Law Offices of Nicholas Gebelt

Lien Avoidance in Individual Cases – Part 4: Lien Valuation


This post assumes familiarity with my last three posts (Part 1, Part 2, and Part 3) this multi-part series.  Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.

Lien Valuation

We have already discussed motions to value liens.  What good are they?

First, if the goal is to strip off a wholly unsecured junior lien, it is important to establish that the junior lien really is wholly unsecured.  Therefore, getting a determination of the value of the senior lien(s) and an appraisal of the property is necessary to establishing the wholly unsecured status of the lien to be stripped.

Second, if the goal is to bifurcate the lien, one must have accurate values of the lien, any senior liens, and the property to get accurate values of the secured and unsecured portions.

Third, if the goal is to negotiate with the creditor, lien valuation fixes one of the starting points for those negotiations.

When should you file a motion to value the lien?

In the § 522(f) context, the collateral is valued as of the petition date.  Unless there is a good reason to postpone the action, perhaps because of a claim objection, it might be best to value the lien as quickly as possible because California judgments accrue 10% per annum simple interest.  Otherwise, before the lien is avoided the creditor’s claim is secured, so it will grow[1] until the lien is avoided.  If the lien is relatively large, this could potentially affect the voting of the general unsecured class in a Chapter 11, and make confirmation without a cramdown more difficult.  The cramdown will trigger the absolute priority rule, thus jeopardizing the debtor’s nonexempt assets.

In the § 506 context, if real estate prices are going up rapidly and the collateral is not the debtor’s principal residence (or is and you’re in a Subchapter V setting), do the lien valuation immediately to maximize the unsecured portion.  One exception:  If the case is one under Chapter 11, the creditor may elect to treat the entire claim as secured pursuant to § 1111(b).  The creditor may lose the right to vote, but retains the right to have its claim paid in full.  That could create a plan feasibility problem.

 

[1] And of course the property value may increase as well, thus increasing the secured portion of the lien.

The post Lien Avoidance in Individual Cases – Part 4: Lien Valuation appeared first on Southern California Bankruptcy Law Blog.

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