're not going to let the... the secured party prevent the Chapter 13.

But it... it's the whole purpose of... of this discussion to... to determine whether they have said, we're going to, moreover, deprive the... the secured creditor of... of the value that he has of... of keeping the business a going concern, so that he can get his money out.

Mr. Durkay: That isn't value in an appraisal sense.

That's power and it's leverage.

Right off the bat, when a bankruptcy is filed, that secured creditor is told, hands off, you're stayed.

That power and leverage is gone until the court says otherwise.

And as long as you can extract the economic value of your loss, your depreciation, over time, adequate protection, that stay is going to stay in effect.

This is a... this is a debtor remedial statute.

Unknown Speaker: May I ask you a question that was prompted by the example you gave earlier.

Supposing in this case, just as the bankruptcy judge was about to rule, the creditor, the secured creditor, got a buyer, somebody who was interested in antique Kenworth trucks or something.

Mr. Durkay: Correct.

Unknown Speaker: Came in with a buyer, who made him a 40... $48,000 offer, higher than any of the appraisals.

Could he have insisted on that valuation?

Mr. Durkay: Oh, if he brought that evidence before the judge, I think a judge would be hard pressed not to give that evidence... hard, fast, factual evidence... full value.

You know, really, what we're talking about--

Unknown Speaker: So that if the... if the creditor could establish that he could get a premium value for the truck, and if he... if they actually repossessed and sold it, you'd say they'd be entitled to that?

Mr. Durkay: --If you want to take that position, you better bring in some good evidence, though.

That's the... that's the only point.

Unknown Speaker: Yeah, I understand.

Mr. Durkay: Now--

Unknown Speaker: You... you can't have a phony--

Mr. Durkay: --it flips the other way around.

Suppose you've got a... a pharmacy and they're... they're going to be delivering pharmaceuticals.

And the owner of the pharmacy insists on using a 1954 antique Mustang instead of a Hyundai.

And... and he says, well, according to the standard advanced by the Associates, I'm entitled to value that collateral at what it would cost me to replace that car, which is a Hyundai.

That doesn't make any sense.

A '54 Mustang is worth real money.

A judge is not going to pay any attention to that.

Now, this isn't mechanical.

I mean it's--

Unknown Speaker: --They didn't make Mustangs till '63.

Mr. Durkay: --Sorry, Justice.

[Laughter]

Well, Justice Rehnquist, now you have to admit, under those circumstances, that '54 Mustang is now mighty valuable.

[Laughter]

Unknown Speaker: Mr. Durkay, what is your explanation... I think this... to my mind, the strongest argument for Petitioners here is... is the language

"in light of the proposed disposition or use of such property. "

What is your explanation of that language?

If it does not mean in light of the fact that this property is going to be continued to be used in this case by the debtor and therefore has a going... a going concern value?

Mr. Durkay: The strong position I took with the Fifth Circuit that's embodied in the King opinion is that it is a genuine non sequitur to say that simply because the debtor proposes to retain the value... the property... in and of itself, it suddenly has an inherently enhanced value.

You have to think about those issues, but it doesn't automatically follow that that means that number changes.

But let... let me add this point if I can.

Unknown Speaker: May I ask you about--

Mr. Durkay: Yes.

Unknown Speaker: --Well, wait.

That isn't the question I asked.

You haven't answered my question.

You're... you're arguing it on the merit.

What is your... what is your... you say it doesn't mean that... that language doesn't mean that.

What does it mean,

"in light of the proposed disposition or use? "

What does it refer to--

Mr. Durkay: In this--

Unknown Speaker: --if it doesn't refer to precisely this?

Mr. Durkay: --In connection with a 1989 Kenworth in a Chapter 13, those words may not give you a lot of answers.

In some bankruptcies involving some kinds of properties and some kinds of proceedings, they may be totally dispositive of the issue.

Unknown Speaker: Give me an example.

Mr. Durkay: The trustee comes in and says, I want to sell the Kenworth.

It's a Chapter 7 now.

And the reason I want to sell it is I think I can get $50,000 for it at auction.

And that's equity above and beyond what the Associates claims their first lien is.

And for my first witness I'm going to call a fellow and he's going to come in and he's going to give an income valuation of that truck that says it's worth $50,000.

The judge would say, wait a minute, you're proposing to auction this property.

What are you going to get at auction?

I don't want to hear about what somebody says it's worth on an income approach.

You're saying, I'm going to auction it; what's the auction value?

That's the proposed user disposition.

And under those circumstances, that language gives you a little bit of information.

Remember how much ground 506 has to cover.

I mean it has to cover every imaginable type of property and every proceeding and bankruptcy, and that's a lot of ground.

You know, if you read 506, and you sit it next to the Canons of Ethics of the Uniform Standards of Professional Appraisal Practice that tell you what an appraiser needs to know before conducting an appraisal, the language is remarkably similar.

It's remarkably similar.

What both are saying is, do this in the real world, in context.

No hypotheticals, no theoreticals.

Let the appraisers know everything there is to know.

Give accurate, honest answers.

Judge, take all the proper context into consideration before you make your determination.

Don't do any blind appraisals.

And if you do that, and when you do that, we will generally leave that alone.

Unknown Speaker: Well, are you suggesting that in the hypothetical that Justice Kennedy gave, where you've got a laundromat and the forced sale would be almost zero, but the income-generating value of the property would be significant, that there you would use some kind of a... a cash flow valuation?

Mr. Durkay: You might be able to do that.

Correct.

If... if an appraiser were able to provide that kind of analysis, that may well be acceptable.

But under this scenario--

Unknown Speaker: But why not here?

Mr. Durkay: --if I can--

Unknown Speaker: Why not here?

If there, why not here?

Mr. Durkay: --Well, because in the scenario that Justice Kennedy gave, what could happen is that secured creditor could find somebody to come in and buy the laundromat, lock, stock and barrel... buy the business.

And he would get the cash flow.

He'd come in and start operating it.

I mean you're going to have to have some good evidence on this, but that's at least theoretically possible.

In the case of a truck, there's no going-concern value for a truck.

The truck is a truck is a truck.

Unknown Speaker: And that's the only... the only situation in which you would... you would answer Justice Kennedy's hypothetical by saying, we would give it going-concern value... only if you could show that... that he could sell it to somebody else... the whole concern?

Mr. Durkay: Yes.

I can't say it's the only... but, yes.

I mean that's really the likely alternative scenario.

Unknown Speaker: But--

Mr. Durkay: Some... somebody would come in and buy the laundromat.

Unknown Speaker: --If he's willing to stay there and operate it himself, but there's nobody else in this little town willing to buy it, then all the secured creditor gets is the scrap value of these machines?

Mr. Durkay: And the secured creditor gets all the cash flow from the operation of the laundromat, because he's probably the major unsecured.

Remember, he's got that backup position.

Now, one thing, also, to do with 506 that I think is important, don't use 506 to judge the quality of the bankruptcy.

There are a lot of other provisions in the Bankruptcy Code the judge can use, such as the good-faith provisions, the liquidation analysis, et cetera, that are going to make sure that these are good bankruptcies, that they're not bad deals, they're not bad outcomes.

They don't really harm creditors unnecessarily.

506 is one component.

If you get a scenario that says, well, I really don't like the way this spins down, in terms of what the bankruptcy looks like... I mean remember that you've got a common sense judge watching that and saying, well, that still doesn't mean you're going to get your bankruptcy.

Even if you get your 506 evidence proved, you don't automatically have a confirmation of your plan.

Unknown Speaker: Mr. Durkay, could you explain to me, since you put it to Judge King, why she thought that it was irrational to make a distinction about the result that you get... now, looking to 1325... whether you use (b) or (c)... that the value should be the same?

Mr. Durkay: 1325(b) and (c) handle the dynamics of the bankruptcy.

They don't really answer the question of what the property is worth.

Unknown Speaker: But she thought--

Mr. Durkay: In order to--

Unknown Speaker: --that it would be an unseemly difference to have, when the debtor surrenders the property, one value--

Mr. Durkay: --Correct.

Unknown Speaker: --and when the... the debtor keeps the property, a much higher value.

Mr. Durkay: The simple formula I used here is I just don't think you can say that when Mr. Rash told the Associates he wanted to keep the truck, poof, it was suddenly now more valuable.

I... I just think it's as simple at that.

It's the same truck.

You know, the comment that was made in en banc was, well, what about the going-concern value?

Trucks don't have going-concern value.

The... trucks have a ready market.

You know what they're worth.

You can find the market.

It's very easy to determine what that truck is worth, what it can be bought and sold for.

You know, if you look, for example, at the Petitioner's reply brief, in discussing BFP and this issue, they toggle back and forth... here... what I'm talking about is... is page 14, 15 and 16.

They say that the value should be based on what the debtor would have to pay... quoting BFP... which is if offered for sale.

Then they say at the top of 15 that it has to be sold within the time and manner.

Then they go on down and say, to determine the price it's paid for.

In other words, they're toggling back and forth between paid and... and bought.

Get on... get in the boat or get on the shore.

I mean you can't flip back and forth between what the buy price is and what the sale price is in the retail context.

Unknown Speaker: You... you say that a truck doesn't have a going-concern value, but that really wasn't what was at issue here, was it?

It was a truck by an owner who had a long-term contractual relationship with... what, was it Lane, the... the... the--

Mr. Durkay: Correct.

Unknown Speaker: --the trucking concern.

So that we... we have something more than a truck here.

And why, therefore, isn't it fair, even on your premise, to say there... there would be a going-concern value here?

Mr. Durkay: He... he wasn't renting his truck on a long-term basis.

Every day he showed up and hauled, he got paid.

If he didn't, he didn't.

And a part of that activity--

Unknown Speaker: Yeah, but I... I... I'm--

Mr. Durkay: --It wasn't--

Unknown Speaker: --maybe... maybe I'm making an assumption, in fact, that is wrong, but I assume that if I were to go out in the market and buy a truck, and show up in Lane's driveway tomorrow morning, I would not get the same kind of preference for business that this individual would.

Mr. Durkay: --No, you would.

Unknown Speaker: Okay.

So he's got something that I, as a buyer on the open market, wouldn't have, and therefore there at least is a sense in which--

Mr. Durkay: No.

You... you would get--

Unknown Speaker: --there's a going concern.

Mr. Durkay: --You would get the Lane deal.

Unknown Speaker: Pardon me?

Mr. Durkay: You would get the Lane deal.

If you showed up at Lane, you would be able to haul for Lane on the same basis as Mr. Rash.

Unknown Speaker: But Lane believes in equal protection no matter who shows up?

Mr. Durkay: If you can drive--

Unknown Speaker: I can't even shift the truck, and he's going to give me the business?

[Laughter]

Mr. Durkay: --But, see, that's the point.

The value here is two components.

There's the truck and there's the truck driver.

Unknown Speaker: Yeah.

And the truck driver is part of the deal.

Mr. Durkay: No, the truck driver wasn't pledged to the Associates.

[Laughter]

That's... that's a 13th amendment problem.

Unknown Speaker: No, but the... the truck... the truck driver is the one who is going to use the truck if he retains it.

And that makes a difference, doesn't it, economically?

Mr. Durkay: I don't think it does.

Unknown Speaker: Thank you, Mr. Durkay.

Mr. Durkay: Thank you, sir.

Unknown Speaker: Mr. Phillips, you have 3 minutes remaining.

Rebuttal of Carter G. Phillips

Mr. Phillips: Thank you, Mr. Chief Justice.

I'll try to be short or briefer than that.

I think, ultimately, the case could be disposed of based on, essentially, Justice Scalia's question, which is, you have language that says "proposed disposition or proposed use".

And we... every example he gave talked about auctions, talked about sales.

He's got lots of use for the language 506(a).

And... and, in fact, if you look in his brief, he doesn't offer up an explanation of what that language is designed to mean.

And the only brief on their side is the one amicus brief says that 12 proceeding.

And it's reasonably clear to me that, to have to stretch that far to find some meaning in this particular language, tells you that their interpretation really eliminates the "proposed use" term.

Unknown Speaker: Of course, "proposed use" doesn't really lead you to "retail value" necessarily.

I mean I... I can see how it doesn't lead you to "wholesale value", but why does it lead you to "retail value"?

Mr. Phillips: Well, what... what it leads you to, ultimately... and the value we're looking for and the rule we ask for is what it would cost the debtor to purchase the same property in the open market.

And that's the fair market value.

Unknown Speaker: But why isn't that the same as the fair market value of this truck, as appraised?

Mr. Phillips: Because the--

Unknown Speaker: Or is it?

I'm not sure whether or not--

Mr. Phillips: --Well, it... it is.

It's the... I mean if he had to go out and buy this truck today, it would have cost him either 41,000 or--

Unknown Speaker: --But why is that different from what it can be sold for if you have fair opportunity to offer it in the market?

Why is there... I... I must confess, I should have asked this in the very beginning... but why is the fair market diff... value... different, depending on whether you're the buyer or the seller?

Mr. Phillips: --Because of the differences of what you can get for it.

I mean I realize that's tautological, but I mean--

Unknown Speaker: But you're saying there are two different markets.

Mr. Phillips: --Yes, exactly.

Unknown Speaker: Yeah.

Mr. Phillips: It's the market that... that determines it.

Unknown Speaker: Well, I would have thought the difference might be what you have to pay somebody, by way of a commission, to sell it for you.

I mean if the debtor is going to keep it, it isn't going to be sold.

But if the creditor is going to take it back and sell it, they're going to have to pay something to somebody to do that, in effect--

Mr. Phillips: That's true.

And--

Unknown Speaker: --typically.

And I thought that was the real difference.

Mr. Phillips: --Right.

Unknown Speaker: Maybe I'm wrong.

Mr. Phillips: No, I think that's right.

And that... that plays out particularly in the hypothetical foreclosure cases, where you have a foreclosure on the house and you... and you--

Unknown Speaker: Yeah, but that... that assumption means if you keep the truck, you save the commission.

Yeah.

So that would be the cheaper value.

Mr. Phillips: --Well, except if... if you keep the truck, he wouldn't save the commission, because he... they would ask you to deduct the hypothetical cost of the commission.

And that's... and that... and there are some decisions to that effect.

But I... as... for reasons I think I've made clear, I think those decisions are wrong.

If there are no other questions, I would urge the Court to--

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.